The seams of the European industrial fabric are straining. The Volkswagen group announced last Monday something that a few years ago would have sounded like a joke: it is considering, for the first time in its history, closing plants in Germany, its cradle and industrial symbol of the Old Continent. There, the carmaker is experiencing serious profitability problems and low activity in its factories due to a demand that was never the same after the outbreak of the pandemic. As an example, Germany closed 2023 with just over 2.8 million new car sales compared to the more than 3.6 million it had registered in 2019, according to data from OICA, the international organization of automobile manufacturers. In that same period, the OICA highlights that German automobile production fell from 4.66 million annual units to 4.11 million. This year, production has dropped by 4% until July compared to 2023, with 2.41 million units assembled, according to VDA, the German car manufacturers’ association.
Following Volkswagen’s announcement, German unions, which have a strong presence on the company’s supervisory board, went into action, mobilising 25,000 of the company’s workers who turned up at the group’s headquarters in Wolfsburg on Wednesday to see with their own eyes the members of the board of directors explain the cutback plans. They were given several minutes of whistles, boos and shouts of “We are Volkswagen, you are not!” before the meeting began, which was not recorded by cameras.
“We have lost around 500,000 car sales, which is equivalent to the production of two plants. And that has nothing to do with our products or the poor sales performance. The market simply does not exist anymore,” Arno Antlitz, the group’s financial director, said bluntly, quoted by public television. The company’s main problem lies in the brand that gives its name to the group, which in the first half of the year reduced its profit margin to 2.3% compared to 3.8% in the same period last year. The other generalist brands of the group have much better numbers, such as the 5.2% margin of Seat/Cupra or the 8.4% of Skoda. However, between these three firms they barely surpass half of the sales achieved by the Volkswagen brand, which delivered more than 1.5 million cars worldwide between January and June.
“The current situation of the Volkswagen brand affects us all emotionally, including me personally,” said Oliver Blume, CEO of the group, who started as an apprentice in 1994 and took over from Herbert Diess in 2022. “I come from the region, have worked in the group for 30 years and promise to bring all my experience to VW,” added the executive, who is also the CEO of the Porsche sports brand, which is the one with the best margins for the group. The burden of the Volkswagen brand for the group becomes more noticeable when looking at the relationship between turnover and group profits. In the first half of 2024, Volkswagen managed to become the car manufacturer with the highest turnover in the world, with 158.8 billion euros, and yet its net profits amounted to 6.378 billion (a drop of 14.5%), less than half that of Toyota and below Hyundai-Kia’s more than 8.8 billion.
The head of the works council, Daniela Cavallo, said she was aware that the company needed to make savings, but she blamed management and said the group needed to be restructured. “Unfortunately there is too much fragmentation, brand egoism and lack of cooperation, and it is the board’s job to control and coordinate this. In my opinion, billions are being wasted,” she told reporters after the meeting. The Volkswagen works council is going to fight back: jobs and plants are not to be touched. IG Metall, Germany’s largest union, threatened on Thursday to go on strike next month if the company goes ahead with plans to close two factories and scrap agreements that guarantee job security until 2029. Up to half a million workers could be willing to join the multi-day strikes at the end of October.
The alarm bells raised by Volkswagen have shaken Olaf Scholz’s government, which is going through a delicate moment due to the rise of the extreme right and the economic slowdown. As a first response to the Volkswagen crisis, the German government announced on Wednesday a package of incentives for the purchase of electric vehicles for the period 2024-2028, under which companies will be able to deduct 40% of the value of electric cars during the year of purchase, a figure that will be progressively reduced to 6%.
“Germany must remain the country of the car. [Volkswagen] “It is our largest company, and many jobs are linked to the sites, beyond the company,” said the Minister of Labor, the Social Democrat Hubertus Heil, on Wednesday. The situation at Volkswagen is reminiscent of that experienced with Renault in France in 2020, when the company announced its intention to cut 2 billion in expenses by closing several French factories. In the end, this did not happen, since the French State has a significant weight of 15% in Renault’s shareholding, and managed to get the company to look for alternative plans for the affected factories, such as those in Flins and Choisy-le-Roi, where the company developed a circular economy project (called Refactory) to give its vehicles a second life. The company also has a plant of this type in Seville. In the case of Volkswagen, the State of Lower Saxony owns 20% of the German company’s shares, so it could follow the path of France and pressure to avoid closures.
