In the first half of 2024, operating profit at the Volkswagen group fell 11 per cent from the previous year, and operating margins fell to 6.3 per cent from 7.3 per cent.DAVID DEE DELGADO/Reuters
Volkswagen was the world’s biggest carmaker in 2019 and its ambition was to displace Tesla as the No. 1 producer of electric vehicles. Given its heft, financial firepower and status as Germany’s biggest private employer and government-coddled global superbrand, the goal did not seem outrageous. “Volkswagen VWAGY will change radically,” then-CEO Herbert Diess told shareholders. “Some of you may be rubbing your eyes in amazement. But make no mistake, the supertanker is picking up speed.”
So was hubris. In mid-2022, Mr. Diess was chucked overboard and replaced by Oliver Blume. Since then, VW’s electric-vehicle ambitions have gone sideways, the company has lost great dollops of market share in China and the shares are down 13 per cent in the past year, giving it a market value of just less than €50-billion ($75.2-billion). Tesla TSLA-Q is worth a dozen times as much, and Toyota TOYOF has overtaken VW to become the industry’s top seller.
This week, the unthinkable happened: For the first time in its 87-year history, VW said it was considering factory closures. Translation: They are coming.
The news was a shock to a country that had assumed VW was a juggernaut, that the company’s technological expertise, powerful brands – among them Porsche and Audi, each backed by the “Made in Germany” badge of quality – would see the group expand forever, creating jobs all along the way, or at least not destroying the existing ones.
Certainly, that’s what employees and successive German governments believed – and demanded. Employees occupy half the seats on the VW supervisory board, and the state of Lower Saxony controls 20 per cent of the votes in the company. No wonder VW’s bosses succumbed to pressure in 1994 to adopt a no-layoffs policy through 2029. That guarantee is being driven off the cliff by Mr. Blume.
The unions and the Lower Saxony government will fight the closures – strikes seem inevitable. But their chances of protecting factories designed to build 14 million vehicles a year when output is only nine million seem low to zero. Carmaking is fundamentally a lousy, low-margin, capital-intensive business where late – or wrong – bets on technology can prove ruinous. The past few years have been punishing for Western automakers, especially the European ones, as China’s lead in EVs, battery production and the global supply of critical metals grows.
More than a decade ago, Sergio Marchionne, the Italian-Canadian boss of Fiat Chrysler, argued that capital destruction was rife in the industry, with too many companies making too many look-alike products. He predicted that only six big car companies would survive. Since he died in 2018, the industry has consolidated somewhat (Fiat Chrysler is now part of the Stellantis empire, which includes Citroën and Peugeot) but another round of mergers – or death of brands – may be in store as profit margins deteriorate and Tesla and Chinese competitors, notably BYD, now the world’s top seller of electric vehicles, dominate EV sales across their price range.
To be sure, the VW group is still profitable, is takeover-proof and does not seem close to unloading any of its low-volume brands. But there is no doubt the company has been on the downswing since 2019, the year before the pandemic. Arno Antlitz, VW’s chief financial officer, recently said the company has lost annual sales of 500,000 cars since the pandemic, “the equivalent of two plants. … We need to increase productivity and reduce costs.”
Many of the numbers are going in the wrong direction. In the first half of 2024, operating profit at the VW group fell 11 per cent from the previous year, and operating margins fell to 6.3 per cent from 7.3 per cent. At the VW brand itself, where a €10-billion ($15-billion) cost-cutting program has come up short, the operating margin was a mere 2.3 per cent, well below the 2026 goal of 6.5 per cent.
What went wrong? The pandemic helped no one in the industry, but VW compounded the problem by making its EV lunge too late, well after Tesla and BYD, among others, had made their mark in that sector. And when VW did get into the EV game, it produced tech-laden monsters that were too expensive to find a lot of buyers. The luxury Audi Q8 e-tron, which goes for about €80,000 ($120,000), has been a slow seller, and its Belgian production line may soon close.
Sales of EVs are falling everywhere in Europe and North America. German EV sales were down 20 per cent in the first half of the year, according to HSBC – and the slowdown is probably a mild positive for VW, since it is still largely a maker of gasoline- and diesel-powered cars. Too bad the big winner in the EV crunch is hybrid cars, which combine gas engines with batteries, not regular cars. VW has few hybrids. Toyota, which bet heavily on hybrids – and took a lot of criticism for downplaying pure EVs – is thriving on hybrid sales.
VW needs a new strategy, but what? It needs more hybrids to compete with Toyota and EVs that are cheap and cheerful to compete with BYD. Too bad cheap is not VW’s style. What it mostly needs is to close factories and get rid of its overcapacity problem. What is certain is that the myth of mighty VW, the company that always hired, always produced desirable products, has become roadkill. There will be blood.