With China's electric vehicles (EVs) gaining a strong foothold and automotive sales in the European Union (EU) slowing down, traditional large Germany-based automotive manufacturers are facing an increasingly bleak business outlook. Their sales and competitive power are being eroded by local China-based EV manufacturers in their main markets.
For example, Volkswagen (VW) announced at the beginning of September that it was considering closing its German factories for the first time in 87 years. They are now also planning to shutter an automotive factory in China that was a joint venture with SAIC, in addition to the cost reduction measures implemented in September, highlighting their dire situation.
Supply chain defects add to cost burden
Other than VW, BMW, and Mercedes-Benz have also been facing significant challenges recently. BMW recently recalled approximately 1,500,000 units due to issues caused by a faulty braking system supplied by Germany-based Continental.
BMW referred to this as an impactful event and not just a simple recall, which will cause BMW's costs to rise. The company also estimates that profits will be significantly lower than the EUR17.1 billion (approx. US$18.9 billion) reported in 2023.
According to market analysis, the magnitude of BMW's estimation suggests that its business in China would deteriorate even further. It is projected that BMW's sales in China for the third quarter of 2024 may decrease by over 30% compared to its results in 2023.
Mercedes-Benz has also divested its shares in Denza, a joint venture with BYD in China, ending their 13-year partnership. Denza was established by BYD and Mercedes-Benz in 2011 to sell BYD's high-end EV brand.
VW reevaluates Chinese market
Bloomberg reports that VW announced in early September that it was considering closing its German factories to further reduce expenditures. The company also stated that automotive sales have been underwhelming, causing the production capacity of two factories to become idle. VW has experienced a car sales drop of about 500,000 units, necessitating increased productivity and reduced costs.
VW CEO Oliver Blume states that new participants are entering Europe, and Germany's competitive power is falling even further behind. VW has about 650,000 staff members globally, with nearly 300,000 based in Germany.
In September, VW also announced the termination of its job security deal with Germany-based auto workers. This move, part of the group's cost reduction measures, underscores Germany's declining competitiveness despite being Europe's largest economy.
This decision primarily targets the underperforming VW automotive brands. With the transition towards EVs and slowing consumer expenditures, the profit margins of these brands are being squeezed. Europe-based manufacturers are also struggling against competition from Tesla and China-based manufacturers, with BYD leading the charge.
Investment bank Jefferies analyzes that VW may forcefully implement the decision to close factories in 2024, potentially eliminating about 15,000 job opportunities. VW can shut down production facilities without the approval of the supervisory board and can even force layoffs.
VW also plans on reducing its business scale in the Chinese market. Sources claim that VW and its 40-year joint venture with SAIC, SAIC Volkswagen, are preparing to close a factory in Nanjing with an annual production capacity of 360,000 units, possibly as early as 2025.
This development follows a sharp drop in sales for VW's subsidiary brand Skoda, prompting its business partners to strategically reassess the brand and highlighting the severity of the challenges VW faces in China.
While VW is contemplating the closure of its German factories, it is simultaneously reevaluating its presence in China, underscoring the complex challenges it must navigate to maintain its leadership position as the automotive industry undergoes a global transformation.
