Germany's image as auto superpower hit by Volkswagen's slow decline

By Monica Raymunt and Mark Schroers
 

On a Monday afternoon in mid-August, workers at Volkswagen AG’s electric vehicle factory in Zwickau shuttled stony-faced between car frames and platforms. The plant was eliminating night shifts after letting go of hundreds of temporary workers.

A sense of foreboding was already in the air.

“The mood is tense, I have to be honest,” recalls Ronnie Zehe, the assembly manager at one of VW’s newest and most efficient factories. 

Three weeks later, the future of those men and women is at risk after the manufacturer that built the iconic Beetle issued a warning that it will need to shut plants for the first time in its 87-year history. Just before the corporate bombshell came a political wake-up call as the far right notched big wins in two state elections in the former east, coming second in Saxony — where Zwickau is located.

Germany is confronting the most symbolic moment yet in its story of industrial decline as its biggest manufacturer is poised to cross the Rubicon of factory closures. VW’s announcement is more than a belated acknowledgment of commercial reality. It’s a body blow to the country’s self image as an automotive powerhouse and an economy that was the world’s largest exporter earlier this century.

The reverberations are cultural and economic too in a nation that was hastily sewn together after the fall of the Berlin Wall but faces the reality that the reunification project has come at a cost. The anti-immigration Alternative for Germany, know as AfD, and left-wing populists have thrived by preying on the east-west divide and the mainstream political establishment have been powerless to stop it.

In the short-term, their electoral gains are yet another knock on Chancellor Olaf Scholz’s struggling coalition. In the long term, with federal elections on the horizon in 2025, the question becomes how to tackle the root cause of voter discontent. And a lot of that hinges on Germany being able to pull off another economic miracle of sorts: a rapid transition from export-led manufacturer of cars to a clean-energy power that is at the avant guard of chips and batteries.

The chronicle of VW’s decline — a cautionary corporate tale about being caught behind the times — mirrors the flaws in what had been Germany’s model for success and casts doubt on Europe’s economic motor to keep leading the way in the continent.

“Volkswagen’s problems are partly self-inflicted due to bad business decisions, but VW is also a good example of the enormous difficulties facing Germany as a business location,” said Carsten Brzeski, head of macro at ING. “Germany has been losing competitiveness for years, and this is now also affecting the former crown jewels of the German economy.”

In Zwickau, a mid-sized city in the east where VW made 247,000 fully-electric cars last years, along with 12,000 car bodies for Lamborghini and Bentley models, cost-cutting measures were already well under way before the prospect of wholesale plant closures came up.

The factory is fully exposed to the much slower uptake on EVs in the region as models remain too expensive and incentives fade. VW, though still very profitable, has had a bumpy ride in the transition by first clinging to diesel engines and then overshooting with a full blown offensive.

The company, with its Wolfsburg headquarters in the western state of Lower Saxony, was one of hundreds of businesses that jumped at the chance to take over eastern factories following reunification, including the Zwickau one. “Every other family is attached to this Volkswagen plant somehow, even if it’s the butcher,” said Thomas Knabel, the local official of the IG Metall union that represents workers at the facility.

The closure of individual factories is devastating to such communities — and carries a political price for Scholz. Carmaking creates around 4 per cent of total value added in the German economies, with a further 4 per cent when taking into account associated areas such as metal or rubber manufacturing, according to Bloomberg Economics.

As Martin Ademmer, an economist at BE, puts it: “The car industry’s importance for the German economy has declined in recent years but it still remains a very crucial sector.”

Cars are an integral part of Germany’s modern identity, a pop culture touchstone and political lighting rod: Whether it was Herbie, the Love Bug in the Walt Disney movies, or Janis Joplin in her 1960s pyschedelic Porsche or Donald Trump complaining about the number of Mercedes-Benz and BMW cars driving along Fifth Avenue in New York. 

Indeed, the story of VW is the story of postwar Germany, an ascendancy against the odds, associated with the post-war miracle that turned a land wrought by destruction into the region’s greatest industrial power.

With the turn of the 21st century, the ability of VW to tap demand from a growing Chinese middle class helped it defy the fate of its rivals in Detroit. But then its reliance on Asian consumers became a problem.

Under the watch of successive governing coalitions in Berlin, the high point of its industrial output in 2017 has been eroded by the ascendancy of advanced Chinese manufacturing, and successive crises from the pandemic to the cut-off of cheap Russian gas imports in the wake of the invasion of Ukraine.  

Then there’s the wider question of the country as a business location. With infrastructure creaking from decades of under-investment in the name of near-balanced budgets, and red tape a frequent complaint of businesses, a survey of 180 economists surveyed by the Munich-based Ifo institute concluded in May that Germany lacks appeal as a place for enterprise. 

The answer by Scholz’s government, in a rushed bid to placate voters in the restless east, has largely been to dole out generous subsidies to companies opening up plants there. 

That approach alone won’t fix the country’s waning competitiveness in the long run, said Jens Spahn, a lawmaker from the opposition CDU who serves on the economy committee in parliament. He warned this week that “VW is just the tip of a large iceberg.”

Monika Schnitzer, an economist who advises the government, cautions that it’s too soon to write off the country’s status as a leading industrial player.

“German companies can continue to succeed if they excel with the latest technologies and high-quality products while keeping costs under control,” she said. “Germany still has many world market leaders, especially among its so-called hidden champions, who dominate niche markets.”

Back in Zwickau, in a region already locked in political unrest, VW’s announcement has at least brought some clarity, even if workers are struggling to see through the gloom. The factory has completely redone the roster for every single team, which was a stress point for workers with families, caregiving duties and health conditions.

“We have worked hard to achieve a very good standard of living here,” Zwickau Mayor Constance Arndt said. “I see more light than shade, but people are now realizing that it can quickly come to an end.”