Europe is the home of the car. The modern car was, after all, invented in Germany in 1886 by Karl Benz, and while the US might make a valid shout for being the home of the first truly popular and affordable car – the Ford Model T – European models such as the Austin 7, Fiat Topolino and the later Mini, Beetle, and 500 can lay justifiable claims for having truly popularised mass marketing.
However, in late 2024 the European car industry – almost across the board – has lurched into crisis, pressed between legislation on one side, disinterested customers on another, and Chinese competition on a third flank.
The first to start sending up distress flares was Volkswagen Group. Europe’s largest car maker, and occasionally the world’s largest, weathered the financial and reputational storm of “Dieselgate” but now a greater crisis appears to have struck, and the company’s financial chief, Arno Antlitz, has said that VW has “one, maybe two years” to turn things around and save itself.
What’s the problem at VW? Essentially it’s one of higher manufacturing costs, especially in its big German factories, and slimmer profits for electric models. VW bet big on electric power in the wake of Dieselgate, partly as a very public mea culpa, and partly because, at that time, electric cars seemed to sell like hot cakes. Now, though, German buyers especially are becoming cool to the appeal of EVs, and the cheaper Chinese models are flooding in to satiate what demand is there.
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The result is that Volkswagen is now looking down the barrel of an impending financial crisis. One might think that a €10 billion operating profit – announced as recently as the start of August – might not sound like a financial crisis, but that was 11 per cent below the previous year’s and even with increasing EU tariffs on Chinese cars, VW is nervously looking at its profit margins, which currently stand at 6.3 per cent. VW’s net cash flow actually went into reverse in the first half of 2024, compared to a massive €2.5-billion cash flow in the first half of 2023.
During that time, the company has been trying to make savings, not least through voluntary redundancy and early retirement programmes, but now the VW supervisory board is saying that’s not enough, and a series of lay-offs and possible factory closures are coming.
That sounds like business as usual for many companies, but VW is slightly different – the German state of Lower Saxony, in which you will find VW’s Wolfsburg HQ, has representation on VW’s board, as do the powerful German unions.
Volkswagen has recently cancelled several big union agreements, apparently laying the groundwork for lay-offs in 2025, which the unions are of course resisting. It’s not yet known how much VW is playing up the crisis in order to negotiate with those unions, but Antlitz’s words seem little short of apocalyptic.
In Ireland, Volkswagen is currently staying tight-lipped, and not making any official statements as to how this crisis might affect its Irish operations. Volkswagen Group Ireland is a part of the wider VW Group, rather than being an independent importer and distributor, and last year Renault took the decision to call time on its Irish operations being part of the Renault Group, selling the operation to Cedar Ireland, which also operates Ireland’s Nissan franchise.
It would seem somewhat unlikely, for now, that VW might follow the same route in Ireland, not least because Thomas Schafer, Volkswagen’s chief executive, has made Ireland his home (when he’s not trying to put out financial fires in Wolfsburg), but such a move will certainly be at least in the air as a possibility.
Closing factories in Germany will be a fraught business for Volkswagen – it has never done so in the past, not even in its previous massive financial crisis in the early 1990s, when the company really did teeter for a time on the brink of bankruptcy – but on Monday it announced that three plants plants will have to close, and R&D spending will be slashed.
Volkswagen reiterated on Monday that restructuring was needed and said it would make concrete proposals on Wednesday.
“Management is absolutely serious about all this. This is not sabre-rattling in the collective bargaining round,” Daniela Cavallo, Volkswagen’s works council head, told employees at the carmaker’s biggest plant, in Wolfsburg, threatening to break off talks.
“This is the plan of Germany’s largest industrial group to start the sell-off in its home country of Germany,” Cavallo added, not specifying which plants would be affected or how many of Volkswagen Group’s roughly 300,000 staff in Germany could be laid off.
Volkswagen also plans to cut salaries at the brand by at least 10per cent and freeze pay in both 2025 and 2026, Cavallo said.
Already it seems as if Audi’s factory in Brussels is doomed – no one’s buying the Q8 e-tron that’s made there, and a plan to sell it to Chinese brand Nio looks to have fallen through.
For all this turmoil, VW has confirmed at the Paris motor show that it’s still intent on becoming, eventually, an all-electric brand, but said that European politicians need to stop prevaricating, and start introducing policies that take away customers’ doubts about EVs.
While all this was going on, BMW was having something of a crisis of its own, although for now the Munich luxury brand is merely trimming its earnings and sales targets for 2024, rather than dealing with an existential crisis. What’s the problem, then? Brakes ...
BMW is having to recall more than 1.5-million vehicles across its three brands – BMW, Mini and Rolls-Royce – which are affected by a faulty braking system, built for BMW by Continental AG. The problem affects the “Integrated Braking System” and it could lead to the brakes’ power assistance failing, making it very difficult to stop the car.
BMW has said that the likelihood of actual failure is very low, but even so the recall – which could cost as much as €1-billion according to Reuters – has already put a dampener on BMW’s profit margins – which are expected to fall from 8-10 per cent or 6-7 per cent – and its share price. Continental’s share price has weakened since the announcement.
In the meantime, BMW boss Oliver Zipse has called on the European Union to backtrack on its planned 2035 ban on combustion-engined cars. Zipse told Automotive News that taking away the 100 per cent electric car target for 2035, and being more “agnostic” about how to reduce emissions would take away much of the advantages enjoyed by the big Chinese car makers, which are starting to dominate the EV sphere.
Also facing difficulties but thinking differently about electric cars is the Stellantis Group, whose boss – Carlos Tavares – has already said that he won’t renew his contract when it runs out in 2026. Stellantis has faced falling sales, and discontented dealers both in Europe and the US have effectively forced Tavares out.
Even so, Tavares – speaking to journalists at the Paris show – said that the move to electric power is still the right thing to do. “We want to be on the right side of history,” Tavares said. “We do not ask for any kind of delay. We just ask for the stability of the rules to be working properly and serving the societies in which we are operating.
“The other day, my youngest daughter was driving her car in a forest in Portugal, and the forest was on fire,” he said. “She had to drive through the forest on fire. The door panel on the right hand side melted. So how do you feel if one of your daughters is in this position and you say, ‘I’m going to ask to dispose the CO2 regulations’? There is a moment where we need to face reality. If the problem is real, we must contribute to fix it. Is it tough? Yes, it’s super tough. There is no discussion. It’s super tough. But I think it’s the right thing to do.”
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What does it all mean? It means that the big European car makers are collectively being affected by the Chinese car market, whether that’s weakening sales for their brands in China, or China’s home-grown brands pressing harder on the export button. Europe’s car makers have all come through severe financial storms in the past – BMW almost went under in the 1960s before the introduction of the Neue Klasse 1500 saloon, VW struggled in the early 1970s and again in the early 1990s, never mind Dieselgate, while Mercedes laboured under quality problems and an ill-starred merger with Chrysler in the 2000s – but we won’t know how well they’ve collectively and independently dealt with this until history tells us.
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