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The once-purring engine of the German auto industry is sputtering. Volkswagen, the world’s second-biggest carmaker, is planning to end production at four plants and cut up to 100,000 jobs. What will be one of the largest downsizing programmes in corporate history is also a test of German industry’s ability to reform itself for the electric vehicle era and to confront “China shock 2.0”.
The pressure has been clear since 2024, when VW warned it needed to axe thousands of jobs and shut three German plants. Tough negotiations with unions agreed in December that year to cut 35,000 jobs, but without outright German factory closures. US tariffs, rising energy costs and a worsening situation in China have made that insufficient. In March VW raised its job reduction target by 2030 to 50,000, but double that may now be needed. Unless certain cost targets are met, management is threatening to close four plants, two of which have already been expensively converted to producing EVs.
China was for years a lucrative market for VW and its German counterparts. Chinese rivals, though, have leapfrogged ahead in EV technology. They did benefit from huge state subsidies and lower labour costs. But they also understood more quickly than old-line carmakers that EV buyers are more excited by whizzy software and computer systems than by mechanics.
VW is in some ways a special case, its plight exacerbated by repeated management mis-steps. In the wake of the “Dieselgate” emissions scandal in 2015, the company launched one of the earliest and best-funded EV pivots by a legacy automaker. But its EV models were too long coming and did not excite consumers when they arrived — in part because of VW’s disastrous initial efforts to develop software in-house.
Its ownership structure also entrenches resistance to radical change. Maintaining jobs has been a priority for the state of Lower Saxony, which has 20 per cent of VW’s voting rights and has often sided with the company’s works council, which holds half the seats on the supervisory board.
Yet VW has embodied the German model of export-driven manufacturing prowess allied with top-tier conditions for employees, built on co-determination between unions and employers. That it can so quickly falter — before the Covid pandemic VW was targeting production of 12mn cars a year, against today’s plans to shrink capacity to 9mn a year — points to a broader reckoning for the German model as Chinese manufacturers move swiftly up the value chain.
The co-determination system worked well in an era of constant expansion and in cushioning the blows of Covid, but it can also slow the ability to respond in a period of radical disruption. VW’s works council and union have declared they will oppose plant closures “with all their might”. The lesson of recent years, though, is that fighting too hard to maintain the status quo today may only lead to more painful steps tomorrow.
German boardrooms, too, will have to come up with compelling visions to get the size and strategy right; VW’s CEO Oliver Blume has suggested VW plants under threat could be repurposed for the defence sector or other manufacturing, though his concept is unproven. The German government needs to play its part by creating better conditions for investment and job creation. Improved labour market flexibility and cuts to red tape in a reform package agreed by its coalition this week are a positive step.
Above all, Germany will need a more flexible form of collaboration to grapple with the upheavals of intensifying Chinese competition and the advent of AI. How well its system manages to adapt will have implications for the entire European economy.
