Volkswagen Faces Intense Scrutiny Amidst Labour Showdown: What It Means for Your Investments
By Victoria Waldersee and Nick Carey
BERLIN (Multibagger) - Volkswagen (ETR:) is embroiled in a fierce debate with its influential labour unions over how to address escalating costs at its underutilized German factories. This conflict has led to significant introspection regarding the fundamental issues plaguing the world’s second-largest automaker.
The Core Issues: Governance, Investments, and Management
Volkswagen's challenges are multi-faceted, with analysts pointing to complex governance structures, ill-advised investments in electric vehicles (EVs), poor management decisions, declining revenues from China, and Germany's stifling bureaucracy as key contributors.
However, a Multibagger review of factory capacity utilization data for six major carmakers across Europe indicates that Volkswagen is not alone in facing these issues. In fact, it might be better positioned than some of its competitors regarding underused plants.
Comparative Analysis: VW vs. Rivals
According to data compiled by GlobalData, Renault (EPA:) and Stellantis (NYSE:) have lower average capacity utilization rates in Europe than Volkswagen. The data also includes figures for BMW (ETR:), Ford (NYSE:), and Mercedes-Benz (OTC:).
In eight major European car-making countries—four high-cost (France, Germany, Italy, UK) and four lower-cost (Czech Republic, Slovakia, Spain, Turkey)—the trend is clear: higher factory utilization rates are found in central and eastern Europe where operational costs are lower.
Capacity Utilization: A Critical Metric
Across Europe, the capacity utilization of factories producing light vehicles was 60% in 2023, down from 70% in 2019. In lower-cost countries, the rate only slightly decreased to 79% from 83%, but in the higher-cost countries, it dropped significantly to 54% from 65%. According to GlobalData, a utilization rate around 70% is essential for profitability, with 80%-90% being the ideal range.
Volkswagen’s Struggle with High Costs
Pressure from German unions and politicians to manufacture EVs domestically has become a “poisoned chalice” for Volkswagen, says Justin Cox, GlobalData’s director of global autos production. The company is compelled to use its most expensive locations to produce high-cost EVs, which are not selling as anticipated.
Volkswagen CFO Arno Antlitz confirmed that premium costs are incompatible with the goal of "mobility for all," particularly at German plants that build most of their electric vehicles. In 2022, the average wage for factory workers in Germany's automotive sector was 59 euros per hour, starkly higher than 21 euros in the Czech Republic and 16 euros in Hungary.
Declining Sales and Uncertain Future
New car sales in Europe are dwindling, with an 18% drop in August and a notable 44% decline in EV sales. The German market was hit hardest, experiencing a 69% slump in EV sales.
Union representatives, like Stephan Soldanski from Osnabrueck, are calling for Volkswagen to produce more affordable models. However, without clarity on future production plans, these calls may go unanswered. The Osnabrueck plant is running at approximately 30% capacity, with its current models set to end production by 2026.
Political and Economic Pressures
Volkswagen’s CFO has stated that the company has one to two years to turn its namesake brand around in the face of Chinese competition. Negotiations with unions about potential cost cuts and plant closures in Germany are imminent.
As high interest rates and a weakening economy curtail demand, the influx of Chinese exports further complicates the situation. Volkswagen anticipates annual European car demand to hover around 14 million vehicles, down from 16 million pre-pandemic.
Strategies of Competitors
Other automakers like Renault and Stellantis have already initiated cost-cutting measures. Renault has cut thousands of jobs in Europe, while Stellantis plans to reduce nearly 20,000 jobs by the end of 2024. These companies are shifting production to lower-cost countries and relying more on temporary workers.
Future Trends: Moving East
Industry experts predict a growing east/west divide in Europe’s auto industry, accelerated by Chinese entrants like BYD and Chery setting up in lower-cost countries such as Hungary, Turkey, and Poland. This shift may confine higher-cost markets like Germany to premium or luxury car production.
Final Breakdown: What You Need to Know
- Volkswagen’s Struggles: High costs, declining sales, and internal governance issues are weighing heavily on VW.
- Comparative Position: Despite the challenges, VW is not the worst off when compared to some of its major European competitors.
- Economic Impact: The industry-wide trend towards lower capacity utilization in high-cost countries could lead to job cuts and plant closures.
- Investment Implications: Investors should monitor VW’s strategic responses to these challenges, particularly its negotiations with labour unions and potential shifts in production.
Understanding how these factors interplay can provide insights into future market trends and help you make informed investment decisions.