Fair warning: This is going to be another one of those Morning Dumps that centers around a common theme, and that theme is China and Germany. Germany is dealing with a massive financial headache, mostly of its own making, and it looks like it’ll directly impact Volkswagen the most.
The existential problem that Volkswagen is facing is making a lot of news, and there’s a lot of talk about the what, but I think the why is important. And if we’re going to bookend the why I think we need to look at two generations of cars: the Piech-era masterpieces that represent the pinnacle of a certain kind of engineering — and the Volkswagen ID.Buzz.
Along the way, we’ll learn about how many electric cars China is selling, how much Volkswagen is planning to write off as it looks to close plants in Germany, and how much angst the company might face as it renegotiates its labor deal in the United States as it copes with the unionization of its big American facility.
I keep debating whether or not we should start at the beginning or the end, but I think I’ll start at the end and work my way backward. The thesis here is that Volkswagen misunderstood the future so fundamentally that it made a series of bad bets, all of which are playing out in the present.
China Becomes First Country To Sell A Million Electric Cars
For all the EV-doomerism in the United States, electric car sales are increasing year-over-year globally. China, in particular, is seeing its sales of electric cars rapidly expand, and now the country has set a new record by becoming the first market to sell over a million electric cars in one month this August. By comparison, there were about 1.4 million cars of any kind sold in the United States in the same month. (Of course, China has over four times the U.S.’ population, but the U.S. likely has more car buyers per capita).
This data is from RhoMotion, which states that the 1 million mark is an increase of 33% year-over-year (January to August), though that’s not quite as strong as plug-in hybrid sales, which grew by 74%.
That’s a big deal. China is the biggest and most advanced car market in the world. It is also the most important to German automakers.
Here’s a quote from Ola Källenius, the Chairman of the Board of Mercedes-Benz Group AG:
China is our most important market and a crucial technology hub for the global automotive industry. China is also a trailblazer for technological innovations and future trends. That’s why we continue to invest in China, expand our R&D and industrial footprint and accelerate the transformation towards electrification, digitalisation, and carbon neutrality.
There is an argument to be made that Mercedes, more than any other German automaker, is the least exposed to the problems of Europe and Germany. Why? Volkswagen is a family dynasty company with a component of state ownership and some public investment. BMW is a family dynasty with public investment. Mercedes, on the other hand, has a diverse investor base (including Geely owner Li Shufu, who is the biggest shareholder of parent company Daimler at about 10%).
Volkswagen is, of course, heavily involved with China, and was long one of the biggest brands there, selling cars via local partnerships. There’s a great interview with the economist Adam Tooze as part of a recent Odd Lots episode, and Tooze summarizes it this way:
I saw this when I was visiting because I speak German and I’m known there, I bump into German business people when I’m in China and they will tell you flat out that they have to be there for two reasons fundamentally because it’s a big market and it’s rapidly growing —If you’re in, say, heavy chemicals, if you’re BASF, you can’t not be there. But the other reason why a VW, for instance, can’t not be there is that, if you are actually going to compete in the global market in the next generation of vehicles, motor vehicles, you can’t do what the US firms are doing, which is basically retreating behind national protectionism.
You have to at least try and stay with the Chinese manufacturers in the Chinese market. And so, VW is doubling down on its investments in China because they just see it as the market. It’s already the biggest but it’s also now at the qualitative, at the technological frontier. And unless you can compete there, and they’ve been having a brutal period for the last 18 months, you’re basically done, you are basically gonna be a legacy manufacturer of sophisticated internal combustion engines, not of the new cutting edge.
Volkswagen is not at the cutting edge in terms of software and not really there in terms of electric cars, either. In a market that is selling a million electric cars a month, Volkswagen sold fewer than 50,000 in the first six months of the year in China.
Is The I.D. Buzz Already A Failure?
We are finally getting the VW ID.Buzz van after waiting for about eight years (or even longer if you ask Jason). It’s not fully for sale in the United States, but it’s finally hitting the market in other countries. Stylistically, it’s a winner. I know plenty of people excited about how the ID.Buzz looks. From a performance standpoint? It’s not amazing, but it’s not terrible. It’s average. It is, on the other hand, not particularly cheap with a starting price of about $61k delivered.
Here’s what Jason had to say in his review, which we published almost exactly two years ago:
I drove the Buzz for the better part of a day all over Copenhagen and with a quick jaunt into Sweden. The seating position is great, the visibility is good, the driving controls are where you expect them, and the overall driving sensation is – and I mean this in a positive way, strangely – forgettable. Maybe the only surprising thing is that for such a tall vehicle, it’s not top-heavy, because all the weight is as low as possible, so in that context, maybe there’s a bit of a surprise.
