It’s Reckoning Time for European Automakers

The transition from fossil-fuel mobility to electrification is proving especially tough for European automakers, which are besieged by high capital costs, a softening market in Europe across the board, slowing growth in EV demand in North America, inroads from cheaper Chinese automakers in Europe and China and decades of maintaining workforces that are too big for today’s more competitive environment.

The Volkswagen Group reported a 64% drop in income for Q3 and an operating margin of 5.4%, down from 6.9% in 2023 and 8.2% in 2022. BMW’s net profit for the first nine months of 2024 was €8.4 billion ($9.1 billion), a decline of approximately 17.6%; the Munich-based company has revised its profit margin forecast for 2024 to between 6% and 7%. Mercedes’ third-quarter income was only about half of what it was in 2023. In the first nine months of 2024, Mercedes reported an operating margin of 9.7%, down from 13.7% in the same period of 2023.

VW is rapidly losing market share in Europe and China. The company’s share in European Union countries through September was 24.5%, down from 25.9% in 2022 – a precipitous drop.

Stellantis, while not a German company, is experiencing the same headwinds and overdue reckonings around production capacity and workforce. Stellantis reported a 27% decline in net revenues for the third quarter of 2024, primarily due to challenges in launching new products and efforts to reduce excess inventories. The owner of Fiat, Alfa Romeo, Maserati and Lancia is having major problems in its home market.

The company experienced a sharp drop in output at most of its Italian plants in the first half of 2024, with a nearly 70% reduction in production over the past 17 years. Italian autoworkers held a national strike for the first time in 20 years on Oct. 18, protesting potential plant closures and job cuts.

Italy is not the company’s only problem. The Opel plant in in Eisenach, Germany, had a utilization rate of just 30% this year as the company prepares to use the facility as an EV production plant, though given the softening of EV sales it’s hard to say when utilization there will rise above 90%.

VW’s own structure is working against it. More vertically integrated than many automakers, when sales and profit-per vehicle go soft it must spread those problems over a far greater workforce than other automakers. At more than 600,000 global employees, VW produces about 13.5 vehicles for every worker. By contrast, Toyota produces about 29 vehicles per employee and General Motors produces 37 vehicles per employee.

Stellantis sticks out as having too many employees, too, producing 24 vehicles per employee, well behind its U.S. and Japanese rivals, but far ahead of VW. That number is improving as the company did manage to cut 14,000 employees from 2022 to 2023, and has buyout offers in place now in North America.

GM’s efficiency sticks out, having had the benefit more than a decade ago of moving through a Chapter 11 bankruptcy reorganization which began the right-sizing of its white- and blue-collar workforces. The company has been disciplined in its hiring and workforce management since.

With falling shares and a big appetite for exporting among the big Chinese automakers, excess production capacity is catching up with the German automakers, as well as Stellantis.

VW Group has 70 production facilities globally, and 115 factories in total. Its most underutilized production plants are primarily located in Germany. According to data from Just Auto, the factories in Emden, Hanover and Osnabrück are among the least utilized within the company’s network. These facilities have been identified as operating below optimal capacity, contributing to higher per-unit production costs. In response to these inefficiencies, VW has announced plans to try to close at least three plants in Germany, aiming to streamline operations and reduce expenses. And it is asking workers to take a 10% pay cut.

In September, VW Group CEO Oliver Blume indicated the need to end a three-decade-old job protection pledge that would have banned layoffs until 2029, suggesting that the company must adapt to changing market conditions. Additionally, in November 2023, VW brand CEO Thomas Schäfer highlighted that high costs and low productivity were significant issues, stating, “With many of our pre-existing structures, processes and high costs, we are no longer competitive as the Volkswagen brand.”

As of October, Mercedes-Benz’s Sindelfingen plant in Germany is experiencing underutilization, particularly in the production of the S-Class model. This decline is attributed to reduced demand in key markets, notably China.

BMW has overcapacity issues as well. Notably, the Munich and Leipzig plants have been operating below optimal capacity. In 2023, German automotive factories, including those of BMW, were utilized at just over two-thirds of their capacity, with some plants operating at approximately 90%.

Strong labor unions and high taxes in Europe, which help provide nationalized healthcare benefits to citizens, offer European automakers only so much flexibility in reducing labor costs. The average annual salary of an auto worker in Germany is €39,695 per year ($42,919) with an average hourly wage of €19 ($20.55). In France, the average is €61,800 ($66,800) annually. Other countries offer cheaper rates. The average hourly wage in the Czech Republic is €9.40 ($10.16), resulting in an annual salary of around €19,500 ($21.08). The average annual salary in China for auto workers is approximately 97,406 Yuan ($13,645), with an hourly rate of about 47 Yuan ($6.59). Top-tier UAW workers are paid $33.00 per hour. Toyota pays its workers $34.80 per hour at its U.S.non-union plants.

So far, both the U.S. and EU are trying to buy time for these auto companies, which are significant contributors to each region’s economy and workforces, through stiff tariffs on Chinese EVs. But economists, as well as auto executives, say this is a temporary remedy at best.

Carlos Tavares, CEO of Stellantis, has expressed strong opposition to tariffs on Chinese EVs in both the U.S. and Europe, labeling them as a “major trap.” He argues that such tariffs shield domestic automakers from the reality that Chinese manufacturers can produce EVs at approximately one-third less cost, thereby hindering necessary restructuring and competitiveness. Tavares, whose contract is up at the end of 2025, emphasizes that the optimal strategy is to adopt the efficient practices of Chinese EV makers, stating the need to “try to be Chinese ourselves.”

Wolfe Research analyst Rod Lache estimates Chinese production costs are 30% lower than Western automakers' costs.

The big problem with trying “to be Chinese” is that labor unions and politicians in both the U.S. and EU aren’t willing to go along with Chinese salary rates. That VW’s union is discussing a 10% cut in salary, though, means productive conversations are happening to preserve an economically vital industry.