Can Volkswagen reinvent itself for the electric era? | FT Film

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Volkswagen, Europe's largest carmaker, is in trouble as Germany itself faces a deep economic crisis.

Profits are in a tight squeeze.

We have an industry globally going through massive transformation, a move to electrification, and many new technologies.

I don't think Volkswagen has ever faced such a slew of challenges at the same time. Slowdown in vehicle demand, costly transition to electric vehicles. And then the traditional source of profits, China, has suddenly collapsed.

Chinese EV carmakers are cooler because they know what we want.

And then there is VW's decision to drastically scale back production capacity in Germany.

And Donald Trump's tariffs threaten Volkswagen's plants in the US.

They don't take our cars. Yet, they send millions of cars in a year, Mercedes-Benz, Volkswagen.

Can Volkswagen, long a symbol of the strength of German industry and the working-class prosperity that built the country, reinvent itself for the electric era and stay competitive as cheap Chinese models flood the market?

I'm Patricia Nilsson, Frankfurt correspondent for the Financial Times. And I report on the fortunes of Germany's leading manufacturers. And top of them all, Volkswagen. Volkswagen has been a pillar of German industrial pride for decades. As the world's second largest carmaker, its cars are valued for their reliability and quality. As one of Germany's largest employers, its jobs are prized for being stable and well-paid.

Spearheading the postwar Industrial Revolution...

VW and the country's car industry have maintained their manufacturing in Germany, long resisting the outsourcing that swept most major economies. VW and its rivals are huge exporters. And China, with its rising middle class, has been a key market. But China's now shifted from customer to competitor.

2024 has undoubtedly been one of the most challenging years in Volkswagen's history.

2024 saw a fall in VW sales and massive market value. And what happens to VW next won't just shape its own future. It stands as a bellwether for the future of manufacturing in Germany and all across Europe. In just five years, nearly a quarter of a million manufacturing jobs in Germany have gone. And there's fears that the business model of Europe's largest economy might be broken.

It's kind of surprising, the troubles that Volkswagen is currently in, because until now, it's been a symbol of Germany's postwar economic success.

Volkswagen is much bigger than just its namesake marque. It consists of brands from Audi and Porsche, to Seat and Skoda, and employs roughly 680,000 people around the world and supports hundreds of thousands of jobs at its suppliers. Beatrix Keim worked for VW for nearly 10 years in Germany and China.

Well, you only need to say, well, I'm working for Volkswagen. Everybody just knows what it is. You didn't need to explain. It was not the money trigger. It was the sheer opportunity offered by such a company with such a fame.

VW is the biggest brand of the group, producing and selling roughly half of all of its cars and facing its biggest problems, as reported across the world's media.

...from VW Group.

We have a cost problem at Volkswagen brand, specifically in the German plants. We have to address this. And we will.

And workers were shocked last September when managers proposed to close plants and cut wages and jobs, breaking with Volkswagen's tradition of securing approval by workers on major decisions. This put the company on a collision course with Volkswagen's powerful Works Council and IG Metall, arguably Europe's strongest union.

The Works Council and the unions have a very strong say in the company. That was OK for the last 10 to 15 years because the markets were growing. The brands were growing. But there were always problems and challenges, that there were too many people, that the efficiency targets were not being able to be reached. And there was just no more leeway to let it go, like in the recent years. They needed to be hard cut. And this is what led to the crisis.

The threat of cuts was fiercely resisted, with walkouts by the Works Council and the union, represented by Thorsten Gröger.

In the end, the company struck a deal, no factory closures and no wage cuts or layoffs, but with 35,000 jobs to go through voluntary redundancies, all with the aim of halving production capacity in Germany by nearly 750,000 cars a year.

To have a few strike hours in the framework of the negotiations and the transformation that the industry and our company is going through, I think is a completely normal part of a process.

But critics argue that the compromise still falls short of making Volkswagen globally competitive, and that its unique corporate structure stops it from taking tougher decisions.

Many investors have long criticised Volkswagen for its complex corporate structure, which many say is making it harder for the company to adjust quickly enough.

