Top executives of the German Volkswagen Group announced earlier this month that they plan to further tighten cost-cutting measures, stating that the existing cost-cutting efforts are insufficient to address the current situation, and the possibility of closing domestic factories and laying off workers in Germany cannot be ruled out. As Germany's largest employer and Europe's biggest carmaker, Volkswagen's moves undoubtedly dealt a heavy blow to Germans' confidence in the economy and sounded an alarm for Germany's economic policies.

This is the Volkswagen "California Concept" plug-in hybrid campervan, which made its global debut at the Caravan Salon in Düsseldorf, Germany on August 26, 2023.

The industry's "headwinds" are growing stronger. Volkswagen, Germany's largest employer, has maintained its employment security agreement unbroken for years since its signing, serving as a successful model of reasonable negotiations between labor and management. According to the agreement previously reached between Volkswagen's union and management, the company must guarantee no layoffs in its home country before the year . Currently, Volkswagen employs approximately million people globally, with nearly million in Germany.

Regarding the closure of factories, according to information provided by the Volkswagen Group's labor union, management believes that at least one full vehicle assembly plant and one component factory in Germany are no longer necessary. In addition to the parent plant in Wolfsburg, Volkswagen also has factories in Hannover, Dresden, and Chemnitz, among other German cities. The last time Volkswagen closed a production base was in the year, when it announced the shutdown of a factory in Pennsylvania, USA. In Germany, Volkswagen has never closed any factory.

Is such a "heroic amputation" move indicative of a deep crisis at Volkswagen Group? Judging solely from the financial figures, Volkswagen Group appears to be in good shape. According to a report in the German magazine Focus, Volkswagen Group's performance has been quite impressive: the group's annual sales were approximately € billion (€ is roughly equivalent to . Yuan), setting a new historical high, with expectations of further growth in the coming years; the net profit after tax reached € billion, also a record high for the group.

However, both the media and the group's management agree that Volkswagen is facing deep-seated issues. The group's CEO, Oliver Blume, admitted that the industry is facing increasing "headwinds." Earlier, the group's management had formulated several cost-saving plans aimed at reducing costs by 10 billion euros by the year. The half-year results released in June this year showed that Volkswagen would not be able to achieve this target.

AFP cited a group internal memo reporting that rising costs are cutting into Volkswagen Group's profits, posing "particularly significant challenges." The memo stated that despite previously announced cost-saving measures, "the current development of the automotive market and the German economy demands further action."

"The cake is smaller, but the diners are more." The so-called industry "headwind" refers to the increasing market share of Chinese and American automakers in Europe, particularly in the electric vehicle sector, with Tesla and BYD as the leading examples. Although Volkswagen has long been one of the world's largest automakers, it ranks only third in the electric vehicle manufacturer rankings. Additionally, Volkswagen's competitors are closing in with strong growth figures.

Although Volkswagen can still achieve high profits through internal combustion engine vehicles, the more market share electric vehicles gain, the further Volkswagen will fall behind. Felix Li, a German journalist who has long been focused on the automotive industry, believes that Volkswagen's predicament is directly related to its poor performance in the Chinese market. He said, "China is Volkswagen's largest single market, with one out of every two Volkswagen cars sold in China. However, Volkswagen's market share in China is rapidly shrinking. A year ago, Volkswagen was still the leader, but now it has been far surpassed by BYD."

Felix Li believes that in the foreseeable future, China will remain the most important automotive market in the world. He analogizes that if you don't play in the top league, you can't become a global player, meaning: if you can't succeed in China, you won't rank among the top in the global market. Volkswagen must heavily invest in the development of electric vehicles to stay competitive with its Chinese counterparts. He said that Volkswagen's recent cost-cutting in Germany is also to increase investment in China. He added that German carmakers like Volkswagen certainly have a strong foundation in technology and talent, but China's development speed is very fast, especially in the two key areas of batteries and software development, where it is already far ahead.

Obermeier summarized the current state of the automotive industry with the phrase "the cake is smaller, but the diners are more numerous." Like Felix Li, he also places great emphasis on Volkswagen's development in China. On a certain day, Obermeier expressed optimism at the World New Energy Vehicle Conference, stating, "Our strategy is clear, our goals are definite—by 2025, we aim to become the number one international automaker in the Chinese market." To achieve this goal, he stated that the core strategy for Volkswagen in the coming years is to consistently and resolutely implement the principle of "In China, for China," striving to integrate even deeper into the local automotive industry ecosystem in China.

"The long-overdue alarm bell." The trends of the public not only reflect their own conditions but also serve as a microcosm of the German and even the entire European automotive industry. Many German media lament that the "good days are over" for the domestic automotive industry. When it comes to the German automotive industry, people usually think of large car manufacturers like Volkswagen, BMW, and Mercedes-Benz. However, behind these giants lies a vast industry composed of numerous suppliers of various sizes. According to German media reports, these companies are more acutely aware of the general crisis facing the European automotive market than the large manufacturers. Leading suppliers such as Continental, Schaeffler, ZF, and Bosch Automotive have planned to lay off tens of thousands of employees in the coming years.

On the date, after the "Automotive Summit" with major automakers' CEOs and union representatives, German Economy Minister Robert Habeck stated that the ruling coalition would discuss new financial support for electric vehicles. However, he warned: The market requires long-term predictability; short-term measures that are here today and gone tomorrow are of no help. BMW stated that what the German automotive industry needs is not market-distorting short-term policies, but sustainable improvements in framework conditions to make it easier for customers to decide to purchase electric vehicles, such as the construction of charging infrastructure and the reduction of vehicle charging prices.

Another issue that has drawn complaints from numerous car manufacturers is the EU's climate protection regulations, which include restrictions on the total carbon dioxide emissions of brand models and the goal of banning the sale of new fuel-powered vehicles by the year. In response, Habeck stated that the government can provide support at the EU level, such as the planned review of carbon emission limits originally scheduled for the year, which Germany will propose to advance to the year.

Reuters believes that Volkswagen's first consideration of closing a factory within Germany is the latest blow to German Chancellor Olaf Scholz. The outlook for the German economy has deteriorated again this year, with market sentiment low. Scholz's ruling coalition suffered another setback in two regional elections on the 10th. Carsten Brzeski, head of macro research at ING, said Volkswagen's latest decision highlights the consequences of years of economic stagnation and lack of structural reforms in Germany. Brzeski said, "If such an industrial giant has to close a factory, it could be a long-overdue wake-up call demanding a significant adjustment in Germany's economic policy."