Volkswagen’s Job Cuts: What’s Happening to Europe’s Car Industry? | Future Engineering Bets

Fred: Well, the sector is experiencing its probably most severe contraction in decades, probably as far back as anyone can remember. So let's talk about the Volkswagen Group. They've approved an additional 50,000 job losses on top of the 50,000 job losses. that brings a cumulative workforce cut of 100,000 across the global operations, which is absolutely huge. it's a false market because you're trying to push EVs at people that don't necessarily want them at reduced prices that don't give you a margin in order to meet targets. It's not really sort of a formula that works in the long term, Are we going to end up in a downward spiral of trade wars? tariff measures in an isolationist environment. And that means companies are going to find it harder and harder to be the global traders that they were anyway. It'll be interesting to see how the EU reacts to the quite terrifying numbers and quite awful market analysis that is the automotive market in Europe currently. Hey everybody, welcome to another episode of Future Engineering Bets. I'm Fred Warner, and today we're talking about the huge job cuts going on in the automotive industry across Europe. You may be wondering what's going on. Well, here at Future Engineering Bets, we talk about advanced engineering and capital allocation in the future, and the electrification and the car industry is one of my favourite subjects. So, what's going on in Europe? Well, the sector is experiencing its probably most severe contraction in decades, probably as far back as anyone can remember. It's driven by a number of reasons, and we'll get into those in a bit more detail. But basically they are unutilised factory capacity, so the factories have more capacity for cars than they are producing. There's high domestic energy costs, you know, electricity, energy, it costs more in Europe. Than it does in other parts of the world. So the cost of producing a car here is high. Now, obviously, world geopolitics aren't helping. That's been pushing prices up for some time. And it's making it very difficult for automotive manufacturers in Europe. You've now got a surge of competition from Chinese car makers, and that is combined with the fact that the Chinese market sector has seen massive losses for them. So, for example, JLR and other premium brands, they sell a lot of cars into China or they did do, and that's taking a massive hit at the same time as the Chinese competition that's taking that market away from them in China is coming after their bacon in Europe and everywhere else. So as a result of that, the OEMs are getting rid of tens of thousands of jobs. They're going to be shutting or reallocating assembly plants, and they are massively cutting the amount of vehicles they're going to be offering in the future. the main headline really was Volkswagen Group. So let's talk about the Volkswagen Group. They've approved an additional 50,000 job losses on top of the 50,000 job losses. They'd already decided on as part of their future plan for 2030. And that brings a cumulative workforce cut of 100,000 across the global operations, which is absolutely huge. Volkswagen planned to reduce its overall vehicle model by 50% by 2035, eliminating manufacturing complexity, which I do understand when you look at some of the product ranges of these car companies now. Whereas when I was a boy, a car company would make around about three to five different cars and you'd know exactly what they are, with maybe different colours and different seats in them. Now you look at the product ranges and they are very complex. The ability of people to bespoke everything doesn't really lead to a very balanced production cycle and an offering to the market. So I do think that reducing the car. Offerings by 50% will actually simplify things for the buyer as well as make it easy for the manufacturer. Too much choice isn't always a good thing. When you see companies that do really, really well, they have a few products, it's very clear what those products do, and there might be some different packs that you put on them. But having so many options is mind-boggling for people. So, in terms of the German sites, there's four sites earmarked for being. Probably shut down by 2031 or having some other plan needed for them. Now, whether or not we see more and more of that shoving into either Eastern Europe or somewhere else is yet to be seen. And they've also shut their Audi plant in Brussels, Belgium. Now, timelines, they're talking around this from starting in 2024 and probably carrying on past 2030 into the mid-2030s. So who else is making cuts in Europe? Well, Stellantis, the owner of Peugeot, Citroën, Fiat, you know, Alpha Romeo, you name it. They're also reducing their workforce. They've been at it for a while. 17,000 positions have gone since 2021. getting rid of hundreds of engineering jobs in Germany. They've closed their commercial van assembly plant in Luton with a loss of around 1100 jobs. And they're transitioning their policy site in France to a vehicle assembly parts by 2028. So they're actively seeking buyers or joint venture partners to share or sell four European assembly facilities as overall production plant capacity is only around about 46%. Okay, well that was quite a mouthful for you, but 46% capacity. So they're producing less than half the cars that they can. They've got more manufacturing capacity than they need. It's down to levels not seen since 2016 and earlier. Now Ford cutting around four thousand jobs in Europe, mainly in Germany and the UK, reducing their operations with its cologne EV plant to a single shift. BMW is cutting around 8,000 corporate and engineering jobs by 2027. And they're mostly focused on their German office and their R&D functions. Interesting. I imagine they can try and cut some efficiency out of it. Maybe they're okay from a production capacity point of view. Mercedes-Benz, they're going to cap R&D expenditure, they're freezing non-essential hiring, deploying artificial intelligence and automation in an attempt to cut overheads, fixed overheads. That's what you carry, that's your people really. While renegotiating labour contracts to avoid direct factory closures. So, what are people saying is the cause of all this and how will it affect the automotive market going forwards in the future? Well, we've already touched on this, but European overcapacity is partly to blame. The total European vehicle sales remain nearly 30% below 2016 peak levels. Legacy production networks