Volkswagen and the Nokia Trap: Why European Automakers Are Stalling

Volkswagen currently sits at the intersection of several systemic failures. Beyond the high-cost, heavily regulated environment of German manufacturing, the company struggles with a governance structure that grants employee representatives half the seats on its supervisory board. This setup makes radical restructuring, such as the proposed elimination of 100,000 jobs, a political and logistical minefield. With the state of Lower Saxony holding a 20 percent stake, the pressure to protect jobs often overrides the need for rapid agility.

The numbers underscore the scale of the decline. Volkswagen’s annual earnings in China have plummeted from approximately €5 billion to just €1 billion, while manufacturing costs in Germany remain 30 to 45 percent higher than in China. This disparity has allowed Chinese brands to capture significant market share within the European Union, where nearly one in nine cars sold is now Chinese—a stark contrast to their near-absence only a few years ago.

Knap points to a strategic failure in how the industry engaged with regulators, particularly following the Dieselgate scandal. While China fostered a competitive environment that allowed domestic champions to emerge, European regulators unilaterally imposed strict terms. Volkswagen’s leadership, focused on short-term quarterly targets, failed to recognize the shifting landscape until it was too late. Now, as the industry transitions to electric platforms, the company must execute a 180-degree turn to remain relevant in a market that no longer favors the traditional combustion-engine giants.