Volkswagen to Close German Factory That Also Made Tanks in WWII [AK Radio]

The Biggest Crisis Since Its 1937 Founding
Produced Tanks and Armored Vehicles During WWII
We Should Also Refer to Their Austerity and Restructuring Measures

German automaker Volkswagen shocked the global automotive market by announcing plans to close a factory in Germany for the first time in its 87-year history. Although immediate worst-case mass layoffs were averted due to intervention by the German government, concerns remain that if structural improvements are not made swiftly, Volkswagen's very existence could be threatened. Given that the automotive sector, alongside semiconductors, forms one of the two pillars of industry in Korea, attention must be paid to Volkswagen's future changes.

Volkswagen's High-Cost, Low-Efficiency Structure... "A Serious Situation"

[Image source=Reuters Yonhap News]

Oliver Blume, Volkswagen's Chief Executive Officer (CEO), stated in an interview with German media Bild am Sonntag on the 8th (local time), "There are employees whose grandfathers worked at Volkswagen. I hope their grandchildren can still work here," adding, "However, current cost-cutting measures are insufficient, and additional austerity programs are being prepared."

Earlier, on the 2nd, he sparked controversy by announcing that Volkswagen is considering scrapping the employment guarantee system applied to employees in Germany until 2029, along with factory closures within Germany. He explained, "The automotive industry is facing very difficult and serious circumstances," and "New competitors are entering the European market, and Germany is falling behind in terms of competitiveness. Therefore, comprehensive restructuring is necessary, and factory closures cannot be ruled out."

Immediately after the announcement, not only Volkswagen's labor union but also the German government exerted strong pressure on Volkswagen's management. Closing factories in Germany could result in at least 20,000 and up to over 120,000 unemployed, potentially causing the complete collapse of the economy in Lower Saxony, where Volkswagen's headquarters are located. The German government announced it would support Volkswagen by partially reinstating subsidies for electric vehicles purchased by corporations.

However, most analyses agree that such support measures will be insufficient to resolve Volkswagen's profitability issues. In the second quarter of 2023, Volkswagen recorded sales of 83.3 billion euros (approximately 123.7 trillion KRW), a 4% increase compared to the same period last year. However, operating profit decreased by 2% to 5.5 billion euros, and the operating margin fell by 0.4 percentage points to 6.6%. While sales in the U.S. and Western European markets increased by 15%, sales in China, one of Volkswagen's key markets, plummeted by 19%, severely impacting overall profitability.

Additionally, Volkswagen employs approximately 680,000 people, which is about 300,000 more than Toyota, the world's largest automaker with 380,000 employees. Toyota sells about 2 million more vehicles than Volkswagen, yet Volkswagen maintains nearly twice the workforce despite relatively lower sales volume, leading to criticism that its structure is unsustainable.

Public Enterprise Structure Since Founding... An Obstacle to Restructuring

[Image source=Reuters Yonhap News]

Although the German government's emergency intervention has prevented the worst mass layoffs for now, there are criticisms that frequent government involvement is actually hindering Volkswagen's structural reforms. While Volkswagen is nominally a private company under Porsche SE, the holding company of Porsche, its actual governance structure has always been that of a public enterprise since its founding, making it impossible to be free from government influence.

Founded in 1937, Volkswagen was established by Austrian engineer Ferdinand Porsche. At the request of the then-ruling Nazi regime, he created a car affordable for middle-class families, naming it Volkswagen, meaning "people's car." The car's name eventually became the company's name. After the outbreak of World War II in 1939, under the protection of the Nazi regime, Volkswagen produced tens of thousands of military vehicles such as tanks and armored cars, leading to its stigmatization as a war criminal company after the war.

From the 1950s, during Volkswagen's reconstruction, the West German government provided full support. The government of Lower Saxony, where Volkswagen's headquarters are located, directly invested in Volkswagen and still holds a 20% stake. The Lower Saxony government holds significant authority in approving Volkswagen's major management decisions.

Furthermore, in 1960, the German government enacted a special law called the "Volkswagen Law" to protect Lower Saxony's investment in Volkswagen. This law restricts major shareholder resolutions at the general meeting to require at least 80% approval and limits major shareholders' voting rights to 20%. This means that any matter opposed by the Lower Saxony government cannot pass at the shareholders' meeting.

The Rise of Chinese Electric Vehicle Manufacturers Causing Sharp Sales Decline

[Image source=AP Yonhap News]

The rise of Chinese electric vehicle (EV) manufacturers has been a major factor behind Volkswagen's consideration of factory closures. Of the 14 million electric vehicles sold worldwide last year, 9.5 million were sold in China, making China a massive market accounting for over 67% of global EV demand. Local companies such as BYD and other Chinese EV manufacturers are rapidly expanding their market share, significantly threatening the market share of Western companies including Volkswagen.

The Chinese government actively supports its domestic EV industry and promotes domestic sales through patriotic consumption campaigns. Additionally, major production plants for key EV components like batteries are concentrated in China, giving China an overwhelming advantage in the EV parts supply chain. These factors make it difficult for European and American automakers to compete with China in the EV market.

European and American automakers, including Volkswagen, are experiencing deteriorating profitability due to the price competitiveness of Chinese EVs and are responding with restructuring and production cuts.

Potential Opportunity for 3rd Place Hyundai Motor... Volkswagen's Restructuring Worth Watching

[Image source=Yonhap News]

The crisis of Volkswagen, the world's second-largest automaker, is seen by some analysts as an opportunity for Hyundai Motor Company, Korea's domestic automaker and the global third-largest. Hyundai has a low dependence on the Chinese market and thus is less affected by sales declines in China compared to Volkswagen.

Hyundai and Kia's global sales in the first half of 2024 reached 3.61 million units, rapidly closing the gap with Volkswagen Group's 4.34 million units. Some experts suggest that Hyundai could surpass Volkswagen to claim second place either this year or next.

However, the rise of the Chinese EV market also poses a significant threat to Hyundai. Chinese EVs are highly price-competitive and are expanding their global market share. Therefore, Hyundai must differentiate itself in terms of safety and performance to gain an advantage over Chinese EVs.

Meanwhile, the restructuring controversy surrounding Volkswagen, a German national company, offers important implications for Korea's national companies Hyundai and Kia. Since its founding in 1937, Volkswagen has effectively maintained the status of a German national company and public enterprise, making it crucial to observe how it will proceed with restructuring going forward.

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