But this is more a car about traveling than driving, if that makes sense. It’s a vehicle about the journey you’re making, the people you’re making it with, and the places you see through all those windows. It’s not about the physical act of how the car reacts to you and the road, as long as it does what it’s supposed to do, without making a big fuss.
The problem is that, in the two years since that review, the price of the seven-seat Tesla Model Y, which was hovering around $60,000 at the time, has dropped to under $40,000 with tax credits. Is a Model Y cooler than an ID.Buzz? No, but it’s much cheaper and otherwise superior in most ways.
And while it’s too early to call the ID.Buzz a failure in the United States, it hasn’t been as much of a hit as Volkswagen had hoped according to Germany’s Manager Magazine:
[T]here is one flaw: people may turn their heads when an ID. Buzz buzzes past them. But buy the car? Better not. The Buzz is expensive and not really practical.
VW delivered a mere 29,000 ID. Buzz vehicles worldwide in 2023. The target was double that. Things aren’t going well in 2024 either. 14,600 units were sold in the first half of the year, 20 percent below expectations that had already been scaled down. A flop in the early stages, when enthusiasm is generally at its highest. Bust, not buzz. Things were supposed to take off rapidly this year. The plan was to sell 130,000 electric vans in 2025, and perhaps build the Buzz in the USA and even China later
That’s ok, surely Volkswagen has invested heavily in hybrids or something else to help it transition to electric cars in this uncertain environment. Right? Right…?
[Ed Note: Back in late 2018, Volkswagen invited me to Dresden, Germany to show me its then-new electric vehicle platform, the Modular Electric Drive Matrix, or MEB. Everyone was excited for the future, and MEB was going to take VW there. It was a huge investment, with $1.4 billion earmarked towards the revised Zwickau plant in Germany, and even more going towards EV development. At least to me at the time, it seemed VW was all-in on EVs. -DT].
Volkswagen Has ‘No Plan B’ Other Than To Cut Capacity
Analysts at brokerage firm Jefferies spent some time palling around with Volkswagen execs in North America on a trip and the report back, which was sent as a note to its clients, is quite bleak.
“The rationale to re-size VW’s namesake (brand) is not new but management’s sense of urgency and determination to tackle excess capacity and spending patterns both are,” Jefferies analysts wrote in the note.
“Three days on the road in North America with management gave us conviction that there is no plan B that would rule out capacity reduction,” they said, adding decisions could lead to provisions of 3 to 4 billion euros in the fourth quarter.
The closing of plants in Germany is a big deal, especially in light of the recent political victories by the far right in parts of the country that used to be East Germany. Volkswagen is also in the midst of having to negotiate a new contract with workers in the United States.
As reported in Automotive News, that’s likely to be a big fight:
Profit-sharing, cost-of-living adjustments, retirement security, affordable health care and the elimination of tiered wages appear to be the UAW’s priorities with VW. Smith said there are 800 demands on the table, without specifying.
“You’ve seen a certain kind of battle, and you’ve seen the kind of fight Volkswagen can mount,” Browning said. “Make no mistake, that fight is coming. It’s going to take everything we’ve got. The whole thing about getting a union is to get that union contract that you deserve.”
How did Volkswagen get here?
The Volkswagen Phaeton, XL1, Bugatti Veyron And The Problem Of Ferdinand Piech
The video above from Jason Camissa over at Hagerty calls Ferdinand Piech, of Volkswagen, the most important car person you’ve never heard of. That’s a bit of hyperbole and, if you read this website, you certainly know of him because he’s responsible for so many of the cars that our own Mercedes Streeter keeps buying and regretting.
Piech is the hero of the story though, as Camissa very rightly points out at the end, everything he created for Volkswagen was of a certain era that really no longer exists. Even worse, his term ended with Dieselgate, a problem that likely stemmed from Piech’s insistence on diesel technology that ultimately didn’t work as promised and could only be promoted via cheating.
Again, this isn’t particularly controversial stuff, and if you read “Faster, Higher, Farther: How One of the World’s Largest Automakers Committed a Massive and Stunning Fraud: The Volkswagen Scandal” you’ll see that journalist and author Jack Ewing basically makes that case.
