The German automotive industry is one of the world's largest employers and employs about 860,000 people, accounts for five percent of Germany's GDP and produced more than 15.6 million vehicles in 2021.
15 of the world's top 75 automakers are German companies: it is the engine of the European economy, and its supply chains stretch across the continent from the Iberian Peninsula to Poland via northern Italy.
German companies over the decades have specialized in the production of luxury and high-quality vehicles, becoming the epitome of "Made in Germany." Dark clouds loom on the horizon, however.
From the beginning of the ukraine crisis German automotive power is quickly crumbling under the blows of a painful energy crisis. Symbolic of this crisis are the internal clashes within Europe's largest automaker, Volkswagen, over whether and how to move production out of East Central Europe.
Now comes another announcement, however: Volskwagen may be unusually closing a factory in Germany
The beginning of the earthquake: the energy crisis in East Central Europe
Volkswagen has major plants in Germany, the Czech Republic, Hungary, and Slovakia, having acquired the Skoda brand and the luxury Audi brand in the 1990s.
These are countries whose competitiveness, in addition to the low cost of skilled labor, depends forcibly on cheap Russian gas. What has been the secret of the European auto mechano, low energy prices, with the war in Ukraine has become its cross.
Volkswagen said it should be able to maintain production on German soil in the next five to six months if Germany continues to replenish its gas reserves, but in the medium-term scenario, structural increases in energy prices and unstable supply networks pose a risk to global production.
In 2023, it was assumed a shift of Volkswagen's manufacturing would have huge economic repercussions, not only in Eastern Europe, which after the fall of the Wall based its income growth on foreign investment, but also for Germany, where the company has about 295,000 employees with well-paid labor contracts.
If German factories are affected, the issue becomes systemically relevant to the entire German manufacturing system where specialized "Mittelstand" live off orders from large groups.
The German corporate governance system which includes union participation and has ensured an upward trade-off between wages and productivity for decades. On Volkswagen's 20-member supervisory board, half are seated employee representatives who could deny the green light for the closure of entire plants.
"The board has presented an irresponsible plan that shakes the very foundations of Volkswagen by massively threatening jobs and locations," IG Metall chief negotiator Thorsten Groeger said in a statement upon the announcement of the group's 2024 business plan.
Eastern European countries such as Poland, the Czech Republic, Slovakia, Hungary, and Romania are less threatened by closures, both for logistical and cost reasons, while Germany-like Italy and France-could be affected by closures.
"For a society like Germany, which is dependent on Russian energy and raw materials ... if you imagine a scenario in which you cut off trade relations with Russia, which we will probably have to do if this conflict [does not cease], you would no longer be able to buy energy, and this would lead to a situation that could have a considerable impact on Europe and Germany."
A car by the sea?
In the case of relocations, to benefit from this potential exodus would be the countries of southwestern Europe or countries in northern European coastal areas such as Portugal, Spain and Belgium where Volkswagen already operates production facilities.
These countries host liquefied natural gas terminals and are not particularly dependent on Russian imports, a factor that makes them more attractive to companies seeking to move production away from Eastern Europe.
However, a drastic change in production structure is very complex and has several critical issues: in general Volkswagen can restructure production, but containing costs is complex.
If production of numbers of vehicles is moved out of Germany, it will be a big blow to the country's reputation as a world leader in automobiles and "Made in Germany"
Moving factories means depressing the economy and generating discontent, which probably, in the countries where factories would be closed, could affect sales, already affected by the Russian market closure and Chinese market contraction initiated by the post-Covid and subsequent economic uncertainty.
Global competition and raw materials
In a global scenario, where German manufacturers must compete with Chinese and American producers, liquefied natural gas is a viable alternative but would still raise costs.
LNG is much more expensive than the gas that Russia used to supply through the North Stream pipelines and those passing through Belarus and Ukraine to feed the production capacity of so-called "Central Europe."
Basing the energy supply of energy-intensive car factories on liquefied natural gas may not be competitive in the long run, as Will have to compete with Chinese companies using gas transported by the "Power of Siberia" at a fraction of the cost and U.S. companies that can benefit from domestic and Canadian resources obtained by fracking.
Keeping factories in Germany, using this technology, would mean that in order to meet the increased demand for LNG, more LNG production plants, ships to transport it, terminals to receive it, process it, and build networks to transport it must be built. A task that requires several years of planning and development, as well as substantial funding for construction.
Short-term alternatives, such as coal, inevitably run up against Europe's stringent climate change legislation, with considerable bureaucratic difficulties and resistance from the public most sensitive to the issue, particularly in Germany.
It is not only the energy factor that affects the supply chain of the automotive industry, but more generally The rising cost of raw materials, the extraction and production of which in turn is affected by rising energy prices, and the relative scarcity of components could hit the supply chain hard, from the price of steel and platinum needed for exhaust units, to plastics.
Chemical giant BASF has in some cases stopped production of crucial components, as it cannot assemble vehicles without plastics and specialized chemicals.
German production chains span many countries in the Union, so. the health of the teutonic economy, which conversely is the first outlet market for many producers given its purchasing power, repeats itself in a feedback loop on its suppliers.
Typically, the Eastern European countries and the Iberian Peninsula, which gradually entered the Economic Union due to a combination of low wages but high productivity due to high schooling, are the favored regions of productive settlement.
The French system is an industrial partner in capital- and technology-intensive sectors such as transportation and energy, while the component supply areas are those of higher industrial and cultural symbiosis (Mitteleuropa, northern Italy)
Every jolt to the German economy has repercussions along the various chains of the industrial mechano spread across the continent.
The Chinese giant: from market to competitor
China has quickly emerged as the world leader in electric vehicles (EVs), both in terms of production and market share. Groups such as BYD, NIO and Geely have now surpassed in sales in some areas of the world of Western giants such as Tesla and Volkswagen, and they are entering Europe
Chinese manufacturers benefit from several strategic advantages, including strong government support through massive sales subsidies, a relative cheap labor force combined with robotics implementation, and the presence of the electronics supply chain, making them highly competitive both in China and in international markets.
Chinese manufacturers are not content with dominating the domestic market; Embracing the "Go Global" strategy are aggressively expanding in Europe, Southeast Asia and the U.S., as part of a broader strategy to position China as a leader in the next generation of automotive technologies.
The rise of Chinese manufacturers presents a significant, if not existential, challenge to Western automakers, who now have to compete not only on price, but also on technological innovation and production efficiency.
Volkswagen, which launched a 10-billion-euro cost-cutting plan late last year, is losing market share in China, its largest market. In the first half of the year, deliveries to customers decreased by 7% compared to the same period in 2023. The group's operating profit fell by 11.4% to 10.1 billion euros.
Electric cars have far fewer components of those with heat engines, so the sophisticated know-how accumulated in Europe for half a century is irrelevant, and the trend is gaining momentum to build increasingly high-tech cars in which the same manufacturing platform that creates high quality phones, laptops and computer equipment is converting to the automotive industry.
Chinese brands are gaining significant market share in key regions, eroding the dominance of Western brands, and they continue to innovate, putting pressure on Western companies to cut costs and accelerate their R&D efforts.
With the closing of the Russian market, the U.S. raising of tariffs, wild competition in the Chinese market, the three traditional export destinations for German automotive out of Europe, combined with environmental regulations in Europe and the prospect of a long economic crisis in the Old Continent a pincer could also close for the keystone for the European economy. Germany, too, is now navigating by sight.
"The European automotive industry is in a very difficult and serious situation. The economic environment has become even more difficult, and new competitors are entering the European market. Germany, in particular, as a production location, is losing ground in terms of competitiveness.
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