Specialist Detects Indications of Site-Related Issues in Volkswagen Earthquakes
Experts find Volkswagen's recent cost-cutting measures unsurprising, attributing them to location troubles, fundamental shifts, and questionable decisions. It's unlikely that Volkswagen is the sole major corporation to encounter such difficulties.
Volkswagen's new cost-saving initiatives, which might involve shutting down factories, are viewed by top economists as a representation of Germany's current location difficulties. "It underscores the long-term implications of years of economic stagnation and structural change in a no-growth environment," stated ING's chief economist, Carsten Brzeski. "The automotive industry is not only symbolically significant for Germany, but also a pivotal sector for the economy."
Alexander Krüger, chief economist at Hauck Aufhäuser Lampe Privatbank AG, concurs. "Location factors in Germany have worsened for years," he said. "It's not surprising that companies and industries are struggling, particularly those with global operations." The fact that even prominent businesses are affected underscores the scope of the location issue. However, some challenges may have been recognized too late.
ING's Brzeski notes that insolvencies and unemployment have been on the rise in Germany recently. "If a major player like Volkswagen now intensifies its cost-cutting measures and considers plant closures, it might serve as the long-overdue wake-up call that current economic policy measures need to be substantially strengthened," said the chief economist.
"It was only a matter of time," says IG broker's market leader Salah-Eddine Bouhmidi. Reduced inflation means companies can no longer pass on expenses to consumers, resulting in slimmer profit margins in the future. "Today, VW is announcing drastic cost-cutting measures aimed at the future profit margins of the VW group," he emphasizes. "VW will not be the only major corporation; others will follow, straining the job market."
Volkswagen is significantly stepping up its cost-cutting measures and examining German factories for the first time in its history. The company warned internally that without immediate action, plant closures cannot be ruled out. It also plans to abolish the job security agreement that has been in place since 1994 and expires in 2029. A restructuring based solely on demographic trends will not be sufficient to boost competitiveness.
According to "Automobilwoche" calculations, the usage rate in VW plants was significantly lower than at other automakers. The Osnabrück plant was the worst performer in 2023 with less than 20% usage, followed by the glass plant in Dresden with 30% usage. "In summary, there is too much capacity," said Stifel analyst Daniel Schwarz. Eventually, a plant is likely to be closed where political support is strongest.
Missed profit target
Despite increased revenue in the first half of the year, Volkswagen fell short of its profit objectives. Volkswagen's CFO, Arno Antlitz, had previously called for additional efforts to meet profit targets. Volkswagen blamed severance payouts and the potential closure of the Audi plant in Brussels for the profit decline.
The company is also struggling with the rising share of electric vehicles. Volkswagen is not yet yielding the same long-term profits from electric vehicles as it does from internal combustion engines. Moreover, the cost-saving program introduced in 2023 is not as effective as anticipated. The company aimed to save €10 billion in the core brand by 2026, with a target of around €4 billion for this year. According to media reports, the savings this year are falling short by several billion euros compared to the original plan.
Manufacturers worldwide may be faced with similar challenges as Volkswagen due to economic stagnation and structural changes. The struggling automotive industry in Germany, represented by Volkswagen, highlights the need for major corporations to adopt cost-saving measures in order to remain competitive.
