VW's drastic cuts: Europe's automotive sector faces stark reality

Last week, Volkswagen (VW) officially announced that it might close two of its plants in Germany. This would be the first such instance in almost 90 years and a real blow to the German economy, which is already facing considerable challenges.

The German giant may not be the only one considering drastic measures. One significant manufacturer has already decided on cuts.

Romanian Dacia (controlled by Renault) announced that it plans a restructuring that will allow employees to voluntarily leave their jobs. Those who enroll in the program in September can expect substantial severance packages. Portal Profit.ro reports that Dacia has not specified the exact number of employees who will be laid off starting October 1. Employees who decide to leave voluntarily between September 9 and 20 will receive severance payments based on their length of service.

According to Bloomberg, last year, nearly a third of the main factories of the five largest European car manufacturers - BMW, Mercedes-Benz, Stellantis, Renault, and VW - used less than half of their production capacity.

Complete factory closures could heighten concerns about a prolonged economic slowdown in the region, which lags behind its competition.

Konrad Popławski from the Center for Eastern Studies (OSW) admits in an interview with money.pl that the current automotive industry crisis is not a mere mishap. - It's the result of erroneous EU policies and the arrogance of the companies themselves - the expert believes.

- On one hand, the EU has focused too much on imposing new obligations on the industry, generating increasingly high costs. On the other hand, it has neglected the preparation of an appropriate industrial policy that would allow competing with new serious players. Meanwhile, EU companies have been too slow in implementing innovation and insufficiently prepared for changes - the OSW expert argues.

There is no doubt that the biggest challenge is China. Chinese companies can benefit from substantial subsidies at almost every level of the supply chain. In this way, they quickly develop competencies, winning the race against European champions - Popławski notes.

In his opinion, the first victims of such activities are manufacturers of lower and middle-tier cars, who cannot rely on consumer loyalty and are unable to compete on price with Chinese vehicles.

- The situation of the automotive industry reveals the sad truth that especially Western Europe will have to accept lower wages to rebuild the competitiveness of the economy, which has been neglected in recent years. Without this and a more decisive trade and industrial policy towards China, competition with them may become impossible to win - the expert concludes.

German Volkswagen has not only officially announced that it might close some factories. As highlighted by Michał Kędzierski from OSW, the company has terminated collective agreements with the IG Metall trade union for employees of VW's domestic plants.

"The company is breaking with the 30-year job guarantee and opening the way for layoffs next year. It is like a declaration of war - the reaction will be violent," - the expert writes in a post.

In Europe, there are a total of 322 production plants associated with the automotive industry, including car, van, truck, bus factories, as well as internal combustion engine, electric engine, and battery plants. The highest concentration of these plants is in Germany, where 54 factories are located, accounting for almost 17% of all such European facilities. The UK ranks second with 36 plants, followed by France with 31 factories.

Poland presents itself quite solidly in Europe, with 19 production plants related to the automotive industry. This number is similar to countries like Italy (23 plants) or Spain (16 plants), which are traditionally associated with the automotive industry. It is worth noting, however, that neighbouring Czech Republic, a significantly smaller country in terms of area and population, has 9 plants, indicating the strong position of this country in the region's automotive sector.

Data analysis points to a certain specialization of production in various European countries. Germany dominates in all categories, but stands out particularly in the production of passenger cars (24 plants) and internal combustion and electric engines (14 plants). France, meanwhile, has a strong position in the production of passenger cars (12 plants) and buses (7 plants).

The European automotive industry faces significant challenges that could greatly impact its future. According to a KPMG report, the European market has been hit by five adverse factors. Their combined occurrence increasingly threatens car manufacturers in Europe. Analysts predict that the sector may soon enter a period of decline and disruptions.

The first factor is decreasing demand. Sales forecasts for the next decade mostly show growth, but there is a risk that the expected demand may not materialize. Analysts expected a rebound between 2023 and 2025 as manufacturers fulfill pending orders and demand accumulated during the pandemic. Increasing economic uncertainty and recession scenarios make it highly likely that this demand may not occur.

The second factor is socio-demographic changes. The number of new car buyers is declining, as is their purchasing power. Statistics suggest that by 2030 the 45-64 age group will shrink by 10%. At the same time, real purchasing power has been decreasing since 2019, and current inflation trends indicate that the gap in purchasing power is likely to widen in the near and medium term.

The third key factor is the transition to electric vehicles (EV). This trend has the potential to fundamentally change the proportional value of production inputs. Recent studies suggest that electric drivetrains require about 25% fewer parts and about 65% less assembly time. Excluding the battery, the total value of parts in an electric vehicle is about 15% lower than in a combustion engine car, reducing the value of the traditional supplier market.

The fourth factor is the increasing debt of suppliers. Continuous pressure on margins and upcoming debt repayments pose an existential threat to many companies. Most of the suppliers' debt is due within two years.

The fifth factor is the earlier price parity between electric and traditional vehicles. While inflation is expected to continue raising costs and prices of traditional combustion vehicles, electric vehicles may mitigate some price increases and maintain margins through increased efficiency and lower battery prices. This, in turn, could accelerate price convergence and drive faster adoption of electric vehicles in the market.

The KPMG report emphasizes that the automotive industry will likely shrink, entering a period of decline. Given the anticipated scenario, analysts believe that survival cannot be achieved solely through financial restructuring. Operational restructuring is needed. Industry-wide coordination will probably be necessary to decide which suppliers will remain and which will leave.

Robert Kędzierski, journalist at money.pl