I think the deeper case to be made is that Volkswagen, like other German companies, invested billions of dollars in China and was happy to sell both cars and the equipment/know-how to make cars. As Tooze also pointed out in that Odd Lots episode above, Germany also benefited from the China Shock that hit the American Rust Belt so hard:
China would produce, with German equipment, the cheap manufactured goods that American consumers would buy. Of course, American consumers also bought high-end German exports directly, as did the Chinese upper middle class. But the direct link was that American aggregate demand excess provided a market for both German and Chinese exports with Chinese industrialization providing a market for German manufactured goods.
Doing so made Volkswagen and other German companies rich and profitable, and that money was spent in ways that were exciting for car fans but terrible for the future. This period of building cheap things in China using German equipment was also the period when Piech pursued cars like the Phaeton, the Bugatti Veyron, and the Volkswagen XL-1. These cars were designed to show that Volkswagen could build an advanced gas-powered luxury car, the fastest gas-powered car in the world, and a diesel car that barely needs any fuel.
Fast forward to the present, and that’s not what anyone particularly wants. The most popular car sold in America over $100,000 is the Cybertruck, Bugatti was turned over to a Croatian guy who became famous for making electric cars, and diesel is now a bad word in Europe.
What Volkswagen should have been doing was making cheap electric cars and learning to make hybrids but, in fact, the whole concept of clean diesel was a reaction to the existence of hybrids. As Ewing writes in his book:
Positioning Volkswagen as a car for environmentally conscious drivers seemed like a clever strategy from many angles. It provided a way to attack archrival Toyota, whose hybrid Prius had become a hit and shown that people would buy a car that lent its owners a green halo. Volkswagen was not in a position to offer competing hybrids, because it has been slow to develop any. But Volkswagen was already a leader in diesel. In the minds of the engineers in Wolfsburg, diesel was the superior technology, anyway. Volkswagen Passats, Jettas, and Beetles were sportier and more fashionable than the homely Prius.
Volkswagen became obsessed with proving they could out-engineer their rivals, while having too much hubris to believe that engineers in America at places like Tesla, and in China, at places like BYD, could ever truly match them.
This hubris has cost them a lot.
There is a new generation of leaders at Volkswagen and they may be the ones to get the company out of this mess. The brands are strong, the engineers are still some of the best in the world, and there’s still time. But it’s going to be a tough transition and, probably, an avoidable one. The company is so far behind.
What I’m Listening To While Writing TMD
It’s David Hasselhoff performing at the Berlin Wall on New Year’s Eve in 1989. Aren’t we all “Looking For Freedom”?
The Big Question
Am I wrong? Where did Volkswagen go wrong? How does it fix itself?
This post contains an Amazon affiliate link to the book I referenced, which is a really good book. Considering buying the book and we may get a small commission.
VAG – the company, not just VW – have become their own victims, riding the “German engineering” (which is b.s., we’re all human and nationality doesn’t merit superiority) line to the point where they over-engineer their products to the point of failure.
I suspect the repository of “special tools” for VAG is larger than any other automotive brand, not to mention overly complicated repair procedures for even simple and common failures.
It’s one thing to engineer vehicles to be quick and cheap to produce with high accuracy and quality (not saying VAG has that, just noting it) but it shouldn’t be to the point where half the vehicle needs to come apart for something that is expected to have a reasonably-short lifespan.
I personally can’t wrap my head around why people keep buying their products. Their ergonomics and interfaces are wonky (and keep changing almost from a perverse delight in screwing with folks who have to interact with multiple models and generations regularly – just look at where they keep moving the engine start/stop button(s) to, for just one frequent example!). The exterior designs are bland and underwhelming and look like they just use different sizes of the same cookie cutter. Their tech isn’t particularly noteworthy. They’re not the safest in their segment. They don’t have any particularly unique vehicle – except perhaps the golf wagon, being one of the few wagons left to buy new. They have a bad reputation, and should have been black-flagged by environmentalists and anyone who cares a smidge about pollution (not to mention fair and competitive play). The list goes on. Just… why?!
I already figured that the ID.BUZZ wasn’t going to sell super well given the range and price, but after seeing the cargo space, I can’t understand what the designers were thinking. How are you going to sell a 7-seater with less cargo room than a Golf?
Maybe a few at the very top, but speaking from experience, the issue remains that VW are, at the working level, is still largely made up of career engineers – people who have been there for 15-25 years. They are all deeply entrenched in how things are done and wield a ton of power with how the cars get developed. None of that will change anything soon unless they clean house.
Yeah, fuck China
Because China does American Capitalism better than American Capitalists?
