How do former automotive manufacturing giants complete their transformation?

The traditional automotive manufacturing industry is facing a test.

Recently, Volkswagen Group announced that it is considering closing "at least" one larger domestic automotive manufacturing plant and one domestic parts plant and will terminate the employment protection agreement implemented since 1994. If this plan is finally implemented, it will be the first time in Volkswagen Group's 87-year history that a plant located in Germany will be closed.

As an established industrial country, the automotive industry has always been one of the pillars of the German economy. But today, the German automotive industry is undergoing significant changes.

It's not just Germany, the automotive industry also plays a significant role in the Japanese economy. China is one of Japan's important overseas markets, and currently, Japanese cars are in a state of contraction in the Chinese market. Honda plans to close some of its production lines in China. Among them, Guangzhou Honda plans to close its fourth production line with an annual capacity of 50,000 units in October 2024; Dongfeng Honda plans to shut down its second production line with an annual capacity of 240,000 units in November 2024, and after the adjustment, Honda's total automotive production capacity in China will decrease from 1.49 million units to 1.2 million units.

Currently, the traditional automotive industry generally faces multiple challenges, including declining sales and profits, difficulties in the transition to electrification, declining international competitiveness, and supply chain crises.

How will former automotive manufacturing giants complete their transformation during the adjustment period?

Volkswagen Takes Action at Its "Base Camp"

Volkswagen Group's decision to close "at least" one larger domestic automotive manufacturing plant and one domestic parts plant means that the agreement reached with the union to guarantee jobs will also be terminated.

This agreement dates back to 1994, and its core provision is to provide workers at six German factories with job security against unilateral dismissals by the company. Originally, this agreement was to extend until 2029, providing workers with long-term job security. However, with the termination of the agreement, this protection will only last until mid-2025. After that, Volkswagen's promised plant closures and layoffs are expected to be formally implemented.

Image source: Volkswagen

On September 4, local time, tens of thousands of Volkswagen workers, union representatives, and Volkswagen executives attended an employee meeting at the Wolfsburg headquarters, where some workers held up banners shouting, "We are Volkswagen, and you are not." On September 12, Volkswagen's Works Council stated in a press release that Volkswagen Group and Germany's most powerful union, IG Metall, will begin negotiations on September 25.

Volkswagen's Works Council stated that earlier this week, Volkswagen Group abolished decades-old job security guarantees at six plants, dealing an "unprecedented blow" to labor agreements. Previously, IG Metall had pledged to resolutely resist any layoffs and plant closures, warning that strikes could theoretically begin at the end of November.

In the first half of this year, Volkswagen Group's revenue reached 158.8 billion euros, a year-on-year increase of 1.6%, but operating profit was approximately 10.1 billion euros, a year-on-year decrease of 11.4%. At the same time, global sales amounted to approximately 4.35 million vehicles, slightly lower than the 4.37 million vehicles sold in the same period last year. As the mainstay of Volkswagen Group, the Volkswagen brand's profit margin was 3.8% in 2023 and decreased to 2.3% in the first half of 2024.

Volkswagen expects approximately 14 million vehicles to be sold annually in Europe in the future and does not anticipate annual vehicle sales returning to the 16 million sold in 2019, leading to a demand gap of approximately 500,000 vehicles for the company, equivalent to the capacity of two plants.

At the same time, Volkswagen's market share in China is also shrinking. In the first half of this year, Volkswagen sold 1.345 million vehicles in the Chinese market, a year-on-year decrease of 7.4%, with its market share dropping from a peak of nearly 40% to 30.9%, and its profits in the Chinese market were 801 million euros, a year-on-year decrease of 30%.

Herbert Diess, Chairman of the Management Board of Volkswagen Group, stated that the overall environment has become more challenging, and Germany is gradually falling behind in terms of competitiveness. "We now need to intensify our efforts to create conditions for long-term success." Diess said at a financial report meeting in early August that Volkswagen's primary action at this stage is to cut costs, specifically mentioning reductions in plant, supply chain, and labor expenses. "We have completed all the necessary organizational steps. The issue now is cost, cost, and cost."

Under the pressure of cost reduction and transformation, layoffs have become inevitable. Volkswagen's latest financial report data shows that the company has nearly 683,000 employees worldwide, with approximately 295,000 in Germany.

In fact, the transformation shocks in the traditional automotive manufacturing industry have already affected multiple automakers. In August this year, after evaluating its "software and services department," General Motors announced plans to lay off more than 1,000 salaried employees globally due to cost-cutting measures.

