ARTICLE
16 January 2025

Volkswagen's Race For Survival

DW
Dickinson Wright PLLC

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Dickinson Wright is a general practice business law firm with more than 475 attorneys among more than 40 practice areas and 16 industry groups. With 19 offices across the U.S. and in Toronto, we offer clients exceptional quality and client service, value for fees, industry expertise and business acumen.
Although nearly all legacy OEMs are struggling to address the myriad challenges inherent in the transformative transition from ICE to BEV...
Worldwide Transport

Introduction

Although nearly all legacy OEMs are struggling to address the myriad challenges inherent in the transformative transition from ICE to BEV, perhaps none has been more consequentially impacted than the venerable leading European manufacturer, Volkswagen. The fallout from missteps in the transition process from ICE to BEV has cost VW billions in losses and materially negatively impacted its iconic brands. It was reported by Bloomberg Law that VW's parent, Porsche Holdings, may take a €20 billion impairment due in large part to VW's failed execution of its EV strategy.

Volkswagen's very viability is dependent upon the successful completion of a massive, painful and unprecedented restructuring. While some elements of Volkswagen's situation are unique, many of the factors contributing to its current precarious state are shared by most legacy OEMs. It is therefore instructive to understand the reasons for the decline of VW and to evaluate its prospects for survival.

Brief Company History and Profile

Volkswagen's history traces back to the development of the "Käfer" (Beetle). In 1934, the initiative to design and mass-produce an affordable "People's Car" began as part of a Nazi-backed project designed to promote the image of Germany as technologically advanced and capable of providing affordable, modern conveniences to its citizens. The German government officially founded Volkswagen in 1937. However, with the outbreak of World War II, the company transitioned to producing military vehicles and armaments. Following the war, Volkswagen returned to its foundational mission, resuming production of the Käfer, which became an iconic symbol of accessible transportation.

The company was the world's largest car manufacturer in 2016 and 2017, based on the number of global sales. In 2019, the VW Group grew its worldwide deliveries by 1.3% to 10,974,600 vehicles. VW Group currently owns 12 brands, employs 671,295 worldwide, has 124 production plants in 20 European countries and an additional 11 plants outside Europe, and sells its vehicles in 153 countries across the globe. The Volkswagen Group's largest market is China (including Hong Kong and Macau), which accounts for 40% of its sales. (Wikipedia).

From Dominance to Survival Mode

VW was once the leader in worldwide automobile sales, selling its iconic brands throughout the world and, for a time, sold more vehicles on an annual basis than any other manufacturer. It was an early entrant into the Chinese market and dominated Chinese domestic sales for a number of years.

Today, VW is losing market share in China and elsewhere, having been eclipsed by Toyota as worldwide sales leader. Perhaps more foreboding, it is feeling the competitive heat from Chinese manufacturers like rising superstar BYD. A New York Times article from December 15th, titled "Automakers Thrived in the Pandemic. Many Are Now Struggling,"1 notes that VW, which gets a third of its sales from China, saw a 10% drop in deliveries there in the first nine months of this year compared to 2023.

Ironically, several years ago, VW was a strong advocate for a rapid transition to electric vehicles and supported government regulations to speed up the process. This stance frustrated some competitors who favored a more incremental and nuanced approach. The author noted that "Volkswagen was among the first established carmakers to develop electric vehicles, but the models underwhelmed buyers and critics." In the U.S., sales of the ID.4 SUV dropped by more than half in the third quarter compared to the previous year, according to Kelley Blue Book. Software issues affected sales of the ID.4 and other electric models in Europe and Asia. Thomas Schafer, CEO of Volkswagen passenger cars, stated, "We currently don't make enough money from our cars, while our costs for energy, materials, and personnel have continued to rise."

Aggressive Restructuring

This fall, VW began negotiations with its union on a bold restructuring plan. Factors such as overcapacity, high manufacturing costs, a declining European market, poor investments, and fierce competition in China necessitated swift action. The restructuring plan initially called for the closure of three German factories, laying off thousands of employees, and implementing wage cuts for those remaining—an unprecedented move in VW's history.

VW's proposals were met with pushback from its union. In an article appearing in Bloomberg's Hyperdrive entitled, "Gridlock in Germany",2 the author noted the stalemate in VW's negotiations with its unions over these cost-cutting measures, in particular looming layoffs and factory closings.

The union is not only opposing the proposed cost-saving measures but is also critical of the corporate decision-making that led to this situation. In an article of Bloomberg Hyperdrive from December 5 entitled, "Placing Risky Bets",3 the author lists a number of multibillion dollar failed investments that have drawn the union's ire and undermines the union's confidence that management can successfully manage a difficult restructuring. The authors criticize multiple failed investments, including the allocation of approximately €1.4 billion ($1.47 billion) into a Swedish battery upstart in which VW was the largest shareholder until its Chapter 11 filing in the US last month. They also claim VW's decision to allocate close to €12 billion into its in-house software unit Cariad was an even costlier move. While more than two-thirds of that investment has gone into existing software architecture and technology used in the current lineup, the unit has racked up billions of euros in operating losses since 2021 and caused years of key model delays. High hopes for autonomous driving also prompted VW to invest approximately €2.6 billion into Argo AI, the driverless tech company it co-founded with Ford. But tantalizing visions of deploying self-driving across a variety of projects ran up against regulatory snags and cultural resistance. VW wrote down €1.9 billion in 2022 after it backed out of the project.

