Why is Volkswagen closing factories? Via Investing.com

Investing.com — Volkswagen ( ETR: ), one of the world’s largest automakers, has announced plans to close some plants, particularly in Europe.

The decision stems from several factors related to market dynamics, regulatory changes and internal financial strategies, according to analysts at Citi Research.

One of the main reasons for the closure of Volkswagen factories is the contraction of the European car market.

“This was largely related to the ‘Japanization’ of the European auto market,” analysts said, which did not return to its pre-pandemic volume of 14.5 million units, remaining around 13.0 million.

With Volkswagen maintaining a stable 26% market share, this loss of volume translates directly into a significant reduction in sales.

Volkswagen, as the market leader, suffered from this decline, losing approximately 500,000 vehicles sold annually.

This drop alone accounts for the bulk of the losses, forcing the company to reconsider its production capacity.

The mismatch between current demand and production capabilities has made it increasingly unsustainable for Volkswagen to operate its existing plant network without incurring excessive costs.

In addition to the broader market contraction, European consumers have started to turn to cheaper alternatives and are delaying the purchase of internal combustion engine vehicles.

This change is partly driven by impending regulations on battery electric vehicles and rapid advances in automotive technology.

As a result, Volkswagen faces both lower sales volumes and intense price competition as consumers delay or cut back on spending.

Volkswagen has launched a 10 billion euro restructuring plan to cut costs, focusing on its core VW brand.

However, this plan now seems to be unstoppable. Citi analysts estimate the shortfall could reach €2-3 billion due to weak demand and market contraction.

The smaller-than-expected recovery in vehicle volumes has exacerbated Volkswagen’s financial challenges, making cost-cutting even more urgent.

With labor costs rising, driven in part by union demands for a 7 percent global wage increase, the automaker is under immense pressure to streamline operations.

Without major cost cuts, the company’s core business could face potential losses.

Volkswagen’s options for mitigating these challenges are also restricted by the European Union’s strict BEV regulations. If it weren’t for these regulations, Volkswagen could have considered launching cheaper ICE models to boost demand and utilize existing plant capacity.

“However, BEV regulations reduce the annuity value of such investments, as new ICEs must be phased out by 2030 or 2035 at the latest,” the analysts said.

Similarly, introducing more BEV models is not a simple solution, as these vehicles remain relatively expensive and consumer demand for them remains low.

Volkswagen is also facing increased competition in key export markets, particularly from Chinese automakers.

The growing dominance of Chinese companies in the global auto industry has complicated Volkswagen’s strategy, particularly in China, where local manufacturers are rapidly gaining market share.

This increased competition in export markets diminished Volkswagen’s ability to make up for its European losses through international sales, making plant closures in Europe even more necessary.

Volkswagen operates approximately 120 production facilities globally, of which 34 are in Europe. The company’s complex manufacturing system, shared across multiple brands and platforms, adds another level of operational cost.

With declining volumes and increasing pressure on profitability, maintaining such a large production network became unsustainable.

“Including Brussels, further European (German) restructuring seems inevitable given the new volume reality,” analysts said.