One such investor is Ingo Speich, based in the financial centre of Frankfurt. He knows Volkswagen is no normal company.

Volkswagen's corporate governance is very weak. The interests of the shareholders are not aligned. That leads to decisions that have to be a compromise.

The majority of VW's voting rights are held by the Porsche-Piëch family. But 20 per cent are controlled by the state of Lower Saxony, effectively giving it veto power over key decisions. It's a legacy of postwar rules designed to protect regional jobs. And with many of Volkswagen's factories based in Lower Saxony, the state often aligns with the Works Council, which holds half the seats on the company's supervisory board, as required by German corporate law.

Such a management style takes time. It takes a lot of negotiation. And in an environment that's moving very fast, it doesn't help.

The close but often tense relationship between Volkswagen's management and workers is rooted in the company's unique history. VW was founded in 1937 as the Nazis wanted to build a people's car, a Volkswagen. This was the birth of the Beetle. After the war, it would take the world by storm. And part of the money used for this endeavour was stolen from Germany's trade unions.

After the Second World War it was touch and go whether Volkswagen would be shut down. The company had used forced labour during the war and built vehicles for the Nazi army. And the Allies seriously considered closing it down for good.

It then was supposed to be demolished. But then the British allies actually said, no, we'll keep it because we want to support the wealth in Germany, Marshall Plan, that it doesn't make sense to destroy a country like Germany totally.

The Allies wanted to re-democratise German industry and dismantle the power structures that had enabled dictatorship, turning VW into a pioneer of Germany's system of giving workers a voice in company decisions.

David Powels is chief financial officer of the Volkswagen brand.

I've worked for Volkswagen Group for 36 years. So I can say, it's a very special company. We run our business on the basis of satisfying all stakeholders, rather than the narrow definition of just satisfying the major shareholders. We have co-determination. And in the framework of that, we have to make sure that we can be competitive.

While from the 1960s, Volkswagen's factories spread across the world to countries like Mexico and China, the company's home is still in Germany, in Wolfsburg. Wolfsburg is the world's largest car factory, where the Volkswagen brand produces roughly 10 per cent of its cars. And the group employs some 70,000 people.

If you have been to Wolfsburg to all these plants, there is a certain pride. It's made in Germany. It's engineered in Germany.

Marc Schröder works in the factory's car body and paint shop.

Marc's colleague, Florian Hirsch, works on one of Wolfsburg's assembly lines.

So what's gone wrong for Volkswagen? Germany has been known for decades as a world leader in engineering. And nothing has embodied that reputation quite like the internal combustion engine, the very symbol of the country's industrial might. The trouble began when the European Union decided to ban the sale of new petrol-powered cars from 2035, effectively putting an expiry date on the very technology Germany's carmakers were best known for.

Companies like Volkswagen have spent billions figuring out how to build electric vehicles, all while trying to stay competitive in traditional cars. That double burden has squeezed margins, made worse by the fact that EVs still cost more to produce - batteries are expensive - leaving less profit on each one sold.

Almost all the other European carmakers issued profit warnings last year, multiple profit warnings. So the whole entire industry is struggling with this transition to electric vehicles.

Volkswagen's shift to electric didn't begin in earnest until 2015, when the so-called Dieselgate scandal exposed that the company had installed software in more than 10mn cars to cheat emissions tests and trick customers into thinking the vehicles were cleaner than they really were.

Following that scandal, Volkswagen in some ways was forced to make a shift away from diesel vehicles. And so that made that shift probably more radical than what the industry was prepared for.

It all started optimistically enough. In 2019, former Chancellor Angela Merkel proudly reopened Volkswagen's Zwickau plant in eastern Germany. For 100 years it was petrol cars that had been made in Zwickau, from Audis, to Trabants and the Golf. Now it would make Volkswagen's new line of ID electric cars

The switch to electric technology was also a point of pride for Zwickau's mayor, Constance Arndt. She says it sparked excitement across the town.

