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Auto giant is considering cuts it has long avoided in Germany as it contends with tepid interest in a high-cost technology

Volkswagen’s VOW -0.49%decrease; red down pointing triangle suggestion that it might have to close a plant in Germany for the first time ever sets up a battle with its powerful union and highlights the mounting pressures on its namesake brand.

The carmaker’s bosses raised the prospect of a plant closure on Monday as it navigates an increasingly bumpy transition toward electric vehicles. The company said a “performance program” at its core Volkswagen brand that was agreed upon with union leaders last December would no longer be sufficient to hit profit targets, following a disappointing first half of the year.

“The economic environment became even tougher, and new competitors are entering the European market,” said Chief Executive Oliver Blume in a statement.

The Volkswagen brand, the group’s largest in terms of sales, contributed less than 1/10th of total operating profit in the first half. Its margin was just 2.3%, or 3.6% excluding the costs of a severance program.

While the company doesn’t break out results for its EV business, a big bet on the new technology under former CEO Herbert Diess with products such as the ID.3 and ID.4 is one reason for today’s weak profitability, according to analysts.

A few days before Volkswagen announced its December deal with the union, the German government unexpectedly canceled EV subsidies. The technology has struggled to win over fresh cohorts of buyers who may be wary of patchy public charging infrastructure and high prices.

EV sales in Germany have plummeted this year, with Tesla’s registrations in the country down 41% for the year through July, compared with the same period of 2023.

“There are plants dedicated to EVs that aren’t producing at the levels expected and costs are out of whack,” said Bernstein analyst Stephen Reitman.

To get the Volkswagen brand’s finances back on track, managers want to take more radical steps than were possible under the previous union deal, notably ending an agreement to rule out compulsory redundancies that has been in place since 1994.

Daniela Cavallo, the union leader who heads Volkswagen’s works council, vowed Monday to fight the move, which is a prerequisite for any potential plant closure in Germany.

In an interview with the company’s union newspaper, she blamed the brand’s poor performance on management missteps such as Diess’s dismissal of hybrids as a niche technology. Car buyers this year have gravitated toward hybrids as a way to get better fuel economy without the charging hassle and expense of an EV.

The emerging negotiations are already attracting scrutiny in Berlin. On Tuesday, Germany’s economy and climate-protection minister, Robert Habeck, called for long-term thinking and “close coordination with social partners” at Volkswagen. He said the government was preparing tax relief for EVs as part of a new growth plan.

Volkswagen can’t easily dial back its profit-sapping EV investments or production because its cars need to meet much stricter European emissions standards starting next year. Its fleet carbon emissions last year were 24.2% higher than they will need to be in 2025, according to data collated by Bernstein, compared with 19.6% for Mercedes-Benz and 9.7% for BMW.

The company will also need to compete with lower-cost, faster-moving Chinese EV makers, not just in China but increasingly in Europe, too. Chinese manufacturers have a cost advantage of as much as 30%, according to industry estimates.

In the first half, BYD, which last year overtook Volkswagen in China, sold roughly 17,000 vehicles in Europe, 14,000 more than in the same period of 2023, according to JATO Dynamics. This summer BYD sponsored the high-profile Euro 2024 soccer tournament and last week agreed to buy its German distributor.

While Volkswagen’s profitability in the first half was particularly weak, its performance has long been a drag on the group, which also includes lucrative luxury marques such as Porsche and Audi.

Other mass-market brands owned by the group, such as Skoda and SEAT, based in the Czech Republic and Spain, respectively, have reported higher margins than Volkswagen itself in recent years.

In his statement, Blume noted that “Germany in particular as a manufacturing location is falling further behind in terms of competitiveness.”

Labor costs in Germany are the highest in Europe, according to an analysis by the German Association of the Automotive Industry. A German auto worker cost roughly €62 an hour last year—equivalent to roughly $68.50—compared with €23 for a Czech worker and €29 for a Spanish one. In Hungary, where BYD is building a factory to avoid European Union tariffs, auto workers are paid only €16 an hour.

Germany’s energy costs also have risen since the country lost access to cheap Russian pipeline gas as a result of the war in Ukraine.

Volkswagen has a long history of resisting redundancies. In 1993, when the company was losing money in an economic slump, its management and union agreed to a four-day week as an alternative to a plan involving 30,000 job cuts.

