[Interview] EU’s carmakers face their own Nokia challenge to survive Chinese threat, says industry expert

European carmakers face a situation similar to that faced by the likes of Nokia and Kodak when smart phones and digital cameras emerged. “Technology is changing, […] and companies that spent decades refining a product for an old market must suddenly make a 180-degree turn,” automotive industry expert and consultant Petr Knap said. The biggest challenge for Europe’s traditional carmakers today comes from Chinese brands, which have gaining a strong position particularly in electric vehicles. How did the problems at Germany’s Volkswagen arise? It is a combination of several factors. The first is long-term and structural. Volkswagen is paying the price for its large presence in China and for US tariffs. At the same time, it operates in Germany’s high-cost and heavily regulated environment. The country’s automotive industry as a whole produces around one million fewer cars than before the pandemic. The second problem is the way the company is governed. Half of the seats on the supervisory board are held by employee representatives. If you want to implement major cuts — for example, there has been talk of eliminating up to 100,000 jobs — it is practically impossible. The situation is further complicated by the federal state of Lower Saxony, which owns around one-fifth of Volkswagen’s shares. For regional politicians, protecting jobs is a natural priority and also a sensitive political issue, especially given the rising support for the AfD. Petr Knap works as a strategic adviser in the automotive sector and has more than 30 years of professional experience. He has led more than 100 consulting projects for the automotive industry in Central and Eastern Europe. Finally, Volkswagen is an exceptionally complex company to manage. It is a huge conglomerate with numerous brands that compete with one another in several markets. It employs nearly 700,000 people and, alongside car production, operates an extensive financial division, fleet companies, truck divisions and mobility solutions. If you had to identify just one biggest problem, what would it be? The scale of the problem becomes clear from the figures. In its best years, Volkswagen earned around €5bn a year in China; today, it is about €1bn. The financial consequences of losing ground in the Chinese market are enormous. But I would not say that China alone explains all of Volkswagen’s current problems. Operating profit has fallen even more sharply, so it is clear that other factors are also at play. Is Chinese competition the biggest problem? Yes, it has fully exposed just how expensive it is to manufacture cars in Germany. After their offensive in the Chinese market, Chinese carmakers have also taken market share from Volkswagen in its home market. Today, almost every ninth car sold in the EU is Chinese, whereas a few years ago they were virtually absent. Estimates suggest that manufacturing a car in Germany is around 30 to 45 percent more expensive than in China. European manufacturers are increasingly feeling the impact of this gap. The automotive industry is undergoing a technological revolution. Over the next five to 10 years, most of the global market, including the European market, will shift towards electric vehicles. An electric vehicle is essentially a different product from a car with an internal combustion engine, both in terms of technology and how it is used. Carmakers are therefore in a similar position to that once faced by Kodak, Nokia and IBM. Technology is changing, customer expectations are changing, and companies that spent decades refining a product for an old market must suddenly make a 180-degree turn. German journalist Wolfgang Münchau writes in his book Kaput that German carmakers simply failed to keep up with the times. Is he right? Volkswagen was among the giants that should have been in a completely different position after this transformation of the automotive industry. In some respects, however, it fell behind; in others, it was in the wrong place at the wrong time. Several problems converged at Volkswagen. Around 10 years ago, dieselgate happened — precisely when there was a need for a sensible discussion with European regulators about the future of the automotive industry. Volkswagen and the entire industry around it, however, found themselves in the position of “culprits” whom no one wanted to talk to any longer. As a result, the rules were set without their substantial involvement. This then led to swings from one extreme to the other. The difference compared with China lies in the approach. The government there told carmakers: we will create the conditions for you, discuss with you which targets make sense, then let you compete fiercely — and the best among you can become global champions. Europe did not take this approach. Instead, we have constrained our own industry and unilaterally dictated the terms to it. And that is another contributing factor to the difficulties European carmakers face today. Did German managers not see what was happening in China? Why did they not respond earlier? People often refuse to admit they have a problem until it is too late. For a long time, Volkswagen felt it had the situation in China under control. It relied on its joint ventures, its strong market position and the belief that it had everything well covered. In the meantime, competitors began to emerge to whom it had long not paid sufficient attention. That is a common problem at large corporations. Managers often work to three- to five-year targets and are assessed on short-term results. Managing a large corporation over a horizon of 10 or 20 years is therefore very difficult. Is Volkswagen discussed so much mainly because it symbolises Germany’s industrial decline?