The German automotive giant, like its peers Mercedes and BMW, is navigating a complex global environment shaped by shifting markets and cost disparities. Volkswagen’s exposure to international competition has made it especially vulnerable, with China emerging as a major challenge due to lower production costs and state-backed advantages.
At the same time, internal financial pressures are mounting. Margins across several of the group’s flagship brands have declined, prompting leadership to consider structural changes. CEO Oliver Blume has pointed to “exceptional effects,” including U.S. tariffs and instability in the Chinese market, as contributing factors.
A Controversial Proposal to Scale Back German Production
According to Bild, cited by Automobile Magazine, McKinsey suggested a radical plan in January: closing most Volkswagen factories in Germany and retaining only two. Production would instead be maintained in regions with lower labor and operational costs, particularly in Eastern Europe and other more competitive locations.
Oliver Blume responded cautiously when questioned about the report, stating he was unaware of such a study. Still, he confirmed that Volkswagen has already agreed on significant workforce reductions, with 50,000 job cuts planned in Germany by 2030. The proposal, whether formally acknowledged or not, highlights the scale of the cost challenges facing the group.
Profitability Under Strain Across Key Brands
Volkswagen’s financial performance has weakened across several of its core brands, including Porsche, Audi, and Volkswagen itself. Operational margins have “melted like snow in the sun” in recent months, reflecting rising costs and competitive pressures.
One notable exception is Skoda, which continues to perform strongly. Its advantage lies largely in lower labor costs in the Czech Republic, improving overall returns. This contrast underscores the impact of production location on profitability within the same group.
The financial breakdown of a Golf 8 illustrates the issue clearly. Volkswagen retains only 2.8% of the vehicle’s sale price. Of the total cost, 68% goes to parts and suppliers, 11% to labor, and 7% to software. On a model sold for €40,000, the company earns just €1,120, a sharp decline compared to previous profitability levels.
Strategic Shifts Reflect Changing Global Realities
Volkswagen has already begun adjusting its production strategy. According to Oliver Blume, developing, building, and exporting vehicles from Germany is “no longer viable” given how regional market conditions have evolved. This shift is not theoretical: models like the Polo and Golf are no longer produced in Germany.
The group is increasingly relying on higher-margin vehicles such as the Tiguan to offset weaker returns elsewhere, though this strategy depends largely on higher selling prices rather than structural cost improvements.
Blume also indicated that Volkswagen may continue to reassess its industrial footprint, both in Europe and China, and could close additional factories if necessary.
