[News] Volkswagen | the first to close the German factory, cancel the promise of no layoffs, the situation is tense!

Under the pressure of fierce competition from China's electric vehicle industry, the world's number two automaker - Volkswagen Group is now facing unprecedented challenges.

The Volkswagen Group is evaluating the possible closure of its plants in Germany. The chief financial officer of the Volkswagen Group, Arnaud Antelitz, is scheduled to address employees at a works council meeting on the morning of September 4, along with the CEO of the Volkswagen brand, Thomas Schaefer.

Although shares in the Volkswagen Group rose on the news, rising 1.2 percent, they have lost nearly a third of their value over the past five years, making them the worst performer among major European automakers.

Earlier, analysts had expected that Volkswagen Group might consider closing its plants in Osnabruck, Lower Saxony, and Dresden, Saxony. It is worth noting that Lower Saxony is also one of the important shareholders of the Volkswagen Group.

"The circumstances are too serious to address the challenges we face with simple cost-cutting measures," Mr Schaefer said bluntly in his public statement. He stressed that the Volkswagen Group is feeling increasing price competition pressure from Chinese rivals.

Antelitz also added that as the results of the first half of 2024 did not meet the company's expectations, the group will need to take more stringent cost-cutting measures in the second half of the year in order to meet its annual targets. The Volkswagen brand will be the first to implement cost cuts, aiming to save up to 10 billion euros, or about 78.6 billion yuan, by 2026.

In addition, while considering plant closures, the Volkswagen Group may have to abandon its 30-year no-layoff policy.

The looming crisis

PART 1

The announcement of the possible domestic plant closures comes a month after Volkswagen Group released a poor financial report for the first half of 2024. Although the company officially described it as a "stable performance in a difficult environment", it actually hid a lot of crises.

In the first half of 2024, the Volkswagen Group's revenue reached 158.8 billion euros, equivalent to about 1.25 trillion yuan, an increase of 1.6% compared with the same period last year. However, its operating profit was only 10.05 billion euros, or about 79.14 billion yuan, down 11.4 percent from the same period last year. The operating margin also fell by 1 percentage point from 7.3 per cent to 6.3 per cent. Pretax profit was 10.16 billion euros, or about 80 billion yuan, down 14.6 percent from a year earlier; Free cash flow from the automotive business was 4.99 billion euros, or about 39.28 billion yuan.

The decrease in vehicle sales is the main reason for the decline in the results of the Volkswagen Group in the first half of 2024: in the first half of the year, the Volkswagen Group sold 4.341 million vehicles, a decrease of 0.6% compared to the same period last year. Specifically, Volkswagen Group's mass-market brands (including Volkswagen, Skoda, Seat, etc.) sold 2.494 million vehicles, achieving a 1.8 percent year-on-year increase, but its operating margin fell to 5.0 percent from 5.5 percent in the same period last year. Premium brands (such as Audi, Bentley, Lamborghini, etc.) sold 549,000 vehicles, a sharp decline of 17.7 percent, and the operating margin fell from 10.0 percent in the same period last year to 6.4 percent. As for the sports luxury brand (namely Porsche), its sales of 152,000 vehicles decreased by 11.1 percent year-on-year, and its operating margin fell to 16.4 percent from 19.3 percent in the same period last year.

It is obvious that the profitability of brands such as Audi and Porsche, which once brought huge profits to Volkswagen Group, has declined significantly and is almost the same as that of ordinary brands, which has become the key factor for the gradual weakening of the profitability of Volkswagen Group. At the same time, the price competition of new energy vehicles in China has undoubtedly intensified this trend.

The Chinese market is crucial for the Volkswagen Group, but its operating profit in the first half of 2024 was only 801 million euros, or about 6.3 billion yuan, down 30 percent from the same period last year. Of particular note is that Volkswagen in the second quarter of 2024 in China there was a loss of 193 million euros, about 1.52 billion yuan, while in the same period last year, Volkswagen in China also achieved a profit of 348 million euros, about 2.74 billion yuan. In addition, Volkswagen Group sold 1.345 million vehicles in China in the first half of 2024, down 7.4 percent year-on-year and accounting for only 30.9 percent of its total global sales. In the past few years, China has typically accounted for more than 40 percent of VW's global sales.

