Germany close to a “perfect storm”

One of the pillars of the German economy is the automotive industry, which is suffering a deep crisis, the most visible face of which is the strike at Volkswagen. On Wednesday (4), the website BBC Mundo published an article by Cristina J. Orgaz that shows the extent of the drama.

A BBCas we know, is the official spokesperson for the United Kingdom and its editorial line expresses this. The cited article omits the main cause of the economic crisis: the greed of German and European political leaders, who put the interests of their people at the forefront, to follow Washington’s dictates of open confrontation with Russia.

Russia was a reliable supplier of fuel for German industry and in this aspect alone, the costs of the disruption of Russian supply (a disruption that came from Germany) caused an estimated impact of US$ 100 billion euros on the German economy. Germany faced a recession in 2023 and for 2024 the forecast is zero growth.

However, the article prefers to point out other causes, such as an industrial model that would be archaic and the “high wages” of German workers. In any case, the text is useful in discussing the various facets of the problem and revealing its extent. One of the interviewees says, for example, that he has never seen a crisis like this and adds: “This time, it is a tremendous, very deep crisis.”

Another interviewee, although he considers the German crisis to be more serious, due to the political instability affecting the country, says that Germany is not an isolated case in Europe: “There is a combination of problems in all important markets (…) The European market faces a long-term slump and its sales are around two million less than before the pandemic.”

And things could get even worse for the “fragile German economy” (term used in the article!). If Trump fulfills his promise to implement import tariffs on German vehicles, a perfect storm will form, according to one expert: “Trump’s proposal would affect both sales and profit margins (…) For German car manufacturers, it would be a catastrophe, turning an almost perfect storm into a real hurricane“.

And as always, those who will pay the bill are German workers, as one of the BBC interviewees candidly explains: “It is likely that part of the strategy (to face the situation) will consist of reducing costs through layoffs and renegotiating salaries, in addition to increasingly transferring production abroad, especially in the case of cars with a profit margin. lower”.

Read the full article below.

What’s behind the deep crisis at Volkswagen

Article published by the BBC News Mundo website, written by Cristina J. Orgaz

There are many problems faced by German car manufacturers, once considered the crown jewel of the country’s economy.

Profits at Volkswagen, Mercedes and BMW dwindled. Companies lost sales around the world.

They are struggling to regain their former splendor, but many experts say that the German automobile industry has not known how to adapt to the new times. The sector was restricted to an old industrial model that, today, no longer works.

In fact, most of the value of modern electric cars lies in their software and battery, not so much in the engineering parts responsible for the German vehicles’ fame.

Furthermore, its directors were slow to recognize the migration to electric vehicles. Now, its companies are struggling to compete with new market entrants such as Tesla and Chinese factories.

Volkswagen, for example, announced in September the development of a drastic cost reduction plan.

The German manufacturer, which has five production units in Mexico and four in Brazil, intends to cut billions of euros in its factories in Germany.

The company justified the measure in a statement, mentioning the need to reduce costs to become competitive again. But this decision is also marked by a 64% drop in its profits in the third quarter of 2024.

Experts point to global slowdown in traditional car sales

The unions reacted immediately, calling a “warning strike”. In other words, if there is no agreement, workers will increase the downtime.

At up to nine Volkswagen car and component factories in Germany, workers began two-hour strikes on Monday, paralyzing assembly lines.

“The lack of technological advances occurred at a time when German automobiles were selling at relatively high prices compared to other European, American and Japanese producers“, he declared to BBC News WorldBBC Spanish service, the economist emeritus of the Institute for World Economics in Kiel, Germany, Federico Foders.

Germany’s working elite

“The high sales volume served as an incentive to increase the salaries of workers and employees, who belong to Germany’s working elite.“, he explains.

“In other words, the lack of technological advances and high production costs harmed the competitiveness of the German automotive industry..”

A company spokesperson stated that the manufacturer respects workers’ right to strike and has taken measures to guarantee the basic level of supply to customers, minimizing the impacts of the strike.

