Will Volkswagen Close Plants In Germany Amidst Growing Challenges?

Volkswagen

Volkswagen’s financial chief, Arno Antlitz, initially estimated the company had two to three years to address its mounting challenges. This week, Antlitz accelerated the timeline by a year, a move that has rattled the global automotive industry. For the first time, he suggested that Volkswagen might need to consider closing plants in Germany, intensifying the urgency of the situation.

Escalating Challenges and Cost-Cutting Measures

Volkswagen is facing a complex array of problems that have worsened recently. The company is struggling with a weakening market in China and a slower shift to electric vehicles than anticipated.

One critical issue is the potential for Asian competitors, such as BYD, Chery, and Leapmotor, to ramp up production in Europe if Brussels enforces substantial tariffs on Chinese electric vehicles. In response to stiffening competition, Volkswagen has slashed prices on its VW brand cars, a strategy that has drained hundreds of millions of euros from the company’s profits, according to Daniela Cavallo, head of the works council.

These deeper-than-expected discounts have led Volkswagen’s leadership to question whether the high cost structure in Germany is compromising its ability to compete with more agile rivals. A source within the company, who requested anonymity due to the sensitive nature of the matter, revealed that the additional costs are undermining Volkswagen’s efforts to achieve its goal of cutting expenses by over 10 billion euros ($11 billion) by 2026.

Margin Pressures and Competitive Strain

The financial impact has been stark. Volkswagen’s profit margin for its passenger car brand plummeted to just 0.9% in the second quarter, down from a mere 4% in the first quarter. In contrast, Renault and Stellantis, major European competitors, reported margins of 8.1% and 10%, respectively, for the first half of the year.

These shrinking margins have sparked concerns about Volkswagen’s ability to remain competitive, particularly as Chinese manufacturers increase their market presence in Europe. The European car market itself has shrunk by 13%, or about two million vehicles, since before the pandemic, putting even more pressure on carmakers to maintain their market share, as noted by CFO Antlitz.

DZ Bank analyst Michael Punzet expects Volkswagen to revise its full-year margin target downward when it releases third-quarter results. The target had already been adjusted to 6.5-7.0% in July due to concerns over a potential factory closure in Brussels, affecting its luxury brand, Audi.

Adapting to a Shrinking Market

As demand for vehicles contracts, the focus has shifted to controlling production costs. Jefferies analyst Philippe Houchois remarked, “The idea of growing out of the problem is no longer viable. Companies are losing market share, and adjustments are necessary.” Antlitz emphasized that the VW brand, responsible for more than half of the group’s production last year, has been spending more than it earns. He warned that this trend cannot continue if the company hopes to succeed.

Volkswagen’s automotive cash flow, a key indicator of operational health, turned negative in the first half of 2024, with a deficit of 100 million euros compared to a positive 2.5 billion euros in the same period last year.

Financial Strains and Competitive Pressures

Profits from China, Volkswagen’s largest market, have nearly halved over the past decade, dropping to 2.6 billion euros in 2023. They are projected to rise slightly to around 3 billion euros by 2030. Compounding the issue are high energy and labor costs in Germany, which are some of the highest in Europe and add further pressure on the company. Citi analysts have highlighted that “rising competition from lower-cost rivals, escalating energy prices, and high labor costs present a tough outlook for European mass-market brands.”

As Volkswagen grapples with these multifaceted challenges, the path forward will require strategic adjustments and significant cost management to stay competitive in a rapidly evolving automotive landscape.

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Prateek Levi