Volkswagen To Shut Down 3 Facilities In Germany Reflecting A Downward Trend In the Auto Industry

Volkswagen’s decision to manufacture electric vehicles in Europe is now being viewed as regrettable, as the vehicle sales are falling far short of the predicted numbers.

After months of speculation, Volkswagen (VW) has announced its plans to shut at least three factories in Germany and lay off thousands of workers in the process. This decision comes amidst months-long attempts to negotiate with workers unions and the general slump in the automobile industry in Europe.

The company, much like its competitors, has been facing issues of high manufacturing and maintenance costs and tough competition from their Asian counterparts. The shift towards electric vehicles, though slow, has also been a contributing factor in the industry slipping into a recession period.

Despite being Europe’s biggest carmaker, the company is being forced to look at plant closures. This has resulted in strong resistance from the workers’ unions, and all negotiations seem to be heading towards a cul-de-sac. The management’s new plans to push business and reduce costs are being met with strong opposition from the unions.

On Monday, however, officials stated that the company has decided to go ahead with the required changes and that the proposal will be presented on Wednesday. The management has also threatened to break off all negotiations if there is further resistance from the unions. The unions’ leaders, on the other hand, say they have no option but to conduct strikes if their demands are not fulfilled.

While VW is the first, it will certainly not be the only carmaker downsizing in the near future. The automobile sector has been witnessing a downward trend in Europe. According to GlobalData, while the average capacity utilisation percentage of companies making light vehicles is 70%, that percentage has slipped to 60% in the past year across Europe.

VW’s decision to manufacture electric vehicles in Europe is now being viewed as regrettable, as the vehicle sales are falling far short of the predicted numbers. The high cost of production of these vehicles has certainly hastened the auto industry slump. EVs are not the only vehicles which are selling at a lower rate; car sales across the continent dropped to 18%, which was the lowest in three years.

2024 began with the auto sector preparing for a surge in sales and profits, after the post-pandemic disruptions seemingly resolved. However, the lack of demand and intense competition from China and the slow transition towards EVs has left the car manufacturers looking at a long-term downtrend.

Market shares of auto sales have not only declined in Germany but also in China. Chinese shares clocked in at 34% in 2024, a steep decline from 64% in 2020. Germany which had 25% of shares in 2020, now looks at a mere 15%. While this is indicative of a healthier auto sector in China, there is no guarantee that the sectoral slump will not transcend intercontinental borders.

The decline of sales in EVs has not only roused concern from the automakers but also from the European Automobile Manufacturers’ Association (ACEA) which supports the Paris Agreement and the EU’s goal to decarbonise by 2050. VW is a prime example of this as the company faces a conundrum wherein neither EVs nor automobile cars sales are hitting the required targets, so as to keep the manufacturers afloat.

Stellantis NV which owns brands such as Fiat has recently reported a drop in registrations to 26%. According to EY’s Mobility Lead Constantin Gall, it is unlikely that the year-end will yield any positive turns, and the rising geopolitical tensions are making it all the more difficult to push sales.

These negative sales growths have caused carmakers to discard their goals of manufacturing EVs, which would result in these companies spending billions of euros in fines for flouting emission rules. This will further cause companies to look at downsizing, thus entrapping themselves in a vicious cycle.