On the other hand, in order to promote its electrification and intelligent transformation, the Volkswagen Group has made large-scale investments in several regions, including China. This includes deepening cooperation with partners such as Xopeng Motor and SAIC Motor, investments that have had a significant impact on Volkswagen Group's bottom line.

In the field of research and development, Volkswagen Group, as one of the earliest enterprises in the traditional car manufacturers to carry out electric and intelligent transformation, its research and development investment in the first half of 2024 reached 11.4 billion euros, about 90 billion yuan, an increase of 11.7% compared with the same period last year. Research and development expenses as a percentage of sales revenue was 8.8%, an increase of 1 percentage point over the same period last year. In particular, CARIAD, the software division of Volkswagen Group, had revenue of 426 million euros, or about 3.35 billion yuan, in the first half of the year, but an operating loss of 1.18 billion euros.

In this context, reducing costs and improving efficiency have become an urgent task for the Volkswagen Group.

In the Chinese market, Volkswagen Group's two joint ventures, SAIC Volkswagen and FAW-Volkswagen, have also made cost reduction a priority of their work in recent years. In August 2024, SAIC announced the appointment of Tao Hailong as the new general manager of SAIC Volkswagen, succeeding Jia Jianxu, who has been promoted to president of SAIC. Mr. Tao worked in auto parts systems at SAIC and held long-term positions in SAIC Volkswagen's quality assurance and manufacturing departments before serving as executive director and deputy general manager of SAIC's Passenger Car Quality Assurance division. He has also served as the general manager of Shanghai Automotive Transmission Co., LTD., and the general manager of Hua Yu Automobile, and is considered to be the right person to drive the company to reduce costs and increase efficiency.

However, Volkswagen's joint ventures in China still face fierce competition in the market. In order to maintain sales, they have to resort to promotional measures, and price cuts will further affect costs, making a return to profit growth out of reach. In fact, as early as July 2023, SAIC Volkswagen's ID.3 and other new energy models have begun to officially cut prices, and the terminal price in some regional markets has even dropped to 120,000 yuan. During the Chengdu Auto Show in 2024, the starting price of the newly listed Volkswagen Tuyue new models fell below 80,000 yuan.

Although the Volkswagen Group has tried to respond to price competition from its own brands in China by cutting prices, this strategy has not brought the expected sustained sales growth. According to the association, monthly sales of the Volkswagen ID.3 increased from more than 7,000 units in July 2023 to more than 13,000 in December in the months after the price cut was announced. However, this growth did not last, and entering 2024, sales of the ID.3 saw a significant decline, only returning to the 7,000 unit level in June. With new products constantly being launched in the market and competition still fierce, the price cuts have not helped VW regain its footing in the Chinese market, but have further hurt its profit level in the country. Therefore, how to find a balance between sales and profits has become an urgent problem for Volkswagen management.

Pressure from the unions

PART 2

In the face of urgent cost reduction pressure, the closure of local factories has become a forced choice for Volkswagen Group. However, to implement the plan, the Volkswagen Group still needs to overcome a major obstacle - the Volkswagen Group's labor unions have made it clear that they will "strongly oppose" the executive board's plan. This shows that the Volkswagen Group needs to take into account the positions and reactions of the unions when implementing any decisions that may affect the interests of employees.

At the end of June 2024, the total number of employees of the Volkswagen Group was about 680,000, a slight reduction of about 200 people compared to the same period last year. Despite this, the Volkswagen Group remains the largest industrial employer in Germany and its workers have the highest level of income in the automotive manufacturing industry on a European scale.

