Europe’s Tariffs On China’s EV Backfires – Volkswagen Closing Factories Before Even Trade War Begins

Europe’s Tariffs On China’s EV Backfires – Volkswagen Closing Factories Before Even Trade War Begins


September 16th, 2024 by financetwitter


When China officially connected to the internet on April 20, 1994, it was a huge milestone despite the 64-kilobit special line, which was made possible thanks to the service of U.S. telecommunication company Sprint. Back then, it would be a challenge for tourists to find a decent public toilet. The country was so poor that Beijing launched the Seven-Year Priority Poverty Alleviation Program that year.

The Middle Kingdom’s economy stagnated around the time of the Tiananmen Square Incident in 1989, before a boost in its economic growth in the first half of 1990s. Even then, in 1998, the country’s per capita income was only about US$770, even though it was an impressive 14 times higher than in 1980. In 2023, its per capita income shot to US$12,174.

To get an idea how much China has progressed, Germany’s per capita income in 2023 was US$42,878, about double than US$22,790 in 1994. While the Chinese per capita income today is still below that of the Germans, China registered a whopping 16-fold increase in the same 30-year period, not to mention China’s populations are about 17 times more.


Crucially, in the same year, Germany’s largest automaker Volkswagen (VW) signed a job security agreement in 1994 to protect its employees from layoffs. The car manufacturer, which has about 300,000 employees in Germany and a total of 684,025 employees worldwide, was able to guarantee job security because it has never closed a factory in its home country – until now.

Last Tuesday (Sept 10), Volkswagen announced a stunning plan to terminate several labour agreements, including a job security promise at six German factories until 2029. The company blames falling demand in Europe and abroad as well as increased competition from China. Worse, it could close down up to two factories in Germany – the first time in the company’s 87-year history.

Who would have predicted that the mighty VW could be brought down by the Chinese, so much so that layoffs could begin by June 2025? The decision to shut down some of its factories in Germany as part of a €10 billion (US$11 billion) cost-cutting plan has sent shockwaves through the automotive industry – a signal of trouble not only in Germany’s industrial sector, but also European Union’s economy.


Already, German giant automotive suppliers such as Bosch and Continental, which are among the world’s largest, as well as other European automakers have resorted to laying off tens of thousands of workers due to declining margins and demand. Initially, Volkswagen Group CEO Oliver Blume planned to reduce personnel expenses by a fifth (20%) by 2026.

However, after two years of driving the company, which has spent decades of building its brand around the image of superior quality linked to German engineering, Blume was forced to announce the humiliating defeat after failing to meet the target of saving €3 billion in 2 years. Workers were simply shocked, demoralized, angry, and protest in disbelief over the announcement.

But some workers at main factory in Wolfsburg were not surprised though. There had been suspicion and uncertainty after the recent cancelled shift work. The nightmare finally emerged when about 15,000 workers packed into a large hall at the Wolfsburg plant for an announcement. “We are short of around 500,000 car sales a year” – Volkswagen’s financial chief, Arno Antlitz, told the hall.


The wishful plan to save €10 billion by 2026 to boost operating margin to 6.5% vaporized when margins slumped to 2.3% in the first half of this year instead. This led management to announce last week that billions more would have to be saved, meaning job cuts and possible German plant closures. But the decision to cut jobs alone could cost the company close to €1 billion.

Experts estimate that Volkswagen has about 20,000 employees too many. CEO Blume revealed the truth to the employees – the company had been living beyond its means – drawing an estimated annual €1.5 billion from its cashflow for around 15 years. And he told the VW workers that it was China who has been bankrolling the company all this time.

China used to be Volkswagen’s largest market, accounting for around 50% of the German automobile manufacturer’s global sales, making €22 billion in 2021. For decades since it entered China in the 1980s it was the top seller almost every year. Its Santana sedan was the beginning of learning about cars for many of China’s first generation of car owners.


But VW lost its title of best-selling car brand in China to Chinese electric vehicle (EV) giant BYD in Nov 2022, and the group’s market share in China plunged to 14.5% last year (2023) from 19.3% in 2020 as combustion-engine sales declined. To make matters worse, Chinese automakers have eaten 6% of the market share in Western Europe in the past four years.

Like other foreign automakers that have invaded and dominated China’s car market for decades, selling millions of vehicles and raking in enormous profits, Volkswagen was complacent and thought it could forever milk the Chinese cash cow. As the world’s second largest carmaker after Toyota, VW pretended nothing had happened even after Ford and General Motors saw sales and market share vanish in China.

