Transcription
If you look at Volkswagen stock chart over the last five years, it doesn't really look like a 90-year-old industrial titan. It looks more like an altcoin that got rugpulled by its own founding team. The stock is down more than 65%, trading at its lowest level since 2010. Which means, and I want you to sit with this, it's now cheaper than it was during Dieselgate, the scandal where Volkswagen got caught building cars that lied to government regulators for a living. Somehow, the current situation is worse.
Volkswagen is, according to two people who are definitely going to be having an uncomfortable conversation with HR, considering breaking a taboo that it's held for the entire corporate history: cutting up to 100,000 jobs and closing four factories in Germany. I say considering because nothing's actually been signed yet. The supervisory board doesn't officially meet to look at the proposal until July 9th. But when three different newspapers all report the exact same very specific number in the same week, you can safely assume that someone in Wolsburg has already started drafting the corporate euphemisms. Personally, I'm waiting to see whether they call it "streamlining operations" or "rightsizing the corporate footprint." I've got some money on "right sizing." Either way, we're talking about roughly 1/6th of their entire global workforce, at a company that as recently as late 2024 promised its own unions in writing that there would be absolutely no plant closures until 2030 at the earliest. We've now learned that a corporate guarantee from a car manufacturer has a shelf life of about 80 months.
They're not alone, which I suppose is meant to be reassuring in the way that it's reassuring to know that other people are also falling off the same cliff as you are. BMW says it'll spend up to a billion euros on restructuring, which analysts translate as another 10,000 job cuts and a 15% cut to European car production. Mercedes-Benz has postponed a summer bonus worth nearly a fifth of a month's salary for 90,000 workers and is asking everyone else to go back to working a 40-hour week for 35 hours worth of pay. And it's not just the German brands either. Peugeot managed to deliver just 373 cars in Australia in the first 5 months of this year. To put that in perspective, Ferrari sells more cars in Australia than that. Their local distributor has now decided that it no longer wants to be in the Peugeot business.
Ask a European official why any of this is happening, and you'll get the same three culprits every time: high energy costs, an aging workforce, and red tape from Brussels. Notice what's missing from that list. It's a bit like asking a man why his house burnt down, and getting a very detailed lecture about the flammability of his curtains. It might be true, but it completely ignores the guy standing on the lawn with an empty gas can. There is of course something to all of those issues. Germany and Europe as a whole have major structural problems, and trying to do business in the EU can feel like being trapped in a Kafka novel. The decision to rely solely on cheap Russian energy was a monumental mistake. And then suddenly not having any was an energy shock of historic proportions, made even worse recently by the military disruptions in the Strait of Hormuz. But if you actually look at the numbers, red tape and demographics doesn't really explain what's happened. Bloomberg research puts about 40% of Germany's recent GDP shortfall down to the energy shock and another 40% down to lost export markets. The remaining 20% is weak domestic demand and bureaucracy. So German politicians have taken the 80/20 rule and confidently applied it backwards. Countries right next door, like the Netherlands and Denmark, deal with exactly the same EU paperwork. Yet somehow their economies keep growing.
The real problem isn't a sudden increase in forms. It's a sudden lack of anyone willing to buy what Germany makes. For decades, Germany ran the textbook trade surplus economy: build extremely complicated, expensive machines, sell them to the rest of the world, and repeat. But today, the rest of the world, and specifically China, is no longer buying. The trade chief in Brussels knows the relationship has flipped so hard that the EU is now running a trade deficit with China of roughly a billion euros a day. The economist Adam Tus has described what's happening between Germany and China as "mercantilist on mercantilist violence," which is both a wonderful phrase and an accurate description. According to Tus, 60% of the massive 27-billion-euro swing in Germany's trade balance with China between 2021 and 2025 was accounted for entirely by vehicles. For a hundred years, German car makers assumed their advantage—the ability to build a flawless combustion engine—was permanent. But the forced transition to building electric vehicles changed the rules of the game entirely. The Chinese didn't just catch up with battery chemistry and software. They lapped everyone else.
