All over the world the automotive industry is facing a new and rather uncertain era. Conventional internal combustion engines are declining in all major markets (USA, China, Europe), while more and more consumers are turning to electric mobility. This is also confirmed by a recent survey by Pricewaterhouse and Coopers (PwC).

The same research even underlines that this trend will strengthen in the coming years. Already today in all major markets the best-selling car is Tesla’s Model Y.

First “lock” from Audi?

Frank Schwope, a professor at the Hannover Institute of Technology for Small and Medium Enterprises, believes that one of the reasons for the problems facing Volkswagen, the largest German car manufacturer, is precisely this “model change”, that is, “the upheaval caused by electrification and the new competition from China,” as he tells DW. This explains the dramatic decrease in profits by almost 64%, announced by the Volkswagen group for the third quarter of 2024.

According to the economic review Handelsblatt, the company will try to reverse the unfavorable data with wage cuts, around 10% on average. With this measure, 800 million can already be saved out of the 4 billion euros which is the overall target. The plans also include closing three factories in Germany and cutting tens of thousands of jobs.

Already in Belgium, Audi, a subsidiary of the Volkswagen group, is taking the first step. At the end of February, a representative of the Belgian CNE trade union told AFP, an electric vehicle production unit near Brussels, which currently employs around 3,000 workers, is expected to close.

The president of the German Association of Automobile Manufacturers (VDA) Hildegard Müller also confirms how serious the situation is. As he tells Reuters, it is estimated that over the next ten years, the transition to electrification will cost around 140,000 jobs. Another 46,000 have already been removed since 2019. “The transition is a huge challenge, the issue is to have the appropriate political framework that will support and accompany this transition”, he points out.

VW and politics

When entrepreneurs consider a better institutional framework necessary, they always ask for the intervention of “politics”. In the case of VW, the request acquires particular weight, as politics is anyway sitting at the same table as the management of the company. VW was founded in 1938 and in the post-war years it never became a completely independent company, as the state of Lower Saxony participates in the Supervisory Board.

The Social Democratic Prime Minister of Lower Saxony, Stefan Weil, is now calling for “alternative proposals” and “consensual solutions” regarding the future of VW, without closing production units. Of course, Weil notes, politics will have to do its part, reinstating economic incentives for electrification and “relaxing” industry-unaffordable EU environmental targets.

Postponing painful reforms

Sudda David-Wilp, director of the German Marshall Fund in Berlin, notes, however, that little has been done to improve the institutional framework of economic activity at the federal level. As she tells DW, all previous governments have been reluctant to launch painful but necessary reforms. “The Angela Merkel years were relatively quiet for Germany, which was rich enough to survive the pandemic,” he points out. “Given the electoral successes of the populists, the traditional parties are doing everything they can to convey a sense of security and prosperity.”

Volkswagen faces the additional problem that politicians are not speaking a single line on the issue of electrification. While the Social Democrat Weil, for example, is in favor of incentives for the purchase of new vehicles, Berlin’s “co-government” had recently abolished such incentives, which had been in place in the recent past due to extraordinary cuts in the state budget.

The problem of deindustrialization

However, many experts believe that the problem is wider. “Volkswagen was only the first victim,” economist Hans Werner Zinn, former director of the Ifo Institute in Munich, points out to Deutsche Welle. “Deindustrialization is not something about the future, it is already happening, here and now.”

Economist Francesca Parmas from the Capital Economics consultancy in London observes that “what is happening at Volkswagen is certainly symptomatic of a wider crisis in German industry, not just an isolated incident”. In July 2024, industrial production appears reduced by 10% compared to the beginning of 2023.

Along the same lines, ING Bank economist Carsten Brzeski points out to DW: “For 90 years, Volkswagen symbolized the success of the German economy. Today, however, it also symbolizes the crisis that the German economy is going through. The problems it faces should ring a ‘bell’ for politicians in Germany, so that the country can become attractive again with the necessary reforms and the necessary investments.”

Edited by: Yiannis Papadimitriou