Volkswagen investors looking for reassurance after Thursday’s inconclusive board meeting may find some comfort in one fact. Even mighty Toyota is unlikely to emerge unscathed from China’s assault on the global auto industry.
Volkswagen’s meeting on Thursday was called to address what some board members had suggested were existential problems. Some progress was made but it left untouched the most controversial proposals – cut 100,000 jobs and shut four plants in Germany. And, of course, the elephant in the room was China.
There was agreement to simplify the model lineup and cut global annual production capacity by one million to nine million. Details were lacking. Perhaps the biggest problem facing VW, and the European industry, is China.
On Friday, the stock market gave its verdict. Volkswagen’s stock price slipped a bit to close at €72.85. In other words, there was no mass scramble by investors for the exits, but no vote of confidence that happy days will soon be here again. The stock price is now 33% lower than it was at the start of the year.
“the most attractive automotive company in the world”
After the meeting, CEO Oliver Blume said this.
“By 2030, we will make the Volkswagen Group the most attractive automotive company in the world – with iconic brands, inspiring products, leading technologies, robust financial results, reliable capital market performance and a team spirit in action. With our future plan, we are now entering the next phase of transformation,” according to investment researcher Bernstein.
With Chinese competition growing daily and the nature of its threat relentlessly moving upmarket, that is some claim. In Europe, Chinese autos now account for almost 10% of the market. Global consultancy AlixPartners expects this to rise to 16% by 2030.
Professor Ferdinand Dudenhoeffer, director of Germany’s Center for Automotive Research, said Blume is overly optimistic. The premium brands Porsche and Audi are the problem.
“But then there is Škoda—a textbook success story: highly profitable and the jewel in the crown of the group. So, if Škoda can do it, it’s possible for VW, too. Cost reductions are needed. VW faces a specific problem in Germany, which is why there is a push to close plants. However, that campaign was poorly conceived and doomed to fail,” Dudenhoeffer said.
VW’s mass market brands include its own name, SEAT/Cupra, and Škoda. Iconic Porsche has fallen on hard times, thanks to electric vehicle mistakes and now it is barely profitable.
“VW needs to find a social consensus… and that isn’t impossible. Ferdinand Piëch managed it a long time ago with measures involving labor concessions and the Hartz reforms. So it is possible; you just need the right strategy—not the approach Blume is taking. Blume is really undermining his own credibility,” according to Dudenhoeffer.
The “Hartz” reforms in the 1990s included a 4-day week to persuade the workforce to cooperate with structural reforms.
Toyota’s substantially smaller workforce
Some analysts contrast Volkswagen’s position with Toyota, which, as global market leader, sells a few more vehicles a year but with a substantially smaller workforce.
They said Volkswagen’s starting position is materially weaker than Toyota’s, and many of those weaknesses are structural and rooted in decades of poor strategic decisions. But even Toyota will have to work hard to compete with the emerging automakers of China.
Volkswagen’s struggle is because of its unique corporate structure, which protects jobs but has difficulty making urgent market-orientated changes. Toyota of Japan, with similar global sales of close to 10 million as VW, is said to be much more efficient, with a production of 28 cars per employee compared with VW’s 13.
Dudenhoeffer said direct comparisons between VW and Toyota are flawed.
“VW has a major battery plant – PowerCo – as well as large component factories and commercial vehicle divisions like MAN and Scania. Lumping everything together is wrong—though clearly, VW does need reforms. All in all, I’m not negative about VW’s prospects, though I’m certainly not as euphoric as Blume,”
Radical changes in automotive design
European manufacturers and Volkswagen in particular’s efficiency remains well below the Chinese. The transition to software-defined vehicles has forced Europeans into a corner. The new methods call for a radical change in automotive design, with Over the Air (OTA) updates allowing for big design improvements in the middle of a production run. So-called legacy manufacturers wait for the new model to be designed and improved.
The meeting Thursday was called to consider CEO Blume’s reported proposal to double planned layoffs to 100,000 and shut German plants in Hanover, Zwickau, Emden and Neckarsulm. Profits from China used to be a virtual magic money tree. The European market has lost nearly 4 million short of its pre-Covid high. U.S. tariffs have weakened another big earner. VW was said to want to spin off its own name core brand and auto parts manufacturing into separate companies.
These problems still await action. The board includes Porsche and Piech family shareholdings, Qatar, the German state of Lower Saxony, and unions. The supervisory board has ultimate power with unions holding half of the 20 seats.
Investment researcher Jefferies, in a report entitled “Firing the Starting Gun for Negotiations”, said there was no indication of progress towards an agreement on either plant closures, the 5-year investment plan or additional headcount reduction up to 100,000. Early reports say these moves were blocked by the board.
No job cuts, no plant closures
Bernstein wanted details of how the one-million capacity cut was to be achieved. Bernstein also pointed to the reaction of the union which said there should be no plant closures and that job cuts would only be voluntary.
Comparing Volkswagen and Toyota is useful, but it is important to recognize that they are solving different strategic challenges,” said Joern Buss, Partner at Arthur D. Little.
“Even highly efficient manufacturers such as Toyota face significant challenges as the industry is reshaped by software, AI, electrification and increasingly capable competitors from China. Employee numbers themselves are not the root cause of competitiveness,” Buss said in an email exchange.
“The more important question is how organizational complexity influences decision-making, execution speed and overall productivity. Workforce size is often an outcome of broader strategic and organizational choices rather than a standalone issue.”
Organizational complexity
“Volkswagen’s multi-brand strategy has created significant market reach and strong customer differentiation. At the same time, managing multiple brands, engineering organizations and governance structures naturally introduces additional coordination requirements and organizational complexity compared with a more integrated operating model.”
“Toyota and Volkswagen have each developed operating models that reflect their respective histories and strategic objectives. Toyota’s long-standing focus on continuous improvement, standardized processes and integrated governance has supported high operational efficiency. Volkswagen, by contrast, manages a broader portfolio of brands and stakeholders, creating a different set of management challenges as well as strategic advantages.”
Inherently complex
“Many of today’s organizational characteristics are the result of decisions made over decades. Transforming an established global manufacturer like Volkswagen, while simultaneously navigating one of the industry’s largest technological transitions is inherently complex.”
“Ultimately, the long-term competitive challenge extends beyond traditional productivity measures. Success will increasingly depend on how effectively manufacturers adapt to software-defined vehicles, AI-enabled development, electrification and the rapidly evolving competitive landscape, particularly in China. Companies will approach those challenges from different starting points and with different strengths,” Buss said.
