The automotive industry is witnessing significant turbulence, particularly for the giant Volkswagen Group, which has repeatedly found itself in the eye of the stormAs of September this year, Volkswagen has made headlines by considering the closure of its automotive and parts factories in Germany as part of a strategy to cut costsThe company’s management has issued stark reminders that, to remain competitive, closures and wage reductions are going to be part of the tough decisions ahead.

This announcement has sparked outrage among workers, with unions and the management in fierce negotiations over pay cuts and potential factory shutdowns, yet an agreement remains elusiveOn December 2, workers from nine Volkswagen and parts factories across Germany staged strikes in protest against the proposed factory closures and mass layoffs.

Subsequent negotiations between Volkswagen Group and labor representatives on December 9 marked the fourth round of talks concerning wage reductions and factory closures, but once again, no resolution was achieved

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Recent financial reports reveal a grim picture for the group, with a staggering 63.8% drop in net profits year-on-year for the third quarter and a staggering 42% decline in operating profitThe operating margin shrank from 6.2% to just 3.6%, marking the lowest level in over four years.

Volkswagen is not alone in this predicament; many European car manufacturers are struggling, forcing several automakers and parts suppliers to implement significant cost-cutting measures to surviveStellantis, a company on par with Volkswagen, is also experiencing turmoil, as CEO Carlos Tavares recently resigned, leaving the company under interim management until a new CEO is appointed.

Founded in 2021 through the merger of PSA Group (Peugeot-Citroën) and FCA Group (Fiat-Chrysler), Stellantis has severely underperformed this year, with a 27% drop in net revenue and a global delivery decline of 20%. Meanwhile, workers have expressed their concerns, questioning the management's competency under the challenging circumstances.

The broader European automotive industry is bracing for mass layoffs

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With the year coming to a close, over ten multinational automotive giants have already announced significant layoff plans, collectively aiming to cut around 50,000 jobs, with predictions indicating that the figure could exceed 100,000. According to Zhang Xiang, a researcher at the Automotive Industry Innovation Research Center, European automotive companies face the dual pressures of a declining internal combustion engine market and a rapid shift to new energy vehicles.

As a result, leading companies like Volkswagen, BMW, and Mercedes are incurring losses due to insufficient sales of their gasoline models, prompting them to cut costs by downsizing operations and even closing factories to avoid escalating lossesThe Chinese market is of paramount importance for Volkswagen’s future prospects.

With years of dominant sales in China, that market stood as Volkswagen's largest single market in 2023 with delivered volumes reaching 3.236 million vehicles, reflecting a year-on-year growth of 1.6%. However, in the first three quarters of 2024, Volkswagen experienced a global delivery of 6.524 million vehicles, with a notable drop of 10.2% in the Chinese market, making it the group’s largest area of decline.

BYD is on track to overtake Volkswagen in annual sales, aiming to become the top-selling automaker in China for 2024. As of the first eleven months of the year, BYD has delivered 3.76 million vehicles, with November alone accounting for over 506,000 units sold

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While the European market becomes increasingly less profitable, the Chinese market remains critical for Volkswagen Group's overall performance.

If the Chinese market wavers significantly, Volkswagen risks severe repercussions across its overall sales and profit marginsAs automotive analyst Guo Yining succinctly puts it, "Volkswagen's declining sales in China represent their gravest challengeThe only avenue left to alleviate pressure is the closure of specific factories to reduce costsLosing traction in China could threaten Volkswagen's long-standing battle with Toyota for the global sales title."

Volkswagen is acutely aware of its lag behind some domestic Chinese brands in terms of technologies related to smart and electric vehiclesTo counter this, the company is aggressively pursuing electrification and enhancing collaboration with local manufacturers, as well as ramping up investment in R&D for advanced driving systems and onboard technology.

Bertrand Le Péron, Chairman and CEO of Volkswagen Group (China), affirmed recent commitments to continue engaging with the Chinese automotive industry's evolution, aiming for advancements in electrification and digitalization

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By 2030, the group plans to launch at least 30 all-electric models, aspiring to uphold its position as the leading international carmaker in China.

In July 2024, Xpeng Motors and Volkswagen signed a strategic cooperation agreement to jointly develop electronic and electrical architecturesCollaborative teams have been established in Guangzhou and Hefei to enhance the project, with the first model utilizing this architecture expected to go into production within 24 monthsThis partnership exemplifies Volkswagen's understanding of its shortcomings while seeking necessary technological cooperation.

According to Yang Yueqing, engineering project director at HiPhi, Volkswagen has made commendable strides towards electrification in the Chinese market when compared to other foreign entities

Their electric ID series aptly demonstrates Volkswagen’s resolve in this directionCollaborations such as this with Xpeng highlight their recognition of internal weaknesses and the necessity for partnerships in technology.

Yet, the hurdles faced by foreign companies during their electrification transitions often stem from the burdens of historical manufacturing practicesTo pivot, these firms must invest heavily to retrofit traditional gasoline production lines into electric-focused infrastructuresThis challenge complicates structural reforms, necessitating factory closures in Europe to reallocate resources towards electrification efforts.

Despite the perceived slow pace of transformation in companies like Volkswagen, this does not equate to a lack of capacityOnce liberated from traditional constraints, these firms might very well eclipse certain Chinese players in efficiency and progress with electrification initiatives