For the first time in its 87-year history, one of Germany’s leading traditional automakers, Hitler’s “people’s car,” is shutting down manufacturing plants in the country.
The closures are the result of a crisis that has been a long time coming, but one that the industry has ignored. VW is in crisis due to strong pressure from the unions against radical cost cuttings, which are trying to hold on to privileges acquired over decades, such as a guarantee of a job for 30 years, in what was the country’s most important industry.
But the labor crisis is, in this case, only one indicator. The reality is that labor costs, along with the structure of the income statement, are reducing the company’s margin, which has gone from 3.8% last year to 2.3% this year. That’s many millions of euros amid a crisis with no end in sight.
The company’s positioning is clearly unfeasible in the long term. Firstly, EVs, which the company has failed to invest in, are much cheaper to manufacture than traditional vehicles, so the company cannot create economies of scale. And what’s more, the income statement structure is so far removed from the one that VW — and all traditional car manufacturers in general — have, that it seems almost impossible for them to transition to EVs or even invest in companies that know how to manufacture them anymore.
EVs are very low maintenance, which rules dealerships out of the equation. Sharing the sales margin with dealers who carry out extremely infrequent repairs makes no economic sense.
Now add the advertising spend that traditional car brands have to make to sell cars that fewer and fewer people want, peddling the lie that they still have some future left. The simple truth is that EV makers tend to sell through direct channels and invest the money that traditional companies invest in advertising in research and development, giving them a growing competitive advantage.
In addition to Tesla, which has made the EV an object of desire, a large number of Chinese brands well trained to be competitive in their gigantic market are now being kept out of Europe, the United States and other countries by government imposed tariffs aimed at protecting their outdated car industries.
The policy is indicative of how desperate things are for the traditional motor sector: if instead of overprotecting this industry for decades by relaxing environmental policies and extending the deadlines for restrictions on its sale, they had forced it to get its act together and make competitively priced EVs, things would be very different.
But that would have meant taking on the powerful motor industry lobby, so the sector now finds itself with the harsh reality that after years of cheating and falsifying its emissions figures with the connivance of governments, they are now the leaders in the manufacture of increasingly unattractive vehicles with a very short shelf life, and at a time when fossil fuels will become increasingly expensive.
As the fleet of EVs around in Europe and the United States grows, the evidence becomes clear: buying an internal combustion vehicle is buying old technology, having to deal with routine checks and repairs, and spending huge amounts on fuel compared to what EV owners pay for a recharge.
For Volkswagen, reality is coming in the form of a labor crisis. For others, it will come as a market crisis, with growing stocks that are increasingly difficult to dispose of. This is already the case in China, where Volkswagen, long one of the country’s most popular brands, is seeing its sales fall very rapidly, given that people now want EVs.
The problem, obviously, is that the automotive industry is carrying a lot of excess weight: from dealerships to auxiliary industries, including an oversized workforce, advertising, etc. And given the industry’s refusal to accept reality, still seeing the EV as the worst of all evils or a niche product, and that it cannot make at a competitive price, it now faces terminal crisis.
A company’s qualities come into play when it has to deal with important changes in its industry. And in the case of the traditional car industry, every single management team should be sacked. If things look bleak now, just wait a couple of years.
Buckle up, it’s going to be a rough ride.
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This post was previously published on Enrique Dans’ blog.
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