Volkswagen AG is considering factory closures in Germany for the first time in its 87-year history, parting with tradition and risking a feud with unions in a step that reflects the deep woes roiling Europe’s auto industry.
After years of ignoring overcapacity and slumping competitiveness, the German auto giant’s moves are likely to kick off a broader reckoning in the industry. The reasons are clear: Europe’s efforts to compete with Chinese rivals and Tesla Inc. in electric cars are faltering.
“VW is recognizing just how serious the situation is,” said Harald Hendrikse, an autos analyst with Citigroup. “We’re living in a difficult geopolitical world, and Europe has not won that battle.”
With car sales still nearly a fifth lower than pre-pandemic levels in Europe, manufacturers including VW, Stellantis NV and Renault SA were operating more than 30 factories at levels analysts consider unprofitable, according to data from Just Auto. That includes Volkswagen’s sprawling home factory in Wolfsburg — Europe’s largest.
An assembly line for EVs at the VW plant in Zwickau, Germany.Photographer: Krisztian Bocsi/Bloomberg
The continent is uniquely exposed to the twilight of the combustion era. Unlike in the US, the region’s auto industry continued to prop up high-cost plants after the global financial crisis. The massive investments required to compete in electric cars, the loss of cheap Russian energy and dwindling prospects in China mean those days are coming to an end.
Troubling signs have been on the rise. Stellantis — the Chrysler parent created from the 2021 merger of Italy’s Fiat and France’s PSA Peugeot Citroen — reported net profit plunged by nearly half in the first half of 2024. Chief Executive Officer Carlos Tavares, an avid cost-cutter, is under pressure amid declining market share and low demand for vehicles like the electric Fiat 500. Its production in Italy fell more than a third in the first half, with the impact sharpest at the Melfi and Mirafiori plants. Car Production Volumes Show Euro Area Falling Behind
Source: European Central Bank
Note: 12-month moving average, December 2017 = 100
Pushed by a slowdown in the pace of EV adoption, Renault CEO Luca de Meo — a former Fiat and VW executive — has advocated for an alliance that would pool assets across Europe, akin to the tie-up that created planemaker Airbus to vie with Boeing Co. But timing for such strategic initiatives looks to be running short.
“If even VW mulls closing factories in Germany, given how hard that process will be, it means the seas have gotten very rough,” said Pierre-Olivier Essig, a London-based equities analyst at AIR Capital. “The situation is very alarming.”
Europe has led a global slowdown in the EV transition after a range of countries including Germany and Sweden reduced or removed incentives. Chinese EV manufacturers including BYD Co. and MG — owned by VW-partner SAIC Motor Corp. — have jumped into the breach. The sluggish uptake has put the EV market in reverse this year, at a time of an expected steep rise.
As a result, investors are showing little faith in the sector. Tesla is worth more than triple the combined value of VW, Stellantis and Renault. And more than double if BMW AG and Mercedes-Benz Group AG are added.
A key part of Germany’s postwar economic miracle, VW was on expansion course for decades — buying Skoda in the Czech Republic, Bentley in the UK and Lamborghini in Italy among its 10 brands across five Europe countries.
That’s because it’s structurally skewed toward expansion through the strong role of unions and the shareholdings and board seats of its home state of Lower Saxony. Even after the diesel scandal in 2015, it responded with aggressive investments into electric vehicles. But those haven’t paid off.
Workers protest outside Audi’s factory in Brussels on Aug. 30.Photographer: Ksenia Kuleshova/Bloomberg
The company showed it was shifting into downsizing mode in July, when the group’s luxury Audi brand announced plans to cut 90% of the 3,000 workers at a plant in Brussels. Germany was generally off limits, but Monday’s announcement changes that and raises the stakes for CEO Oliver Blume, who is also working to reverse a loss of market share in China, VW’s biggest market.
“What is ultimately at stake is the future viability of industry in this country and a corresponding knock-on effect,” Daniela Cavallo, VW’s top employee representative, said in a works council newsletter. “We will not allow VW to sell out Germany as a business location.”
VW’s planned cutbacks are another blow for Europe’s largest economy, struggling with stagnation and facing challenges from migration and higher energy costs to budget austerity and the war in Ukraine. Car-Manufacturing Jobs Are Still Below Pre-Covid Levels
Source: EY, BMWK
State elections on Sunday in eastern Germany showed how fragmented the country’s political landscape has become. The far-right Alternative for Germany won the largest share of the votes in Thuringia and came in a close second in Saxony, where VW’s main electric-car hub is located. The pro-Russia BSW party, which has only founded in January, got a larger share of the vote than all three parties in Chancellor Olaf Scholz’s ruling coalition in both states.
