Volkswagen Group Operating Profit Plummets 42% as German Economy Slides into Recession, Scholz Government Faces Intense Pressure

According to the third quarter financial results released by the German Volkswagen Group on October 30, the group's operating profit fell by 42% from the same period last year to 2.86 billion euros, hitting a three-year low. Meanwhile, operating margins fell to 3.6%, the lowest in more than four years. The core Volkswagen brand had an operating margin of just 2% in the first nine months of the year. Volkswagen has publicly admitted for the first time that it has asked employees to take a 10% pay cut to keep the company competitive.

Outside analysts believe that the financial difficulties of the Volkswagen Group are not unexpected, it reveals the difficulties encountered by the German auto giant in the transition to electric vehicles, and highlights the need for the Volkswagen Group to make major adjustments to maintain its market position. The Volkswagen Group's woes have also heightened concerns about the competitiveness of European carmakers and Germany's position as an industrial powerhouse. Moreover, the Volkswagen Group's challenges are not the only negative news for the German economy.

Combined with Reuters and German media reports, Volkswagen Group's car sales fell 8.3 percent in the third quarter from a year earlier, and sales fell 0.5 percent to about 78.5 billion euros. Operating profit plunged 42 percent to 2.86 billion euros compared with the same period last year. In the first nine months of the year, although sales revenue increased to €237.279 billion from €235.202 billion in the same period last year, operating profit decreased significantly from €16.241 billion to €129.07 billion, down 21% year-on-year, and profit margin also decreased from 7.0% to 5.4%.

Commenting on the latest results, Arno Antlitz, chief financial officer and chief operating officer of Volkswagen Group, said that the group's net liquidity was negative 160.6 billion euros and is expected to be negative 147.4 billion euros by the end of 2023. He stressed that this highlights the urgency to significantly reduce costs and improve efficiency, and pointed to the current challenging market environment, underscoring the importance of the company's continuous performance plan.

Volkswagen, the core brand of the Volkswagen Group, had an operating margin of just 2.1 per cent in the first three quarters of the year. Mr Antelitz points out that while the VW brand has historically had low margins, it is no longer profitable enough to cover the cost of new product development. He also mentioned that in order to remain competitive in the market, the VW brand needs to cut costs by more than 10 billion euros.

Volkswagen has officially confirmed for the first time that it is asking employees to take a 10% pay cut, but has yet to resolve the question of whether to close three local factories. Management said the German plant's operating costs were much higher than its competitors because of high labor and energy costs.

Volkswagen has been in talks with works councils (unions) for weeks over possible plant closures and job cuts. Volkswagen employs about 120,000 people in Germany and works councils said specific plans were on the table, with tens of thousands of jobs at risk.

Volkswagen's works council announced plans to close at least three German plants and cut tens of thousands of jobs at an information conference for employees in Wolfsburg, Lower Saxony, on Oct. 28. If implemented, it would be the first closure of a local plant in Volkswagen's 87-year history.

Antelitz was frank that cutting jobs would be a difficult decision. "Many employees are worried about their future and we are facing important and painful decisions," he said.

"In order to remain competitive, we urgently need to reduce labor costs. It requires employees to contribute." Arne Meiswinkel, VW's head of brand personnel, said on Oct. 30 that the company was considering plans including a 10 percent pay cut, a new bonus system and a new sustainable wage agreement. If those conditions are met, he said, the issue of plant closures could be removed from the agenda.

The third-quarter results came on the same day that VW held a second round of intense negotiations with its unions over pay and other issues. The two sides agreed to continue negotiations and are scheduled to discuss them again on November 21.

For Volkswagen, the third-quarter results are further evidence that the company needs to make major changes to remain competitive. However, workers' representatives accused management of making poor decisions and destroying valuable decision-making consensus. The workers are demanding a 7 percent pay rise and for the company to explicitly rule out factory closures or face a strike starting in December.

Daniela Cavallo, head of VW's works council, said: "From the company's point of view, the possibility of a plant closure is still on the table, that is, it has not been completely ruled out."

"Today's talks are, at best, the start of a marathon in which both sides finally understand that they must cross the finish line together," she said.

The German government has been pushing for a solution to help the Volkswagen Group keep the plants running. But a spokesman for the German government said on October 30 that it was too early to decide whether to provide state aid.

