Volkswagen AG is considering closing factories in Germany, the first closure in Germany in the company’s entire history.
The announcement could spark a major labor dispute as the automaker considers scrapping a decades-old agreement with unions to protect jobs and workers.
There have been fears of deindustrialization for some time now, but if the German brand follows through on this, it will in fact confirm that production in the country is facing a major decline.
If factories close, where will Volkswagen, the country’s largest industrial employer, go?
Costs, politics and unions
There are a few reasons why Volkswagen is reconsidering this decision, which would be very drastic and historic.
They face increased logistics, rising energy and labor costs, and a complicated political landscape. The anti-immigration Alternative für Deutschland (AfD) recently won its first state parliamentary elections, becoming the first far-right party to win an election in Germany since World War II.
There is also frustration over Germany’s lack of competitiveness in the EV sector. Last year, Chancellor Olaf Scholz’s government abruptly scrapped EV incentives after budget plans fell apart. VW CEO Oliver Blume said that “Germany is falling further and further behind as a business location in terms of competitiveness.”
The strength of unions in Germany is also central to the potential closures. Disputes with unions led to the departure of several of the previous CEOs.
Will China take over?
A study by the IW Institute shows that FDI inflows into Germany will be at their lowest level in ten years in 2023. Foreign companies invested just €22 billion last year.
At the same time, there have been high FDI outflows from the country. Total net outflows, the difference between outward FDI and inward FDI, amounted to €94 billion.
The study found that ‘the repeated net outflows suggest that these are not exceptional phenomena but rather the first symptoms of deindustrialization.’
Against this investment landscape, there has been an increase in German FDI into China, particularly in the automotive sector. This follows multiple warnings from EU and German officials to companies about the geopolitical risks associated with strengthening economic ties with China.
Volkswagen announced in April that it would invest €2.5 billion to expand its manufacturing and innovation center in Hefei, China. Other auto companies such as BMW have also made major investment announcements in the country.
As the deindustrialization trend continues, companies will have to weigh geopolitical risks against cost savings when determining where to invest their money.
“Volkswagen mulls plant closures. Is increased FDI the next step?” was originally created and published by Investment Monitor, a GlobalData brand.
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