Germany’s image as an automotive superpower is being damaged by VW’s slow decline

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(Bloomberg) — On a Monday afternoon in mid-August, workers at Volkswagen AG’s electric-vehicle plant in Zwickau shuttled, straight-faced, between car chassis and platforms. The plant eliminated night shifts after laying off hundreds of temporary workers.

A sense of foreboding was already in the air.

« The mood is tense, I have to be honest, » recalls Ronnie Zehe, the assembly manager at one of VW’s newest and most efficient plants.

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Three weeks later, the future of these men and women hangs in the balance after the maker of the iconic Beetle announced it would have to close factories for the first time in its 87-year history. Just before this commercial bombshell, a political wake-up call was sounded when the far right won sweeping victories in two regional elections in the former East, coming second in Saxony, where Zwickau is located.

Germany is currently going through the most symbolic moment of its industrial decline: its largest carmaker is about to cross the Rubicon of plant closures. VW’s announcement is more than a belated recognition of commercial reality. It is a blow to the country’s self-image as an automotive powerhouse and to an economy that was the world’s leading exporter at the beginning of this century.

The repercussions are also cultural and economic in a nation that hastily reassembled itself after the fall of the Berlin Wall but is grappling with the reality that the reunification project has come at a cost. The anti-immigration Alternative for Germany, known as the AfD, and left-wing populists have thrived by exploiting the East-West divide, and the traditional political establishment has been powerless to stop them.

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In the short term, their electoral gains represent another blow to Chancellor Olaf Scholz’s coalition. In the long term, with federal elections looming in 2025, the question is how to address the root cause of voter discontent. And that depends largely on Germany’s ability to pull off another economic miracle: a rapid transition from an exporting carmaker to a clean-energy powerhouse at the forefront of microchips and batteries.

The chronicle of VW’s decline — a cautionary tale of being caught off guard by the times — reflects the flaws in what has been Germany’s model of success and casts doubt on whether Europe’s economic engine will continue to lead the way on the continent.

« Volkswagen’s problems are partly due to bad business decisions, but VW is also a good example of the enormous difficulties Germany faces as a business location, » said Carsten Brzeski, head of macro at ING. « Germany has been losing competitiveness for years, and this is now also affecting the former jewels of the German economy. »

In Zwickau, a mid-sized city in the east of the country where VW built 247,000 fully electric cars last year, as well as 12,000 bodies for Lamborghini and Bentley models, cost-cutting measures were well underway before the prospect of mass plant closures loomed.

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The plant is fully exposed to the region’s much slower adoption of electric vehicles, as models remain too expensive and incentives fade. VW, while still highly profitable, had a difficult transition by first clinging to diesels and then overreaching with a full-scale offensive.

The company, headquartered in the western city of Wolfsburg, is one of hundreds of companies that have seized the opportunity to take over factories in the east of the country after reunification, including the one in Zwickau. « All the other families are connected in one way or another to this Volkswagen plant, even if it’s the butcher, » says Thomas Knabel, local head of the IG Metall union that represents workers at the plant.

The closure of individual plants is devastating for these communities and comes at a political price for Scholz. According to Bloomberg Economics, the auto industry creates about 4% of the total value added in German economies, and another 4% if you factor in related sectors such as metal or rubber manufacturing.

As Martin Ademmer, economist at BE, says: « The importance of the automotive industry for the German economy has declined in recent years, but it remains a crucial sector. »

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Cars are an integral part of Germany’s modern identity, a pop culture touchstone and a political lightning rod: whether it’s Herbie the Love Bug in Walt Disney films, Janis Joplin in her psychedelic 1960s Porsche or Donald Trump complaining about the number of Mercedes-Benz and BMW cars on Fifth Avenue in New York.

Indeed, the story of VW is the story of postwar Germany, a rise against all odds, coupled with the postwar miracle that transformed a land ravaged by destruction into the region’s greatest industrial power.

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By the turn of the 21st century, VW’s ability to tap into demand from a growing Chinese middle class allowed it to defy the fortunes of its Detroit rivals. But its reliance on Asian consumers has become a problem.

Under the watch of successive government coalitions in Berlin, its peak industrial output in 2017 has been eroded by the rise of advanced Chinese manufacturing and by successive crises ranging from the pandemic to the shutdown of cheap Russian gas imports following the invasion of Ukraine.

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There is also the broader question of the country’s attractiveness as a business destination. With infrastructure in poor condition, the result of decades of underinvestment in the name of nearly balanced budgets, and red tape, a common complaint of businesses, a survey of 180 economists by the Munich-based Ifo Institute in May concluded that Germany lacked business appeal.

The Scholz government’s response, in a hasty attempt to appease voters in the restive East, consisted largely of handing out generous subsidies to companies opening factories there.

That approach alone will not be enough to address the country’s long-term decline in competitiveness, said Jens Spahn, a CDU opposition lawmaker and member of parliament’s economics committee. He warned this week that « VW is just the tip of a big iceberg. »

Monika Schnitzer, an economist who advises the government, warns that it is too early to question the country’s status as a major industrial player.

« German companies can continue to succeed if they excel in the latest technologies and product quality while controlling costs, » she said. « Germany still has many global leaders, especially among the ‘hidden champions’, who dominate niche markets. »

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Back in Zwickau, in a region already gripped by political unrest, VW’s announcement at least brought some clarity, even if workers are struggling to make sense of it. The plant has completely reshuffled the composition of each shift, which was a source of stress for workers with families, caregiving duties and health problems.

« We have worked hard to achieve a very good standard of living here, » said Zwickau Mayor Constance Arndt. « I see more light than shadow, but people are now realizing that all this can quickly disappear. »

Learn more about the German industrial scourge:

Germany’s era as an industrial superpower is coming to an end

Scholz fails to revive German economy

VW lashes out at Germany as China targets Europe’s big EV mistake

—With the collaboration of Elisabeth Behrmann, Kamil Kowalcze, Alex Newman and Christoph Rauwald.

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