Han Dieperink: The impending end of the European car industry

September 17, 2024

_{This column was originally written in Dutch. This is an English translation.}

By Han Dieperink, written in a personal capacity

Volkswagen's management does not paint a positive picture of the company. According to the CFO, the car manufacturer has one to at most two years to get things right. The CEO states that major changes are needed to survive.

Now these statements are mainly addressed to the employees and the unions, if only to convey the 'sense of urgency'. Yet bondholders will find it difficult to ignore such statements. They mean that Volkswagen (which will have to refinance tens of billions in the coming years) will probably be confronted with higher credit spreads. The problems are partly due to Volkswagen's own choices in the past and partly due to developments in the industry. While future transitions will further increase the problems for the automotive industry.

Accumulation of errors

Volkswagen responded to the diesel scandal by moving forward. While the car manufacturer was very cautious with electric cars prior to that scandal (the Zoë was the best-selling electric car in Germany), it suddenly launched more than 30 new electric models, all of which were built on its own production lines and platforms.

It now appears that part of the end market no longer exists as a result of Chinese competition and disappearing subsidies. Volkswagen suffers above average from Chinese competition because the company mainly operates in the lower segment. In that part of the market, people buy a car and brand loyalty is quickly exchanged for an alternative with a lower price. People in the higher segment, on the other hand, usually do not buy a car from Volkswagen, but from Mercedes, for example.

Difficult company to reorganize

The choice of one's own production lines for the electric models is fine, as long as there is a lot of demand for electric. However, if demand (due to disappearing subsidies) shifts to fossil or hybrid, this will suddenly become a very expensive hobby. To survive in the capital-intensive car industry, there is no other option than to reorganize.

In Germany (and specifically at Volkswagen) it is particularly difficult to fire staff. Various Dutch construction companies can discuss this. At Volkswagen, the employees (and the unions) have a lot of power. This is partly due to the governance and the dual shareholder structure. The ordinary shares are owned by three investors: the Porsche family, Qatar and the state of Lower Saxony. The preference shares are therefore more liquid. Lower Saxony effectively has a veto right through its interest. Decisions in the board are made by a two-thirds majority. Partly because of this, the staff has a lot of power.

The Chinese win on flexibility

Volkswagen has been losing market share for years. There was a time when Volkswagen was the market leader in the Chinese market. That spot has now been given to Baidu and there are more than 100 Chinese car manufacturers that compete with Volkswagen not only in China, but also in other markets. Europe's choice to respond with import tariffs is not only stupid, but also counterproductive. Import duties are nothing more than an additional burden for European consumers. Moreover, China can take countermeasures, which mainly affect the German car industry. Other German car makers will also be affected.

Western car makers in trouble

The problem in the car industry affects not only Volkswagen, but many more Western car manufacturers. Previously there was competition with the Japanese and then the Koreans. The Chinese are now surpassing that in a superlative manner. There are plenty of complaints about unfair competition due to state subsidies, but there is no French car brand that has not been rescued several times (if necessary through nationalization). Furthermore, the risk of transitions in such a capital-intensive industry is once again apparent.

Volkswagen has focused on electric, but can produce many more cars than it sells. Volkswagen can build about 14 million cars every year, but last year only about 9 million were sold. That is why Volkswagen wants to close factories in Germany for the first time in its existence.

Germany no longer ExportWeltmeister

The problems at Volkswagen naturally also affect Germany itself. For years, Germany was Export Weltmeister, helped by cheap Russian gas. Germany now accounts for 13% of turnover and 44% of the workforce. Volkswagen employs 650,000 people worldwide. Do not underestimate the size of the supply industry (partly also in the Netherlands). They all have families and acquaintances and that is an important part of the German electorate. This will ensure that Volkswagen continues to exist as a brand, although it is questionable whether it will be of much use to shareholders.

Perhaps a quick merger with Baidu is the way to ensure Volkswagen's survival. The problems come at an unfortunate time for Germany. Things are not going well in Germany, but things are possibly even worse in France. If in the next crisis situation France looks to Europe again for a solution (read: money), there is a good chance that they will not receive a euro cent from Germany.

Even more challenging transitions

After the transition from fossil-powered cars to electric cars, there are two other challenging transitions in the short term. The most important is that of autonomously driving cars. After almost 10 years of speculation about the first self-driving cars, the time has now come. Robotaxis are now operating in Phoenix and San Francisco (and several Chinese cities). These are cheaper than buying a car yourself (which stands still 95% of the time) and much cheaper than public transport.

The impact is enormous. No parking garages in the city, but outside of it. In the city, the car will disappear from the streets and be replaced by the robotaxi. Large parts of the countryside are suddenly much more accessible. Public transport – especially on short distances – will disappear. In addition, car factories will be fully staffed by robots in the form of humanoid robots. That also sidelines the unions.

More columns by Han Dieperink