In addition to falling demand for cars in Europe, Volkswagen is also having to share the pie with a larger number of customers than before due to the arrival of new manufacturers, especially from China, which have lower costs and better technology. In this regard, VW made a strong bet in June by investing 5 billion in the creation of a joint venture with the American company Rivian, an operation that gives it access to the software of this electric vehicle manufacturer.
The clash between the Italian government and Stellantis
Italy is also going through difficult times, as the Stellantis Group (whose main shareholder is the Agnelli family and owns historic Italian brands such as Fiat and Alfa Romeo), the second largest European carmaker, is reducing its industrial footprint and taking models to other countries at lower costs. This has caused several clashes between the Government of Giorgia Meloni and Carlos Tavares, CEO of Stellantis, such as when Alfa Romeo, a brand owned by the group, had to change the name ‘Milano’ of one of its models to ‘Junior’ in April, in order to avoid people thinking that it is made in Italy, when in fact it is assembled in Poland.
Production of the Fiat 600 has also ended there, and Stellantis had to remove the Italian flag in order to try to calm things down with the Italian government. Poland also took over production of the T03 from Leapmotor, a Chinese brand that Stellantis has the right to produce and market in Europe, and which will begin to be sold starting this month. Initially, there was speculation that Italy could compete with Poland to acquire this model.
The Italian car workers’ union Fim-Cisl reported that in the first half of the year, Stellantis’ production in the country fell by 36% and that if this continues, the company would end up assembling around 500,000 vehicles in Italy in 2024, far from the 751,000 it made in 2023. Stellantis is crucial on the Italian industrial map, which last year manufactured 880,000 vehicles (far from the 2.45 million made by Spain, the second largest European producer). A paradox that is difficult for the Italian government to digest is that Stellantis last year produced more than a million cars in Spain in three different plants.
The tense relationship with Stellantis led Meloni to look for new manufacturers such as the Chinese Chery or Dongfeng to produce in the c
ountry. He has not been successful with the first of these, because the company has decided to establish its first European plants in Turkey and Barcelona. In Barcelona, Chery, in partnership with Ebro, is preparing the facilities of the former Nissan to make models of the Omoda, Jaecoo and Ebro brands. In the case of Dongfeng, it does seem that there will be good news for Italy since the negotiations between the Government and the car manufacturer are at an advanced stage, Reuters reports.
The search for Chinese manufacturers to replace Stellantis’ lost production in Italy led Tavares to fan the flames of the conflict with the Italian government: “If someone wants to introduce Chinese competition, they will be responsible for the unpopular decisions that have to be taken (…) if we are under pressure, the only thing we can do is accelerate our efforts to increase productivity and be competitive,” he said in April. One of the highest peaks of the conflict between Stellantis and the Italian government was in July when the latter threatened to take away defunct brands from Stellantis to give them to Chinese manufacturers who want to produce in the country, according to the media. The Sun 24 HoursThese brands would be Innocenti and Autobianchi, both firms that became extinct in the 1990s.
These plans by some European countries (including Spain) to try to entice Chinese brands to produce in their territories make even more sense after the imposition of extra tariffs by the European Union on electric vehicles from China. The measure, which arose from an investigation launched by the European Commission in October last year, spurred on by countries such as France (which excluded Chinese brands from purchasing aid), has ended up becoming a boomerang that has hit its own manufacturers. The most recent example is the Cupra brand, owned by the Volkswagen group, which this week admitted that the imposition of tariffs on the production of electric cars in China will mean that it will sell at a loss the new Cupra Tavascan, an electric car that is assembled in the Asian giant. The company complains that the measure comes after the decision to produce there was taken and when they had already made the investment in their Chinese facilities. On the other hand, brands from the Asian giant that have announced that they will produce in Europe will be able to avoid these tariffs, which range from 17% to 36.3%, in addition to the 10% that already existed before.
France, another major European producer, has also had clashes with Stellantis (the company resulting from the merger of the former French manufacturer PSA and Fiat-Chrysler, an Italian-American consortium), especially following the allocation to Spain (not yet official) of the STLA Small production platform, which is the structure on which the group will make all its future small electric cars, i.e. the best-selling ones. This will be installed in the Vigo and Zaragoza plants. The latter also won the production of the Peugeot 208, another car for which France bid last year, but without success. “The economic equation linked to the relocation of this project would not be in the interest of either the company or the country,” Tavares said.
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