The crisis surrounding Volkswagen just got a whole lot worse, with at least three German factories and potentially tens of thousands of jobs on the line. While the company posted record-breaking revenues last year, stagnating profits and diminishing growth potential indicate deeper issues.

VW’s struggles are a potent mix of internal strategic challenges and government policies that, critics argue, have worsened the company’s position in an increasingly competitive electric vehicle landscape dominated by China.

VW’s challenges began surfacing earlier this year when the company let an employment guarantee for its workforce expire after nearly 30 years.

This was a sign of looming cost-cutting measures, although the scale of potential layoffs and factory closures has come as a shock to many. The mere idea that the company could close one or more of its factories in its homeland was, until then, simply unthinkable.

At the heart of VW’s predicament is the company’s struggle to match its European and American rivals’ success in the EV market while simultaneously contending with new competition from lower-cost Chinese manufacturers.

China, once VW’s fastest-growing market, now poses significant competition, particularly as the country’s EV sector has surged forward with cheaper, more innovative models. Looking at some of VW’s electric models from the ID. range next to some of the current Chinese cars makes the German autos look almost dated, and shows why the firm is in trouble in the big red country up north.

In the second quarter of 2024, VW’s shipments to China fell by nearly 20%, highlighting a sharp decline in demand. VW’s heavy reliance on the Chinese market, where approximately one-third of its vehicles were previously sold, has now become a vulnerability. The European market alone is unlikely to bridge this gap, as EV demand is more subdued compared to Asia.

Compounding VW’s woes are recent policy decisions by Germany’s current coalition government. In December 2023, the German government, led by Economic Minister Robert Habeck and Finance Minister Christian Lindner, abruptly ended EV subsidies, which had previously supported consumer demand for German-made electric cars. Without these subsidies, VW found itself facing further underutilization of its EV factories, struggling to attract buyers in a cost-sensitive and rapidly evolving market.

This decision, many argue, was a hasty one, made without sufficient consideration of the longer-term impacts on local automakers like VW, already under pressure to adapt to a global EV shift. Some industry analysts suggest that the German government’s approach contrasts starkly with other regions where EV incentives remain strong, such as the United States and China. With less government support, VW’s challenge to remain competitive has intensified.

High labor costs in Germany are another factor putting VW at a disadvantage, especially compared to neighboring European countries. VW, unlike luxury brands such as BMW and Mercedes-Benz, operates in the more competitive, mass-market sector, where it has to be mindful of pricing.

While the company has created new jobs in digitization and electrification, it has not restructured enough to offset rising costs. Germany’s labor costs, along with high taxes, have severely constrained VW’s ability to keep prices competitive without heavy subsidies or tax reliefs.

The economic framework in Germany further worsens VW’s struggles. Some analysts argue that the country’s heavy tax and social welfare commitments, while aimed at preserving the standard of living, have led to a ‘toxic’ business environment that erodes profitability.

While the government has prioritized social and environmental initiatives, these have not been matched by measures to support competitiveness in core industries like automotive manufacturing. The VW crisis is only the biggest name in a shift of German manufacturing jobs to lower-cost regions, often right next door in other European countries.

VW’s predicament reflects a larger crisis in Germany’s manufacturing sector. German economic policies under the current administration have come under fire for failing to improve production efficiency or reduce business costs.

The nation’s high energy costs, paired with rising taxes and healthcare premiums, are seen by some business leaders as impediments to growth. Critics contend that the government’s approach has been reactive rather than proactive, leaving manufacturers vulnerable to external economic shifts and international competition.

The example of Tesla’s challenges in setting up its Berlin Gigafactory has become emblematic of Germany’s bureaucratic and regulatory obstacles. Tesla faced delays, protests, and stringent environmental regulations, which critics say dampened foreign investment interest.

For VW, the message from the government’s treatment of Tesla is clear: Manufacturing in Germany may come with unsustainable costs and regulatory burdens, prompting companies to consider relocating production.

For VW, the path forward is uncertain. Closing plants in Germany would mean the loss of a significant number of jobs, directly and indirectly impacting as many as 100,000 positions.

The company may find it increasingly challenging to justify investments in a high-cost environment without strong market growth or government support.

Markets like the Philippines may end up being the unlikely winner here, as the firm could build more models in China that then find their way into showrooms on our shores with cheaper price tags.

As they say, every cloud has a silver lining. However, the question remains the same: Would Filipinos ever learn to appreciate Chinese-made Volkswagens?