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To understand how Chinese manufacturers managed to sidestep a century of European engineering dominance, you need to understand something the industry is now calling "China speed." European and American car makers typically run product development cycles of 40 to 80 months. Chinese firms, on the other hand, can get a brand new model out the door in under 24 months. That's a lot faster. They manage this with flat management structures, punishing work hours, and by applying a software industry attitude towards quality control, where they first ship the car and, if there are any problems, fix them later with an over-the-air update once people start complaining on social media. This is a very different approach to running a car company. Not one that I would have picked, but here we are. China speed explains how they're developing and building cars so fast, but it doesn't explain the wave currently hitting Europe. That's a separate thing. And economists have started calling it "China Shock 2.0."
The first China shock, or China Shock 1.0, hit after China's entry into the WTO in 2001. It mostly wiped out low-wage manufacturing—things like toys, furniture, and basic electronics—industries that were never going to define any country's long-term economic future. And these industries were a much smaller slice of the global economy at the time. It hit the American rust belt hard, but Germany did just fine, because a rapidly industrializing China needed enormous amounts of heavy machinery, chemicals, and vehicles. And Germany happened to make exactly those types of goods and could sell them to China. China Shock 2.0 is a very different animal. China's economy today is about 18% of global GDP. So any growth in its exports is growing from a vastly larger base. And that export growth is now concentrated in precisely the capital- and technology-intensive sectors Europe used to have to itself. China doesn't need German machine tools anymore. In fact, that relationship has now flipped. Since mid-2025, according to the Centre for European Reform, Germany has been buying more capital goods from China than it sells them. It's a bit like selling a man a complete set of precision tools only to look out your front window a few years later and realize that he's used them to take the wheels off your car.
The scale of this is hard to overstate. China's auto exports are expected to approach 10 million vehicles this year. A lot of the exports are being driven by weakness at home. Domestic car sales fell 22.3% in China year-on-year in May, according to Reuters, and manufacturers who are stuck in a brutal domestic price war are dumping their surplus production onto the rest of the world instead of trying to sell them to buyers in China. Now, in a normal functioning economy, a surge in exports would come with some offsetting correction. According to the economist Michael Pettis, rising production should mean rising wages. Rising wages should mean rising domestic consumption, and rising domestic consumption should mean rising imports. Or, failing that, the resulting trade surplus should push the currency up, making exports more expensive and closing the gap on its own. Neither of those things is happening. Adjusted for inflation, the renminbi has actually depreciated by around 15% over the last 5 years or so. This is not a coincidence. Brad Setser and Sander Tordoir have written that Chinese state banks routinely intervene in currency markets, buying dollars to keep the renminbi cheap. The IMF puts the undervaluation at around 16%. Setser and Tordoir think that the real number is considerably higher, and they note that Beijing even changed how it calculates its own trade surplus back in 2022. Foreign firms operating inside China now get classified as running a trade deficit against China, which conveniently makes the real surplus harder for anyone outside the country to see. So, China isn't just competing hard. It's working its way around all of the normal mechanisms that would usually correct for these problems and exporting the imbalance directly onto everyone else's books instead, which leaves Europe's car makers staring at a problem that doesn't actually have a solution on their end.
The traditional corporate response to shrinking profits is simple. You fire people. If the business model is under siege, you call a press conference, explain to shareholders that you're streamlining operations to achieve lean, agile efficiency. And if you're feeling ambitious, you blame the headcount reduction on AI. Car executives are discovering that this particular trick doesn't work. Take Volkswagen's restructuring plan. The average VW employee in Germany costs the company roughly €70,000 a year in wages and benefits, according to the FT. Cut a 100,000 of them and you save about €7 billion a year. Close those factories and you shave another €3 billion off capital spending. All in, that's €10 billion a year. Spread that across the 9 million cars Volkswagen sells annually and you get a saving of roughly €1,000 per car. Assuming, of course, that you can still build the cars without the workers in the factories. This would be a great plan if you weren't competing against people who can build the same car for €6,000 less. McKinsey puts the Chinese cost advantage on EV production at 20 to 50%. On a Volkswagen that costs roughly €30,000 to build, that's a gap of at least €6,000 per car. So Volkswagen's historic, once-in-90-years layoff proposal is designed to claw back €1,000 per car. The competition is already ahead by €6,000 per car or more. It just doesn't add up. Firing the workforce isn't curing the disease. It's just a fairly dramatic way of treating one symptom of it.
