Summary of Key Points
Due to declining performance, particularly in the Chinese market, and difficulties in its transition towards智能化, Volkswagen has introduced the most comprehensive reform plan in its nearly 90-year history. The company aims to reduce costs by streamlining its product portfolio, cutting production capacity, and laying off employees. It is also delegating decision-making power for research and development in China. Additionally, it has adopted a strategy of dividing its software development efforts between China and Europe/America to better cater to local needs. Its goal is to become the most attractive automotive brand globally by 2030, with a target sales profit margin of 8%-10%.
I. The Chinese Market as a Drag on Group Performance
Volkswagen was once the dominant player in China, holding a 40% market share, but its fortunes have taken a dive:
- Performance Figures: Sales in China fell by 25.9% in the first half of this year (to just 973,000 units), and profits of joint ventures decreased by more than 60% (from 506 million euros to 184 million euros). Profit in China is expected to peak at only 600 million euros in 2026.
- Reasons for the Decline:
1. Centralized Decision-Making: Vehicle design decisions are made in Germany, leaving China with limited room for localization adjustments. For example, the Lavida was originally designed by SAIC, but Volkswagen later took back the development rights.
2. An Overwhelming Product Portfolio: A large number of models was a strength in the fuel vehicle era, but in the electric era, this has become a burden. More complex models require more extensive software development, leading to longer cycles and missed market opportunities.
3. Competition from Chinese Automakers: Local manufacturers are not only competing on price (with new car prices expected to drop by 15% in 2024-2025) but also exporting to Europe, where they account for 30% of the hybrid market, directly challenging Volkswagen's home market.
II. Struggles with Intelligent Transformation: CARIAD as a Costly Failure
Volkswagen recognized the importance of software in defining vehicles and established the independent software department CARIAD in 2020, aiming to create a unified architecture similar to Tesla's. However, this effort has been costly with little tangible results:
- Problems Encountered: Development delays (the SSP platform was postponed from 2025 to 2028), budget overruns, and changes in management. The intelligent features of the ID series electric vehicles lag behind those of Chinese startups.
- Root Causes:
1. Managing Multiple Brands: With over a dozen brands (Volkswagen, Audi, Porsche, etc.), the need to customize software for each brand has increased the complexity and coordination costs significantly.
2. Incompatible Processes: Traditional automotive companies focus on long-term hardware development, while software requires rapid iteration and trial-and-error, creating inherent conflicts.
3. Structural Barriers: Strong labor unions in Germany, with employee representatives on the supervisory board, and local authorities (holding 20.2% of shares) having veto power, make reforms difficult to implement.
III. Aggressive Cost-Cutting Measures
To turn things around, Volkswagen has implemented a drastic reform plan:
- Streamlining Products: It plans to reduce the number of models by up to 50%, focusing resources on high-selling and profitable segments.
- Reducing Capacity: Global production will be cut from 12 million units to 9 million units, with closures or reorganizations of factories (e.g., closing the Brussels plant and selling the Russian plant; reducing capacity at plants in Nanjing and Ningbo, as well as in Changchun and Anting).
- Cutting Costs: The number of parts will be reduced by 75%, and management expenses will be lowered from 16% to 12%. Additionally, 50,000 indirect jobs will be eliminated through natural turnover and early retirement.
- Results So Far: Cash flow improved in the first half of the year (by 320 million euros), but annual revenue forecasts have been revised downward (from a 0%-3% increase to a 3%-6% decrease). These measures need to be accelerated.
IV. Adaptation to the Chinese Market
Volkswagen is now taking more proactive steps to adapt to local conditions:
- Delegating Decision-Making: It has established a local R&D center in Hefei and for the first time moved vehicle development decisions from Germany to China, specifically for the Chinese market.
- Software Strategy: It is dividing software development between China and Europe/America:
- China: Collaborating with Xpeng on a localized electronic and electrical architecture (CEA) and forming a joint venture with Horizon Robotics for intelligent driving systems, which will be available in 7 new models by 2026, with L3 autonomous driving by 2027.
- Europe/America: Working with Rivian on the SSP platform for these markets.
- Why This Approach?: The Chinese market is changing rapidly, and localized decision-making and technology are essential to stay competitive.
V. Speed Matters in Reform
CEO Oliver Zipse emphasizes that rapid and decisive implementation is crucial for the success of the reform, but there are significant challenges:
- Organizational Resistance: As a large company with established processes, Volkswagen faces resistance from employees and local governments regarding layoffs and plant closures.
- Fierce Competition: Chinese automakers are not only competing domestically but also entering the European market, threatening Volkswagen's home market.
- Time Required for Software Transformation: Even with partnerships like Xpeng and Horizon Robotics, it will still take 1-2 years to catch up with the innovation pace of Chinese startups.
In summary, Volkswagen's reform is a last-ditch effort. If implemented swiftly, it could reverse its declining fortunes; otherwise, it may fall further behind Chinese competitors and Tesla.