Volkswagen embodies the challenge ahead for European industry
The risks of decline go far beyond any single company
Europe’s automakers face mounting problems. For over a decade, an industry historically associated with technological and engineering excellence has concealed less flattering truths about high costs and stagnating output. Now faced with a trade conflict and accelerating Asian rivals, the ability of Volkswagen and others to restructure is a litmus test for whether European industry can remain globally relevant.
Our company embodies the challenge ahead. For too long we have operated under the assumption that growth would offset rising costs and underutilised capacity. Fuelled by profits from China and strong sales of premium brands such as Porsche and Audi, Volkswagen tried to grow its way out of the problem instead of addressing structural inefficiencies. When demand softened, the consequences became clear — declining margins, idle factories, and fast-moving rivals first from the US and now China grabbing share on their home turf.
But this is not just Volkswagen’s challenge. The auto industry remains a pillar of Europe’s economy. According to McKinsey, manufacturers, suppliers, finance providers and after-sale care services together account for 7 per cent of Europe’s GDP and support nearly 14mn jobs across the continent. The sector also drives wider growth: every euro invested generates more than twice that in added value in the broader economic landscape. The risks of decline go far beyond any single company.
Carmakers’ woes also reflect a deeper, long-term issue: Europe’s widening productivity gap. Over the past 25 years, labour productivity growth in the US has outpaced that of Europe by at least a percentage point on average per year. Today, the consequences are stark. According to Goldman Sachs, labour productivity per person employed in the US is, adjusted for purchasing power, between 35 and 45 per cent higher than in France, Germany and the UK — and the divide continues to grow.
Volkswagen Group is confronting these challenges head-on with tough decisions. We have reduced production capacity by 750,000 automobiles in our German plants. We have limited wage growth. And we are reducing our workforce by 35,000 in Germany alone by 2030 to boost productivity both in terms of labour and capital. These steps are not easy, but they are necessary in a world where competitiveness is non-negotiable. At the same time, we are investing decisively in the future, allocating €165bn over the next five years to drive electrification and digitalisation while expanding into areas such as autonomous driving.
But one thing has become clear: investment alone is not enough. Structural reform must come first — both at Volkswagen and in the European Union. Without changing how we work, build and organise, even the boldest investments will fall short. Long-term industrial competitiveness depends on core efficiency.
Priority reforms for the EU include more flexible labour markets and smarter regulation that supports rather than stifles innovation. It also means being pragmatic: securing access to critical raw materials and adopting technology partnerships where speed matters more than self-sufficiency. That’s why Volkswagen and others have entered tech-focused joint ventures with partners in China and North America. The goal: to speed up development of software, architecture, and platforms — while scaling faster and reducing costs, instead of building everything in-house.
All of this requires more ambition. Europe must become a place where bold ideas are not just researched but industrialised and scaled up across a common market. “Profit” should not be something we need to excuse. It is the foundation for a sustainable business model and for securing jobs and prosperity.
There has been some progress. The Draghi report on European competitiveness set the right tone. But speed and scale remain lacking. One example: EU battery regulations due to be advanced this year risk imposing costs and complexity that disadvantage local producers. Given that batteries account for the single largest part of an electric vehicle’s cost, this is not just a technicality — it’s a strategic issue.
At Volkswagen, we’ve embarked on change, and the initial results are promising. But the road ahead is long and winding. The ingredients for Europe’s renewal exist, too. What made the continent strong in the first place — a passion for innovation, a commitment to education, a culture of performance — should be its guiding values. To move forward, we must now choose structural reform over complacency, performance over nostalgia, and bold adaptation over rigid tradition. The future of European industry depends on it.