Have China invented venture capitalists yet? Making money by selling things that people want to buy is so 20th century, you gotta be making products shittier and shittier while charging more and more, that’s The American Way!
I was sucked in by that TDI siren song. I was even impressed that my 2011 Jetta TDI ran cleanly without the need for urea injection. I thought “wow! Those VW engineers are on another level!” What’s really sad is that even with the legal tuning and injection systems they actually needed to be compliant, they were still pretty compelling. If they just would have done the right thing from the get-go, they would have succeeded. Maybe we would have been talking about their sweet diesel hybrids by now? Also – many other makers are guilty of the same sin of trying to skip hybrids altogether and go all BEV. It makes my heart sad in general to read that China is the biggest and most advanced car market now. Biggest I get due to the population, but most advanced?! Sad.
My Sis had a couple of them as well.
She was quite sad when she turned her manual Jetta TDI Sportwagen in – and replaced it with with a big Highlander.
Piech didn’t have anyone to push back from an onverengineering, hubris, and finance perspective. Volkswagen had several times to make it right but upscale strategy, too much power of the union, Dieselgate, and missing flexibility when it comes to technology are surely critical factors
I am sure this has been said here and elsewhere. They swallowed the seductive and often poison pill of upscale and exclusivity. VW, the people’s car, should be cranking out decent LOW priced cars that are good and reliable that people will want to buy instead of used crap cars. They did this for 60ish years and did it well. Now they are a company that here in the US pushes out bland, questionable crossovers. Why would anyone shop at a VW dealership these days? What do they have that is so much cheaper and more fun than Honda or Toyota? I have owned and loved VWs. But nothing newer than 1990 does anything for me. Where is their new equilivant new versions of the bug, rabbit, bus, camper, fox, scirocco, thing, Karman Ghia, gti? They may reuse the names but the spirits are gone.
In Europe VW have a cheaper marque, a Skoda is what you buy when you want a VW but for less money, with a cheaper feel and not as nice looks.
But even then I don’t think they really outdo Korean firms.
Thye ID Buzz? Sorry. Not only does the van already look tired but its sort of stupid looking. I’m sure a few aging boomers around here will buy them. Not many others. I fail to understand the reason anyone would buy a VW at all anymore. They now make a bunch of not-remarkable cars that have at best- mediocre reliability.
What I don’t get is, everything “went wrong” aka they got caught, for VW like 10 years ago, how are they still so very far behind?
Because they agreed to set up Electrify America as a provision of their settlement – but didn’t bother engineering cars to use Electrify America.
My mother-in-law is the prime Buzz target audience, and was initially excited when she heard about it. She had an old Type 1 back in the day, loved it, and was interested to have a more modern one with more horsepower. Started asking me about it, and after I told her that it was electric only, she hesitated and then asked the price. After telling her that she definitely marked it off her list. Then I got a text asking if they made it in a hybrid, since she’s owned every iteration of the Prius except the new one. Nope, EV only.
She bought a Toyota Venza, because she’d loved her Prius (Priuii? What’s the plural?) and had excellent luck. And it was a hybrid.
That’s what VW is missing here, a market segment they abandoned for diesel. Also the Buzz is way overpriced.
Regarding the VW ID Buzz:
” It is, on the other hand, not particularly cheap with a starting price of about $61k delivered.”
So essentially it will fail for the same reason their past vans failed… massively overpriced compared to the competition. And the reason for the high price will be due to tariffs and unfavorable exchange rates… which will be the case if they choose to only build it in Germany.
Seriously… the VW hasn’t been able to successfully sell vans in places like North America since the 1980s.
Prior to that, they had success because their vans were practical, cheap to buy and cheap to operate. But they were cheap to buy because exchange rates used to be far more favourable.
Had this been released 5 years ago when it was a sellers market for BEVs, they would have had a good chance of success at that price point.
Now for it to succeed in the long run, VW needs to work to get the cost down.
I think they have a decent chance of success as it’s still the only passenger-focused electric van in the market… at least in North America. But things won’t stay that way forever.
If they are serious about making the ID Buzz a success, that means building it in North America as well as China.
Regarding Ferdinand Piech… Yeah the insane vanity projects probably hurt VW more than it helped.
And how does VW fix itself? Well focusing on being competitive, affordable and having quality vehicles that are NOT needlessly complex would be a start.
And doing that would mean completely abandoning the ridiculous idea that VW is a luxury brand. Leave ‘luxury’ to other brands in the VAG empire like Audi, Bentley, Bugatti, Lamborghini and Porsche.