And what happens here in the next couple of years will say a lot about the future of European industry and its ability to build electric cars profitably. And Danny Auerswald, who oversees Volkswagen's business in Saxony, including Zwickau, says it requires big changes to the production process.

What is specific about building electric cars? Of course, we get the painted body out of the body shop. Then we build in the cockpit that is fully-automated here. Then the whole battery assembly is done near the line. And then the battery and the chassis is put together in the so-called marriage station. And then the final interior parts are assembled as well.

It's completely different to build an electric car than a combustion-based engine car. You need new people to develop such cars. You need new technologies, new supply chain. And you have to reconfigure your entire processes.

I think it was quite a big step also for the plant here, and also for the people, to really think new, to get, let's say, the real feeling for the new electric age, considering that these guys here built for ages, only internal combustion engine cars.

But building electric vehicles is not enough. People also need to buy them. And demand has been lower than expected, not just for VW. That's partly down to cuts in subsidies. In Germany, the ruling coalition in 2023 abruptly cut support for EVs.

And this debate has been fuelled by populist anti-green rhetoric. Germany's far-right Alternative Für Deutschland, has attacked electric vehicles as a fairy tale. Zwickau's mayor strongly disagrees.

But many customers are not convinced that it's easy or cheap enough to charge electric cars. And the design and functionality of VW's early electric vehicles were not highly rated by customers.

You have cars that are not highly accepted by the market. The competition is very fierce. And you have the huge fixed cost scale.

VW's first ID-3s were poorly reviewed, seen as expensive, with the range on the battery not far enough.

We are reinventing the car.

And there was one more problem, software, another new technology that VW was not ready to master. The company went big, launching its own in-house software division called Cariad. It hired thousands of coders to build systems to compete with Tesla and its Chinese rivals. But the promised software kept getting delayed. And the customers complained of buggy cars.

The idea to bring the entire software development and new electrification strategy under one roof, it didn't work. It was far too complex.

Last year, after sinking nearly 12bn euros into the struggling Cariad, Volkswagen finally pulled the plug.

For people who love adventure...

And surprised many by announcing a 5bn euro joint venture with Rivian, an American EV start up.

Its new partnership with Rivian is an acknowledgment that Volkswagen cannot keep on going with its old ways, that everything cannot be done in-house. They needed to tap into outside expertise.

It was in the world's biggest car market that Volkswagen's troubles with software and batteries first became really clear, China. China had long been Volkswagen's stronghold. In the late 1970s, it was one of the first western companies to be allowed in. And VW didn't just sell cars. It helped build the market. James Kynge, former FT China bureau chief, saw the change firsthand on China's streets.

To own a Santana was really something amazing. It was really the first big-name foreign brand that came into China in the 1980s, formed a joint venture with the Chinese company, and began producing these cars called the Santana. Everybody in China calls it Santana.

And it just became a complete sensation. This was a massive status symbol for a slowly-emerging middle class. And then by the mid-90s, more than half of all the cars in China were Volkswagen, joint-venture vehicles.

But now the roles have reversed. As Chinese drivers turned to smart electric vehicles with sophisticated software, VW started falling behind.

It was part of a strategy launched in 2012 by then-science minister, Wan Gang, to switch the country to electric cars, with massive subsidies from the Chinese state at all levels. And many say that Volkswagen just didn't see it coming, that they underestimated their Chinese rivals and simply thought their incredible success in China would last forever.

After Covid, a lot of executives went to China. And they said, we were completely thrown off guard by the pace of the changes that's been happening in China. All of these Chinese rivals suddenly emerged.

A lot of other analysts that I've spoken to tend to point back to VW's headquarters in Wolfsburg in Germany. And they tend to say that maybe there was a sense of hubris. Maybe they didn't believe early enough in the transformative capabilities of the electric vehicle technology.

This was the point when the Chinese car market was developing rapidly, fuelled by Tesla and more than 100 EV start-ups, like BYD, Xpeng and Nio, all now aggressively competing for customers' attention in an intense price war. And that led finally, last year, to VW losing its position as the top-selling brand to BYD.