And European car makers can't even count on a slow market to buy them more time to figure out software. For a while, it looked like the real story here was just EV fatigue. That after getting burned on depreciation, consumers had gone off electric cars altogether. If you only look at America, you'd believe that since the Trump administration phased out the federal EV tax credit at the end of 2025 and rolled back Biden-era emissions rules, US EV sales have dropped by roughly 27% in the first quarter of this year. Off a cliff, more or less. Europe is a very different story. European car makers operate under strict fleet emission targets. Miss the EV quota and Brussels fines you into the ground, so selling EVs isn't optional. European drivers don't get cheap domestic fuel the way Americans do either. Gasoline in Europe costs almost 70% more than in the United States. When the war in Iran escalated and the Strait of Hormuz closed, European drivers ran towards electric cars to get away from high prices. Tesla, which had been in a multi-year European slump, saw sales jump in the first half of the year. The problem was never that Europeans stopped buying electric cars. It's that they stopped buying European electric cars. They're buying the flood of cheaper Chinese alternatives instead. Cars that come with voice-controlled AI and charging speeds that make European EVs look like they're running on a phone charger. One of BYD's new Denza models can apparently go from empty to 70% charged in just 5 minutes. Good luck selling a European EV that takes 40 minutes to charge when the car next to it at the station leaves before you've finished your coffee.
Since traditional manufacturers can't compete on price, the EV subsidies EU governments hand out often just function as a taxpayer-funded discount on Chinese cars. Brussels' response to this criticism is something called the Industrial Accelerator Act, which tries to restrict those subsidies to vehicles actually assembled in Europe with local content requirements attached. The Chinese manufacturers found the loophole almost immediately. They're moving into the exact factories the Western car makers are abandoning, because their EV divisions are losing money. Ford and Nissan have been cutting production and leaving huge plants sitting half-empty. If you're a Chinese EV brand, the play writes itself: you don't export the car and eat the tariff. You take over the empty plant, do final assembly there, and then the car officially qualifies for European subsidies—paid for by European taxpayers to build cars that are putting European workers out of the job. The furniture is being swapped out in real time. Chery is moving into a former Nissan factory in Barcelona later this year and is in advanced talks to take over freed-up lines at Nissan's plant in Sunderland. Geely is taking an idle hall at a Ford plant near Valencia in Spain. BYD is in talks to take over half of Volkswagen's Dresden factory—the glass-walled one that Volkswagen used to show off to customers who like to watch their car being built. And Stellantis has entered a joint venture to build vehicles for China's Dongfeng inside its own historic post-war plant in Rennes.
On paper, European executives are calling this a win-win. Someone pays rent on the empty real estate. Local politicians get to save a few thousand jobs. Everyone claps. Rest of World quoted an industrial consultant, Babak Hashemi, who pointed out the actual long-term cost: "The issue is that these deals hand rivals instant local legitimacy, access to local supplier networks, and a clean way around EU import tariffs all at once." Philippe Gilleron, a union rep at Stellantis, put it better than I can when he told Bloomberg, "When your tech know-how is gone, it becomes nearly impossible to make a comeback down the road. It's as if somebody started cooking your meals for you all the time. In the end, you no longer know how to cook for yourself." Once a manufacturer is running on Chinese batteries, Chinese software, and Chinese vehicle architecture, it isn't really a manufacturer anymore. It's a marketing department putting a familiar badge on someone else's car, which leaves Western leaders with an actual question to answer. What do you do about an export shock that's turning your industrial base into a chain of very well-branded distribution centers?