Also in August, Stellantis, the world's fourth-largest automaker, had news of layoffs. Public reports indicate that the company is considering laying off more than 1,200 engineers in Europe and the United States and plans to offer a new round of voluntary buyouts to salaried employees in the United States to address profit declines and the challenges posed by the transition to electrification.

Multiple automakers adjust their operations in China

Today, China is a pioneer in the transition to electric and intelligent vehicles, posing a significant challenge to the traditional automotive manufacturing industry. Against this backdrop, the decline in sales of joint venture brands has become increasingly apparent, corresponding to excess production capacity.

Honda is making a series of strategic adjustments in China. To reduce inventory, three of Honda's factories have suspended production for approximately two weeks since August 26.

Image source: Honda China

According to Honda China's official information, Honda has seven automotive production lines in China with a combined annual capacity of 1.49 million vehicles. Guangzhou Honda plans to close its fourth production line with an annual capacity of 50,000 units in October 2024, and Dongfeng Honda plans to shut down its second production line with an annual capacity of 240,000 units in November 2024. After the adjustments, Honda's total automotive production capacity in China will decrease from 1.49 million units to 1.2 million units.

Data shows that in August this year, Honda sold 56,900 vehicles in the Chinese market, a year-on-year decrease of 44.3%; in July, it sold 52,600 vehicles in the Chinese market, a year-on-year decline of 41.4%. In the past two months, Honda has experienced sales declines of over 40% in China.

Honda has long been renowned for the power and fuel economy of its gasoline-powered vehicles, but under the wave of electrification, these advantages no longer stand out.

Meanwhile, Nissan has also announced that it will close its manufacturing plant in Changzhou, Jiangsu Province, China. This decision marks the closure of the plant after less than four years of operation since it began production in 2020.

In 2018, Nissan reached its peak sales in China with 1.564 million vehicles sold throughout the year, representing a year-on-year increase of 2.9%, surpassing Toyota China and Honda China. In 2020, Dongfeng Nissan's Changzhou plant officially commenced production, primarily manufacturing the Qashqai SUV. Nissan's total production in China reached 1.6 million vehicles, with the Changzhou plant accounting for approximately 130,000 units annually, or 8% of its total output. Facing market pressures and industry transformation, the company decided to transfer production of the Qashqai SUV to the Dalian plant.

How to transform?

In the transition to electrification and intelligence, the closure of traditional automotive manufacturing plants is inevitable, but in the long run, it is a necessary path for enterprises to undergo transformation and upgrading.

Regarding the closure of some Chinese plants, a Honda spokesperson stated that these adjustments are part of Honda's response to changes in the Chinese market. "Accelerating a steady transition to electric vehicles and optimizing production capacity to achieve sustainable growth in our four-wheeled vehicle business in China," said the Honda spokesperson.

It is worth noting that Honda is adjusting its layout in the Chinese market rather than simply scaling back. Honda plans to compensate for this reduction by producing electric vehicle models through two new new energy vehicle plants under construction, in joint ventures with Guangzhou Automobile Group and Dongfeng Motor Corporation. Honda aims to begin production at these two new plants later this year, with an expected restoration of production capacity to 1.44 million units. The company also emphasizes that China, as the world's largest market, remains an essential market for Japanese automakers such as Honda.

Before announcing the closure of its German plants, Volkswagen announced in April this year that it would invest 2.5 billion euros in China to further expand its production and innovation center in Hefei, strengthening local research and development. At the same time, the production of two smart electric vehicle models co-developed by Volkswagen and XPeng Motors under the Volkswagen brand is also accelerating. Ralf Brandstätter, Chairman and CEO of Volkswagen Group China, said, "Through the Hefei Production and Innovation Center, the speed at which new technologies reach the market will increase by approximately 30%. The continued investment in this center demonstrates the Group's commitment to rapidly strengthening its local innovation capabilities."

It is worth noting that according to the "Manufacturing Talent Development Planning Guide" issued by the Ministry of Industry and Information Technology, it is predicted that by 2025, the total demand for talent in the energy-saving and new energy vehicle industry will be 1.2 million, with a talent gap of up to 1.03 million.

On the one hand, traditional automotive manufacturing industries are closing plants and laying off employees, while on the other hand, new plants and new cooperation models are attracting new talent. These common scenes during industrial changes are likely to persist for several years during the transformation of the automotive industry.