Veteran German stock analyst Jürgen Pieper expects the latest war of words that has broken out between Volkswagen’s management and union to end in some kind of compromise that again avoids shuttering plants. One option could be the sale of components businesses, he said.

“The challenge for management is that this isn’t a full-scale crisis. Volkswagen just gets a little weaker every year.”

Excluding the Covid-19 pandemic period, annual growth was the lowest since 1992

SYDNEY—Australia’s commodity-rich economy recorded its weakest growth momentum since the early 1990s in the second quarter, as consumers and businesses continued to feel the impact of high interest rates, with little expectation of a reprieve from the Reserve Bank of Australia in the near term.

The economy grew 0.2% in the second quarter from the first, with annual growth running at 1.0%, the Australian Bureau of Statistics said Wednesday. The results were in line with market expectations.

It was the 11th consecutive quarter of growth, although the economy slowed sharply over the year to June 30, the ABS said.

Excluding the Covid-19 pandemic period, annual growth was the lowest since 1992, the year that included a gradual recovery from a recession in 1991.

The economy remained in a deep per capita recession, with gross domestic product per capita falling 0.4% from the previous quarter, a sixth consecutive quarterly fall, the data showed.

A big area of weakness in the economy was household spending, which fell 0.2% from the first quarter, detracting 0.1 percentage point from GDP growth.

With population growth running at around 2.5% a year, per capita spending declined by around 2.0% over the same period, according to the ABS data.

Helping to lift the gloom, government spending rose 1.4% over the quarter, due in part to strength in social-benefits programs for health services, the ABS said.

The soft growth report comes as the RBA continues to warn that inflation remains stubbornly high, ruling out near-term interest-rate cuts.

RBA Gov. Michele Bullock said last month that near-term rate cuts aren’t being considered.

Money markets have priced in a cut at the end of this year, while most economists expect that the RBA will stand pat until early 2025.

Treasurer Jim Chalmers has warned this week that high interest rates are “smashing the economy.”

He told reporters after the data that without growth in government spending over the quarter, the economy would have contracted.

Still, with income tax cuts delivered at the start of July, and the government announcing handouts to every household while offering rebates to subdue rental and electricity cost increases, there are some expectations that consumers will be in a better position to spend in the third quarter, reviving the economy to some degree.

Sally Auld, chief investment officer at wealth manager JBWere, said that while the weakness in consumer spending will alarm the RBA, it is too soon to rule out a recovery as government stimulus lifts consumption.

“Let’s see what happens,” she added.

But the economy has clearly slowed to a crawl.

“Output has now grown at 0.2% for three consecutive quarters now. That leaves little doubt that the economy is growing well below potential,” said Abhijit Surya, economist at Capital Economics.

“But if activity does continue to disappoint, the RBA could well cut interest rates sooner,” Surya added.

Sony chief bets on original content as part of ‘creation shift’

Tech group joins Netflix, Apple and Amazon in spending war as it targets greater share of $3tn entertainment industry

Sony is betting on a multibillion-dollar push into producing more original content, as part of a “creation shift” the Japanese tech giant hopes will win it a greater share of the $3tn entertainment industry.

In an interview with the Financial Times, chief executive Kenichiro Yoshida said that Sony needed to shift its focus from distribution to the creation of intellectual property, to cement a corporate transformation from a consumer electronics brand into a global entertainment company. 

“We have the technology and creation is the area where we like and where we can contribute the most,” Yoshida said, adding that the group can still use its camera, sensor and other consumer electronics roots to produce live entertainment.

Under Yoshida, the group has spent $10bn over the past six years to build its vast portfolio of games, films and music — the three business segments that now account for 60 per cent of its annual revenue. 

The transition puts Sony alongside the likes of Netflix, Apple and Amazon in a spending war for global content that is set to reach nearly $250bn this year, according to Ampere Analysis, a market researcher. 

Until now, the Japanese group has taken a different approach. Instead of directly competing with streamers, Sony has sold its film and TV rights to them — a relationship the Japanese group wants to maintain as it involves itself more deeply in content production. 

“By putting our efforts in creation, that also means that we will work with partners on the distribution side. So I think we have developed very good relationships with the so-called Big Tech players,” Yoshida said.

So far, Sony has leveraged its variety of media businesses to better profit from its acquired intellectual property, leading to hits in recent years including The Last of Us, which was converted from a PlayStation game into a hugely popular television series, and Uncharted, another video game adaptation for cinema. 