are operating at around 40 to 50%. So, I mean, that leaves Volkswagen alone carrying an excess of half a million units a year. That means they could make another half a million units. That's how much spare capacity they have. And that's in Europe. You look at the Chinese market. Now, we talk a lot about the Chinese cars coming in, and as I've already mentioned, the Chinese market was a key market for Western brands. But particularly BYD and Geely, they've done what you'd probably class as an excellent job of pushing the JLRs and everybody out of China, collapsing that market to them, which was a really good market for them. And at the same time they've lost that high market share inside China and they're losing market share in Europe at the same time because the Chinese market's coming in and they're undercutting. And they're undercutting for reasons that are believed to be along the lines of lower energy, lower production costs, lower staff costs, and Funding from the Chinese government. Now I don't know the facts of that funding, so I'm not going to mention that in this episode at all. But the fact is, the Chinese cars, and we're all seeing them on the roads, particularly the UK market, is a very fast-growing market for China, and I'm sure is going to be for some considerable time. Now you've got two other factors in Europe that I've just sort of mentioned in the China one there. That is, we've got very high energy costs and we've got very high labour costs compared to other places in the world. So when it comes to making a margin on a product, it's hard to compete pound for pound with countries that have far lower production costs. Now, countries like Germany, France, Britain the energy costs are high, the production costs are high, it means you end up being uncompetitive. Now The one that is still hurting, and we've not talked about on this episode yet, is the EV capital squeeze. So to produce EVs, to produce the cars that the regulators are calling for, does require massive upfront capital investments in software, in battery platforms, and this has all been done by the automotive companies at the same time as they've had a very sluggish reality from the private retail market. So outside of company car buyers. Who have to buy EV unless they want to pay astronomical taxes. The private industry hasn't picked up in the same sense. You know, 22%, I think 23% of EV sales currently in the UK are private, and the rest is corporate, as in company cars and everything else. So whilst the OEMs have been investing their capital into this, they've had to write down some huge numbers in the last year, and their margins are being eroded. And their margins are also being eroded because whilst the OEMs haven't been fined for not producing enough and selling enough EVs as a percentage of the total, they are making massive discounts that some estimates put just in the UK around about 10 billion of losses due to discounting on EVs in order to try and boost the numbers. So it's a false market because you're trying to push EVs at people that don't necessarily want them at reduced prices that don't give you a margin in order to meet targets. It's not really sort of a formula that works in the long term, and we'll get onto that in another episode when we look at the ZEV mandate that is currently being reviewed as we speak. So OEMs are doing heavy price discounting on their EV platforms. Now, on top of all that, we've got trade friction, global tariffs. We've got tariffs between North America, China, and Europe, which is now also hitting profitability. It compels automakers to downsize global production networks to fit this localised demand. It doesn't really make for a very easy life when you think, right, I'm going to produce all my cars here. Ship all to there. We've all been doing this for years, and all of a sudden that's no longer working, and you have to consider your capital allocation. It's very difficult for companies at the moment because with the geopolitical uncertainty that's been brought by the current US presidential team, that leaves everybody feeling, well, this isn't likely to change in the next two years, and the ramifications are likely to continue on for years after that. Are we going to end up in a downward spiral of trade wars? tariff measures in an isolationist environment. And that means companies are going to find it harder and harder to be the global traders that they were anyway. A lot of people look at EVs and car sales and they tend to think very isolated in their own single market. but an OEM can't think in one market. To make the cars at the volumes they're making them, to make them for the cost they're making them, they have to think globally. And that doesn't really work. when compared to an isolationist way of thinking. So, in terms of the future, where does this go? It's really difficult times for Europe. If you're a Tier One, some of the cuts will feed through because of more work being pushed into Tier Ones from the OEM reductions. But equally, it's difficult times if production numbers are dropping and overcapacity needs to be met with other market sectors. So some of the tier one suppliers. will be looking at other markets such as defence and aerospace to try and prop up their dwindling sales that are coming because of the promises that have been laid out by the OEMs not being met. And the decisions the OEMs have taken are also not being met. Now, the most recent one, of course, in the news is Landrover, Jaguar Landrover, making 4,000 majority managerial cuts in the UK, and they're trying to save a couple of billion over the next few years. That again. Leads you to say, how are they going to make sure they're producing the cars that fit the environment? when I say the environment, I'm not just talking about sustainable, but I'm talking about the environment in terms of the market and then demand from the market at a time when other companies are really going after their premium products. Difficult times for JLR for Mercedes, Volkswagen, all of them. And It'll be interesting to watch what happens over the next few months with the ZEV mandate in the UK and see how the EU reacts to the quite terrifying numbers and quite awful market analysis that is the automotive market in Europe currently. So thank you for listening to another episode of Future Engineering Bets where we talk about advanced engineering in capital allocation moving now and into the future. If you want to share this with anyone, please do. Please follow, like and subscribe. And I will see you in the future.