Chinese consumers now want Chinese electric cars, not VWs.

Like Nora Tan, who works for a gaming company in Shanghai and has bought the latest model from Chinese EV start-up, Nio.

I know Volkswagen were very popular in China because my father had his first car a Volkswagen. But the reason why I don't want to choose a car from a western carmaker like Volkswagen is that I don't think their technology is up to date.

Instead, Nora has the features and software she wants in her Chinese EV.

First of all, I like its design. It has different colours. The second is the app. For example, before I enter the car I can turn on the AC. And the third part is how I can interact with the kind of robot in the car named Nomi.

Hi, Nomi.

And it can almost help me do everything I want to do in the car. So actually, I don't use my mobile phone in the car anymore.

There's a lot going on in Chinese cars. It's an entertainment experience as well as a mode of transport.

You can install any app that you want. You can enjoy karaoke in the car. And also, you can watch videos.

And it doesn't stop there. Nora is a fan of her car being able to partly drive itself.

As for the software, you can upgrade only by your phone. So it's really convenient.

And all of this has made VW's cars far less popular. Its EVs are seen to be slower, less affordable, less smart, with fewer features. So the question is, can Volkswagen ever catch up in China and win back consumers like Nora?

I actually worked in China in 2017 to 2021. So I witnessed the transformation, a different speed of development to which we've been used to in the western world.

Volkswagen is one of the biggest players. So I think, if anybody has a chance to recover market share, it's going to be Volkswagen. But it's just that the advancement that the Chinese carmakers have made is so large and so fast, it's unlikely that they'll ever be able to depend on China for the amount of revenues that they've been able to produce in the past.

The company's biggest headache is just how quickly its nimbler Chinese rivals can develop and roll out new models. It's all about the tech, as Sun Tianya knows well as head of EVs in one of China's largest showroom chains.

The role of tech firms like Huawei is a central problem for VW and all legacy carmakers. Software and AI are now at the core of the car, not engineering.

I don't think we've been complacent in China. It's not just that they are new players with new technologies. The new players have lower cost base, higher efficiency and productivity. So it has created additional challenges to improve competitiveness.

But while Volkswagen faces growing competition and a fierce price war in China, a different problem is brewing at home. Europe's struggled to recover first from the pandemic, and then Russia's war in Ukraine, which has ramped up energy prices and helped cause a cost of living crisis.

People are fearing for their jobs. So they are not doing big expenses like buying a car. They are rather sticking to their existing car.

The slump in the European car market is staggering. Nearly two million fewer cars are sold a year compared to before the pandemic. And that means for Volkswagen Group, with nearly a quarter of the market, a loss of about half a million cars a year. Still, investors are betting growth will come back to Europe.

And EV sales have recently picked up. But it's going to be a tough fight for share. BYD and other leading Chinese EV makers, who've already hit VW hard in China, have their eyes set on Europe and are already expanding rapidly.

I was on the dock in Bremen when the first big car transporter of BYD docked. And it seemed like a big moment. The Chinese electric vehicle revolution had just washed up onto the shores of Europe.

The tight squeeze in Europe and China has made VW look elsewhere for future profits, the US.

The US is a very important market for us. If you look at the global situation, you've got Europe that will continue stagnating. You've got China, which is probably still going to grow, but very competitive. So we have a growth strategy for the US.

This is not the first time VW has tried to make it big in the US. But its last push ended with Dieselgate, one of the largest corporate scandals of recent times, when the company cheated on emissions. 10 years on, it's trying again. But there's a dark cloud on the horizon.

The European Union has been very bad to us. It's got to be fair and reciprocal. It's got to be fair. They send millions of cars in a year, Mercedes-Benz, Volkswagen, BMWs.

Tariffs have been Donald Trump's response. And these have hit carmakers and their global supply chains especially hard.

Volkswagen management do point to this rise in the US sales. But it's still very small. And so that will be a big challenge going forward. Expanding your presence in the US now will be tricky in the Donald Trump era.

