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VW and Groundhog Day

Posted by | Michael Ratcliffe

The Internet is full of articles about the challenges VW faces following their announcement to scrap their labor agreement that protected workers from layoffs. However, to fully understand the gravity of this situation, it is worth looking back 70 years to a remarkably similar scenario in the global shipbuilding market.

After WWII, deep-sea shipbuilding was primarily dominated by European shipyards, especially in Northern Europe. However, in the search for cheaper alternatives, international shipowners turned to Japan. As part of Japan’s post-war reconstruction efforts, the country made its dry docks—largely unaffected by the war—available to the global market.

Unlike their European competitors, Japan offered a radical new method of shipbuilding which was significantly faster and cheaper. They adopted the mass-production technology developed in the US, building large separate sections of each ship simultaneously, and only bringing them together in a dry dock for final assembly.  This was in stark contrast to the traditional European process of laboriously building ships from the “keel up.”

In addition, the Japanese government provided cheap finance through their Export-Import Bank. Within 20 years, Japan had effectively taken over the global market for standardized bulk shipping. South Korea soon followed Japan’s lead, and European shipbuilding for this segment had nearly collapsed.

Why did this happen? Quite simply, it was the power of unions.  In the years leading up to WWI, unions had grown incredibly strong and resisted any changes that could result in job losses.  Most shipyards were the dominant employer in the cities and ports where these shipyards were located and local politicians sided with the unions to protect those jobs.

 

VW Deliveries and China

 

Unions and politicians in Germany, Japan and the US are echoing sentiments similar to those seen in the shipbuilding industry 70 years ago.  The forces swirling around VW are ominous. In 2015, the company was rocked by “Dieselgate”, a shocking corporate emissions fraud that resulted in $35 billion in fines. Although VW launched its first electric passenger vehicle in 2013, it significantly underperformed. In 2018, Herbert Diess was appointed CEO and initiated a major EV investment program, launching VW’s first competitive EV models, the ID.3 and ID.4, in 2021. However, both were plagued with software issues that rendered some vehicles virtually undriveable.

Three years later, VW finds itself in a dire situation. China, a late entrant into auto manufacturing, started focusing on EVs in the early 2000s. This accelerated dramatically in 2009 when the Chinese government introduced subsidies for new energy vehicles, including EVs. China was VW’s biggest market at the time.  As Chinese manufacturers improved their technology and the quality of their cars, and subsequently reduced prices through economies of scale, VW faced increasing competitive pressure.

In 2020, VW was hit by a global downturn in sales due to COVID. While overall sales have since recovered somewhat, its sales to China, which accounted for 40% of VW’s total deliveries in 2019, have not. They have now dropped to nearly 30% of total deliveries, with total vehicles delivered to China falling 25% from 4 million to 3 million per year.

This trend is unlikely to improve. Today, VW lacks competitive EV models for the Chinese market. Making matters worse, since 2021, Chinese manufacturers have begun exporting their EVs, further cutting into VW’s global sales, where it was already facing fierce competition from Tesla.

History of VW

The stark fact is that VW currently lacks a competitive EV solution and is unlikely to have one for several years. 2024 has seen a flurry of deals by VW related to EV technology, but it has also seen announcements of factory closures and cancellation of union agreements, signposting impending mass layoffs.

Yes, VW can still profitably sell ICE vehicles outside China in the short to near-term, but the looming threat from China to the incumbent automakers in Europe, the US, and Japan poses a serious challenge. In the near future, Chinese automakers are set to swamp global markets with low-cost EVs powered by Chinese-made batteries. The extensive R&D into battery technology virtually guarantees higher performance in power density, charging speed, range and, ultimately, lower costs.

Seventy years ago, Europe’s failure to compete head on with new manufacturing technology  – due to union intransigence and political support for incumbents – led to the total collapse of its shipbuilding industry, with production moving to the Far East. Are we now witnessing a similar scenario with VW  and the dawn of Groundhog Day for the auto industry?

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