Volkswagen, a giant of the German automobile industry, is currently facing major challenges, which are forcing it to consider drastic measures. The situation is such that the government across the Rhine is terribly concerned.

What exactly is going on?

Volkswagen’s financial situation remains apparently strong, with an operating profit of 22.6 billion euros in 2023, and 20 billion forecast for this year. Nevertheless, particularly worrying trends are emergingnotably a profit margin which fell to only 2.3% in the first half. Local competition, such as BMW and Mercedes, have margins of 10.9% and 9.9% respectively.

And the trend does not seem ready to improve, so much so that for the first time in its 87 years of existence, Volkswagen is considering closing three of its factories in Germany. Other extremely strong measures are being considered by the brand to “ prepare for the future » and save 10 billion euros.

This includes the highly contested termination of a job protection agreement with unions, in force since 1994, as well as the 10% reduction in its workers’ wages.

How did Volkswagen get there?

Volkswagen encounters significant difficulties in its transition to electricconsidered one of the most important upheavals in the history of the automobile. The manufacturer faced numerous technical problems integrating advanced software systems, leading its CEO to revise its strategy.

Some of its electric models have had inconsistencies in build quality, with poor fit and finish, as well as a complex user interface. The 100% electric SUV ID.4 was even the subject of a recall, aggravating already established production problems. In the first quarter of 2024, Volkswagen’s electric vehicle sales in Europe fell by almost 24%.

Upstream, the company faces increased competition from Chinese manufacturers like BYD, in particular because of highly more affordable prices than those of their European counterparts. And it is in the electrical sector that they are the toughest. In 2019, Chinese electric vehicles represented only 1% of the European market. They are now on their way to reaching 15% market share.

Volkswagen is also falling in China, a market that is so essential for its business. During the first half of the year, Volkswagen’s deliveries to the Middle Kingdom fell by 7% compared to the same period in 2023. Its operating profit there fell by 11.4% to 10.1 billion euros. .

How does Germany’s economic situation affect Volkswagen?

Volkswagen must also adapt to a highly unfavorable economic context in its native country. The country is facing a drastic rise in energy costs, made worse by the geopolitical situation in Ukraine. This particularly affects the natural gas supply to Germany, which was previously heavily dependent on Russian gas.

In this context, the manufacturer must adapt to exorbitant production costs, exacerbated by the price of energy and the underutilization of its factories. It is becoming increasingly difficult for Volkswagen to profitably produce entry-level models in Germany. This disadvantage is particularly marked when it comes to competing with manufacturers from countries where production costs are lower.

Is this harmful for Germany?

The German government is extremely worried about the situation. And for good reason. Volkswagen is a pillar of its economy: with more than 120,000 employees, it is one of the largest employers in the country. Additionally, the automotive industry is crucial to Germany’s industrial base and overall economic health. The measures planned by Volkswagen would lead to a significant increase in unemployment in the affected regions, further weakening a stagnant economy.

How does Volkswagen’s situation reflect the state of the European automobile industry?

You should know that the entire European automotive sector is suffering. Vehicle sales in Europe increased by only 0.4% in July 2024 compared to the same period of the previous year. This dynamic is all the more evident in the field of electric vehicles where demand has weakened considerably.

The European automotive industry finds itself in a very demanding and serious situation. The economic environment has become even tougher and new competitors are entering the European market. Germany, in particular, as a production location, is increasingly losing ground in terms of competitiveness “, warned Oliver Blume, CEO of the Volkswagen group.

Renault and Stellantis, which has 14 brands, also produce far more cars than they can sell. Likewise, one in three European factories of giants like BMW, Mercedes, Stellantis, Renault and Volkswagen is underutilized. In some cases, less than half of the vehicles that could theoretically be produced are, according to the German media Deutsche Welle.

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