Tariffs will be pretty tough because every automotive manufacturer are manufacturing globally. So they import cars from the US to Europe, from Europe maybe to China, back and forth. So it will be a mess.

Coming in with the Trump administration, you need to push more of the production to the US. That, of course, means laying off people here unless they come over to America. But I don't think that's Mr Trump's idea.

This unravelling of free trade, the rise of Chinese rivals, a struggling Europe, and the race to develop more sustainable technology like EVs, are unprecedented challenges for the world's second-largest carmaker.

German factories remain a key part of our global production footprint, as does, for example, a factory in Mexico, or our factories in the US, or our factories in South America. But the key thing is we have to improve the competitiveness of our capacity in Germany.

It's individual plants that will feel the pain, like Zwickau in eastern Germany, cradle of Volkswagen's EV switch.

I mean, it was a tough negotiation, for sure. But we also cannot ignore the reality. All the German plants have to improve their productivity in order to have a secure and safe future.

Under the deal, Zwickau will lose its pioneering production of electric cars to Wolfsburg and western Germany. It's a major blow, and came as a surprise to Constance Arndt, mayor of Zwickau, where Volkswagen is the largest employer.

Our target is clear. For the next five years we are going to fight. For the plant, I would say roughly 20 per cent needs to be reduced. And therefore, we need the productivity here. So I think that we need to rethink how to build a car, what is the work content?

But none of this will matter if the EV cars made in the German factories still don't sell.

We want to be able to offer competitive new technology at a price point which enables entry level customers to come in and have a product range which enables the customer to stay with the brand.

Their approach is the right one, to bring costs down and to develop new models. But they have to bring the right car. We saw the ID.3. That didn't get any high acceptance rate. Now the ID.7 is far better. And the acceptance rate is far higher. So if you hit the right product, then they are back in the game. Then they get more scale in their factories. And then the cost issue is over.

We really heard the voice of the customer. There have been huge improvements. And now we keep up to it.

But to really bring e-mobility to everyone in a VW-branded car, yes, they do need the more affordable cars.

And the company plans to launch a more affordable EV next year, and in 2027, the entry level ID.1 at 20,000. euros. But is this quick enough?

These cars need to come in faster because people are trusting in VW. People want to drive a VW. And they need to really speed up that one.

In China, Volkswagen will have to work extra hard to bring back once loyal consumers. In just a few years, it spent billions of euros on initiatives such as a new R&D centre. And it's had no choice but to work more closely with EV rivals like Xpeng, which it's taken a stake in.

Adapted to the new reality of China, we will make products for China, in China. And most of that product development is battery electric vehicles. From 2026 onwards, we will be back in the game.

So when they are coming in with all these new models and changing over, I think it takes another two to three years. And then of course, gaining the trust from the consumers, that they are delivering against the Chinese digital customer, who is the most digital customer anywhere in the world.

The agreement between Volkswagen's managers and workers is protecting factories and jobs in Germany for the moment. But the union will still face pressure from shareholders to move production to lower cost countries.

The agreement that they reached, it's nowhere from the radical restructuring measures that the management had said is needed to cut costs more aggressively. So we'll probably keep seeing these very tough negotiations between its unions and the management.

With the union veto on VW's plans to close factories, one option still on the table is to sell them instead. Ironically, potential buyers include those rival Chinese EV makers looking to expand production in Europe.

We're open for any discussion on any topic with any partner. So we don't exclude anything. In a dynamic world, you have to keep all options open.

Few people believe that Volkswagen could ever disappear. The company is simply too big to fail. And it's also a symbol of Germany, a point of pride to a lot of Germans. It's managed to survive crisis and scandal before, thanks to its sheer size, vast R&D budget, and loyal customers, so far.

But Volkswagen needs to sell cars that consumers want. The next two or three years will decide the future of Volkswagen and all legacy carmakers, as will the ways in which politicians deal with the electric car revolution and global trade war. It will make all the difference, not just to Volkswagen, but to the future of manufacturing in Germany and Europe.