Since 1994, the Volkswagen Group has implemented a job security program that promises no layoffs until 2029. The plan covers the Volkswagen Group plants in Wolfsburg, Hannover, Braunschweig, Salzgiter, Kassel and Emden.

However, in the face of the planned plant closures, Volkswagen Group said it may have to end the job guarantee program. The company stressed that all relevant measures will be discussed with the Works committee to ensure that the interests of employees are properly considered and dealt with in possible plant closures and cost reduction measures. This shows that the Volkswagen Group, in the face of operational challenges, remains committed to communicating and consulting with employee representatives to find mutually acceptable solutions.

Danila Carvalho, as president of the Volkswagen Group works Council, is also a member of IG Metall, an industry union with significant influence in Germany and throughout Europe. In an interview within the Volkswagen Group, Carvalho criticized some of the decisions made by management in recent years, saying they had not been quick to invest in hybrid vehicles or to develop more affordable pure electric vehicles.

Carvalho argued that the Volkswagen Group's board should consider taking advantage of the group's planned synergies to reduce costs and improve efficiency, rather than opting for plant closures. She stressed that the plant closures could shake the foundation of the Volkswagen Group and have a negative impact on the company's long-term development.

In addition, Carvalho also warned that the upcoming talks on the 4th would pose a "great discomfort" to the management of the Volkswagen Group. She also expects Oliver Blume, the chief executive of Volkswagen Group, to be involved in the talks. Oberumu had previously informed management that due to the difficult economic environment, the emergence of new competitors in the European market, and the declining competitiveness of the German economy, the Volkswagen Group needed to take additional measures to address these challenges.

It suggests that labor and management within the Volkswagen Group are divided on how to deal with current operational challenges, and the upcoming talks could be key to resolving those differences.

Analysts have different opinions on the current management changes and decision-making direction of the Volkswagen Group. Compared with his predecessor Herbert Diess, Oberumu is seen as likely to be more diplomatic and effective in building consensus between the group and the unions. Still, the decision to close the local plant is likely to be the first major clash the group faces with unions, testing Mr Obumu's ability to manage industrial relations and internal divisions.

Carsten Bleski, global head of macro at ING Research, commented on Volkswagen's decision to close its local plants, arguing that the decision highlights the consequences of years of stagnation and a lack of structural change in the German economy. Bleski noted that this may be a long overdue wake-up call, suggesting that Germany's economic policy may need greater stimulus and reform to cope with current challenges and future uncertainties.

This view reflects some concerns about the German car industry and the German economy as a whole. As an important player in the global automotive industry, this decision by the Volkswagen Group may have a profound impact on economic and industrial policy in Germany and around the world. At the same time, it also shows that in the context of globalization and technological change, even large industrial giants like Volkswagen are facing challenges that require constant adjustment and adaptation.

The statement of the German Ministry of Economy emphasizes the need for the management of the Volkswagen Group to act responsibly in the face of market challenges, which shows that the government's expectations of corporate decision-making are prudent and well-considered. However, the economy ministry did not comment specifically on the planned job cuts at Volkswagen Group, either out of respect for the company's autonomous decision-making or to wait for more information and details.

At the same time, the Volkswagen Group's plan to close factories is certainly bad news for German Chancellor Olaf Scholz. Scholz's ruling coalition suffered a setback in regional elections on September 2, which could affect the stability of his government and its ability to implement policies. The far-right Alternative for Germany (AfD) party has taken the lead in Thuringia's parliamentary election, in a sign of its growing influence on the German political scene. In addition, the AfD came second in the elections in Lower Saxony, which is the second largest shareholder of the Volkswagen Group, which may have some influence on the future decisions of the Volkswagen Group.

These political developments may have an indirect impact on the Volkswagen Group's decision-making, as government policies, the political environment and social sentiment all play an important role in the operation and development of the company. At the same time, it also shows that the political and social environment in Germany is undergoing some changes that may have a profound impact on German companies, including the Volkswagen Group.