Volkswagen’s Long Partnership With China Is Backfiring

The collapse of Germany’s government is not directly related to Volkswagen, nor is the prospect of new elections precisely tied to Germany’s more open approach to China. They are not unrelated, however, and there’s a way to view Volkswagen’s issues with China and Chinese suppliers as an analog for a lot of what’s gone wrong in Germany.

Yet again, Volkswagen is facing the prospect of having to ditch a supplier over human rights concerns, though the issue is with a Chinese supplier operating in Europe and not in Asia. Continuing on the theme of yesterday’s Morning Dump, Volkswagen’s über-performance-brand Lamborghini is hitting pause on its electrification plans as it waits to see what the market actually wants.

The Biden Administration, on the other hand, is hitting fast-forward on its loan programs to companies hoping to build factories related to electrification. Despite fears that the next administration might slow down chargers, some think it would take an “act of God” to reverse those plans.

There’s a lot to talk about for a Tuesday, so let’s jump right into it.

VW Subsidiary Has To Ditch Another Chinese Supplier

If the second half of the 20th century was all about the ascendance of Germany and then Japan in the global car market, it seems clear that the first half of the 21st century is all about China and, to a lesser extent, South Korea. Part of Germany’s economic might at the turn of the century came from its growing relationship with China, which involved sending its manufacturing and industrial expertise to Asia in return for a lot of money and access to China’s market.

There’s an argument to be made that the China Shock of the 1990s over here was aided and abetted by European companies, and in particular German ones, that helped China quickly industrialize and flood the American market with cheap goods. In general, Germany has relied on its industrial might to navigate the many financial upheavals of the last 30 years or so, with China as a key partner.

Keeping Germany’s key industries running was a big part of maintaining political stability for the country’s moderate Conservative governing party and, more recently, its shaky “stoplight” coalition government. Not only did the greater economy need to be stable in order for the country’s leaders to keep both the right-wing and left-wing parties from gaining too much electoral power, but companies like Volkswagen were encouraged to build plants in the former East Germany to boost employment in these areas.

Unfortunately for Germany, there was a bit of realpolitik involved in all this that the country is now having to face. The first shock to the system came when Russia invaded Ukraine. Germany, and much of the West, looked the other way as Russia intervened in the politics of other countries in exchange for cheap energy flowing via a pipeline to German homes and factories. The invasion of Ukraine put an end to that.

The issue of China has been much harder to deal with as the economies of the two countries have long been more intertwined. Volkswagen was essentially the biggest automaker in China for decades due to early local partnerships and, in recent years, more exports to the country. Volkswagen brands still sell millions of cars there, but not as many as in the past as some of the expertise it helped build in the country has been coopted by Chinese firms making cars better suited to local tastes.

Porsche SE, the Porsche/Piech group that owns the largest share of Volkswagen, is already writing down the value of its stake in the company by $21 billion in no small part due to issues with China:

Analysts have warned the combination of pricing pressure, lower dividends from China joint ventures and committed investments will likely leave Volkswagen with a free cash flow close to zero in coming years, boding badly for Porsche SE’s financial stability.

As if sales in China dropping wasn’t itself wasn’t a big enough problem, Germany, in order to keep its good relationship with China, had to vote to try to allow Chinese automakers to sell its cheap cars in Europe, where VW is struggling.

This brings us to this week’s report from Manager Magazine that VW’s truck brand MAN, is stopping the use of tires from upstart Chinese tire manufacturer Linglong over credible reports that the company committed human rights violations against Indian workers building its new tire plant in Serbia:

Zrenjanin in northern Serbia, an hour and a half from Belgrade: Until February 11, 2024, 14 Indian workers were apparently temporarily housed here in order to build the first Chinese tire factory on European soil. Beds without mattresses, contaminated drinking water and illegal employment contracts – this is clear “exploitation” according to the local human rights organization Astra, which had contact with eleven of the men and has extensively documented the conditions together with the Serbian investigative media “Balkan Insight” . “We suffered from everything,” wrote one of the alleged victims to manager magazin via a group chat, “our company made us suffer.” The atmosphere was threatening.

Worse for Volkswagen is the fact that the new Tiguan is rolling out on Linglong tires, forcing the company to “investigate” the issue, which is likely to further aggravate the Chinese government. This isn’t the first time Volkswagen has had issues with Chinese suppliers, as earlier this year he company had thousands of its Audi, Bentley, and Porsche cars stuck in ports here in the US due to suspicions of parts made using forced labor in China.

Germany’s Chancellor Olaf Scholz essentially asked for a “no confidence” vote this week so that the country could have an early election and answer the question of who is really in charge. If the more conservative parties in Germany fare well the issue will become potentially even more complicated as those parties don’t seem quite as inclined to serve Chinese interests, and may become more aligned with the rest of Europe and the United States on the issue.

Both Germany and Volkswagen have to decide the value of the partnership going forward amid increasing pressure both at home and abroad.

Lambo’s First EV Now Not Coming Until 2029

In keeping with the theme of this year, Lamborghini has said it’ll delay the rollout of its first full EV model until 2029, instead of 2028, reports Reuters:

“We do not think 2029 is late to have an electric car. We do not think that, in our segment, the market will be ready in 2025 or 2026,” Winkelmann told reporters at Lamborghini’s headquarters in Sant’Agata Bolognese, near the northern Italian city of Bologna.

As a premium exotic brand, Lamborghini can afford to pass on the costs of those delays in any gas guzzler/carbon taxes onto its customers.

Ford Gets Final Approval For $9.6 Billion Loan For Battery Joint Venture

Ford and its battery partner, South Korea’s SK On, will get the biggest loan ever from the Advanced Technology Vehicles Manufacturing loan program of $9.63 billion to create plants in Kentucky and Tennessee.

From Reuters via the Detroit Free Press:

The amount is higher than the $9.2 billion conditional commitment announced in June 2023 for the BlueOval project. Trump and his advisers have been critical of the Biden administration’s efforts to incentivize EV production.

“This program is essential to getting people to choose the United States of America,” Jigar Shah, who heads the DOE Loan Programs office, said in an interview. “When you look at the competition that we have from China, it is very clear to me that they have used low-cost debt for a very long time to promote a lot of manufacturing capacity that has hollowed out many communities in Kentucky, Tennessee and other states around the country.”

Once allocated it’s unlikely a new administration will be able to, or even try to end a program that’s building plants in traditionally Republican areas.

It Would Take ‘An Act Of God’ To Overturn EV Charging Money

Yesterday, I encouraged people to buy an EV now in case tax incentives went away. A part of that conversation was the noise that the Trump transition team was making about removing support for EV chargers.

A new report from Automotive News indicates that maybe it’ll be harder to reverse the push towards more charging than initially thought:

“It would take almost an act of God for Trump or Congress to overturn” the National Electric Vehicle Infrastructure program, said Loren McDonald, chief analyst at Paren, which recently acquired McDonald’s EV Adoption firm.

That’s because much of the $5 billion that underpins the initiative has already been doled out to the states. The remainder was preapproved. Policymakers designed the five-year program, which started in 2021, to help states create a network of public charging stations in 50-mile intervals along interstates.

That’s a great quote. McDonald goes on to say that private companies were already in the process of rolling out chargers, with the public money helping speed up adoption by reducing the amount of time it takes for these companies to break even.

What I’m Listening To While Writing TMD

When my daughter gets upset she’ll just straight up lay on the floor, which happened today and reminded me of Radiohead’s “Just” video.

The Big Question

How many EV chargers are you near? Are new ones being built?