Following the investment splurge, Sony’s top executives argue that the group needs to be more directly involved in creating content at an earlier stage to get higher returns.

“Whether it’s for games, films or anime, we don’t have that much IP that we fostered from the beginning,” said chief financial officer Hiroki Totoki, who is widely seen as Yoshida’s successor, in a separate interview.

“We’re lacking the early phase (of IP) and that’s an issue for us,” he added, noting that Sony has historically been better at finding a global audience for content that have already become popular in their home market. 

Jefferies analyst Atul Goyal says the new focus is a natural part of Sony’s evolution into a fully integrated media company but investors have also called on Sony to present more concrete plans for it to deliver higher returns as its next phase of growth.

“One thing that you need is IP, that is step one. And if you don’t start creating or buying in those that do, then the risk is someone else will do it. So the risk is not doing anything,” Goyal said.

At the centre of the “creation shift” is how Sony can generate higher returns from one of the world’s largest portfolios of Japanese anime cartoons, which was bolstered by its $1.2bn purchase of AT&T’s anime streaming service Crunchyroll in 2021. 

“It has become a movement. Some of our research shows that there are over 800mn anime fans globally, and there is going to be a billion over the next few years,” said Rahul Purini, president of Crunchyroll, which is releasing close to 200 titles a year, double what it was four years ago.

But Purini estimated that the average cost of producing anime had gone up between 40 and 60 per cent over the past few years, due to the increasing pricing power of creators in Japan as well as a limited supply of animators.

In response, Crunchyroll, which now has 15mn paid subscribers, and Sony are trying to co-produce shows. The companies are also working to train more animators, while making the creative process more efficient using digital tools and new software. 

“Given the constraints within the ecosystem, there is opportunity for various companies, including Sony, to see if there is a way to add additional capacity, bring additional talent and potentially leverage digital technology in the creation process,” Purini added.

Totoki said Sony also wanted to use its knowhow from its PlayStation Network service including payments, security and data analysis to improve engagement with Crunchyroll subscribers, and expand business opportunity through joint promotions.

“About 30 per cent of PlayStation Network service customers watch anime, but only about 5 per cent have Crunchyroll accounts,” Totoki added. 

Still, executives admit that Sony’s deeper involvement in the production process will also put the group on the frontline of the heated battle with animators, games-makers and directors and those using artificial intelligence tools to generate new material.

“It’s not going to be easy to balance . . . and it will be a continuous search for how we can use technology while protecting the rights of the creators,” Yoshida said. 

FT : Goldman slashes copper forecast dimming miners’ profit outlook

UK’s venture capitalists brace for tax rises

Higher UK taxes threaten venture capital

For the UK’s venture capital industry, the looming arrival of a new tax regime is being denounced in life and death terms.

Haakon Overli, co-founder of UK venture investor Dawn Capital, warned the contemplated tax increases “would hit us so hard . . . if suddenly 45 per cent of it goes away our economic model ceases to work”.

The alarm from Overli and his rivals across Britain comes as the Labour party and chancellor Rachel Reeves attempt to pin down their first Budget, due this autumn. The plan is expected to make “big asks” of the wealthy, many of whom are up in arms.

The venture capital industry’s concerns centre on two changes to the tax code: a potential increase in the capital gains tax and the closing of some of the loopholes that set how carried interest — the lucrative performance fees that fund managers receive from asset sales — is taxed.

Even before anything final has been approved, the discontent is palpable.

“If anything makes the UK less attractive for talent — and increasing taxes will do so — the country as a whole will end up losing,” said Taavet Hinrikus, the co-founder of London-listed fintech Wise who now runs European tech investor Plural.

The tax shift will be laid out in the October Budget. Many already see the writing on the wall: Prime Minister Keir Starmer last week gave his clearest indication yet that tax increases were on the horizon.

Reeves has said there was a £22bn “black hole” in the public finances left by the Conservative government that needed mending, with gaps in funding for Britain’s asylum system and railways. 

Capital gains and carried interest are taxed in the UK at a rate of 20 per cent and 28 per cent, respectively. That’s much lower than the highest bracket of income tax, which is 45 per cent.

While private equity executives are the first group that clearly would be affected by the rises, venture capitalists would also be forced to pay up. 

The industry is arguing that it shouldn’t be treated like its private equity peers, given so many of its wagers don’t turn profitable — let alone into unicorns. It believes taxing the profits on its big wins, as a result, would hamper the industry and future investment in start-ups.