GM’s sales in China have halved from a peak of above 4 million in 2017 to 2.1 million last year. Toyota’s income dropped 73% in the quarter ended June 30, 2024 compared with a year earlier. Japan’s Mitsubishi Motors already announced it would end production of its cars at its joint venture in China, whilst Honda, Hyundai, and Ford have also taken drastic steps to cut costs, including layoffs and factory closures.


But Tesla and BYD, as well as dozens of other Chinese EVs, are not the only problems faced by VW. Geopolitics further complicate the outlook for the German company as Germany – the economic powerhouse of European Union – made the mistake of allowing Europe to be used by the United States to play politics in its own backyard by provoking Russia to invade Ukraine.

In testimony to the European Union Parliament, NATO Secretary-General Jens Stoltenberg admitted that it was America’s relentless push to enlarge NATO to Ukraine that was the real cause of the war and why it continues today. Thanks to the U.S. and E.U. politicians, energy-intensive businesses in Europe suffer high energy prices, wreaking havoc with an already-strained supply chain post-Covid pandemic.

As a result of Ukraine War, energy and labour costs in Germany, which are among the highest in Europe and have also become a major headache for the country’s chemicals and steel sectors, deliver the deadly blow to Volkswagen. From lack of wiring components from Ukraine to pricey electricity, the German carmaker was forced to halt its own two electric vehicle plants in Germany.


Not satisfied with the idiotic subservience to the U.S.’ obsession to suppress the rise of China’s economic and military prowess, the German government has also pressured its own VW to exit China over dubious allegations of human rights violations in Xinjiang region. Yet, despite a US$104 million loss in the second quarter of 2024 in China and calls for exit, even American GM remains committed to stay in the kingdom.

Germany, and European Union for that matter, was not done with their self-inflicted economic destruction. Following Joe Biden’s 100% tariff on Chinese-made electric vehicles in May 2024, the E.U. too obediently followed suit – slapping extra duties of up to 37.6%(on top of existing 10% duty)on imports of EVs made in China, despite Beijing’s warnings the move would unleash a trade war.

European Commission President Ursula von der Leyen, arguably the biggest cheerleader of Washington, has parroted the U.S.’ concerns that Chinese EVs could flood Europe with cheap electric vehicles. The Commission has estimated Chinese brands’ share of the E.U. market has risen to 8% from below 1% in 2019 and could reach 15% in 2025.


According to JATO Dynamics, Chinese automakers are so efficient that they can produce a car for about US$5,500, while it costs European automakers closer to US$20,000. The mind-boggling cost advantage has been blamed on Chinese government subsidies. That’s not entirely true though because China simply has achieved higher economies of scale.

Not only China’s labour cost is lower than Western automakers, the Chinese electric car manufacturers have already secured the supply chain for the batteries while companies like Volkswagen was still counting profits milking the Chinese consumers in the combustion engine business. VW knew Beijing could retaliate in similar fashion and instantly kills the German automakers, hence has rejected the tariffs.

By the end of October, the European Union will make a final decision whether to proceed with the biggest EU trade case against China, which could see a full-blown trade war if the Chinese decide to retaliate in kind. The proposal could be blocked if a “qualified majority” of at least 15 countries representing 65% of the EU population votes against them.


France, Italy and Spain, with 40% of the EU population, have indicated they would back tariffs, largely because Italian and French automakers have almost no presence in China. German automotive trade association says they would hurt German automakers, which have a significant presence in China. It didn’t help that following a recession in 2023, economic activity in Germany is expected to stagnate in 2024.

Beijing has already responded with a warning – launching anti-dumping investigations into European pork and brandy. The EU is the world’s largest exporter of pork and pork by-products, most of which are exported to China. Countries like Spain, the Netherlands, Denmark, Germany and Belgium would be the hardest hit by Chinese retaliation in a likely tariffs on pork imports from Europe.

In the face of the crisis at Volkswagen, top politicians have demanded more help from Brussels. German politicians have accused the European Union of putting numerous obstacles in the way of carmakers – suggesting an internal crisis within the E.U. It is humiliating to VW to close down factories when even Czech automobile manufacturer Skoda is successful and more profitable.


Yes, Germany – the eurozone’s largest economy – has become the “Sick Man of Europe” again as its economy has shown zero growth in the best part of two years, whilst its infrastructure is badly in need of modernisation. The best part is motor vehicles export is the country’s main export, accounting for 17% last year. Hilariously, before China could even declare a trade war with Europe, VW is already crumbling.

Now, the Europen Union appears to have chicken out from its July tariffs hike when it is considering slashing proposed final tariffs on electric vehicles. Tesla’s proposed tariff rate will drop to 7.8% from 9%, while BYD’s 16% remains unchanged. For Geely, the new rate would be 18.8% from a previous 19.3%. Like it or not, it cannot win the electric vehicles war, let alone a trade war with China.