Dark Clouds Circle Over Wolfsburg
For the last few months, one car manufacture’s name has continually popped up again and again. From headlines, to brief mentions in conversation to posts on social media, the German behemoth, Volkswagen, has been humming in the air and the mood in Wolfsburg seems bleak. Since it was established in Berlin in 1937 *cough*, Volkswagen has been responsible for bringing us some of the 20th centuries most iconic cars from the revolutionary Beetle, the Microbus that became synonymous with the swinging 60’s, to the pulsating excitement of the Golf GTI, this once jack-booted auto maker has gone from it’s humble and unfortunate beginnings to achieve something it’s founder never could, world domination. After all, a whopping 40% of Volkswagen’s sales and profits come from China alone, however, all is not well in that crucial market and Volkswagen is now having to navigate an immensely transitional period in the automotive industry with very little room for error with cut throat competition from new brands, many of whom are native to that most lucrative and crucially important Chinese market.
In the 1970’s, things were changing quickly in China. With the death of Mao in 1976, decades of economic isolation came to an end and under the new leadership of Deng Xiaoping, it was decided that, in order to modernise China’s automotive industry, an injection of foreign investment and knowledge was best and this led to a faithful visit to Wolfsburg in 1978, when a delegation of representatives from the Chinese Communist Party visited VW HQ in search of a partner from the automotive industry for a project in Shanghai. Exploratory talks were held, and a few weeks later the Volkswagen Group and representatives of the Chinese government began negotiations on local assembly. This culminated in the production of the first Chinese Volkswagen, the Santana in September 1985, but here is what is most important about this story, Volkswagen was in first. A China emerging from isolation and looking for foreign investment and know-how from Western brands to develop their automotive industry was equivalent to taking a cast of a squalid Victorian London slumites and offering one massive t-bone steak to whom ever could get their first and watch as they salivate and clamber over one another to take the prize. In 1985, China had a population of just over 1 Billion people and, in the next 40 years, that population of road going globalists would balloon to just under 1.5 Billion, and crucially, Volkswagen got in the door first and were adept at producing cheap, reliable transport that was desirable in ways other cut price manufacturers simply were not, and to you’re average pedal-pushing Chinese worker, a Volkswagen would have been as exotic as a Bentley to loud 19 year old Twitch Streamer. But, sadly, this was not to last.
Volkswagen may have had the jump on everyone else in getting to China, but, despite its early dominance, Volkswagen faced increasing competition in the 2000s as more foreign automakers, including General Motors, Toyota, and Honda, entered the Chinese market. More worryingly, Chinese domestic car manufacturers were also improving their capabilities and introducing more competitive models. This was due to the CCP’s condition of foreign car manufacturers having to pair with domestic manufacturers under a joint venture in order produce and sell cars in China. The down side to this arrangement is that domestic Chinese companies gained access to the latest in European and American automotive technology which they can study and research and develop until they are independent enough to produce their own models. We can talk more about Dieselgate another time, but what’s important to note now, is Volkswagen’s aggressive leap to Electric Vehicles and Battery Technology is partially to shed their skin in the aftermath of the emissions scandal and partially to shore up their market share in China. However, the truth of the matter is German car manufacturers as a whole hold only about 20% of the market share in China with domestic auto makers producing EVs only, now holding 30% and, if we drill down into just the EV market alone in China, 62.5% of the share is owned by domestic brands with German brands holding onto just 3.4%. China has always known it would never catch up to Europe, the Unites States and Japan when it comes to internal combustion, but the CCP saw another way by pouring investment into battery technology for decades until the likes of BYD and CATL controlled over 50% of the global battery market.
Tariffs are another thing I’ve been hearing about lately and it turns out that green subsidy initiatives might have done more bad than good to the European car industry. Basically, if you were a German consumer looking into purchasing a brand new EV, you are welcome to do so and the Government will even pay for it in the form of subsidies. How great is that? Any vehicle you like from any manufacturer you like from anywhere in the world. If you were a Chinese consumer, on the other hand, subsidies would only be available to you if you were to buy a Chinese EV and not a foreign one, like an ID.4, for example. Subsidies for Chinese EVs were worth $231 Billion between 2009 and 2023 and you don’t need to be Archimedes to work out that this spells trouble for those who are not just losing out in the World’s largest car market, but on their home turf as well.
As I covered already, China is worth 40% of Volkswagen’s bank balance and their market share has been declining for years and so, we must ask the question of what Volkswagen should do? If they were to abandon this market it could sink the entire group and you’d have to be mad to walk away from the world’s biggest car market so that seems unlikely. They could continue to crawl through the mud and try to hold onto their shrinking market share, but gargantuan companies like Volkswagen are a bit like sharks - if they stop moving they die. And so, the only option left for them is to try to regain some ground in China, but, that brings it’s own set of complications. All legacy car manufacturers are going through a difficult time of transition away from fossil fuels and into battery electric technology and this is both an expensive and risky game. It’s also important to know what your consumer wants from their car, and so, expensive technology for infotainment purposes is also a necessity and, if Volkswagen wants to regain share in the Chinese market, they will have to put a lot of resources and focus into R&D for software. Enter Rivian.
Volkswagen’s $5 Billion joint venture with Rivian to develop vehicle software. As EV adoption grows, software — used for driver assistance, optimizing vehicle performance, and integrating with smartphones, maps, and apps — is becoming a crucial factor in consumers’ decisions when choosing a car. The EU is imposing high tariffs on Chinese cars, but this does not help competition in Europe. For instance, Tesla (an American company) successfully lobbied the European Commission for a separate investigation within its made-in-China EV probe, scoring a lower rate than Europe’s own brands. Meanwhile, Volkswagen’s China partner SAIC was lambasted for non-cooperation and slapped with the highest duty of 35.3 percent. Couple this with underutilised factories throughout Europe and Chinese manufacturers determination to circumvent tariffs by setting up shop in Europe, and you have a cataclysmic outcome for Volkswagen, and it looks like Volkswagen is headed straight for that cataclysmic outcome. It is rumoured that up to 30’000 lay offs could be in the pipeline on Volkswagen’s home turf in Germany. According to Manager Magazin, 10% of the conglomerates workforce would be cut, hitting R&D hardest and forcing the closure, for the first time ever, of two of it’s German factories. The rumours have sparked outrage among union leaders in Germany and offers of help from Germany’s Economic Minister, Robert Habeck.
Volkswagen is not the only European car manufacturer in this difficult position, but it is especially vulnerable given how reliant it has become on China. As mentioned, many factories across Europe remain underutilised as manufacturers produce more cars than they can sell. The Stellantis factory in Mirafiori, Italy, where the Fiat 500e is built has dropped production by more than 60% in the first half of 2024. A need for extra revenue, idle factories, politicians looking to prevent a workforce ending up on the unemployment list and determined Chinese manufacturers looking for ways around import tariffs might be the perfect storm to turn Wolfsburg from the home of the Volkswagen Golf to home of the BYD Seal.
