Driving VW off a cliff
Germany’s lemming strategy and what it means for us.
Something absolutely stupefying is happening in Germany: its iconic auto company, VW, the darling of every Chancellor from Adolf Hitler to Olaf Scholz, appears to be in a death spiral. At the end of this story I’ll draw a link to the salutary lesson countries like Australia and New Zealand need to draw from the German experience if we are to survive and thrive in the coming world.
For the first time ever, Volkswagen intends shuttering factories across Germany and tearing up labour contracts with its workforce in a desperate bid to survive. VW saw its profit margin crater in the second quarter of this year - hitting an unsustainable 0.9% – a reflection of tumbling sales across the planet. Tens of thousands of staff will be let go in a drive to save 10 billion Euros over the next two years.
It is the latest case in what many analysts are seeing as a relentless breakdown in the once-mighty engine of Europe: the German manufacturing sector. The process – deindustrialization – has multiple causes but energy prices and labour costs are at the centre of this drama that is Wagnerian in its scale and implications for Deutschland and the rest of Europe.
Also heading for the off ramp – moving production offshore in a desperate bid to keep the wheels turning – are a host of other big name companies. All are in sectors that not only rely on big brains and skilled workers - two things the Germans have long had in numbers - but access to affordable energy. Chemical giant BASF has moved significant production to China and the United States. Its flagship German plant uses more gas per day than Switzerland. Siemens Energy and whiteware manufacturer Miele are two of a host of German companies that are scaling down their home production in favour of lower cost factories in China and Eastern Europe. The steel industry, once one of the backbones of German manufacturing, is struggling to survive as high energy costs are pricing its steel out of the market. The list goes on.
The war in Ukraine has impacted Germany as much as it has impacted Russia (Ukraine is obviously suffering the most). Regardless of your view on the war, by bowing to US pressure and turning off the spigot of cheap Russian energy and replacing it with expensive US liquified gas, the German government has tipped the scales against its own energy-hungry manufacturing sector.
To build a car takes an awful amount of energy – something like 60,000 megajoules (a couple of years’ worth of domestic electricity consumption for a household). Huge pressing machines shape the car panels, robots twist and turn, pepper the body with thousands of spot welds and glue, the paint shop alone is an energy guzzler. The whole production process, supported by large ventilation and extraction systems, burns through increasingly expensive energy.
Founded in the Nazi era, Volkswagen - the People’s Car - is facing a blitzkrieg of hits on multiple fronts but several come back to two critical issues: energy costs and Germany being impacted by US sanctions and subsidies.
The curiously-named US Inflation Reduction Act (IRA) is partly a giant subsidy scheme into which the US is pumping hundreds of billions of dollars. The IRA is ostensibly designed to compete with China and re-industrialise the US for the future but it is also sucking the lifeblood out of European manufacturing companies, particularly those centred on EVs, batteries and semiconductors. Companies, including VW, are being drawn like steel to a magnet by the huge subsidies the US is putting into building its own EV industry.
The Germans are getting it every which way: sanctions against Moscow means Russia has turned away from Europe towards China. China is reaping a dividend turning Russia into a big market for its automotive sector. At the same time, China is winning the technology, price and quality war, meaning the appetite for European brands is waning rapidly.
If you’re looking to understand why the far-right is again on the march in Germany, sweeping to victory in the latest regional elections in Saxony and Thuringia, it’s clear the working class in Germany is losing hope in their leaders' ability to maintain their jobs and livelihoods.
An overwhelming majority of Germans also believe their elites, by breaking decades-long policy in 2022 and pouring money into a war zone are doing more harm than good both in Ukraine and in Germany. There is also growing alarm at what will happen when their government welcomes a return of US medium-range, nuclear-capable missiles back into Germany from next year. This may suit the US but few Germans like the idea of being a bullet in America’s gun - or a target for a Russian strike.
No single factor will kill off VW but clearly Germany was offered and drank a poisoned chalice from its friend and ally – the USA. If our elites place US geostrategic interests ahead of domestic imperatives – and we collectively fail to adapt to a changing world – the damage could be incalculable.
AUKUS, to me, is an example of this principle: endangering us economically and militarily in a confrontation with China that is fundamentally about the US maintaining primacy rather than any real threat to our own countries. It is a salutary lesson for countries across the Western world to understand and take heed - because, like the once-mighty German manufacturing sector, our own economies and our own national security could be sacrificed on the altar of America’s doomed jihad to retain its global hegemon status.
The Germans are learning and we should too that we can’t trust our captured elites to do anything other than the US’s bidding. I’ll give the last word to the quote William F Buckley attributed to former US Secretary of State Henry Kissinger in a private conversation with him:.
“It may be dangerous to be America's enemy, but to be America's friend is fatal.”
Eugene Doyle