When an industrial foundation starts to crack, the immediate political instinct is to panic and start pouring concrete. If foreign goods are arriving too fast and too cheap, you simply build a giant wall. But as economists like Brad Setser and Michael Pettis have pointed out, a modern trade war isn't a simple masonry job. It's a complex architecture problem. Start with the structural power dynamics. Michael Pettis has long argued that in any trade dispute, it's actually the importing countries—the deficit economies—holding the good cards. An export-driven economy like China depends entirely on foreign consumers to absorb its enormous state-subsidized overcapacity. Cut off a major market and the domestic engine hits a wall. Surplus nations like Germany used to resist this logic because they thought of themselves as part of the same exporters' club. That gets harder to maintain once China's manufactured goods surplus reaches roughly €2 trillion, a number that matches the entire national income of Italy. The trouble, according to Setser, is that Europe's existing toolkit was built for a much smaller problem. The European Commission currently relies on product-by-product trade investigations. Slow, bureaucratic, and trivially easy to route around. Case in point: when the EU slapped countervailing duties on Chinese battery EVs, manufacturers simply changed lanes. Monthly battery EV sales slowed, and imports of Chinese hybrids into Europe surged 155% almost overnight. Tordoir and Setser say that the result is a leaky bucket of product-by-product duties. For instance, on Chinese truck tires but not electric trucks, and on EVs but not hybrids. Trying to defend an entire industrial economy one product line at a time is like bailing out a flooded basement with a teaspoon, which has led to a fight over how high the wall should actually go.
France's national planning office has floated a flat 30% tariff on all Chinese imports. A truly drastic proposal, and one that comes with a real risk of triggering a beggar-thy-neighbor spiral where everyone scrambles to protect their own slice of an increasingly shrinking pie. History shows how that tends to work out. In the run-up to the Great Depression, the United States passed the Smoot-Hawley Tariff Act. At the time, America was the dominant economic power on the planet, running huge surpluses and responsible for nearly 16% of global exports. The tariffs were meant to protect American farmers and factories. The timing was, in retrospect, not great. Trading partners around the world retaliated immediately. Global trade seized up, and American exports fell by more than 65% within 3 years. The wall didn't keep the trouble out. It locked everyone in with it and made the Great Depression much worse than it needed to be.
To avoid repeating that particular mistake, Tordoir and Setser have proposed something closer to a scalpel. They want Brussels to build a European version of America's Section 301, the 1974 trade law that lets Washington investigate economy-wide unfair practices rather than suing over one product at a time. They argued that a European 301-type instrument would allow Brussels to respond to systemic distortions that fall outside traditional trade defense—notably, China's persistent currency undervaluation and macroeconomic policies that generate demand externally while suppressing it at home. "A 301 does not imply indiscriminate tariffs on all Chinese imports, but flexibility to apply a remedy on key sectors." This type of tool, they say, would let Brussels flexibly target the sectors that matter most: autos, machinery, chemicals, batteries, clean tech, and the semiconductors to build them. Emmanuel Macron put the underlying complaint about as bluntly as it can be put. He's told the Chinese, more or less, that a trade surplus built on importing almost nothing isn't sustainable because it slowly kills off your own customers.
Even a perfectly targeted tariff, though, can't override basic accounting. A trade deficit simply means that a country is consuming more than it produces and saving too little. If you use a tariff wall to shift production from an efficient foreign factory to a slightly less efficient one in another country, you haven't touched that underlying macroeconomic imbalance. You've just forced the local consumer to pay more to sustain it. What all of this really marks is the end of a 30-year design rule for global trade: efficiency first. Western economies didn't outsource their manufacturing base by accident or because they weren't paying attention. They did it because in a stable world with open sea lanes, optimizing for immediate cost efficiency was the entirely rational choice. Stretching a supply chain across an ocean to save a few cents on a component makes perfect economic sense right up until the moment where it doesn't. That era appears to be over. As trust between the major trading blocs runs out, the global economy is splitting into something closer to autarky—a self-sufficiency motivated mostly by fear. Governments and boardrooms are looking at how exposed their delivery routes actually are and deciding that the efficiency of global integration isn't worth the strategic risk anymore. We seem to be moving from free markets into a higher-cost and less efficient one, where businesses pay a premium for the comfort of redundancy, building duplicate plants and trading mainly with countries they trust politically. It means higher prices for consumers and thinner margins for businesses. The old rules of global trade were designed to reward the most efficient operator on the planet. The new ones are being designed to make sure everyone pays a permanent premium just to keep the gates closed.
If you found this video interesting, you should watch my video on Brexit 10 years later: what it actually cost Britain next. Don't forget to check out our sponsor, ZocDoc, using the link in the description. Have a great day and see you in the next video. Bye.