Why Germany is stuck in the slow lane Volkswagen is a herald of national decline

October 20, 2024 

Source - Unheard

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The three-piece band was doing its best to lift spirits with relentlessly upbeat pop songs and bursts of oompah music as rain plummeted down on a bleak autumnal day. A handful of people sat scattered at tables set up under an awning beside some food stalls and a small ferris wheel. Four middle-aged women swayed together in unison to the music, doing their best to bring the Oktoberfest vibe to their town, while a few other brave souls swigged pints of lager or munched on their sausages.

But it will take more than a few blasts of brass, bratwurst and pilsner to lift the storm clouds over Wolfsburg. For this prosperous place, about two hours’ drive west of Berlin, is a company town like few others, built from Nazi roots off the back of Volkswagen — “The People’s Car Company” which overcame its fascist birth to become the world’s highest-earning motor manufacturer. Now, however, it is in serious trouble as persistently sluggish management considers closing plants in their homeland for the first time in their history.

Such is the scale of this crisis — labelled an “earthquake” by the local paper — there are even mutterings this mighty car giant might emulate the high-speed crash of Nokia, the Finnish behemoth dismantled and sold within a few years of being the largest maker of mobile phones. Tensions are rising as the powerful IG Metall union, which just began another round of negotiations with managers, insists all German sites must remain open, even as there have been furious clashes with bosses at internal meetings. ’The situation is not good,” said one worker. “I am 54 so my working life is nearly over and I hope to get my pension in three years time but this is very, very worrying for Wolfsburg. I hope this plant will not shut.”

That kind of statement seems unimaginable in this city made by Volkswagen. Step out of the station and you see the world’s biggest car plant, three times the size of Monaco and where 70,000 employees churned out almost half a million vehicles last year. In front of you squats a futuristic science centre designed by Zaha Hadid, which serves as a sculptural reminder that this otherwise rather dour place has some of the highest average incomes in Europe thanks to cars. Even that bustling main shopping street is named after Ferdinand Porsche, creator of the iconic Beetle car and founder of a globally famous marque.

Almost half the workforce in Wolfsburg helps make cars, the highest proportion of any city in a country with 47 other places heavily dependent on this core industrial sector. “Volkswagen not only stands for economic prosperity, but also has a strong emotional component,” said the city’s mayor Dennis Weilmann. “Many families have relatives or acquaintances at VW and the majority of Wolfsburg residents have been driving a Volkswagen since their first car. Volkswagen also invests in many different areas of society, from art and culture to voluntary work and leisure events. It is therefore completely understandable that the current news is causing uncertainty among citizens.”

The city and car company have grown up together. Wolfsburg — twinned with Luton — was created in 1938 for one of Adolf Hitler’s pet projects: the mass production of cars for the people. It was originally named after the Kraft durch Freude Wagen (Strength Through Joy Car), and seen as a model Nazi town, only to be devastated by Allied bombs during the Second World War, after slave labourers were forced to manufacture rockets and military vehicles. Then, a British army major kickstarted production of the quirky and eventual global best-selling Beetle. Three generations later, the city is home to about 125,000 people with a university and football team — sponsored by VW, of course — that once won the Bundesliga.

Cars have come to symbolise nations ever since Henry Ford invented mass production. Think of the United States brimming with confidence in its post-war heyday — and you picture those huge Cadillacs with space-age tail wings. Italy has its gorgeous supercars and unreliable mass-produced motors. And the rollercoaster ride of Britain’s manufacturers reflected the economic and political zeitgeist in our own country. But in Germany the sector is a source of national pride, the key to an economy that showcases their consensual corporate model. As one top economist put it: “VW is the alpha male.”

So VW’s troubles after bungling the transition to electric vehicles are not just woeful for Wolfsburg. The sector powering Germany’s economic success for decades is struggling, exposing a national inertia at time of intense disruption and rapid technological change. As cars turn into computers on wheels, analysts fear the German giants are being left in the dust of faster-moving rivals from China and the United States. So there is sudden angst that all those beautifully-engineered marques, with their purring combustion engines, might soon look like expensive relics from another age — and fears that if the sector collapses, it will leave a large hole in the heart of the economy that props up the European Union.

And the consequences might not only be economic. Factory closures and job losses could easily push more voters into the arms of the populist parties thriving on both political extremes. Already, Alternative for Germany (AfD) is fighting against what it calls the “erroneous path to electro-mobility”, making opposition to EU plans to ban sales of petrol and diesel-powered cars a central part of its platform. Analysts suggest VW sites in Osnabrück, Lower Saxony, and Dresden, Saxony, are potential targets for closure — both regions where the AfD is building support.

