How Volkswagen Lost Its Way

Europe's biggest economy is confronting the most symbolic chapter yet in its story of industrial decline. And the great icon of Germany, incorporated is at the center of the crisis. Volkswagen epitomizes German engineering This is probably its most serious struggle in its history.

The fundamental underpinnings of the company are falling away from it. As are tens of billions of euros of its market cap value, which has plummeted to lows not seen since the aftermath of the financial crisis or VW’s emissions scandal. Management needs to find €17 billion in cost savings to stabilize the business, and it's ripping up its rulebook to find them.

Volkswagen's historic move to consider factory closures in Germany for the first time in 87 year history. That has pitted Europe's largest carmaker against its huge workforce and the governing bodies of cities built around its plants, and has left everybody asking an existential question. .

. Cars are integral to Germany's modern economic and industrial identity a pop cultural export and political lightning rod. 87-year-old Volkswagen embodies this on a global scale.

It employs 680,000 people around the world. It has dozens of production locations. Millions of people, workers and other industries are reliant on the business that they get from this company.

It owns several household names. Some of those households are very wealthy indeed, while others descend from VW’s principal demographic. There was a big celebration in Germany to mark the one millionth “People's Car” since the war.

The whole idea of the People's Car was that, every individual in the country would be able to afford one. Decades later, in 2023, VW’s portfolio generated €320 billion in sales, equivalent to about 7. 5% of Germany's entire GDP from that year.

Which sounds pretty healthy. So what's going wrong? First, electrification.

You could arguably chart the current crisis to the diesel scandal in 2015, it cost the company billions of euros in fines and recall and costs. And it forced a rapid pivot towards electric vehicles that the company wasn't really well prepared for. They really wanted to create a vertically integrated supply chain.

Part of that included creating their own battery making facilities and creating their own in-house software unit. The problem is, creating software is very different than making cars Tesla is so far ahead because it's good at all of these things the batteries, the vehicles and the software. VW is not.

In the combustion engine era, they could still make cars that people wanted. The transition to electric vehicles is they're not doing well with making cars that people want to buy. Or that they can afford.

This is reflected by slumping registrations for new EVs in Germany. For the majority of the months last year, sales have been down compared to the year before. In the 21st century, VW lacks an electric “People’s Car” to stimulate German EV adoption.

Volkswagen is emblematic of Germany's industrial struggles right now. And so the business model and the factors that led to Germany's, decades long, kind of stable, successful economy is at threat. Which brings us to the second big problem: China.

VW has been active in the world's second biggest economy for decades. But while China has been dealing with its own economic slowdown, its carmakers have been churning out competitive electric vehicles at VW’s expense in particular. Just look at the changing makeup of China's EV market.

Local manufacturers have taken considerable share, while German brands, including VW’s, have steadily declined. They slept on the competitive threat that Chinese carmakers play. The expectation that German cars are just better.

It wouldn't be controversial to say that Volkswagen, through its decades of success in China, grew a bit arrogant about its position there. VW has company in its struggle with macroeconomic headwinds. The European Commission is fighting back on behalf of EU carmakers, and in late 2024 introduced controversial tariffs on Chinese vehicles.

And so to VW’s third problem: its workforce. Volkswagen considers its first ever factory closures in Germany in an effort to cut costs as Europe's car industry struggles. The Volkswagen brand has ten production locations within Germany that both make cars and components.

Volkswagen management has said that as many as three of those factories could be at risk of closing or of restructuring. The pressure on VW’s workforce is felt keenly here - Wolfsburg, in the German state of Lower Saxony. Wolfsburg is absolutely the symbol of Volkswagen inside Germany.

It was the site of the first factory of the company. The factory itself is enormous. It's the size of Monaco, effectively.

If Volkswagen ceased to exist in Wolfsburg, the city of Wolfsburg would also cease to exist. And in Germany, at this point in time, there's not as many stable jobs as there used to be. And like a VW worker or assembly line worker was well-paid, blue collar, middle class kind of job.

If you lose that, you don't get something easily. So your livelihood, all of a sudden collapses. Dietmar Tuitje began his career at Volkswagen as an apprentice mechanic three decades ago.

He works here, about 200 miles from Wolfsburg at VW’s Emden plant. His lengthy tenure, like many, fostered great loyalty to his employer, but now also trepidation. It scares me and what's much worse, it scares my family that Volkswagen is questioning our work, our plants.

Today, I talked to my employees and colleagues at the VW plant, everyone sees their existence very, very, very threatened. Not only do they see their existence threatened, but also the livelihoods of their children, who, if everything goes well in the ideal case, would have been or could have had an adequate employer at Volkswagen. Volkswagen's turnaround efforts right now are being led by, Oliver Blume, who is the chief executive officer of the whole group.

And who's leading the charge to downsize. Which is a very controversial decision because you're picking a fight with the employees, which have a ton of power. So there's like 140,000, German employees at the VW brand.

which have obviously political power, which in the other turn influences Lower Saxony, the state which has a blocking minority. In accordance with historical laws particular to VW. Regional government has voting powers in the company's corporate decisions, often allying with the workers groups and at odds with investors.

The state of Lower Saxony has two seats on Volkswagen's supervisory board. They, along with the ten seats that sit on the supervisory board from the labor side, that means they have majority. And that means it's in their interest to protect the locations within Lower Saxony from being closed.

This tension fueled protests and heated negotiations between management and unions. There's lots of competing power players. That structure that makes Volkswagen very slow-moving.

This has also hindered the ability of Volkswagen to make cuts to its operational costs that come from the labor side, because those are often not seen as being in the interests of the hundreds of thousands of workers that are employed at the company. One potential component of a restructured VW is giving a new life to its plants. There is precedent for a factory to be sold off to another carmaker or to another company so that those jobs remain saved.

But there would be a difficult irony for Germany to reconcile if that manifests. The likely buyer of any Volkswagen plant is probably going to be a Chinese manufacturer. Blume has characterized his company's crisis as “truly demanding” but the restructure is progressing.

On calls with investors, he said. “highly competitive” new products are coming in 2025, while partnerships with EV companies in China are advancing well too. But then there's the US, where VW is facing another problem because it exports more vehicles there than anywhere else in the world.

You know how many cars we have? Mercedes Benz and BMW and all of the Volkswagen. Millions and millions of cars.

We're going to put tariffs on them. It's a real risk that Volkswagen that we know of today doesn't exist in the same way in five to 10 years. Germany and the German government, the German system, the company itself will do everything to prevent that.

But, the transition is going away from Germany's traditional strength.