VW and Groundhog Day

History sometimes does repeat itself.

The Internet is full of articles on the issues that VW is facing after their announcement of the scrapping of their labor agreement to protect workers from layoffs. Before we talk about this, it is worth going back 70 years to a very similar picture in the global shipbuilding market.

Following the end of WWII, deepsea shipbuilding was dominated by Europe, mainly Northern European shipyards. In the search for cheaper alternatives, international shipowners turned to Japan who, as part of the war reconstruction, gave access to their dry docks which had been unaffected by the war. Unlike their European rivals, they offered a radical new way of building ships which was far faster and cheaper. They used the technology of mass production developed in the US by simultaneously building large separate sections of each ship, only bringing them together in a dry dock for the final assembly. This was in stark contrast to the traditional European process of building them from “keel up.”

Added to this, the Japanese government offered cheap finance through their Ex-Im Bank. Within 20 years, the European shipbuilding industry was effectively dead for standardized bulk shipping which had all gone to Japan plus South Korea which had quickly followed Japan.

Why had this happened? Very simply, unions. Unions had become seriously strong in the years leading up to WWII and opposed any changes that might lead to the loss of jobs. Most shipyards had become the dominant employer in the cities and ports where these shipyards were located and local politicians sided with the unions.

VW and Shipbuilding

Is what we’re seeing with VW looking too much like an automotive version of European shipyards? Is this déjà vu or Groundhog Day?

Unions and politicians in Germany, Japan and the US are all making very similar noises to what was seen 70 years ago in the shipbuilding market. The forces swirling around VW are ominous. 2015 saw “dieselgate”, a near unbelievable case of corporate cheating with emissions, which has cost VW $35b in fines. In 2013, the company launched its first electric passenger, but it badly underperformed. In 2018, Herbert Diess was appointed CEO and set about a major EV investment program. He launched VW’s first competitive EV models in 2021, the ID.3 and ID.4. However, these were plagued with software issues making some vehicles virtually undriveable.

Today, 3 years later, VW finds itself in a dire situation. The Chinese, who were late into auto manufacturing, started focusing on making EVs in the early 2000’s. This movement radically ramped up in 2009 when the Chinese government introduced subsidies for new energy vehicles, including EVs. China was VW’s biggest market. As Chinese manufacturers improved their EV technology, the quality of their cars and, through economies of scale, prices, VW came more and more under competitive pressure. In 2020, VW was hit by the global downturn in sales thanks to COVID and although overall sales have recovered somewhat, sales to China, which in 2019 accounted for 40% of its total deliveries, have not recovered and have now dropped to nearly 30%. The number of vehicles delivered to China have fallen by 25% from 4 m to 3 m per year. This is unlikely to get better. Today, VW does not have competitive EV models for the Chinese market. Added to this, starting in 2021, Chinese manufacturers began exporting their EVs cutting into VW global sales where VW was already facing fierce EV competition from Tesla.

The stark fact is that VW does not have a competitive EV solution and is unlikely to have one for a number of years. 2024 has seen a flurry of deals by VW around EV technology, but it has also seen the announcements of factory closings and cancellation of union deals, heralding major job layoffs.

Yes, VW will still be able to profitably sell ICE technology outside of China in the short to near term, but there is a massive threat from China in the near to longer term to the incumbent automakers in Europe, the US, and Japan that China is going to swamp global markets with low-cost EVs built from Chinese batteries. The R&D going into batteries virtually guarantees higher performance in terms of power density, charging speed, range, and, hence, lower costs.

Seventy years ago, a failure to compete head-on with new manufacturing technology thanks to union intransigence and political support for incumbents resulted in the total collapse of a major European manufacturing sector and its transfer to the Far East. Is what we are seeing with VW a similar situation and the dawn of Groundhog Day for the auto industry?

In his long career Mike Ratcliffe has been an executive with Fuld & Company, Wood Mackenzie, Mckinsey, Nervewire, DRI/McGraw Hill and Lloyd’s List among others.