Volkswagen's woes are not the only challenge facing Germany's economy

According to Politico's analysis, the financial difficulties of the Volkswagen Group are not unexpected. The German auto giant has faced multiple obstacles in its transition to electric vehicles, including a recession at home, falling demand as consumers cut back on big-ticket spending, and slowing growth in China.

The European car market has shrunk by about 2 million vehicles since the outbreak began, resulting in a loss of about half a million VW annual sales. At the same time, Tesla's more cost-effective models and car brands from China have taken share in the European market.

"We firmly believe in the principles of a free and open market and observe competitors from China who have started to set up production sites in Europe." "We have not forgotten how to make great cars, but our production costs are not competitive," said Antelitz, VW's chief financial and operating officer.

"We really need to invest time to improve the competitiveness of our plants in Germany," he added.

Reuters noted that Volkswagen's market share in China continues to shrink as local automakers rise. In the third quarter, Volkswagen's deliveries in China fell 15 percent to 711,500 vehicles, which negatively impacted its global deliveries, which fell to 2.176 million vehicles. Vw's share price has fallen by about a fifth so far.

Political opponents are using the situation to attack the coalition government led by Chancellor Angela Scholz. Markus Soder, leader of Germany's Christian Social Union (CSU) and premier of the state of Bavaria, said recently: "The situation at Volkswagen is serious for Germany as a centre of car production." He blamed the green policies pursued by Scholz's government and the European Union, in particular the EU's plan to phase out sales of new internal combustion engine cars by 2035 and the introduction next year of tougher emission limits on pollutants that the auto industry claims will cost billions of dollars.

"Volkswagen's woes are not the only challenge facing the German economy." German chemical giant BASF also said its results would be lower than expected due to the downturn in the automotive and agricultural industries, Politico noted.

German media pointed out that the uncertainty of the German economic crisis has spread among businesses and consumers. While many businesses are cutting back on investment, consumers are pulling back on spending despite rising wages. Germany's key industries, such as the car industry, are facing severe tests.

All these factors have put pressure on Scholz, who recently held an emergency meeting with German industrial giants. On Monday, he urged Volkswagen not to cut jobs, stressing that past management mistakes should not be made at the expense of employees.

On the 30th, Scholz received a rare "good news". According to the latest data from the Federal statistics office, after adjusting for prices, seasons and working days, German gross domestic product grew by 0.2 per cent in the third quarter compared with the previous quarter. The increase was helped by an increase in government and private consumption spending during the quarter. Economists had expected gross domestic product to fall 0.1 per cent in the third quarter from the previous quarter.

The German economy also grew 0.2 per cent quarter-on-quarter in the first quarter. According to revised data from the Federal Statistics Office, the German economy shrank by 0.3% in the second quarter compared with the previous estimate of 0.1%. If gross domestic product contracted for two consecutive quarters, it would mean the German economy was in a technical recession.

While German Economy Minister Habeck expressed optimism about the unexpected growth in the third quarter as a sign of hope, Jorg Kramer, chief economist at Commerzbank, described the summer growth as an "outlier." "Indicators such as the German IFO business climate index have continued to decline since the spring, pointing to a challenging half year for the coming winter," he said. The situation is likely to improve only slowly due to the bad news in the auto industry and the weakening of regional competitiveness over the years."

According to the Bundesbank's forecasts, the weakness of the German economy will continue. In its monthly report for October, the central bank said the German economy was likely to "stagnate roughly" in the final quarter of the year.

"The situation is grim and the outlook is bleak" - this is how the German media describes the economic situation in Germany this year. Earlier this month, Germany cut its forecast for growth this year from 0.3 per cent to -0.2 per cent, meaning the economy could shrink for two years in a row. According to German market analysts, with the German economy in zero growth or even depression, Germany has become the "problem child in the euro zone", as an investment destination Germany is also declining attractiveness, some German companies have been difficult to avoid the fate of foreign takeover.

Stefan Kooths of the Kiel Institute for the World Economy bluntly said that maintaining industrial competitiveness is the key to Germany's economic recovery, and the German government does not need to try to stop the trend of companies being bought, otherwise it will commit the mistake of "capitalist protectionism". Everything should follow the laws of the market, he said. "When the competition mechanism cannot keep pace with The Times, companies will naturally become targets for mergers and acquisitions."