At most, VW is a premium brand.
Though it would be nice to expand Skoda as a basic car brand sold in more places.
It is kind of shocking that the ID.Buzz is the only EV passenger van in North America. I guess we should be thankful to have a hybrid and a PHEV available here. But really, we desperately need more passenger vans of all kinds. I can’t believe nobody was able to successfully sell anything smaller than the current massive “mini”vans that are found here. Hell, the auto companies couldn’t even make small cargo vans a sustainable thing!
(This is where the Chicken Tax just boomerangs around to decapitate us. Who is being protected when it’s impossible to import a product that has no domestic equivalent?!)
“At most, VW is a premium brand.”
Volkswagen literally means “People’s Car”.
Nothing premium about that.
The Phaeton cost $1.4 billion to develop.
Dieselgate has cost VW $30 billion so far. Not to mention reputation damage to VW, diesels, marketshare, etc…
Nobody is above making mistakes and if you have a big role at a big company you can make big mistakes. I dont know what reasoning went on at the VW board rooms when they decided going full bore on diesels instead of electrification but they certainly had a come to Jesus moment after their cheating was discovered.
Maybe it was national pride that convinced them that the diesel engine, invented over a 100 years earlier by fellow german Rudolf Diesel would be the answer as people become more and more aware of global warming and tail pipe emissions… It was a fundamentally flawed decision. Obviously.
I remember when VW in Mexico was the king on sales and reputation, they were everywhere. Having a Passat on your driveway meant you were successful (I am talking 80s to early 00s). People looked at VW a step above Nissan or Chevy at that time, the way they drove, the interiors, all superior to their competition. The Jetta A4 sold for so long with minor changes because it had an excellent formula, reliable engine, decent interiors, fun to drive, good on gas. But what happened after, everything got so complicated and their reliability went down a lot, along expensive parts to replace and overcomplicated things.
My mom had a Beetle first, then a Golf I, changed to a Jetta to then move to Nissan!
Nissan took over since their cars were still cheap and reliable. Chevy is second on that, their trucks/suvs and fleet sales helped them a lot. VW is still popular but not the same way it was, its just nostalgia at this point.
They need to go back to basic transportation for the people, the formula the Beetle followed. They should be the one with a cheap electric vehicle everywhere.
VW Mexico makes all of the cars people are discussing here – they make inexpensive versions of the Golf, they make a cool little pickup truck (Saveiro) and a larger 4 door truck (Anorak) and in other markets ALL of the cars you all wish they would make. Why don’t they sell them here? Could be crash protection rules, could be features like blind spot warning and auto braking, could be emissions…….but I’m sure all of those issues could be overcome and still sold for less money than what they’re trying to do now in the US.
IMHO, all of their upscale and electric cars are just too much money for what they are……
The statement about the 7-seat Model Y vs. ID.Buzz doesn’t make sense to me (though I see another commenter mentioned they were eyeing an ID.Buzz and went Model Y, though it sounds like they weren’t after the cavernous space in the Buzz). Those drawn to the Buzz purely as a mid-size SUV alternative with better vibes would surely find a Model Y / Equinox / IONIQ 5 / Mach-E / etc. a much better value proposition, no contest.
For people with 3 or more kids (and/or pets) who want a useable 3rd row and are searching for an EV minivan / large SUV alternative, the Model Y isn’t remotely on their radar (or at least it won’t be once they see the 3rd row). In its size class, the only true competitors to the ID.Buzz I can think of are the EV9, EX90, R1S, and maybe Model X (I guess also the upcoming Escalade EV thingy, the Lucid Gravity, and whatever Hyundai’s EV9 sibling will be). Among that crowd it seems to be priced about right, and I suspect the EV9 will be the one people cross-shop the most (it will be for me at least). It’s still a hell of a lot more money than a Pacifica PHEV though, and the low range compared to the aforementioned competition isn’t going to do it any favors. The biggest knock against it is how long it took to get here… feels like it’s going to need a mid-cycle refresh 6 months after it launches.
I tend to agree, sure the Model Y is cheaper, but it’s also much smaller than the ID.Buzz that we are getting, the LWB version, so there’s some price difference to be expected. Though I don’t think the SWB would be meaningfully cheaper.
The EV9 does seem like a dead-on comparison, similar size and seating, and neither is a premium brand for the price. The Kia starts at 5k less with the same estimated range, ~30% more range for the same MSRP, or with AWD for $4k less and still 20% more range. And the Kia can be had now.