Volkswagen's woes reflect a stagnant German economy

Automaker considering job cuts amid issues with labour costs, organisational structures

No industry is more important to the German economy than cars. And no car-maker is more important than Volkswagen.

Now, as the 87-year-old automaker is floating the prospect of job cuts and factory closures as it seeks to return to profitability, Volkswagen's struggles are being reflected in the overall troubles facing the country, which is grappling with a shrinking industrial sector and an economy that is forecast to contract for a second consecutive year.

"The fact that Volkswagen, Germany's largest car manufacturer, largest industrial employer and the world's No. 2 behind Japanese car-maker Toyota, is no longer ruling out plant closures and compulsory redundancies shows how deep the German industry is now in crisis," said chief economist Carsten Brzeski at ING Germany.

The issues dragging on profitability at Volkswagen's core brand - high-priced labour, cumbersome organisational structures and an inability to keep up with advances by Chinese carmakers - mirror those facing Germany's overall economy.

On Oct 7, the German government said the economy would contract 0.2 per cent in 2024, down from a previous projection of 0.3 per cent growth.

Dragging output down is the industrial sector, which has failed to recover from the shocks of the coronavirus pandemic and Russia's invasion of Ukraine in 2022.

Germany also appears to have lost some clout in the European Union, which voted on Oct 4 to impose higher tariffs on electric vehicles imported from China, a key trading partner of Germany.

Some economists trace the root of the problems, both at Volkswagen and in Germany as a whole, to a missed opportunity to invest in the future during what many call the "golden decade", when the country's output expanded 14 per cent after the global economic downturn of 2008.

"The German economy did really well, and so did Volkswagen," said economist Jens Sudekum at Heinrich Heine University in Dusseldorf.