The Fuel Driving Volkswagen’s Crisis – Reuters

By Victoria Waldersee, Christina Amann, Christoph Steitz

BERLIN/FRANKFURT – In May, Volkswagen’s finance chief, Arno Antlitz, raised alarms about the need for Europe’s leading car manufacturer to prepare for fierce competition from abroad, especially from China, within the next two to three years.

However, last week, Antlitz reduced that timeframe by a year, sending shockwaves through the global automotive sector with a warning that the company may need to close plants in Germany for the first time.

Volkswagen has been grappling with several challenges, including a weakening Chinese market and a slower-than-expected transition to electric vehicles. Recent developments have exacerbated the situation, according to interviews with various sources within the company, investors, and analysts.

One major concern is that Asian rivals, such as BYD, Chery, and Leapmotor, may expedite their plans to establish production capacity in Europe if the EU implements significant import tariffs on electric vehicles manufactured in China.

Additionally, Volkswagen has recently slashed prices for its VW brand vehicles to counter heightened competition, a strategy that, according to works council chief Daniela Cavallo, is costing the company hundreds of millions of euros in lost profits. These discounts exceeded initial expectations and led management to recognize that high operational costs in Germany are undermining their competitiveness against more nimble rivals.

"This is one of the largest car producers in the world which is not producing large returns from that scale," stated Cole Smead, CEO of a major Volkswagen shareholder. He questioned whether the company could maintain its production levels in a country that offers such low returns.

On top of restructuring costs, the price reductions have hindered Volkswagen’s efforts to achieve cost savings exceeding 10 billion euros by 2026. As a result, the profit margin for the VW passenger car brand plummeted to 0.9% in the second quarter, down from 4% in the first. In contrast, other major European automakers, Renault and Stellantis, posted profit margins of 8.1% and 10%, respectively, in the first half of the year.

The squeeze on Volkswagen’s margins occurs as Chinese competitors increase their presence in the European market, raising concerns about what might happen when they begin local production. The overall car market in Europe is approximately 13%, or two million vehicles, smaller than it was before the pandemic, according to CFO Antlitz.

DZ Bank analyst Michael Punzet suggested that given the mounting challenges, Volkswagen is likely to further reduce its full-year group margin target when it releases third-quarter results. The target was already cut to between 6.5% and 7.0% in July, primarily due to potential closures of an Audi facility in Brussels.

With diminishing demand, selling mass-market vehicles has become a battle centered on minimizing production costs. "The strategy of finding growth to solve problems is gone. Everyone is losing market share, and adjustments are necessary," remarked Jefferies analyst Philippe Houchois.

Antlitz noted that the VW brand, which accounted for over half of the company’s production last year, has been spending more than it is earning, warning that sustained losses are unsustainable.

Volkswagen’s automotive cash flow, a critical indicator of operational health, became negative in the first half of 2024, reflecting a loss of 100 million euros, compared to a profit of 2.5 billion euros during the same timeframe last year.

The issue of stiff competition is not confined to Europe. Profits from China, Volkswagen’s largest market, have nearly halved over the past decade, with projections indicating a slight recovery to around 3 billion euros by 2030.

In Germany, the company is also contending with high energy and labor costs, which rank among the highest in Europe, posing additional challenges for the automotive sector.

Analysts at Citi emphasized that the combination of new, less expensive competitors, rising energy prices, and elevated labor costs heralds a difficult future, particularly for European mass-market brands.