Volkswagen — long a symbol of German engineering and automotive prowess — is staring at an uncertain future, faced with a raft of challenges as the global auto market transitions away from internal combustion engines to more environmentally friendly alternatives, particularly electric mobility.

The company on Wednesday reported its least profitable quarter in years, with profit down as much as 64% between July and September to just €1.58 billion ($1.7 billion) from the €4.35 billion it earned a year earlier.

Revenue was also marginally lower, slipping 0.5% to €78.49 billion.

The figures came as VW, Europe's largest automaker, was locked in talks over potential mass layoffs and wage cuts.

The company's works council said earlier this week that management had informed employee representatives that it wants to close at least three plants in Germanyand cut tens of thousands of jobs. 

Management on Wednesday presented a cost-savings proposal to workers, including a 10% pay cut and a revised bonus system. They said it might be possible to avoid factory closures if there's an agreement on the plan and other necessary steps to bolster the carmaker.

VW bosses say the overall market environment is "challenging" and that there is an "urgent need for significant cost reductions and efficiency gains."

They cite an array of developments for the firm's woes, ranging from weakening demand for its vehicles in key markets and greater competition from Chinese e-car manufacturers to high labor and energy costs in Germany.

In the first nine months of this year, VW deliveries were down about 1.6% in its home market of Germany, which is battling economic weakness and rising structural challenges.

In China, which has been key for the company's financial strength in recent years, the drop was as much as 10.2%.

VW's woes in China

China is the biggest and most lucrative market for VW, accounting for a third of the carmaker's overall sales and a significant portion of its profits.

But the German auto behemoth has so far failed to crack the fast-growing electric car market in the Asian nation, resulting in VW losing ground rapidly to Chinese rivals like BYD, NIO and XPeng Motors.

Dunne Insights, a global automobile industry consulting firm, estimated that the share of electric vehicles in total car sales in China will jump to almost 50% this year, up from just 6% in 2020.

It pointed out that 18 of the 20 best-selling EVs this year are Chinese brands, with the remaining two models being Teslas.

Meanwhile, of the over 1.3 million VW units sold in China in the first half of the year, only a little over 90,000 were electric.

Alicia Garcia-Herrero, a senior fellow at the European think tank Bruegel, said it will be increasingly difficult for European carmakers like VW to compete in the Chinese market.

"China has moved up the ladder, it's competing with European companies, perhaps the luxury sector is the least affected, but there is a lot of nationalism and pushing of local brands, so I think, frankly, it will be increasingly difficult," she told DW. 

"On top of that, growth is slowing down. So you know, there isn't enough consumption on the part of Chinese households to really support the growth of European carmakers in China," the expert added.

What's behind impressive growth in Brazil?

While VW is confronting a severe crisis in its key European and Asian markets, the carmaker is still recording growth in regions like North America and South America.

In Brazil, for instance, the company said earlier this month that its sales grew by 19.1%.

"In the Chinese market, electric cars are important. But in Brazil, they are not so important. Secondly, relatively older and more affordable models work well in Brazil," which has helped VW so far, Ferdinand Dudenhöffer, director of the Center for Automotive Research (CAR) in the German city of Bochum, told DW.

Nevertheless, "Brazil is far too small to compensate for the weakness in Europe and China," he said, adding that good performance in the South American country is like "a drop in the ocean, and it won't solve the problem" of declining VW sales in key markets.

The expert also pointed out that VW will face increased competition from Chinese carmakers in Brazil over the next five years: "The company will face greater competition even when it comes to combustion engines and vehicles that run on ethanol. The competition will become fierce, at the moment it is still relatively manageable but it will certainly become more intense."

To strengthen its position in the Brazilian market, VW has said this year that it will pump more money into the country to develop new models, including flex, hybrid and electric vehicles.

Marcio de Lima Leite, president of Anfavea (Brazilian Association of Automotive Vehicle Manufacturers), told DW that the country is "experiencing the biggest investment cycle in the history of its automotive sector, with 130 billion reais (€20.9 billion) being invested by vehicle manufacturers alone, not counting automotive parts suppliers."

He noted that several factors have contributed to the inflow of investments, including the pace of recovery in Brazil's auto market, economic and political stability as well as favorable industrial policies.

Leite also credited the Brazilian government's MOVER policy for boosting the sector. The program provides tax incentives for automakers committed to developing low-carbon technologies, such as hybrid and electric vehicles, in the country.

EV sales on the rise in Brazil

Even though electric cars still account for less than 5% of overall vehicle sales in Brazil, they are recording rapid growth.

And Chinese companies are already making inroads into the market.

According to the Brazilian Electric Vehicle Association (ABVE), sales of electrified cars jumped 146% in the first half of 2024 compared to the same period the previous year, to 79,304 units, with VW's Chinese rivals BYD and Great Wall Motor leading the pack.

The Brazilian government has responded to growing EV imports by slapping 10% tariffs at the start of this year, which was raised to 18% in July and is set to top out at 35% by 2026.

Against this backdrop, to effectively compete with Chinese firms, "it's important for VW not to stand still with the existing vehicle models," said Dudenhöffer.

"Because the Chinese, just like the Japanese, are coming up with more modern vehicles, so, VW must effectively manage the transition and modernize its vehicles, piece by piece, so that it's not overtaken by the competition in the future."

Edited by: Ashutosh Pandey