The Volkswagen's crisis

Volkswagen's crisis, marked by factory closures and job cuts, reflects the broader challenges Europe and especially Germany are facing these days. Once a symbol of industrial strength, the company’s struggles now highlight deeper economic issues affecting the continent. The automotive industry, Germany’s largest sector, accounts for 5% of the national GDP and employs around 800,000 people. Volkswagen alone is responsible for about 37% of these jobs, many of which are well-paid, underscoring the far-reaching impact of the company's troubles on the wider economy.

A key factor in this downturn is rising competition from China. In recent years, China has transformed from a manufacturing hub into a global leader in sectors like electric vehicles (EVs). Chinese automakers, such as BYD and NIO, have seen rapid growth, with BYD becoming the world’s top-selling EV brand in 2023, and exports of Chinese-made cars increasing by 50% in the first half of 2024. As Chinese automakers capture market share in Europe, traditional players like Volkswagen are under increasing pressure. This shift is evident in the decline of German exports to BRIC countries, especially China, where exports have dropped by nearly 25% since 2019. In contrast, Chinese exports to these markets have surged, reflecting China's growing dominance. The rise of China as both an industrial and technological powerhouse is leaving Europe struggling to keep up.

Europe’s challenges are further compounded by its energy crisis, worsened by the war in Ukraine. Europe’s dependence on external energy sources, particularly natural gas, has led to rising costs and supply disruptions, making European industries, including Volkswagen, less competitive than their counterparts in the U.S. and China, where energy costs are more stable. This strain is reflected in Volkswagen’s financial results: a 21% drop in operating profit for the first nine months of the year, down to €12.9 billion, partly due to restructuring costs and weak demand from China, which also contributed to a 4% decline in vehicle sales.

These intertwined crises—competition from China, energy dependence, and industrial stagnation—underscore the need for an urgent, coordinated response. Europe must move beyond piecemeal solutions and adopt a comprehensive strategy for industrial renewal. The European Union (EU) is best positioned to lead this change, ensuring that member states work together toward common goals. In this context, Mario Draghi’s recent report underscores the urgent need for a shift in EU investment, recommending an increase from 22% to around 27% of GDP to reverse decades of stagnation and address the challenges faced by industries such as Volkswagen. It highlights Europe’s chronic underinvestment in innovation, with EU companies investing €270 billion less in research and development (R&D) than their American counterparts, leaving sectors like automotive and technology vulnerable to competition from China. Draghi stresses the need to prioritize investments in key industries, particularly green technology and digital infrastructure, to support Europe’s transition to carbon neutrality by 2050. However, he cautions that the green transition must be managed carefully to avoid undermining Europe’s economic competitiveness. For example, the EU’s 2035 ban on fossil-fuel vehicles has forced Volkswagen, once a leader in combustion engine cars, to overhaul its business model. The company’s delayed shift to electric vehicles allowed competitors who specialized early in this market to pull ahead. In addition, Europe’s energy prices remain significantly higher than those in the U.S. or China, further disadvantaging European firms like Volkswagen. The report also highlights Europe’s dependence on a small number of countries for critical technologies, posing a significant risk in an increasingly unstable global environment. To meet its transformation goals, Europe will require an additional €750-800 billion annually for decarbonization, infrastructure, and security. Given this, it is crucial that the EU focus its efforts on strategic investments. Only with coordinated action and targeted spending can Europe strengthen its industries, reduce vulnerabilities, and reclaim its competitive edge in the global economy.

In conclusion, the crisis at Volkswagen reflects the broader economic challenges Europe is facing. The continent's industrial decline, exacerbated by intensifying competition from China and rising energy costs, requires urgent attention. However, Europe has the tools for recovery, and it needs to adopt coordinated strategies that emphasize innovation, sustainability, and energy security. With these measures, the EU can guide its members toward a more resilient, competitive, and secure future.