Volkswagen – Is this the beginning of the end?

Volkswagen (ETR:VOWG_p) is facing a profound change. The former world market leader is confronted with billions in losses, falling market share and possible plant closures. The latter is particularly noteworthy at Volkswagen, because like no other company, Volkswagen is directly linked to politics.
 
The current crisis at VW in five important aspects:
 
Historical rise
 
The history of Volkswagen is closely linked to the economic rise of the Federal Republic of Germany. The factory in Lower Saxony, originally founded by the National Socialists, developed after the war into a major industrial enterprise under state ownership. When the company went public in 1960, the first ‘people's shares’ were issued – in line with Ludwig Erhard's motto: ‘Property for all’. As early as the 1950s, Volkswagen achieved its first successes in international markets, particularly in Europe, America and Africa. In the 1970s and 80s, the group grew into a global player under the leadership of Toni Schmücker and Carl Horst Hahn.
 
The Decline
 
However, the company's once unchallenged position is a thing of the past. In 2023, Toyota sold almost two million more vehicles worldwide than VW. VW's market share in China has fallen to around 14 per cent, and on the stock exchange, its shares have lost around 60 per cent of their value compared to their all-time high in 2015. In Wolfsburg, the cancellation of the job guarantee for the German workforce and possible plant closures are now being openly discussed – the crisis is obvious to all.
 
The most important factors can be summarised in five areas:
 
1. A welfare state in the company
 
Volkswagen's in-house collective agreement was long seen as a competitive advantage, but is increasingly perceived as a burden. The wages and salaries of the workforce are often higher than those of competitors. In 2023, the company's personnel costs rose to almost 50 billion euros, including pension obligations – an increase of nine billion euros compared to 2020. Particularly striking is the ‘Tarif Plus’ system, a hybrid position between management and tariff employees, which in many cases leads to annual salaries of 120,000 to 150,000 euros. At the end of 2023, around 9,000 employees were working in this system, which, according to one manager, ‘has gone off the rails’.
 
2. Obstacle to innovation
 
Four years ago, the then VW CEO Herbert Diess launched the Cariad software unit to develop the company's own software architecture. But it is now clear that the project was too expensive and too complex. Today, the group's brands are buying the software externally, with VW drawing on technology from the US electric carmaker Rivian – at a cost of five billion euros.
 
All of this doesn't sound as bad as it actually is. Buying software is not a reason to diagnose a serious problem. At Volkswagen, however, we consider it important because it points to a much bigger problem. Volkswagen has spent enormous sums of money in the past to recruit skilled workers in the field of software development. We would not assume a lack of expertise due to the good salaries either.
 
Rather, we see the problem in the processes. Volkswagen produces cars. These are clear processes that are timed from top to bottom. It's different with software development. If you choose the same structures for such projects, the projects are usually doomed to failure before they have even begun.
 
Anyone who has anything to do with software development and knows a thing or two about it will agree with us when we say that buying in third-party software does not solve the problem. If your own software failed despite an army of software developers, implementing third-party software is bound to fail even more.
 
The group would have to adapt its processes to the respective demand. Only then do we consider the company to be truly sustainable again. This applies to the entire industry. The Chinese had it easier. They only started when the software was already indispensable. So they implemented the right processes for the respective requirements from the outset. The transformation in the German automotive industry is not only aimed at the products, but even more so at the way they are manufactured.
 
3. Influence of politics and trade unions
 
Volkswagen has always been a political issue in Lower Saxony, which has not always been to the advantage of the company. The VW law gives the state government of Lower Saxony considerable influence over strategic decisions, as it holds 20 percent of the shares and can block important decisions. Former CEO Herbert Diess came into conflict with the IG Metall trade union, but was unable to prevail against it. The current CEO, Oliver Blume, is acting more cautiously, but the planned plant closures are likely to lead to a showdown. Works council leader Daniela Cavallo has already warned: ‘The board is calling into question nothing less than the entire core VW brand. We will not allow ourselves to be phased out here.’
 
4. Challenge in China
 
VW's growth in China is slowing down, while Chinese car brands are catching up. In 2023, VW sold 3.2 million vehicles, an increase of just 1.6 per cent. By comparison, its largest Chinese competitor, BYD, increased its sales by around 50 per cent to almost three million vehicles. In the field of electric cars, VW has so far played a minor role in China. The company's new strategy, ‘in China, for China,’ is intended to change that and aims for a stronger local customer focus.
 
5. Miscalculation with electric cars
 
Volkswagen is also facing difficulties in Europe. Sales of electric cars in Germany fell by around 15 per cent in the first half of 2024 compared to the previous year. A study by the consulting firm USCALE showed that only 37 per cent of buyers of a VW electric car would recommend their vehicle, while almost 70 per cent of Tesla customers would be willing to do so. ‘VW now only stands for mediocrity when it comes to electric cars,’ said USCALE CEO Axel Sprenger.
 
The stock continues to follow our roadmap exactly. That's not great, because it's pointing down.
 
You can find out more about us via the link next to my profile picture.
 
Disclaimer/Risk warning:
The information provided here is for informational purposes only and does not constitute a recommendation to buy or sell. It should not be understood as an explicit or implicit assurance of a particular price development of the financial instruments mentioned or as a call to action. The purchase of securities involves risks that may lead to the total loss of the capital invested. The information provided does not replace expert investment advice tailored to individual needs. No liability or guarantee is assumed, either explicitly or implicitly, for the timeliness, accuracy, appropriateness or completeness of the information provided, nor for any financial losses. These are expressly not financial analyses, but journalistic texts. Readers who make investment decisions or carry out transactions based on the information provided here do so entirely at their own risk. The authors may hold securities of the companies/securities/shares discussed at the time of publication and therefore a conflict of interest may exist.