“I am deeply concerned” about VW’s plans, said Bernd Westphal, economic policy expert for Scholz’s Social Democrats. “Despite all understanding for the challenges facing the automotive industry, plant closures and job cuts are not a convincing strategy.” European Car Sales Haven’t Recovered From Covid
Regional vehicle registrations remain below pre-pandemic levels
Source: European Automobile Manufacturers’ Association
Note: Registrations cover EU + EFTA + UK countries
The trends put the economic anchor of numerous communities on the line and threaten the livelihoods of tens of thousands of blue-collar workers like Maurizio Sabatino, who first walked through the doors of the Brussels factory four decades ago.
As a 19-year-old, the Belgian with Italian roots started in the paint shop, when the iconic VW Golf rolled off the line. He had experienced threats of closures before, but those concerns seemed to be in the past when in 2018, the Brussels plant was awarded a vanguard role in the German automaker’s electric-car strategy, with production of the Audi Q8 e-tron, the brand’s first all-electric model and a would-be Tesla fighter. It hasn’t gone as planned.
Maurizio SabatinoPhotographer: Ksenia Kuleshova/Bloomberg
“We were the cowboys, the pioneers” for EV production in Europe, Sabatino said as he stared into a coffee near the plant. “But it’s turned into a catastrophe.”
Since its founding in 1949, developments at the Brussels site moved in lockstep with the continent’s rise from postwar rubble to mass affluence. The plant started out making American-designed Studebakers before producing German-engineered VW Beetles in the 1950s. Acquired in 1970 by the German auto giant, it assembled Golfs, Passat sedans and ultimately upscale cars for the Audi unit.
The factory skirts a railway line and a canal in the Brussels district of Forest. The center of the working-class neighborhood is dotted with cheap corner cafes and fast-food joints. It’s only a 15-minute drive from the headquarters of the European Union, which is seeking to thwart the inflow of cheaper Chinese-made electric cars by slapping tariffs as high as 37.6% in retaliation for state subsidies.
The switch to electric cars was supposed to be a new chapter for the factory, along with the rest of the industry. The entire workforce was trained to handle high-voltage batteries and fit electric motors, and equipment was upgraded including installing solar panels across an area the equivalent of 15 football fields.
Campaign posters near the Audi factory in Brussels, on Aug. 30.Photographer: Ksenia Kuleshova/Bloomberg
Despite the investments, the €76,000 Q8 e-tron was a flop — too expensive and with software that didn’t live up to the brand’s claim of Vorsprung durch Technik (advantage through technology).
Europe’s auto manufacturers only reluctantly entered the electric-car race, underestimating new rivals and the pace of change. Volkswagen’s cost-cutting steps are “unfortunately the consequence of many missed opportunities over the past years,” Moritz Kronenberger, a portfolio manager with Union Investment.
Threats of closure are especially acute at older facilities in western Europe, where wages and costs are higher. Shutting a factory has major implications for local economies. The facilities employ thousands of people directly and support thousands of additional jobs from parts suppliers and logistics to cleaners and bakers. They can’t be easily replaced.
Because of the scale of the impact, closing a factory isn’t a straightforward decision, but involves lengthy talks with local authorities and employee representatives to seek alternatives or costly measures to soften the blow. The closure of the Brussels plant, for instance, could cost Volkswagen about €1 billion. Belgian Prime Minister Alexander De Croo has been involved in talks.
But VW says there are no alternatives to taking a more aggressive approach. “The economic environment has become even tougher and new players are pushing into Europe,” Blume said in a statement on Monday. “Germany as a business location is falling further behind in terms of competitiveness.”
Protesters outside Audi’s “factory of the future” in Brussels.Photographer: Ksenia Kuleshova/Bloomberg
It changed quickly for workers like Sabatino. Outside the plant in Brussels this summer, a banner reads “Welcome to the factory of the future.” The bitter irony isn’t lost on the 59-year-old, who is now one of the chief negotiators in an effort to save as many jobs as possible.
“Everyone says you have to be positive,” he said. “But it’s impossible when you have this on the table. I don’t believe in anything anymore.”
