The comprehensive restructuring plan Volkswagen intends to implement highlights the power of the "Chinese shock" impacting the German economy. The Chinese market—the world's largest for automobiles and a major source of profit just a few years ago—has rapidly become a significant competitive challenge.
The formidable challenges emanating from China, facing Germany's largest car manufacturer, have helped break the deadlock within the management board and convince employee representatives, unions, and local government officials that Volkswagen needs to change quickly.
Four Car Plants in Germany to Close
The plan, announced on Thursday, will likely involve cutting 50,000 jobs and closing four car plants in Germany, as their manufacturing costs are no longer competitive.
Analysts at Deutsche Bank wrote on Friday that the board's decision was "a much better outcome than feared."
While the decision doesn't solve Volkswagen's challenges overnight, it "removes one of investors' biggest concerns: whether the company is still capable of making the tough decisions needed to address these challenges."
Volkswagen shares rose 8% on Friday following the news.
The analysts noted that the decision could have a "positive knock-on effect" (or "halo effect") on other German manufacturers, encouraging them to make similar difficult adjustments.
The Chinese Auto Sector
Dozens of Chinese automakers have launched 500 new models this year alone, in a market that has seen sales decline by more than 20% and prices fall.
The Chinese auto sector has benefited from government subsidies for electric vehicles and is characterized by fierce competition, low costs, and rapid adoption of new technologies.
While German automakers have seen their sales decline in China, Chinese companies like BYD, Geely, and Chery have begun to gain market share in Europe.
This has raised concerns within German industry and among voters, as the German economy—the largest in Europe—has been struggling with recession for several years, contracting in 2023 and 2024 and registering only 0.2% growth last year. Although the unemployment rate of 4% is lower than the EU average, Germans are following worrying headlines about job cuts at companies that have been pillars of the German economy for decades: Volkswagen is reportedly cutting 50,000 jobs, with media reports suggesting further reductions; BMW is offering 8,000 voluntary redundancies by the end of next year; and Bosch, the automotive technology company, plans to eliminate 13,000 jobs by 2030.
China is now producing many of the complex goods in which Germany specializes. Trade figures show that since last year, China has sold more industrial goods to Germany—such as cars, trucks, locomotives, and medical equipment—than Germany has sold to China.
Stefan Bratzel, director of the Center for Automotive Management (CAM) in Bergisch Gladbach, said the headwinds facing Volkswagen are “a warning sign for the entire German automotive industry.” He added that Volkswagen, as a mass-produced car manufacturer, faces the biggest challenge, but that Mercedes and BMW also have to cut costs and meet the challenge of the transformation the entire sector is undergoing.
He added: What we are witnessing now is a fundamental crisis facing Volkswagen and other established companies in the automotive industry; It's a technological shift and a change resulting from the entry of new players into the automotive world.
US Tariffs
Volkswagen has also been affected by high US tariffs on cars imported from Europe. It faces a 15% tariff on cars from Europe and up to 27.5% on cars imported from its factories in Mexico.
Volkswagen's profits fell by 31% in the first half of the year to €3.1 billion ($3.6 billion), despite selling more cars globally—excluding China—than in the same period last year.
The company has established a design center in Hefei to develop vehicles specifically for the Chinese market, as part of its "In China, For China" strategy.
Volkswagen stated that it is "currently" planning to phase out production between 2031 and 2034 at four plants located in Emden, Zwickau, Hanover, and Neckarsulm, indicating that it does not expect to be able to produce new models at competitive costs at those locations after these dates.
However, the severity of the plant closures has been mitigated by the extended timeframe before implementation and promises to address the controversial decisions regarding these sites and find alternative uses for them.
The company also announced that it will halve the number of models across its various brands, from approximately 150 to 75. This will allow for increased production volume per model, thereby reducing fixed costs.
The job cuts will affect both administrative staff and assembly line workers, and will be accompanied by measures to streamline management structures to expedite decision-making.
Volkswagen, which employs around 650,000 people, has already begun reducing its workforce under a previous restructuring plan.
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