Volkswagen’s Struggles: Declining Numbers, Potential Factory Closures, and Workforce Reductions

September 8, 2024September 8, 2024Car manufacturing, Car sales, economy, EV, factory closures, Germany, Layoffs, Trouble, Volkswagen, VW

Volkswagen (VW) has long been a global leader in the automotive industry, producing iconic vehicles and pioneering technological advancements. However, the German auto giant has recently faced a series of challenges that have brought them to a critical crossroads. Plummeting sales figures, coupled with growing market competition and economic shifts, have forced VW to consider drastic measures, including factory closures and cutting up to 30% of its workforce. Let’s explore the factors behind VW’s current situation and the potential impacts on the company and the industry as a whole.

Sales Declines: The Heart of the Issue

In recent months, Volkswagen has reported disappointing sales numbers, particularly in its key markets. While the global automotive industry as a whole has faced difficulties due to lingering effects of the COVID-19 pandemic, supply chain disruptions, and inflationary pressures, VW’s situation is more concerning. The company saw a notable dip in sales across Europe, its home market, as well as in China, a major growth region for the automaker.

One of the primary drivers of this decline is the slow adoption of electric vehicles (EVs) within VW’s lineup. While the automotive world is undergoing a significant transition toward EVs, VW has struggled to compete with brands like Tesla and BYD in the growing EV market. Additionally, rising energy prices and raw material costs have made production more expensive, leading to thinner profit margins.

VW’s traditional internal combustion engine (ICE) models have also been impacted by tightening emission regulations in Europe and other regions, making it increasingly costly to produce and sell these vehicles. Meanwhile, consumer preferences are shifting toward sustainable and energy-efficient vehicles, further affecting sales of VW’s older models.

Another challenge for VW is shrinking market. Even though sales rose by around 13% in 2022 and 2023, the total European new car market in 2023 was still almost 3 million vehicles smaller than in 2019. As the biggest car producer in Europe and one of the biggest in the World, it is logical that VW felt the biggest downfall. People just don’t buy as many cars as they use to!

Why Volkswagen is Considering Factory Closures

Faced with these challenges, Volkswagen is exploring factory closures as a means of cutting costs and staying competitive. The company has substantial production capacity, with factories scattered across the globe, many of which are under-utilized due to lower-than-expected demand.

Closing factories would help VW reduce overhead and streamline production, ensuring that they are focusing resources on profitable operations. However, this is not an easy decision. Factory closures have a ripple effect, not only impacting direct employees but also the local economies that rely on these facilities.

German government owns 20% of VW shares and their answer to this troubled times was, “under no circumstances will there be closures of factories”. The risks for German economy are too big to let Volkswagen go that root. Not only would closures reduce workforce and production capabilities, but it would rather trigger a chain effect with it. Many VW suppliers would be dragged with it to the ground.

A key concern is VW’s production hubs in Germany and Eastern Europe, where many of their traditional ICE vehicles are manufactured. As VW pivots more aggressively toward electric mobility, the need for such expansive ICE production facilities may continue to diminish. Factory closures in these areas could be imminent unless a turnaround in sales occurs or new strategies are implemented.

Workforce Reductions: Up to 30% of Jobs at Risk

In addition to potential factory closures, Volkswagen has signalled the possibility of reducing its workforce by as much as 30%. This would affect tens of thousands of workers across various production sites, including those involved in both the manufacturing and administrative arms of the company.

The workforce reduction would serve multiple purposes:

Cost Reduction: Lowering personnel costs is a significant way for VW to free up capital, especially when revenue streams are shrinking.
Shifting Focus to EVs: The move toward electric vehicles requires different skill sets and expertise. As such, VW may find that many existing roles, especially those tied to ICE production, become redundant. A reduction in workforce could help align their employee base with the future needs of EV production.
Automation: As VW and other automakers embrace automation and AI-driven manufacturing, fewer human workers will be needed on production lines. This shift is a natural outcome of technological advancement in the automotive industry many experts fear.

What’s Next for Volkswagen?

Volkswagen’s current predicament highlights the complex challenges that legacy automakers face in the era of electrification and sustainability. The company is making efforts to ramp up its EV portfolio, including the launch of the ID series, which has shown promise but has yet to reach the scale of competitors. The ongoing development of battery technology, supply chain management, and the expansion of charging infrastructure are also critical for VW’s success in the EV space.

Additionally, geopolitical factors, such as the Russia-Ukraine war, have exacerbated the cost of raw materials and energy, further squeezing automakers like VW. Rising production costs and supply chain issues have created a perfect storm for the company, forcing them to reassess their operations.

Another challenge for VW and other European car makers is the rise of Chinese cars. China is traditionally not a car producing country and until recently Chinese market was a steady profit for Volkswagen. As China successfully started to produce quality vehicles on their own, less foreign cars are needed, directly reducing sales for VW. Further more, as Chinese cars get their reputation as being reliable, safe and cost effective, more Europeans started buying them.

Conclusion: A Turning Point for Volkswagen

As Volkswagen grapples with declining sales and mounting economic pressures, the company is faced with difficult decisions that could reshape its future. Potential factory closures and significant workforce reductions are on the table as VW works to regain its footing in a highly competitive and evolving market.

The steps VW takes now, whether it’s expanding its EV lineup, embracing technological advancements, or streamlining operations, will determine its long-term success. Volkswagen’s ability to innovate and adapt will be the key to overcoming these hurdles and remaining a dominant player in the automotive industry. The world is watching closely to see how one of the largest automakers in the world navigates this pivotal moment.