Just about a year ago, VW Works Council Chairwoman Daniela Cavallo already warned that Europe's biggest carmaker is "heading straight into a perfect storm." Apparently, this storm has now arrived after the VW management recently announced that it will be forced to close one, if not two, car plants in Germany and cut thousands of jobs due to falling sales.

The announcement came just ahead of fresh collective bargaining talks in late September that many workers routinely expected would reap them higher wages, but instead will now fuel uncertainty within the 120,000 workforce employed at the VW brand in Germany.

Meanwhile, the tense situation at Europe's biggest carmaker is also threatening to spill over into German politics as 20% of VW shares are held by the federal state of Lower Saxony in which VW is located and operates its main factory. 

As times are changing

Over many decades, and with the help of politicians, management and labor unions have carved out a special relationship. After the partial privatization and stock-market listing of the formerly state-owned carmaker in 1960, workers represented by the powerful metalworkers union IG Metall achieved an agreement that allowed them to opt out of the type of industry-wide collective bargaining agreement common in German industry.

Since then, VW wages have been significantly higher than those at other manufacturers, and in the 1990s worker representatives secured a 35-year job guarantee that ruled out job cuts until 2029. This job guarantee has now been unilaterally scrapped by the VW management citing "particularly significant challenges" such as rising costs cutting into company profits.

"In the current situation, even plant closures at vehicle production and component sites can no longer be ruled out," Volkswagen said in the note sent to employees early in September.

VW crisis unfolding amid European car slump

In 2023, the 10-brand car group still posted sound profits totaling more than €18 billion (19.7 billion), and paid out €4.5 billion in dividends to shareholders. Nevertheless, VW management launched an efficiency program last year aimed at saving €10 billion by 2026 to boost competitiveness.

In August 2024, however, management said further savings measures were required after disappointing results showed an expected dip in overall sales to €320 billion — about 2 billion less than the previous year.

The decline has come as car sales across Europe generally are down by 2 million vehicles, compared with levels before the COVID-19 pandemic. For VW, this means selling about half a million fewer cars — roughly equivalent to the production capacity of two plants, as VW finance chief Arno Antlitz said during the presentation of company figures in September.

Stefan Bratzel, founder and director of the Center of Automotive Management (CAM) in Bergisch-Gladbach, Germany, says overcapacity is a problem for all German carmakers because their factories are currently operating at only around two-thirds of their maximum output capacity. For a plant to be profitable, he told DW, "production levels should ideally exceed 80%" depending on the model.

Bratzel said carmakers based in France, Italy and the UK were experiencing a similarly dire situation, while those in Spain, Turkey, Slovakia, and the Czech Republic are still operating at around 79% capacity thanks to lower production costs.

And yet, Germany still produced more cars in 2023 than any other European country, according to latest industry data.

Thomas Puls, a transportation expert at the German Economic Institute (IW), notes, however, that car production in Germany has steadily gone down in recent years, dropping by about 25% since 2018. Also, sales of electric vehicles (EVs) made up only a quarter of the 4 million cars sold overall in Germany last year, he told DW.

Industry transformation gains traction as China muscles in

According to a report by German auto industry association, VDA, German manufacturers' wage costs are the highest in the world, averaging over €62 per hour in 2023. By comparison, hourly labor costs are €29 in Spain, €21 in the Czech Republic, and just €12 in Romania.

German carmakers' production costs have been manageable because of their mostly high-end premium models of which roughly three-quarters were exported overseas. At least 20% of the cars produced here went to China in recent years.

The IW think tank wrote it isn't possible to produce cheaper models with lower margins in Germany, which is why French and Italian carmakers had moved their production of mass-market cars to cheaper locations long ago.

Auto expert Bratzel also thinks that it's "extremely difficult to produce affordable vehicles — especially affordable electric vehicles — in Germany," adding that the last German EV maker attempting to do this was named e.Go and went bankrupt only recently.

What's even more worrisome for German carmakers than high production costs is the technological edge secured by their rivals from China, notably in the EV market. Thanks to lavish state subsidies and regulatory measures, they've made big technological strides in key EV components such as batteries which they can produce cheaper now.

"The technological transition has opened the door for new competitors whose strengths lie in battery and electrical engineering," an IW report says, so that "almost a third of all cars produced worldwide now come from Chinese factories, where production costs are significantly lower."

Stefan Bratzel says Chinese manufacturers are in a better position regarding EVs because " they've gained a lot more experience and implemented efficiency improvements."

The competitive advances China has made are being reflected in European car production figures that show an overall decline of 40% since the year 2000, with France and Italy even dropping by about 50%. Only German carmakers have been managing to hold their ground somewhat, IW has found.

Emission targets: The final blow to Europe's carmakers?

Some carmakers in Europe are now also warning they could incur billions of euros in fines if they can't meet the EU's ambitious climate goals due to falling EV sales. The current fleet average target of 115.1 grams of CO2 per kilometer traveled will decrease by around 19% in 2025 to 93.6 g/km.

Renault Chief Executive Officer Luca de Meo told France Inter radio in September the European car industry could face penalties of "as much as €15 billion." The European car industry body, ACEA, is already calling for an "urgent review" of emissions rules to be applied in 2025.

The ACEA board, which includes the chief executives of Renault, Nissan and Toyota, said in a press release that carmakers faced the "daunting prospect of either multibillion-euro fines . . . or unnecessary production cuts, job losses, and a weakened European supply and value chain."

Amid these challenges, VW management is now looking to tighten the screws on its employees, who are demanding a 7% wage increase, no layoffs, and no plant closures.

After the first round of negotiations, union negotiators said VW's management presented charts highlighting the "Germany penalty" associated with high labor costs. But labor costs aren't the only issue at the carmaker, they added, as management errors, misjudgments, and scandals like the diesel emissions scandal weren't the fault of the employees.

This article was originally written in German.