Exogenous shocks hit VW
The pillars of the German prosperity model are collapsing
By Timo Pache
07.09.2024, 12:52
Volkswagen announces drastic cost-cutting measures – even layoffs and plant closures are not out of the question. But VW is not the only one in crisis. Germany’s prosperity model is under acute threat.
The management of the VW Group wants to cancel the job guarantee and cut costs much more drastically – even the closure or sale of one or more plants in Germany is being considered. The shock waves triggered by this news reached far beyond Wolfsburg, Emden and Hanover. It is about market shares and sales that are disappearing; about jobs that are at risk; about know-how that could be lost. But the explosiveness of the crisis at Volkswagen, which has been looming for a long time, is much deeper – what many have already suspected and feared is suddenly becoming very real: Germany’s prosperity model is under acute threat.
Before everyone starts complaining about Berlin once again, let me briefly state: This model was essentially based on three pillars, none of which initially had much to do with politics. Technical excellence in important industries and markets; a clever cost mix of domestic and global production, preferably in much cheaper regions of the world; and a perfectly functioning, global supply and production chain. These three principles formed the basis for the second German economic miracle, the three golden decades of globalization from the early 1990s to the Corona shock in spring 2020.
All the notorious adversities and disadvantages of a small and ageing country like Germany – few domestic raw materials, relatively high wages and salaries, a high level of regulation and demanding bureaucracy, comparatively high taxes and levies with a foreseeably shrinking population – all of this could be elegantly balanced out for a long time: German companies simply conquered the world. Anyone who crossed a street in Beijing or Shanghai in the mid-2000s could not fail to notice: German car brands were lined up in long rows on the streets, including large and expensive ones. But Volkswagen was at the forefront. Market leader over all providers, more than 25 percent of sales and even more profits were generated for many years in the communist People’s Republic of all places.
All three principles have been shaken in recent years: German cars are no longer considered the ultimate in automobile manufacturing, especially in China; on the contrary; the globalized production and supply chains were first disrupted by a virus called protectionism, then by a virus called Corona, and later wars and conflicts were added to the mix; and the clever cost mix has now also been lost, as supply chains no longer function and markets are closing off.
And politics?
Exogenous shocks are hitting VW particularly hard in recent months – and they combine with the well-known structural weaknesses that have long been the case for industrial companies here: high costs, slow bureaucracy, too little investment, uncertain political conditions, and demographic developments that are not exactly accelerating innovations and technological leaps. It’s just that the old evasive strategy no longer works.
A big question now is: how much of the misery is the fault of the company’s management, and how much responsibility does the politicians bear? Since no other company in this country is run as politically and with such union participation as VW – 20 percent still belongs to the state of Lower Saxony – the question is particularly urgent here. The answer to this, however, is reminiscent of the chicken-and-egg problem: it is not so easy to say what came first, bad decisions and incorrect considerations by management or erratic interventions by politicians. At VW, everything is somehow intertwined with everything else, and that makes the solution particularly complicated.
Just before the start of this autumn of 2024, only two things are certain: Germany will pay a price for the upheavals in the global economy, and the country’s prosperity model needs a complete overhaul. This will hardly work without harsh cuts, and these will be particularly painful in those sectors that have benefited particularly in the past: automotive, chemicals, and probably other traditional engineering sectors as well. Ideally, such a restructuring – and this is the second lesson from the VW debacle – would be accompanied by a policy that promotes structural change and does not delay it or cause uncertainty. Through smart reforms and incentive systems that last and are not thrown out every six months.
The current federal government took office almost three years ago with exactly this aim. Unfortunately, it has achieved the exact opposite. It is never too late for politicians to make a change – but the task is getting bigger every week.