German automotive giant Volkswagen (Volkswagen, or VW) reported a significant decline in profits and lowered its annual revenue expectations, influenced by a sharp drop in sales in the Chinese market and the pains of transitioning to electric vehicles. To tackle the crisis, the company is aggressively pushing forward with a major restructuring plan that could see up to 100,000 jobs cut.
Volkswagen is expected to see a 3% decrease in sales revenue this year, reversing the earlier forecast of a 3% growth from last year’s 321.9 billion euros. In the second quarter of this year, the company’s operating profit fell by 9.5% to 3.5 billion euros, below analysts’ expectations.
The main reason for the decline in performance lies in the severe difficulties in the Chinese market. In the first half of this year, the company’s global deliveries decreased by 6.3% to around 4.1 million vehicles. Sales in the Chinese market plummeted by over 31%, with a sharp 37% drop in deliveries in the second quarter alone.
Russ Mould, Investment Director at AJ Bell, stated, “Volkswagen’s latest performance reveals that Western car manufacturers are being significantly squeezed out of the Chinese market by local players.” Chinese domestic brands such as BYD and Geely have expanded their leading edge in the electric vehicle sector. At the same time, the stagnant Chinese real estate market has suppressed demand for luxury items like German luxury cars.
The decline in sales has increased the pressure on the world’s second-largest carmaker to cut costs. Volkswagen employs over 650,000 people across its global brands (including Audi, Porsche, Bentley, Skoda, etc.). On Friday, Volkswagen confirmed the target of job cuts had been raised to 100,000, primarily focusing on global administrative positions, doubling the previously agreed upon number with the unions.
Furthermore, the restructuring plan includes cutting Volkswagen’s model lineup by up to half and selling non-core assets. Chief Financial Officer Arno Antlitz also stated that at least 10 billion euros (over 11 billion US dollars) in administrative expenses need to be cut.
Meanwhile, CEO Oliver Blume’s plan to close four German factories is facing strong opposition from the unions and intense internal struggles within the supervisory board, with negotiations currently deadlocked.
Antlitz admitted, “We have excellent products, but the costs are too high.” Volkswagen currently faces issues of underutilized factory capacity and a cost gap of up to 30% compared to competitors.
Blume noted that Chinese automakers not only dominate the domestic market but also significantly increase exports, expanding into Volkswagen’s European stronghold with low-priced electric and hybrid models, putting direct “export pressure on Europe.”
Aside from Volkswagen, other European carmakers are also feeling the impact. BMW adjusted its full-year profit guidance last month due to challenges in the Chinese market and chaotic situations in the Middle East.
Despite the challenges, Volkswagen still expects an improvement in profitability in the second half of the year. Blume pointed out that there is strong demand in the market for new compact electric vehicles, with over 70,000 orders received in just a few weeks for the affordable urban electric vehicle family built around the ID. Polo (of which the ID. Polo holds 25,000 orders). The launch of new Audi models and the effects of cost reductions are also expected to provide momentum in the second half of the year.
(This article referenced reports from Bloomberg and The Guardian)