“THE FUTURE of the VW model is at stake.” When Thomas Schäfer, the mass-market marque’s newish boss, gave a presentation to his administration workforce in early July, he didn’t sugarcoat its issues. Excessive prices, falling demand, rising competitors—the record goes on. “The roof is on hearth,” he warned, echoing one of the famous alarm calls in latest enterprise historical past—from Stephen Elop, who in 2011 in contrast his firm to a “burning platform” shortly after taking the helm at Nokia, then the world’s largest maker of cellphones.


Within the case of Nokia, the wake-up name didn’t assist. Just a few years later the agency was dismantled and its mobile-phone enterprise bought to Microsoft, which has since closed it down. May mighty VW, its mightier mum or dad group, which owns 9 different manufacturers, and even Germany’s mightiest {industry} as an entire actually endure an analogous destiny? And if it did, what would that imply for Europe’s greatest financial system?

An imminent implosion of the automotive {industry} appears unlikely. In 2022 Volkswagen was the world’s largest carmaker by income, giving it loads of money to help its greatest model. On July twenty seventh it reported that gross sales rose by a wholesome 18% within the first half of 2023, yr on yr, to €156bn ($174bn). BMW and Mercedes-Benz, Germany’s two different massive automotive issues, are in first rate nick.

But catastrophe is not inconceivable. German industrialists are feeling actual angst concerning the future. In July an index of enterprise confidence from Ifo Institute, a think-tank, fell for the third consecutive month. German bosses echo Mr Schäfer’s record of issues and add different gripes, from bunged-up paperwork to the fragile geopolitics of commerce with China.


Carmakers are extra uncovered to those challenges than most industries, as they’re having to barter a number of transformations without delay. They need to electrify their fleet, as an illustration, and be taught to develop software program. As these developments play out, extra of the worth added is more likely to come from elsewhere. Trade insiders admit that factories should shrink and even shut down, as will many suppliers, particularly these which make elements for inner combustion engines and gearboxes.

Germany’s automotive {industry} should additionally sort out its rising China downside. Having benefited from the Asian large’s fast progress in latest a long time—within the second half of 2022 Germany’s three massive automotive firms made round 40% of their income there—they’re now affected by a reversal of fortunes. Volkswagen has simply minimize its international supply forecast owing mainly to slowing Chinese language gross sales. Geopolitics are liable to make issues worse. And Chinese language rivals have began increasing overseas, significantly in Europe. Final yr, for the primary time, China exported extra automobiles than Germany: round 3m and a couple of.6m automobiles, respectively.

Pushed to extinction?

All these issues are coming collectively in Wolfsburg, house to Volkswagen’s headquarters—and thus the roof in Mr Schäfer’s metaphor. Based on press stories, orders for the group’s EVs are between 30% and 70% beneath plans, relying on the marque. The agency nonetheless has to type out its software program issues: in Might it once more shook up the administration workforce of Cariad, its digital unit. In China’s fast-growing marketplace for EVs, the VW model is an also-ran, with a market share of two%.

The implications of carmakers’ potential demise rely on how massive you assume the {industry} is. Carmaking instantly employs fewer than 900,000 folks in Germany, two-thirds of them on the automotive corporations and the remaining at their suppliers. That’s simply 2% or so of Germany’s whole workforce. Practically three-quarters of passenger automobiles bought beneath a German model at the moment are made overseas. Final yr a mere 3.5m automobiles left native factories—about as many as within the mid-Seventies.

Apprehensive {industry} insiders level to various measures. Greater than half of the EU’s carmaking gross worth added is produced in Germany, miles forward of France, which is second with 9%. Automobiles account for 16% of German exports of products. And though the financial significance of Germany’s automotive {industry} peaked at 4.7% of the nation’s gross worth added in 2017, the share was nonetheless at 3.8% in 2020, the final yr for which knowledge can be found, calculates Nils Jannsen of the Kiel Institute, a think-tank. Based on different estimates, that is a few proportion level greater than different carmaking powerhouses resembling Japan and South Korea.

