[Choi Junyoung's World+] Shaken German Manufacturing May Be Korea's Future

Volkswagen Closes Factories for the First Time Since Founding
Drastic Cuts: 25,000 Jobs Slashed
Rapid Decline in Chinese Market Share
Competitiveness Weakened by Excess Staffing
Electric Vehicle Sales Falter After End of Government Subsidies
Layoffs Face Strong Union Opposition
Rising Fears Over EU's Waning Cohesion

Choi Jun-young, Senior Advisor at Law Firm Yulchon (Global Legal Affairs and Policy)

Germany, boasting the largest economy in Europe, is showing signs of trouble. In July, Germany's industrial production decreased by 2.4% compared to June, a figure worse than initially expected. Having already experienced a 0.1% contraction in the second quarter, the continued decline in industrial production in July has raised concerns that the German economy has entered a full-fledged recession phase. German economic research institutes have revised their 2024 economic growth forecasts downward from an initial 0.4% to between -0.1% and 0%, and they now expect 2025 growth to be 0.9%, lower than the previously anticipated 1.5%.

The downturn in the German economy is significantly influenced by the slump in the automotive industry. Global automotive parts supplier Bosch announced a reduction of 1,200 employees, and transmission manufacturer ZF plans to cut 12,000 jobs over the next six years. Between 2020 and 2023, the number of first-tier automotive suppliers with more than 20 employees decreased from 700 to 615, resulting in the loss of over 30,000 automotive-related jobs. The automotive industry accounts for 4% of Germany's total added value, and when including related sectors, it reaches 8%, making it a core sector of the German economy. The slump in this sector is dragging down the overall German economy.

The company producing the most cars globally is Japan's Toyota, manufacturing 11.23 million vehicles annually, followed by Volkswagen with 9.24 million. Comparing employment numbers, Toyota employs 380,000 people, while Volkswagen employs 680,000, significantly more. When comparing vehicles produced per employee, Toyota produces 29.5 cars per person, whereas Volkswagen produces only 13.5, less than half of Toyota's productivity. In this context, the question inevitably arises: "Is Volkswagen actually making a profit?"

In response to this question, on September 2, Volkswagen announced the closure of two factories and a workforce reduction of up to 25,000 employees. This announcement, marking the first factory closures since the company's founding, caused a major shock. In June 2023, Volkswagen had announced a plan to cut costs by 10 billion euros by 2026, aiming to increase operating margins to 6.5% by reducing staff through early retirement programs. However, within a year, this plan proved unattainable, leading to the drastic measures of factory closures and workforce reductions. The labor union naturally reacted vehemently against the company's announcement. At a consultation meeting held on September 4, over 10,000 workers shouted slogans and jeered at management, delaying the start of discussions for more than 20 minutes.

Volkswagen factory in Wolfsburg, Germany. Photo by Reuters and Yonhap News Agency

Volkswagen's drastic measures are closely related to the contraction of the European automotive market, which has shrunk by more than 13% compared to 2019, before the COVID-19 pandemic. As a result, sales across Europe have decreased by over 2.5 million units, with Volkswagen's sales dropping by more than 500,000 units. This 500,000-unit decline corresponds to the annual production capacity of the two factories slated for closure. Volkswagen had been offsetting the sales decline in Europe with revenue from the Chinese market. However, as the Chinese market rapidly shifts toward domestically produced electric vehicles, Volkswagen's market share in China has plummeted, making it unsustainable to continue. Despite efforts to cut costs by halting shift work and laying off hundreds of temporary workers for several months, the company has reached its limit.

Oliver Blume, Volkswagen's current CEO, has continuously pushed for the transition to electric vehicles since taking office. The shift to electric vehicles, which began before Blume's tenure, has faced difficulties. The development of the electric vehicle software Cariad, aimed at supporting Level 4 autonomous driving, has been delayed from the original target of 2025 to 2027, postponing the release of related models. To overcome these challenges, Blume has chosen to strengthen partnerships with overseas companies. In January this year, Volkswagen formed a partnership with Chinese electric vehicle manufacturer Xiaopeng, and announced a $5 billion investment plan in American electric vehicle company Rivian. However, despite these efforts, electric vehicle sales in Germany have declined. By August this year, only 360,000 electric vehicles were sold in Germany, a decrease of over 20% compared to the same period last year. Consequently, Volkswagen's battery factory in Germany is operating only one of the two planned production lines. The decline in electric vehicle sales in Germany is due to the German government's sudden suspension of subsidies for electric vehicle purchases from December last year because of budget constraints. Since 2016, the government had provided subsidies ranging from 4.25 to 6.37 million won per vehicle, but the seven-year subsidy program's termination caused a sharp drop in sales.

While the poor electric vehicle sales directly caused workforce reductions, Volkswagen's excessive staffing and resulting cost increases and weakened competitiveness have been criticized for a long time. The previous CEO, Diess, also announced plans to cut 30,000 jobs but resigned amid union opposition. Volkswagen's union questions why workers should bear responsibility for management's strategic failures. Although the company focused on transitioning to electric vehicles, it failed to achieve results and did not secure competitiveness in the recently spotlighted hybrid vehicle segment. In contrast, companies like Toyota and Stellantis continue investing in hybrids alongside electric vehicles, adapting to the changing market, whereas Volkswagen has not. In 2022 alone, the German automotive industry spent 16 billion euros on research and development but failed to gain an advantage in electric vehicles, internal combustion engines, or hybrids due to incorrect market forecasts.

Volkswagen's workforce reduction announcement is shaking all of Germany. Since 1994, Volkswagen has had a job security agreement promising no forced layoffs until 2029, but the company is attempting to override this to proceed with cuts. However, Volkswagen's unique ownership structure lowers the likelihood of workforce reductions becoming a reality. The Volkswagen Act, enacted in the 1960s, requires 80% shareholder approval for major decisions, and the state of Lower Saxony, holding a 20.3% stake, can block management decisions. Considering Lower Saxony's usual stance prioritizing job retention, it seems unlikely that the company's proposed workforce reductions will materialize in the short term.

Germany faced significant difficulties after reunification in the 1990s due to the costs of unification. However, it revived in the late 1990s through labor market reforms and relocating workplaces to Eastern Europe to reduce costs, and it has grown steadily by securing a high market share in the rapidly expanding Chinese market. Recently, rising energy costs and increased labor costs due to labor shortages have caused new difficulties. Moreover, Germany is facing a crisis as it fails to respond effectively to new competitors represented by Chinese electric vehicles. Political instability caused by the rapid rise of the far-right Alternative for Germany (AfD) party, combined with a deepening economic recession, is raising concerns about Germany's future. Alongside political instability in France, which leads the European Union (EU) together with Germany, there is growing anxiety that the EU may lose its cohesion. The difficulties faced by Germany, a manufacturing powerhouse, may foreshadow the future challenges awaiting countries with similar industrial structures like ours.

Choi Jun-young, Legal Specialist at Yulchon LLC (Global Law & Policy)