The car industry accounts for about 1.8 million German jobs in total, 8% of annual economic output and 16% of exports. These are impressive figures. But Professor Marcel Fratzscher, president of the German Institute for Economic Research, says that simply looking at the data underplays its significance, since it has been a key driver over the decades of innovation, which spills over to benefit other parts of the economy. “The big concern is China, electric cars and automated vehicles.” he says. “[Volkswagen] were leaders but now they are lagging behind in electric vehicles. They have lost the technological leadership.”

Last year, China exported more cars than Germany for the first time. Germany is still the biggest car exporter to Britain, but Chinese imports such as cheap BYD eco-vehicles have risen tenfold in two years, while Elon Musk’s Tesla dominates the upper echelons of the electric market. Beijing’s latest data shows their production of new energy vehicles has soared by almost half over the past year. Meanwhile German makers also face a reversal of fortunes in the lucrative Chinese market that provided almost a third of their revenues last year — and this hit VW’s premium brands such as Porsche and Audi especially hard. The firm’s share in this market has fallen from 19% to 14% since 2020, as buyers shift from petrol and diesel-powered vehicles, while BMW last month blamed “ongoing muted demand” in China for cutting their profit forecasts.

Fratzscher is confident German manufacturers can reinvent themselves as they have in the past. “I am by and large optimistic because the skills that made German industry strong over the last 70 years — and especially the last 20 years — are still there,” he says. “Now they need to shift this innovation to new technologies — not just batteries but software, where VW is struggling badly. But they still have strong brands and distribution networks.” According to Fratzscher, then, “pessimism is over-done — although it depends, of course, how economic policy and geopolitics plays out. But taking a snapshot today of German industry, I would say it is pretty strong.”

But other experts disagree. In his forthcoming book Kaput: The End of the German Miracle, Wolfgang Münchau looks at how the nation slipped from technological innovators to sluggards due to blinkered attitudes, lack of investment and bad decision-making. He highlights the media prominence of an academic who argues schools should not use any digital content to underline their anachronistic attitudes. Then he tells the anecdote of a photographer who found it slower to send pictures on the internet to a printer 10 kilometres away than to travel there by horse. Such stories are familiar for anyone who spends time in Germany, as many football fans discovered to their surprise at the Euros this summer. Münchau polemically concludes that German car makers are like typewriter manufacturers, whose market was killed off swiftly by the arrival of desktop computers and cheap printers.

“German car makers are like typewriter manufacturers, whose market was killed off swiftly by the arrival of desktop computers and cheap printers.”

Reminding readers that VW sacked their chief executive, who tried to modernise the firm by focusing on electric cars, Münchau fears the problems may be existential for these car makers. “I am not predicting the German industry will disappear, but it will decline and no longer play the central role it does in the world and as a hub for German industry,” he tells me. He blames “oligopolistic groupthink and arrogance” along with a “lack of entrepreneurial dynamics” as the Germans fumble the problems confronting all legacy car producers, before going on to argue that the EU response of protective trade barriers against imported Chinese electric cars “is the playbook of how industries decline”.

VW must also navigate the nation’s consensual approach to labour relations that is currently also testing Tesla, which chose Germany over post-Brexit Britain as the location for its first European factory. Musk typically moaned about the red tape that delayed the opening of his plant near Berlin, while his employees created a works council against the wishes of their bosses. And the firm is reportedly warning staff that work practices and absenteeism levels must change if they are to continue in the country, attracting some criticism after managers were sent to the homes of workers on long-term sick leave.

Ultimately, the German car industry grew complacent, resisting the trend towards electric cars for too long. And once again, this sector symbolises wider issues in a society that became a corpulent victim of its own success — despite a reputation for taking the long-term approach. Its arrogance was shown by the emissions scandal, which led to huge fines and criminal charges, after VW’s cheating emerged in 2015. Then executives were slow to understand that electric cars are different products to traditional vehicles, ones that rely on powerful batteries and smart software rather than slick engines and smooth gear boxes. One economist in Berlin laughed as he told me how Tesla and Chinese firms update software constantly “but in Germany everyone thinks it is unbelievable that you can change cars through the air”.

Professor Andreas Knie, a specialist on transport and technology, believes the problem lies deep in Germany’s psyche, arguing that his country needs to transform its governance and corporate structures to embrace flexibility, failure and innovation. “We still believe we are the best footballers, the best soldiers, the best car makers — we don’t understand that the world is changing. Now in Germany we build the wrong cars. We are masters of hardware but not of software. We are losing market share dramatically. We will have 50% fewer jobs in the car industry in a decade.”

These are shattering predictions. And the problems are not unique to Germany: one in three European car factories is under-utilised. But Germany looks like an analogue country in a digital world. Knie fears that the cities dependent on the traditional car giants face a tough future. “Wolfsburg will be like Detroit — it will shrink very much. But so will other German car cities — even Stuttgart, the capital of the German car industry, will probably shrink,” he tells me. “It’s time to say goodbye to the car industry in Germany.” It seems ironic, but VW and Germany both seem to have forgotten Vorsprung durch Technik — that progress comes through technology.