Furthermore, zeroing in on slender {industry} numbers misses the sector’s true significance for Deutschland AG. “It’s an working system of kinds,” explains Oliver Falck, who runs the Ifo Centre for Industrial Organisation and New Applied sciences. “Vital elements of the German financial system and its establishments depend on it,” he says.

For starters, direct suppliers are usually not the one ones to rely on Volkswagen and its friends. Newer numbers are exhausting to return by, however in line with a research in 2020 by Thomas Puls of IW, one other think-tank, and others, international demand for German automobiles accounted for greater than 16% of the worth added of Germany’s metallic bashers and plastics makers. Additionally they estimated that such international demand not directly paid for one more 1.6m jobs, bringing the overall variety of folks supported by the automotive {industry} to 2.5m, greater than 5% of the German workforce.

German funding and innovation are tied to the nation’s carmakers. The automotive {industry} accounted for 35% of gross mounted capital formation in manufacturing in 2020, in line with IW. In 2021 the sector was the supply of greater than 42% of producing analysis and improvement and paid for 64% of all R&D performed by different corporations and analysis establishments, primarily based on numbers from the Stifterverband, an affiliation largely of analysis foundations. Based on IW, carmakers accounted for practically half of company patent filings in 2017, up from a 3rd in 2005.

The automotive {industry} can also be central to Germany’s much-vaunted social mannequin. One essential factor is regional equality. Automotive factories had been typically in-built in any other case economically weak areas, of which Wolfsburg is the prime instance. The sector shores up many of those areas. Based on one latest research, 48 of Germany’s 400 cities and counties are closely depending on jobs within the automotive {industry}. Wolfsburg leads the pack: 47% of town’s staff toil within the sector. Ought to carmaking fade, Germany would face “many native crises”, says Wolfgang Schroeder, one of many authors of the research and a fellow on the WZB, a analysis outfit.

With out a robust automotive {industry}, Germany’s usually placid industrial relations would turn into a lot rougher. Union leaders resembling Roman Zitzelsberger, who heads IG Metall in Baden-Württemberg, the state that’s house to Mercedes-Benz, Porsche and Bosch, a large car-parts provider, freely admit that it’s the organisation’s “spine”. IG Metall’s some 2m members make it the world’s single greatest commerce union. A few third of them work within the automotive {industry}. Union membership at some firms within the sector reaches 90%. This energy, in flip, helps IG Metall negotiate good wage offers which then radiate out to different corporations and industries the place it’s much less entrenched.

The automotive {industry} additionally undergirds Germany’s mannequin of co-determination, the place staff are assured illustration on company boards. Volkswagen is once more the prime instance. The sector’s highly effective works councils present IG Metall with entry to essential assets, from cash to data. Worker representatives make up half the agency’s 20-member supervisory board, giving them entry to common updates concerning the firm’s situation and the flexibility to veto strategic selections. (One other two members are political appointees from the state of Decrease Saxony, which owns 12% of the group.)

If this association had been to crumble, it will alter the steadiness of Germany’s labour market, reckons Sebastian Dullien, an economist on the Hans-Böckler-Stiftung, a trade-union think-tank. “To magnify solely a bit, it’ll make a giant distinction whether or not Volkswagen manages its transformation or whether or not it’s changed by Tesla,” he says, referring to the American EV pioneer, which has simply introduced that it intends to increase its plant close to Berlin to what will likely be Europe’s greatest automotive manufacturing unit. Over time, says Mr Dullien, manufacturing jobs in Germany would not be exceptionally effectively paid relative to service ones and manufacturing jobs in different European nations.

Tougher to measure, however no much less profound, can be the psychological results of a diminished German automotive {industry}. The status of German {industry} and its engineering prowess, already knocked by Volkswagen’s “Dieselgate” emissions-cheating scandal of 2015, would take one other hit. In a paper revealed final yr, Rüdiger Bachmann of the College of Notre Dame and others calculated that as a result of the corporate was discovered fidgeting with emissions readings, gross sales of different German manufacturers in America fell by 166,000 automobiles, costing them $7.7bn in forgone revenues, or practically 1 / 4 of their whole in 2014.

