Why is Volkswagen so important for Germany?

The crisis around Volkswagen hits at the very heart of German engineering excellence. With its long history, it's a legend among European automakers. But can it survive the jump to EVs and beat out Chinese competition?

It's hard to be more German than Volkswagen.

Based in Wolfsburg in northern Germany, the company was founded in 1937 and created the iconic Beatle and the VW Bus and got people moving around the world.

Today, the company is more than just Volkswagen (VW). The Volkswagen Group includes 10 brands like Audi, Bentley, Porsche and Skoda, among others.

By sales, it was the largest vehicle manufacture in the world from 2016 until 2019. It is still Europe's largest automaker.

It has 114 production facilities and 684,000 employees around the world. Last year, it sold 9.2 million vehicles and brought in €322 billion ($351 billion) in revenue, the most ever.

How important is the auto industry for Germany?

Volkswagen was long known as an engineering and manufacturing lighthouse. Its prowess helped propel the country's "Wirtschaftswunder," or economic miracle, that revitalized West Germany after World War II.  

Vehicle manufacturing is still important for the country.

In 2023, nearly 780,000 people were employed in German factories that make motor vehicles and motor vehicle parts, according to the German Association of the Automotive Industry. Of this total, over 465,000 workers were employed by parts and equipment suppliers.

Last year, the German automobile industry generated over €564 billion in revenue, according to statistician Statista. In 2022, it brought in €506 billion.

How important is VW for Germany?

For its part, Volkswagen Group has around 300,000 employees in Germany. The 87-year-old VW brand has about 120,000 of these.

Many local economies depend on VW — it is the country's biggest industrial employer. Slowdowns at the company will have knock-on effects on suppliers, dealers and choices for shoppers.

Suppliers are already planning for a different kind of future. In February, Hanover-based Continental, the world's third-largest automotive supplier, announced 7,150 job cuts worldwide by 2025. In July, ZF Friedrichshafen, another auto supplier, said it would cut 14,000 German jobs by 2028.

What is Volkswagen proposing?

At Volkswagen the situation is dire. Just as the IG Metall metalworkers union was demanding a 7% pay increase in October, the company announced a 64% drop in third-quarter net profit compared with the same quarter a year ago.

It quickly became clear that the management wanted to close at least three of its 10 plants in Germany, downsize other facilities, cut thousands of jobs and reduce wages by at least 10%.

The company has fired German workers before, but it has never closed a plant in its homeland. The news was a wake-up call to the EU's biggest economy as it struggles on many fronts with sputtering growth.

The state of Lower Saxony is home to around a third of the group's German employees and its premier is against any factory closures. In most places and for most companies this wouldn't matter much, but Lower Saxony has a 20% voting share in the company and a seat on the supervisory board.

Why is Volkswagen struggling?

The first big hit to Volkswagen's reputation was the Dieselgate software scandal, which came to light in 2015. It was a huge embarrassment that led to settlement fines and payments exceeding €31 billion. The then CEO is still on trial after being accused of perjury, market manipulation and fraud.

More recently, energy costs, inflation and the high cost of German workers are to blame for a dismal outlook, according to the company management, and that is hurting its chances to invest in the future.

VW is not alone with its problems. German competitors Mercedes and BMW have also lowered their outlook for the year. They all face higher costs and changing customer tastes.

At the same time, demand for Volkswagens is falling in Europe and especially China, its biggest and most lucrative market.

For decades, VW was the market leader in China. The company still sells the most petrol-powered vehicles there, but in the first nine months of this year, its Chinese sales were down over 10% as customers bought home-grown vehicles. In Germany, sales were down by a moderate 1.6% in comparison.

What is VW doing about China?

Another problem is VW's lack of vision to see how the market for electric vehicles (EVs) would grow.

Volkswagen did not ignore mobility developments and spent a lot on trying to turn into an EV player. So far, the investments have not panned out. Attempts to create its own inhouse software are plagued by problems and delays.

Where VW is struggling, China is the driving force and is at the forefront of the shift to electric vehicles with rivals BYD, NIO and XPeng Motors. Half of all new car sales in the country are EVs and the country is desperate to build and export more of them, which highlights VW's last problem.

The European Union imposes a 10% duty for EVs made in China. But in October, they introduced new tariffs of up to 45% for Chinese EVs because of huge subsidies provided by the government in Beijing.

The move will likely keep Chinese vehicles out of the EU for now, but German manufactures like VW fear Chinese retaliation could hurt their own opportunities and big investments in Asia.

To remain relevant, VW won't have to reinvent the wheel, but it will need to reshape its business and vehicle offering at home and abroad.

Edited by: Uwe Hessler