Volkswagen considers closing plants in Germany

On 2 September 2024, Volkswagen announced that, for the first time in its history, it could not rule out closing plants in Germany. The reasons it gave were falling demand and Chinese competition in electric cars. It was a striking statement from a company that has for decades been a symbol of German and European industrial strength. That a company of that size should raise it shows how far the sector’s context has changed.

The announcement is not just an internal matter for the manufacturer. In the modern economy, every large plant is part of a network of suppliers, hauliers, service companies and local communities that depend on its activity. When a company of this size considers reducing its structure, the effects travel along the whole chain, and companies that do not see it coming can pay dearly.

An unprecedented decision

The announcement responds to two simultaneous pressures: falling demand and Chinese rivals competing hard in electric cars. A company considering such a measure is acknowledging that its costs, its offer or its market have changed faster than its structure can absorb.

It is not a decision taken lightly, either economically or socially. Closing a factory involves high costs, tensions with workers and consequences for the region in which it stands. That it was even raised as a possibility reveals the pressure the industry was under, and the change in environment that electric cars and Chinese competition had brought with them. Companies in the sector, large and small, read in that announcement a warning about their own future.

A knock-on effect

The crisis in German industry affected the whole European supply chain, including Spain’s, where the car industry weighs heavily. When a large manufacturer reduces its activity, suppliers of components and services feel the impact before the manufacturer itself. They receive fewer orders, with less notice, and have to adapt their production and workforce to an increasingly uncertain rhythm. That uncertainty makes it harder to plan purchases of materials, work shifts and investment in machinery.

In addition, suppliers tend to have narrower margins and less financial capacity to withstand a prolonged fall in demand. A delay in payments, a cut in volumes or a renegotiation of prices can put companies in difficulty that have worked for years with the same client without any problem. The effect then extends to their own suppliers and employees. That is why industrial chains are increasingly analysed as a whole, and not just from the link of the final manufacturer.

Diversifying clients

Diversifying customers was the best defence. A company that depends on a single client or a single sector should know what share of its turnover that represents and what margin it would have if that client cut its orders. With that figure in sight, the dependence ceases to be a vague feeling and becomes a datum one can work with. From there it is possible to set a reasonable limit on concentration and review it regularly.

Reducing dependence takes time and is not always possible in the short term, but one can begin with small steps: exploring other sectors that use the same products or processes, securing contracts with clear terms and conditions, keeping prudent cash reserves and watching payment terms. An adviser can help evaluate scenarios and decide what room for manoeuvre is worth preserving. The worst decision is usually the one put off until the main client changes supplier.

Dependence on a single client is a risk that can be measured.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.