Mass redundancies and plant closures in Germany are no longer taboo for Volkswagen. Last month came the thunderbolt of an announcement that it was cancelling the job security agreement that had been in place since 1994, and was scheduled to run until 2029. And there is also the possibly of closing domestic sites for the first time in the company's history, something that illustrates the extent of the current crisis in the German car industry.

LBBW notes that the growth story has been centred on exports, with a focus on China, for years. The bank titles a current sector analysis „The looming Detroit moment for the German automotive industry“, alluding to the decline of the American „Motor City“. Furthermore, the industry has focussed primarily on high-priced premium vehicles for both combustion engines and electric vehicles. Both strategies have reached their limits.

Against the backdrop of recent profit warnings from individual manufacturers such as VW, the bank points to the consumer crisis in China, the world's largest sales market. In addition, expensive electric cars, some of which are technically inferior to Chinese models, are not selling as well as forecast. In addition, there are structural cost problems, as well as stricter CO₂ emission limits in the EU from 2025, with possible fines in the billions. Steps clearly need to be taken, but a simple solution is hardly available.

In the first half of 2024, the operating profits of German manufacturers BMW, Mercedes-Benz and Volkswagen fell by 18% compared to the previous year, with sales revenue remaining virtually unchanged overall, according to an analysis of the 16 largest global automotive groups by consulting firm EY. In terms of return on sales, however, Mercedes (10.9%) and BMW (10.8%) still rank second and third in this study, while VW is in 11th place with 6.3%.

The study found that Stellantis (7.8%) and Tesla (5.9%) suffered the biggest drop in profitability in the first half of the year. According to EY, large investments in electromobility, in proprietary software capabilities, and discount campaigns, had a negative impact on profitability. At the same time, weak demand is leading to low unit volumes and underutilised factories. All of this is putting pressure on margins.

At the Wolfsburg-based core brand Volkswagen Passenger Cars, which accounts for a quarter of VW Group sales, the return on sales recently slipped to 2.3%. This means that there is hardly any room for manoeuvre to invest in the transition, or to react to price discounts from competitors. Lower Saxony's Minister President Stephan Weil (SPD), who sits on the Group's Supervisory Board on behalf of the state, which holds a 20% share of the voting rights in VW, is also aware of this.

The fact that there is a need for action with regard to competitiveness is not disputed in Hanover. The measures agreed only last year, which are intended to lead to a margin of 6.5% for the core brand by 2026, have proven to be insufficient. According to the management, the Group will have to prepare for at least half a million fewer cars sold per year in Europe in future, compared to the times before the coronavirus pandemic.

However, the state wants to prevent the lights going out at VW sites in Lower Saxony, and tens of thousands of employees being made redundant. The same goes for the powerful German VW Works Council, which points to the company's historical roots, and emphasises that profitability and job security have long been equally important corporate goals.

The fact that VW has always managed to overcome crises in the past is also emphasised now by stakeholders such as the state of Lower Saxony, which has been involved with Europe's largest employer for 75 years. The company has experienced bad periods repeatedly, for example after the diesel emissions scandal came to light in 2015, which was initially even seen in Wolfsburg as a threat to the company's very existence. In the wake of the biggest slump in sales to since 1992/93, tens of thousands of jobs are on the line.

The introduction of a four-day week, which was combined with a collective labour agreement to safeguard jobs for all VW employees, prevented the job cuts. Bernd Osterloh, head of the works council at the time, said in an interview with the WAZ newspaper in 2014 that the agreement protected „our jobs in the event of a crisis“, was „indispensable“ and had „the same significance as the euro bailout programme“. Now it has been cancelled.

Since then, the furore has been great. Daniela Cavallo, Chairwoman of the General Works Council since 2021, speaks of a „declaration of bankruptcy“ by the Management Board, which is not doing its job. In negotiations with the employee side, however, the Board of Management will hardly be able to agree to compromises that do not quickly and permanently resolve the long-standing problem of Volkswagen's lack of competitiveness.

Whether the negotiation process leads to a result that is more in line with the structures of the company, which has a high degree of co-determination, or to a solution that is sufficient from a business perspective, will not only affect employees at the German VW sites. The outcome of the restructuring agreements will also decide the future of Daniela Cavallo and Oliver Blume, the Financial Times quotes Jefferies analyst Philippe Houchois as saying.

For more than two years, investors have been calling for Blume to relinquish one of his two roles at the helm of the VW Group and Porsche, the subsidiary that has also been listed on the stock exchange since 2022. Ingo Speich, Head of Sustainability and Corporate Governance at Deka Investment, asks in the Financial Times how Blume can do both jobs properly when the automotive industry is in a structural crisis. DWS corporate governance expert Hendrik Schmidt is similarly sceptical, having expressed criticism at previous annual general meetings that Volkswagen is the only listed company in Germany to have a part-time CEO in Oliver Blume, thus causing „a worrying governance anomaly“ that can only be justified temporarily at most, but not permanently.

The requirements are enormous, for example in China, where Porsche is exposed to weak demand for luxury electric cars, and where the long-standing industry leader Volkswagen is lagging behind the competition in electric vehicles. At the same time, observers concede that the Group CEO, who has been in office for two years, is the right person to wrestle with the employee side, thanks to his three decades of experience in the multi-brand company following the resignation of his predecessor Herbert Diess.

As the production of electric vehicles requires significantly fewer employees, redundancies and plant closures seem almost inevitable, LBBW concludes its industry analysis. The bank believes that politicians are called upon to limit cutbacks by car manufacturers by creating more favourable production conditions.