Beatrix Keim: 'Volkswagen must reduce its massive complexity'

Volkswagen faces plant closures and layoffs. However, we see that VW is investing heavily in China. How does that fit together?

There are two levels: group and brand level. Recent reports have been about the core Volkswagen brand. Salaries in Germany are a very high cost factor, severance payments and partial retirement schemes no longer seem to be enough to reduce expenses. In addition, demand for electric cars is not as high as expected, which is why, for example, the Chemnitz plant has had to go into short-time work several times. There are also cost factors, such as the diesel scandal. At the half-year conference, Volkswagen presented figures showing that the company lost 300 million euros in the first half of the year in connection with the diesel scandal. This has already resulted in unplanned costs of around 20 billion euros.

And yet the company continues to invest in China?

The transition from combustion engines to electric mobility in China is dynamic because the cars are in demand there. At the company level, investment in the future is necessary to catch up with Chinese manufacturers and push ahead with digitalization, electric drives and perhaps even hydrogen. This also includes investments in joint ventures, such as those with XPeng or Rivian.

Volkswagen's plants in China are also not operating at full capacity. From a purely mathematical perspective, some of them would have to be closed as well. Is overcapacity a general issue?

Yes, definitely for the current market. On the one side, we have the transition to new mobility, but we also have weak sales, especially in Germany, where economic sentiment is in crisis, and people are no longer buying as many new cars.

A trend can also be observed in other companies: Producing in China for China and thus increasing local investment – this is seen as a form of de-risking. While companies focus on investments for more innovations in China, jobs are being cut in Germany. ZF Friedrichshafen was a prominent example of this. Is this a trend?

Yes and no. Due to the geopolitical risks, many companies are pursuing a China-plus-one strategy: They are also on the lookout for other markets to make themselves less dependent on China. In Volkswagen's case, this includes other European countries, the USA, and some South American markets that are developing positively. Japan is also still an interesting market, as are the Southeast Asian countries. On the other hand, the Chinese market is still far from saturated, and the transition from combustion engines to electric mobility is being accelerated. Existing plants are also being converted to e-mobility to create capacity.

Did Volkswagen executives misread the signals for too long and set the wrong priorities? Is what is happening now an attempt to remedy the situation?

Yes, I think so. I did some more research recently. All of China's policy guidelines in the area of new mobility have been published since the early 2000s and these documents are openly accessible. You can read them yourself, and if you've been in China for a while, you know what makes the Chinese government tick. When it announces something, it follows through. There are documents from 2010 detailing China's investment in this area over the next ten years. It was actually obvious what was going to happen here.

You worked for Volkswagen in China for a long time. How do you explain that?

On the one hand, you must acknowledge that it takes a long time to turn around such a huge company. Developing new technologies costs a lot of money, and when you embark on this task, things like what we are seeing now also happen: That personnel measures have to be taken, for example. This is very difficult, especially in a highly unionized company like Volkswagen. Work stoppages are to be expected. Product development processes are also designed for the medium and long term, especially in a large group that works with cross-brand platforms. With such high investments, it makes sense to implement them a little more slowly to spread them out. As far as the money for investments is concerned, an event like the diesel scandal, generating billions in additional costs, doesn't help.

Have German politicians sent the wrong signals regarding electromobility?

The signals were fine initially. There was a lot of support, there were subsidies, and in 2022 and 2023, we also saw a ramp-up of e-mobility. The maximum support of around 6000 euros wasn't that much, but cutting that money does seem to have had an impact, especially for people who do not lean towards premium, but towards an upper middle class.

If you look to China, not everything is all sunshine and roses either. BYD is an incredibly strong competitor, and many other car manufacturers are trying to gain market share in the EV segment. Volkswagen is banking on China despite this competition – will they be successful?

I believe that the company itself needs to change. The massive complexity must be reduced in one way or another, starting with the model policy and ending with the price structure. On the other hand, we can see that Chinese manufacturers are exposed to a very strong price war, especially in the electric sector, and are not operating profitably. They also have to rely on the government to pull them out. However, this will be scaled back more and more because the Chinese government is no longer interested in supporting this electric bloat. It wants to achieve consolidation. Given the long history of Volkswagen's joint ventures with SAIC in Shanghai and FAW in the north, both of which are very strong companies, I think Volkswagen will be able to keep up.

So you see an optimistic future for Volkswagen in China?

It is hard to tell which direction things are headed. After all, China will first and foremost look out for itself, especially the Chinese manufacturers. However, Volkswagen has many plants with joint ventures that employ many Chinese workers. We are talking about hundreds of thousands of Chinese jobs that would be at risk. That is why the Chinese government would not let Volkswagen perish.

Beatrix Keim is Director Business Development China Projects at the Center Automotive Research (CAR). She has many years of experience in the automotive industry, particularly in the field of electromobility and international markets. Keim has worked for leading automotive groups, including Volkswagen, and has extensive knowledge of the Chinese market. As a consultant and analyst, she is frequently consulted on strategic issues in the automotive industry.