The Limits of Expansion
VW’s vehicle sales peaked in 2019 but its workforce has to continue to expand
Europe’s auto industry is in danger of losing its way. Tuesday’s downbeat VW news on jobs and sales highlights the challenges ahead, as the market divides into Winners and Losers:
- 2015’s Dieselgate scandal led VW to focus on innovation – with a new approach and new CEO
- It aimed to become the world’s No. 1 automaker, and added capacity to make 14m vehicles
- But Herbert Diess was fired 2 years ago, and since then the momentum has gone into reverse
- In reality, VW sales peaked at 11m in 2019, and were just 9.2m last year, as the chart shows
As Bloomberg notes, a sign of the problems is that:
“The core VW brand is barely profitable, and the entire group is valued at just €50 billion ($55 billion). After deducting VW’s majority stake in Porsche, this implies the remainder of the group is worth next to nothing.“
VW SEEMS UNABLE TO ACT ON THE NEED FOR CHANGE
EU & UK NEW CAR MARKET SHARE BY FUEL TYPE
%, 2014 – 2024 H1
There are no great surprises when it comes to identifying VW’s core problem. The Dieselgate scandal effectively destroyed consumer trust in diesel cars:
- Diesel took 52% of new car sales in 2015, as the chart shows
- Sales have collapsed to just 13% of total sales in H2 this year
However, Diess’s efforts to move the company in a new direction soon ran into massive internal resistance from unions, senior managers and local politicians. And since he was ousted, the transition has stalled.
EV sales are well below budget. The software issues at the Cariad digital unit are still unresolved, and VW has lost major share to local competitors in the key China market. As the company’s new CEO, Thomas Schäfer, warned a year ago:
“The future of the VW brand is at stake – the roof is on fire”….
And as The Economist has warned, “disaster is no longer inconceivable.”
VW FACES MAJOR CHALLENGES
VW’s core challenges have been obvious for years. As we noted here 2 years ago:
“Russia’s invasion is a major wake-up call about the danger of assuming business will always be ‘as usual’. The window for investing in future growth is starting to close. As Hemingway warned in Fiesta, major changes (such as Net Zero) occur ‘gradually, then suddenly’.”
Now the European market is facing major challenges as the charts show:
- Internal Combustion Engine (ICE) sales have been in decline since 2019
- Electric Vehicle (EV sales) began well, but have plateaued since 2023
And unfortunately, since Diess’ departure, VW has effectively been falling behind. Its cost base is out of control, with Germany home to 44% of its 650k workers, despite a local market share of just 13%.
THE AUTO MARKET IS CHANGING, AND VW COULD BECOME ONE OF THE MAIN ‘LOSERS’
Markets are polarising as the Boomer SuperCycle ends – the highly profitable Middle Market is disappearing
VW could, and should have been well placed to anticipate the changes underway. VW, after all, stands for VolksWagen – the People’s Car.
But it turned its back on this heritage in 2022, as reported in the Financial Times. It decided to abandon the super-critical ‘Entry Segment”:
“These are cars that cost between €10,000 and €20,000 ($10k-20k). And they lifted a whole load of families and households on low incomes into the car-owning class. Now it looks like they’re going to abandon those segments altogether.”
This tactical shift made sense during the pandemic, when supply chain shortages limited the number of chips available for the auto industry. But it makes no long-term sense today, when the Middle Market is disappearing.
The end of the BabyBoomer SuperCycle means that markets are polarising again into High Volume (Value) and Low Volume (Luxury) as the chart suggests.
CHINESE MANUFACTURERS ARE CREATING STRONG COMPETITION
Electric Vehicles Are Cheaper Than Combustion Models In China
In turn, this is leading to a major focus on cost. And this focus is accelerating the shift to EVs. They are much simpler to make as their engines have only 20 moving parts, compared to an ICE’s 2000.
Chinese manufacturers are leading the way, as the Bloomberg NEV chart shows:
“Almost two-thirds of EVs available in China are already cheaper than their internal combustion engine equivalents, and many cheaper electric models are planned for launch outside China in 2025 and 2026… Battery-electric vehicles are currently the cheapest drivetrain by average transaction price in the country, even after stripping out mini city cars from the dataset.”
Inevitably, Chinese automakers are now focusing on the European market, and are investing in local plants to avoid import tariffs.
The question today is, therefore whether European legacy companies such as VW can move fast enough to head off the threat.
Their culture is slow-moving and cautious, and they risk becoming Losers in today’s New Normal market.