Volkswagen Considers First-Ever Closure of German Plants
Europe’s largest carmaker battles high costs, difficult EV transition, fierce competition
Volkswagen AG (VOWG_p.DE) is considering closing two factories and axed an agreement protecting jobs in Germany as increased competition with rival Chinese car manufacturers, such as BYD (BYD Co Ltd) and Geely Automobile Holdings Ltd, and mounting price pressure impact European carmakers.
Volkswagen said that it was looking at closing “at least one larger vehicle manufacturing plant and one component factory in Germany” in an effort to cut costs. Any shutdowns would mark the first-ever closures on German soil in the company’s 87-year history.
Europe’s largest car manufacturer is battling high costs, a difficult transition to electric vehicles, and fierce competition from rivals in key market China. The last time VW closed a major car factory was more than 30 years ago, when it shut down its lone US assembly plant near New Stanton, Pennsylvania.
“The European automotive industry is in a very demanding and serious situation,” Volkswagen Group CEO Oliver Blume said in a statement. “The economic environment became even tougher, and new competitors are entering the European market. Germany in particular as a manufacturing location is falling further behind in terms of competitiveness.”
Confidence in the German Economy plunged in recent months as investor confidence in Europe’s largest economy experienced its steepest decline in about two years as the country contracted on slowing exports, geopolitical concerns, and faltering investments.
VW’s shares have declined 21% year-to-date. This compares with an 8.57% year-to-date gain for the broad German DAX index.
On July 9, Volkswagen reduced its 2024 forecast for overall operating return to as much as 7%, down from a high of 7.5%. The company also announced the potential closure of an Audi electric vehicle factory in Belgium due to poor demand for an SUV made at the location.
Shares of Porsche, which is majority-owned by Volkswagen AG, are down 18% year-to-date and are down 35% over the 12-month period. The company went public in 2022 with an initial public offering of €82.50.
EU Lags
During the same week that Volkswagen’s CEO made his pessimistic comments on German manufacturing, former Italian Prime Minister and European Central Bank president Mario Draghi issued a similar warning: economic growth in the European Union (EU) lagged behind China and US, threatening the bloc’s goals of bolstering its geopolitical relevance, social equality and decarbonization.
“Across different metrics, a wide gap in GDP has opened up between the EU and the US, driven mainly by a more pronounced slowdown in productivity growth in Europe,” Draghi wrote in the future of European competitiveness report on September 9. “The era of rapid world trade growth looks to have passed, with EU companies facing both greater competition from abroad and lower access to overseas markets.”
He also criticized the EU for largely missing out on the digital revolution led by the internet and the productivity gains it brought, calling on member states to redress their “failings in innovation and productivity and to restore its manufacturing potential” by changing track with artificial intelligence.
The Draghi report pointed out that EU industries that use energy intensively face higher investment costs than their competitors to meet decarbonization targets. Volkswagen has struggled with cost-cutting efforts faced with weakened demand in China and increased competition, particularly in the EV sector.
Labor Disputes
The move to close Germany plants puts Blume at risk of facing a labor dispute with German unions. The carmaker, which employs over 650,000 staff globally, nearly 300,000 of which in Germany, said it also felt forced to end its job security program. The program has been in place since 1994, preventing job cuts until 2029.
Half the company’s supervisory board seats are also held by labor representatives and the German state of Lower Saxony — which owns a 20% stake — often siding with trade union bodies. Lower Saxony said it supports VW’s cost-cutting efforts, adding alternative options must be explored in talks with labor representatives.
Stephan Weil, Lower Saxony premier and VW supervisory board member, said: “We expect that the issue of factory closures will not arise due to the successful use of alternatives,” adding, “The state government will pay particular attention to this.”
Volkswagen brand chief Thomas Schaefer said in a statement: "The situation is extremely tense and cannot be overcome by simple cost-cutting measures,"
Competition
One of Volkswagen’s major competitors in the EV sector is Chinese manufacturer BYD, whose net profit hit 9.1 billion yuan ($1.3 billion) in the April-June quarter, up 32.8% from a year earlier, hitting its fastest growth since end-2023. BYD revenue grew 25.9% to 176.2 billion yuan.
BYD has outsold the combined sales of Volkswagen's two joint ventures in China by 14.5% in the first seven months and is expected to replace Tesla (TSLA.O) as the world's largest EV vendor this year with a 17.7% share of the global market.
Overseas shipments accounted for 11.9% of BYD's total car sales in the first seven months of the year, nearly double the same period last year.
Despite rapid expansion into regions like the EU, the company is facing a 17% additional tariff for exporting EVs from China to countries in the EU. BYD now plans to build a brand-new manufacturing and production center in Szeged, Hungary.
In July, the European Union announced additional tariffs ranging from 17.4% to 37.6% on Chinese imports, which already carry a 10% import levy. It argued that Chinese companies have benefited from heavy and unfair state subsidies.
Subsidy Cuts
European sales growth of EVs has also fallen after the German government withdrew subsidies offered to consumers in 2023. Germany's electrical vehicle subsidy program ended prematurely last December after paying out some €10 billion since 2016.
Following Volkswagen’s proposal to shut down some of its factories, Economy Minister Robert Habeck said that the government would continue to support the German car industry's transition.
The move was part of a 2024 budget revision forcing the government to shelve some programs designed to speed up Germany's green transition.
The e-car subsidy was originally intended to apply until the end of 2024. In July 2024, Germany saw 30,762 EV registrations, a 36.8% drop from July 2023. The EV market share in Germany also fell to 12.9% from 20% in the past year.