Volkswagen’s electric vehicles failed to take off in the market

The crisis at Volkswagen also affected the entire tangle of small and medium-sized German companies that supply the car sector. They all suffer from falling sales, from the nut manufacturer to the window glass supplier.

“I have never experienced an economic crisis like this”, declared Hans Beckhoff, owner of the company Beckhoff Automation, a manufacturer of automated control systems for 44 years. “This time, it is a tremendous, very deep crisis.”

For economist Thomas Puls, a specialist in the sector at the Institute of German Economics in Cologne, Germany, Volkswagen is not an isolated case.

Other factories are also being affected, such as the European Stellantis and Renault, the Japanese Nissan and the American Ford.

But he believes VW is different, given Germany’s current political instability.

“They have severe overcapacity and should close at least the smallest factory“, he says, “but it’s not very clear whether they will succeed.”

Other parts of Europe

“There is a combination of problems in all important markets,” explains Puls.

“The European market faces a long-term slump and its sales are around two million less than before the pandemic.”

In the case of Volkswagen, this translates into a reduction in sales of 500 thousand vehicles.

“In China, new competitors with electric cars have emerged and now they have their own gasoline car manufacturers“, he continues. “Furthermore, protectionism is clearly growing on the world stage.”

This is another factor adding to the perfect storm at Volkswagen: the threat of import tariffs from Donald Trump.

Volkswagen has five factories in Mexico

The Republican’s victory in the United States presidential election places the automotive sector in one of the most vulnerable positions, due to its high dependence on exports to the world’s largest economy.

“If we consider that the sector’s exports reach an annual value of more than 60 billion euros (around US$63 billion, or R$380 billion), a 25% import tariff on vehicles, as suggested, could reduce significantly the competitiveness of European manufacturers such as Volkswagen, BMW and Mercedes in the American market“, according to the investment director of the financial institution Edmond de Rothschild, Rodrigo Cebrián.

“All of this comes at a time when Chinese competition is intense, with the development of electric vehicles“, he adds.

Trump’s proposal would affect both sales and profit margins.

“For German car manufacturers, it would be a catastrophe, turning an almost perfect storm into a real hurricane.“, according to Martin Wolburg, senior economist at asset management firm Generali Investments.

Impact on Mexico

European and American car manufacturers could lose up to 17% of their combined annual profits if the United States imposes import tariffs on products from Europe, Mexico and Canada, according to a report from American financial analysis firm S&P Global.

Premium car manufacturers Volvo and Jaguar Land Rover – produced mainly in Europe – and the General Motors and Stellantis groups (which manufacture many cars in Mexico and Canada) are the most threatened by the increase in import tariffs, according to S&P.

A BBC News World asked Volkswagen what its plans are for its factories in Mexico, but received no response.

As if the Chinese competitors and the possible increases in import tariffs by the Trump administration weren’t enough, the fragile German economy led the country’s government to eliminate subsidies for the purchase of electric vehicles.

Federico Foders believes the government suspended subsidies too soon. But he remembers that support cannot replace the necessary technological transition.

“The process includes the closure of several factories, both in Germany and in other countries“, argues the economist. “The restructuring of Germany’s automotive industry is inevitable.”

No state help

Martin Wolburg believes it is unlikely that tax aid will rescue the company. The government has committed to complying with the ambitious reduction of the national debt, “which only leaves room to boost demand or make investments in urgently needed infrastructure“.

“It is likely that part of the strategy will consist of reducing costs through layoffs and renegotiating salaries, as well as moving more and more production abroad, especially in the case of cars with lower profit margins.“, he explains.

With several factories affected by the partial strike, the Volkswagen crisis is an example of the difficulties faced by German industries. And it arrives at a very specific moment.

In November, the government coalition headed by German Chancellor Olaf Scholz collapsed, leaving the country without a budget and forcing new elections to be called for February 2025.