Will the troubles for Volkswagen and its rivals ever end?

The troubles come during an already difficult year for the European auto industry. Since April, the combined market capitalization of the continent’s five largest automakers by sales – Volkswagen, Stellantis, Renault, BMW and Mercedes – has plummeted from more than 300 billion euros ($320 billion). At less than 200 billion euros, a series of pessimistic profit forecasts have worried investors (see chart). In Europe, demand is shrinking and competition from Chinese electric vehicle (EV) companies is increasing. “The cake is smaller and there are more guests at the table,” Volkswagen boss Oliver Blume said. Meanwhile, the European automaker’s overseas operations are struggling. Sales in China have plummeted, as have profits. Philippe Houchois of Jefferies described it as an “unprecedented economic downturn”. However, efforts to cut domestic costs to remain competitive have met with fierce resistance from unions and politicians.

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Not long ago, European automakers were in boom times. The shortage of microchips during the pandemic has helped them pursue a “value over quantity” strategy as they prioritize putting scarce chips into the most profitable vehicles. Volkswagen will break its operating profit record every year from 2021 to 2023. Stellantis (its largest shareholder) Exor (a shareholder in The Economist’s parent company) had its highest ever revenue and profits in 2023. BMW and Mercedes also ushered in a good year, and Renault’s restructuring plan also began. Pay off.

Lately, however, things have turned bleak. Auto demand in Europe has stalled and is likely to experience a structural decline. Volkswagen Chief Financial Officer Arno Antlitz admitted that Europe will never return to its pre-pandemic peak of 16 million annual sales. Total sales in 2023 are just over 11.5 million vehicles, up from the previous year but well below the peak. This year is expected to be lower, and few in the industry predict significant growth next year.

As the chip shortage ends, production shifts back to less profitable cars. Margins could shrink further if a price war breaks out in the EU to meet tough new emissions targets as it bans the sale of gasoline cars in 2035. Tighter rules next year will require a higher proportion of cars sold by the industry, which currently has lower profits than gas guzzlers.

European automakers are also being squeezed on prices at home by Chinese rivals. Chinese automakers still account for 10% of Europe’s new electric vehicles, although sales fell slightly after the EU imposed tariffs on imported electric vehicles in October, according to consultancy Schmidt Automotive Research. One-tenth of sales volume. This share will rise further. Two Chinese automakers, BYD and Chery, are setting up factories in Europe to serve the continent directly.

Meanwhile, in China, European companies are losing ground to domestic rivals. The world’s largest auto market has long been an important source of profit for the European auto industry. Those days are coming to an end. According to UBS, the market share of foreign brands has plummeted from 63% in 2020 to 37% currently, with Chinese automakers proving better at equipping cars with advanced technologies that Chinese consumers demand. Volkswagen was particularly hard hit. China’s largest automobile company, once far ahead, has seen its market share drop from 19% in 2019 to 14% today. UBS said that number could fall to single digits by 2030.

It is also becoming increasingly difficult for high-end German companies to do business in China. BMW and Mercedes generate 48% and 37% of their operating profits respectively from China. Although their market share has dropped by only a few percentage points so far, both companies rely heavily on gasoline vehicles in a country where half of sales are now electric. Sales in China of Porsche, another European brand, have plummeted 27% since 2022.

Stellantis has largely exited China but still competes with Chinese rivals in South America and the Middle East, key regions for the company. Its bigger problem, however, is a sharp decline in North American profits. The company made the poor decision to increase the prices of its pickup trucks and SUVs in an effort to bring them closer to those of Ford and General Motors, but it backfired as it lost customers. Last month, the company announced a 42% year-over-year decline in North American revenue for the July-September quarter. The surge in inventories led the company to cut production and temporarily close factories.

The U.S. market will become trickier for European automakers under Trump. Nearly two-fifths of the cars Volkswagen sells in the United States are imported from both north and south of the border, and the same goes for the Stellantis. If Trump also imposes tariffs on imports from the EU, that will intensify the pain. Although two-thirds of the cars BMW sells in the United States are made in the United States, the rest are imported from the European Union, according to Berenberg Bank.

All this suggests that European automakers will face a painful adjustment period, starting with addressing domestic overcapacity. However, efforts to do so have met with resistance. The Volkswagen union is not the only organization taking strike action. Last month, Italian autoworkers went on a one-day strike, the first nationwide strike in 20 years. French automotive suppliers have also been affected by the strike, with two tire plants also facing the threat of closing in 2026.

Politicians are also pessimistic about factory closures. Embattled German Chancellor Olaf Scholz said of Volkswagen’s planned closure that “possible bad management decisions in the past must not come at the expense of employees”. Stellantis boss Carlos Tavares said: But unless European car companies can cope with rising costs and falling sales, their woes will only become more pressing now.

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