If Germany’s automotive {industry} had been to evaporate, in different phrases, this is able to “depart an enormous financial crater within the midst of Europe”, says Mr Schroeder of WZB. Germany’s politicians are, in fact, determined to not let that occur. After Dieselgate, their help for the sector is much less wholehearted. However subsidies resembling tax breaks for firm automobiles, which make it worthwhile for workers to forgo part of their wage in trade for a high-end car, are usually not going away. Greater than two in three new automobiles in Germany are purchased by firms; many find yourself being pushed totally on private journeys.

In Decrease Saxony the automotive {industry} might be too massive to let fail. Volkswagen operates factories in 5 locations moreover Wolfsburg. Altogether, the agency employs about 130,000 folks there. The state’s politicians want solely look next-door at Thuringia to see what would possibly occur if its financial system floundered—which it inevitably would had been Volkswagen to crumble. The far-right Different for Germany get together now leads Thuringian polls with 34%.

Using into the sundown

Such issues are drowning out voices declaring that extending life help for carmakers might be counterproductive in the long run. Mr Bachmann thinks German politicians must put a bit extra religion in market forces to fill the financial house that may open up as German carmaking wanes. Germany’s outsized automotive {industry}, as soon as a energy, more and more holds the nation again, argues Christoph Bornschein of TLGG, a consultancy. “Automobiles are the largest manifestation of Germany’s whole give attention to mechanical engineering,” he says. As Volkswagen’s ongoing issues with its software program unit present, an financial system that’s optimised to churn out costly mechanical wonders that run like clockwork will battle to reinvent itself in an more and more digitised world.

As soon as the automotive {industry} is not that dominant, there can be more room for options. Fewer subsidies would circulate into the sector, and extra capital into startups. Fewer younger Germans would research mechanical engineering and extra go for pc science as a substitute. And researchers would put extra effort into, say, growing mobility providers as a substitute of submitting yet another car-related patent.

The freewheeling strategy has labored for Eindhoven. The Dutch metropolis, as soon as as dominated by Philips, a one-time electronics large, as Wolfsburg is by Volkswagen, now hosts hundreds of small firms. Most of those provide ASML, a producer of superior chipmaking tools that has emerged as certainly one of Europe’s most beneficial firms. Espoo, nonetheless house to the rump Nokia, which at the moment makes telecoms networking gear, additionally now boasts a thriving startup ecosystem.

Admittedly, carmaking is far more deeply rooted than the ephemeral manufacturing of electronics resembling cellphones. As such, particularly if the decline is gradual, the sector will adapt. Huge suppliers resembling Bosch or Continental will work extra for international carmakers resembling Tesla (within the Californian agency’s early days, Bosch is alleged to have offered 80% of its worth added). Smaller suppliers will specialise and supply providers, as many Mittelstand corporations have achieved earlier than. And Germany is more likely to cease producing cheaper automobiles and focusing much more on making smaller numbers of higher-margin luxurious ones. Volkswagen might even flip itself right into a contract producer, assembling EVs for different manufacturers, a lot as Foxconn places collectively iPhones for Apple.

Some in and across the {industry} are already imagining a future with out Volkswagen, at the least because it exists at the moment. The enterprise “must cease constructing its methods solely across the automotive”, says Andreas Boes of ISF Munich, one other analysis outfit. Mr Boes leads a gaggle of youngish car-industry executives and specialists which just lately revealed a “Mobilistic Manifesto”. As a substitute of creating automobiles ever extra comfy, so folks spend extra time in them and will be bought further providers, corporations ought to intention to organise society’s potential to go from A to B as an entire, he suggests. Volkswagen and its fellow German carmakers have all the time helped folks transfer round. There is no such thing as a purpose why they shouldn’t maintain doing it in intelligent new methods.

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