In today’s Finshots, we tell you why German automaker Volkswagen is struggling.
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The Story
€230 billion ($240 billion)!
That’s the staggering debt sitting on Volkswagen’s (VW) books. And that makes it one of the most indebted listed companies in the world. But if you think that’s the only trouble brewing for the German auto giant, buckle up.
Its profits have hit a speed bump too — down 20% in the first nine months of 2024 compared to last year.1 And now, VW is weighing a drastic move — shutting down three factories in its home turf, Germany.
If that happens, tens of thousands of jobs could vanish, a gut punch for a country where VW is the largest employer.
And that signals a troubling time for the world’s second-largest automaker.
So, what’s driving this crisis, you ask?
To understand that, we’ll have to go back in time and see where it all began.
In 1937, Germany’s government, led by Adolf Hitler, founded Volkswagen, or “The People’s Car Company”.
The idea? To build an affordable, fast car priced under 1,000 Reichsmarks, the currency back then. Ferdinand Porsche, the engineer behind the design, came up with the KdF-Wagen, which we now know as the Beetle.
Sure, World War II put a halt to production, but VW found its footing again post-war.
And of course, the car’s Nazi roots and tiny size didn’t win over Americans at first. But in 1959, a genius ad campaign turned the Beetle’s compactness into its charm. Suddenly, it became America’s favourite foreign car.
Then came a big shift. The German government sold off 60% of its VW stock to the public, privatising the company. And not long after, VW hit a historic milestone. The Beetle broke a major record, surpassing Ford’s legendary Model T, which had held the worldwide production record of 15 million vehicles since the early 1900s.
From there, VW was unstoppable. By the 1990s, it was on a buying spree, snapping up lavish brands like Škoda, Bentley, Lamborghini, Ducati and Scania trucks.2 Its market share in Europe surged from 12% in 1980 to 25% by 2020. At one point, it even overtook Toyota to become the world’s top carmaker. It was riding high, with an audacious or as some people would call arrogant slogan — “Das Auto” (The Car).
But 2015 changed everything.
That year, the US Environmental Protection Agency (EPA) uncovered a shocking scandal. VW wasn’t playing fair. It had been rigging its cars to cheat emissions tests, letting vehicles spew out 40 times the legal limit of nitrogen oxide for over a decade!
If you’re wondering how it got away with that for so long, well, it had a little trick up its sleeve — a “defeat device”. This was a sneaky software designed to outsmart emissions tests.
It would monitor details like speed, engine activity, air pressure and even the steering wheel position to detect when the car was in a controlled testing environment. And that would switch the car into a special “clean mode”. In this mode, the engine would emit far less pollution than it actually did on the road. But as soon as the test was over, the car went back to its regular polluting ways.
And that’s how VW’s so-called “clean diesel” vehicles managed to become a hit, capturing nearly a quarter of their US sales, until the truth came out.
When the scandal broke though, the backlash was swift and brutal. VW’s once-pristine image was tarnished. Its stock nosedived and customers didn’t want to touch the brand with a barge pole, especially in the US.
The financial hit was colossal — €31 billion ($35 billion) in fines and settlements that kept draining its coffers until 2021.
But VW knew it had to bounce back and fix its reputation. It had to build great cars again and take on its competition the honest way.
Then came the twist.
The pandemic hit global economies hard, but Germany’s woes were particularly worse.3 Its economy slowed to a crawl and never quite recovered. For context, Germany’s GDP barely grew 1% above its pre-pandemic level, lagging far behind the 5% growth in the rest of the Eurozone and more than 10% in the US.
Things only got worse with the Russia-Ukraine war. Russia’s invasion led to skyrocketing energy costs, especially after it cut off gas supplies to most of Europe. And Germany, heavily dependent on Russian energy, was left scrambling. Industries that guzzle energy — chemicals, metalworks and yes, even automakers like VW, felt the heat. Rising input costs squeezed VW’s margins further.
And if that wasn’t enough, the EU (European Union) added a new challenge. In 2023, it announced plans to ban petrol and diesel cars from 2035. This meant that VW had to pivot hard towards electric vehicles (EVs), moving away from the combustion engines that had long been its claim to fame.
But shifting to EVs wasn’t smooth sailing either. VW was late to the EV party, and the timing couldn’t have been worse.
Germany had ended its EV subsidies after spending €10 billion to support 2 million electric vehicles since 2016, declaring the subsidy program a success.4 And without these incentives, Germans had little reason to switch to pricey EVs, especially VW’s, which came with higher price tags.
To top it off, VW faced another hurdle ― a shrinking pool of skilled workers.5 An ageing population made it harder to find the young talent it needed to keep production running smoothly.
It was a perfect storm of challenges.
What was left then?
Exports?
Well, that hasn’t panned out either.
Take for instance Germany’s trade with China. Back in the 2010s, the trade between the two countries was a win-win. Germany sold cars, chemicals and machinery to China, while China in turn supplied consumer goods and things like batteries and electronics. But now, China produces most of those locally, at much lower costs. So, VW cars aren’t as competitive in China anymore.
Even in the US, VW struggled to understand the market.6 The cars it made were either too small, too expensive or both. By the time VW caught on to what Americans wanted, Japan and Korea’s automakers had already learned from VW’s mistakes and grabbed the market share.
So yeah, with home and international sales dropping, VW expects to deliver just 9 million cars globally this year, down from 9.24 million in 2023.7
And maybe it sees cutting costs as the only way out.
But here’s the thing. Even if it goes down that road, it’s going to affect the entire automotive industry. After all, the automotive sector is Germany’s biggest, contributing 5% to GDP and employing nearly 8 lakh people — close to 40% of them at VW.
Can cutting costs help VW drive out of its slump, even if it means dragging down its own country’s economy?
Only time will tell. Until then…
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Story Sources: Volkswagen Group [1], The Conversation [2], The Economist [3], Technology Review [4], CNN [5], Capital One [6], Fortune [7]
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