The impact of Volkswagen closures on German society should not be underestimated

VW was not just any old carmaker. It provided a socio-economic template to Germans which placed the “socio” firmly above the “economic”.

Volkswagen factory in Wolfsburg, Germany (via Alamy)

If uncertainty is the enemy of markets, what to make of the announcement in Germany that three VW plants are to be shuttered? I think I can declare, fairly, that I know Germany pretty well. We Anglo Saxons like to believe that the French are very different from us but that, at heart, the Germans are more alike and that we have a greater understanding of what makes Germans tick. They are humourless, unimaginative but hard workers. They can drive as fast as they like on their Autobahns, and they have a predilection for naturism. You should never heckle a German politician until he has finished splitting his infinitives. That just about covers it apart from that Germany makes the best cars - lots of them too - and now it is stuck between a rock and a hard place as the switch to EVs takes hold. I would happily contest all of the prejudices other than the last one and even that with qualifications.
 
BMW and Mercedes have built their reputation on high value vehicles even though both of them have in the past couple of decades by way of the 1-series Beemer and the A-Class Merc attempted to add to their ranges. But it was VW that really controlled the volume car market. From Ferdinand Porsche’s legendary Beetle that was in one form or the other produced from 1938 until 2003 to its spiritual replacement, the Golf, that has been with us since 1974, Volkswagen has in many respects set the standard in the small family car space. Sure, the Japanese and then the Koreans produced some very nice and also competitively priced alternatives, but the Beetle was the Beetle, and the Golf was the Golf and that was it.
 
The post-war history of VW is interesting – not that its pre-war history isn’t - and its links to the government of Lower Saxony which owns just over 11 per cent of the business make it rather special. It was never a nationalised industry such as was Renault. Lower Saxony’s representatives assured an unusual management structure in which workers’ representatives sat on the board in what has in many ways been seen as a model for controlling conflict between the board room and the factory floor. Part of the result was the promise that, irrespective, maintaining German jobs would always take precedence over profitability. It should never happen that the putatively lower cost of manufacturing in offshore locations should lead to skilled workers at home being laid off.  VW was not just any old carmaker; it provided a socio-economic template which placed the “socio” firmly above the “economic”.  
 
News of the probability of factory closures within Germany emerged just a week or so ago and it made headlines which really rattled the country. Now the probability has turned into fact and three of VW’s ten domestic plants are to go. As far as I can tell, which ones are on the block has as yet not been revealed. Given that the firm employs 300,000 people, one can also only speculate as to how many tens of thousands are to lose their jobs and through the complete supply chain from makers of lightbulbs to floor mats that number could rise a six digit total.
 
Germany has done well in high value added manufacturing. Many, many years ago I was engaged to the daughter of a leading manufacturer of stretch packaging machinery. It was one of those classic paternalistic German “Mittelstand” businesses. Hans Beck was the largest employer in a small Wuertemberg town, sat on the town council, on the board of the local savings bank and was the largest donor to the local church. When, however, it became clear that if I were to marry his youngest daughter I was for life to be drawn into this parochial vortex, I packed my bags and ran. I decided to leave Zurich and to move back to the UK, the land of my birth. The rest is history. The company, by the way, has thrived without me. I still occasionally take a peep at their website where they proudly also report on all the links the business has to the local community, be that by fielding a football team or funding a large barbecue party for employees, their families and their friends. It’s not something we see here.
 
Volkswagen closing three plants is much more than a matter of jobs going. The band between workers and their place of work has been broken and with that there will be a chain reaction through society which we will find hard to understand. The deindustrialisation of the UK took place 40 years ago and I can remember the pain of watching TV news when every day they reported with a map projected behind the news reader how many skilled jobs had gone up and down the country. Germany, currently outcompeted in its core competences by China, is facing a similar fate. Which is bad enough of itself although, with the immigration crisis added to the mix and the lingering threat from Russia overhanging the equation, there is the possibility of deep social and political disruptions in the engine that has for many decades pulled and pushed the EU train.
 
The VW news is not like Ford or GM closing a plant in Detroit. It is tantamount to the seal being cut off Germany’s much-vaunted social contract and its impact across the country should not be underestimated. Germans will be asking themselves whether this is the result of their much-admired engineering companies having for decades made fortunes by selling kit to China which is now being used to put themselves out of business? There is of course no going back.

Germany has been particularly good at making things one can see. Things one can’t see – think IT – are not their bag and they have a significant deficit in that space. It does sport SAP as its largest listed company with a market cap of over €200 billion – five times that of VW – but even that fades into near insignificance when held up next to Alphabet that reported overnight and is valued at over US$ 2 trillion. Ahead of its own quarterly report Apple is worth US$ 3.55 trillion and Nvidia US$ 3.46 trillion.
 
The EU imposing tariffs on Chinese EVs is not going to fatten the calf. Replacing ICE motor car production with EVs, even if protected by tariffs which will in all likelihood be largely ineffective, is not swapping like for like. The supply chain, even excluding the critical dependency on Chinese raw materials, is shorter, less complex and of lower value added than that of hydrocarbon fuelled vehicles. The assembly is less skilled and therefore much lower paid. The economics of ICE vs EV can quite simply not be compared. VW this morning might well have opened Pandora’s box or die Büchse der Pandora to give it a more local flavour. Mercedes workers in Stuttgart and BMW workers in Munich will not be feeling too comfortable.