VW has reportedly reached a deal with its union in order to charge forward with its plans to streamline operations, enhance efficiency, and restore its financial footing. In an article4 appearing in Wall Street Journal on December 20, the author provides the broad outline of VW's deal with its union. In sum, it is reported that the deal will avoid any forced job cuts or factory closures in Germany until 2030. Also, based on staffing and bonus reductions and what the author describes as "...a novel cost-control tactic," annual savings at some point are estimated to rise to €4 billion.

VW's China Problem

VW's precipitous decline in China represents perhaps VW's greatest challenge. In an article appearing in the Wall Street Journal on December 18 entitled, "The China Shock Behind the Honda-Nissan Merger Talks,"5 the author discusses the rapid growth of EVs and hybrid vehicles in China and the rise of Chinese competition. The author aptly captures the dilemma, noting, "Western and Japanese brands for decades dominated and milked the Chinese market, while having little fear of Chinese rivals encroaching on their own strongholds. ....The foreign brands were taken by surprise at how quickly EVs and their plug-in hybrid cousins took off in China in the span of four years."

Given the extraordinary support of the Chinese government for its domestic producers, which shows no sign of abating, production costs advantage of the Chinese competition as well as the advanced state of engineering and styling of the Chinese products, it is hard to envision how VW will be able to rebuild its brand and market share in China.

Volkswagen Isn't Throwing In the Towel

In an early December interview with Automotive News Europe, Martin Sander, VW Board member for sales and marketing, struck an optimistic tone, in terms of VW's ability to compete in terms of quality, performance and price. He noted for example the Model ID3, which has a price tag in Germany and France below €30,000, has more range than the Tesla Model Y, and charges faster than the BMWj4.

Apparently, VW has no plans to abandon the China market. Volkswagen has made clear it intends to invest and rebuild in China, its biggest market, even as it pursues painful cost cuts at home. Over the past year or so, Volkswagen has been shifting to use more Chinese components obtained from local suppliers to cut development time and expense. It is also investing billions of dollars in local companies to get its hands on cutting-edge Chinese technology.

In his interview with Automotive News, Mr. Sanders again struck an aggressively optimistic tone. "Our business in China is the huge advantage for the whole organization. We are committed to competing there, which is why we have more than 30 new products in the pipeline that are going to launch in China starting in 2026. Most of them will be new energy vehicles (full-electric and plug-in hybrids). I'm convinced these cars will be highly competitive when it comes to their features and prices. Everything we have to do to be successful in China helps us in Europe, North America and everywhere else. We already talked about the how it has helped us speed up our development cycle. It has forced us to be much more rigorous about cost control to compete with all these new players. This will definitely put us in a much more competitive position everywhere."

As an example of its creativity or, as others would argue, its desperation, VW is partnering up with Rivian to build EV software. In an article appearing in Barron's December 16th edition entitled, "Volkswagen Bets On US Start Up To Save Its EV Strategy,"6 the author reports that the companies will jointly build the operating system for VW's EVs from 2026 onward. The author quotes the Center For Automotive Research as describing the partnership as "high risk."

Conclusion

Successfully undertaking a complex restructuring of a global company in a stable and generally positive environment is an enormous task. To do so, during a time of industry transformation, in a declining overall European market, in a skeptical, if not hostile labor and regulatory environment and in a highly competitive industry is, extraordinarily challenging, if not arguably impossible. Whether Volkswagen management is up to the task remains to be seen. Stay tuned.

Footnotes

1. https://www.nytimes.com/2024/12/15/business/automakers-trouble.html

2. https://www.bloomberg.com/news/articles/2024-12-16/volkswagen-s-conflict-with-labor-risks-dragging-on-next-year?cmpid=BBD121724_hyperdrive&utm_medium=email&utm_source=newsletter&utm_term=241217&utm_campaign=hyperdrive

3. https://www.bloomberg.com/news/newsletters/2024-12-05/vw-s-risky-northvolt-bet-exposes-series-of-costly-investments

4. https://www.wsj.com/business/volkswagen-union-says-labor-negotiations-stuck-after-four-days-of-talks-0f2558cd

5. https://www.wsj.com/business/autos/the-china-shock-behind-the-honda-nissan-merger-talks-0b1ce808

6. https://www.barrons.com/news/volkswagen-bets-on-us-startup-to-save-its-ev-strategy-428ee428

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