Volkswagen, the jewel in Germany’s industrial crown, is turning sour on its native home, which it sees as compounding its struggle to expand its profit margins.

For the first time in its 87-year history, Volkswagen is considering shutting down plants in Germany, where it employs around 300,000 people, as the company ramps up efforts to save €10 billion in costs.

In a statement on Monday, Volkswagen CEO Oliver Blume decried Germany’s falling industrial clout and its effect on his automaker, which is battling slow EV uptake, falling consumer demand, and the ominous threat of cheap Chinese EVs.

“The economic environment has become even tougher and new players are pushing into Europe,” Blume said in a statement on Monday. “Germany in particular as a manufacturing location is falling further behind in terms of competitiveness. 

“In this environment, we as a company must now act decisively.”

The German problem

Indeed, Germany’s manufacturing outlook is bleak, leaving the country’s chancellor, Olaf Scholz, in an existential bind.

Germany’s manufacturing sector has been in recession since early 2022, battered by the loss of cheap Russian energy following the country’s invasion of Ukraine, a fall-off in demand in its key export market of China, and declining consumer confidence in its own country.

In August, Germany’s manufacturing PMI, which hasn’t experienced growth for more than two years, fell to a five-month low of 42.4, contrasting with a global uptick in manufacturing output. Any figure lower than 50 is marked as a contraction.

“The recession in Germany’s manufacturing sector is dragging on way longer than anyone expected,” said Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. “August saw an even steeper drop in incoming orders, killing off any hope for a quick bounce-back.

“Normally, over the last 30 years, the industry has managed to recover within a maximum of 20 months of a recession starting. But this time, things are different, and China seems to be the main culprit,” de la Rubia added. 

“The country is stepping up its game, competing head to head with German industrial companies—not just in China, but also in Germany and in other key markets, especially in the automotive and mechanical engineering sectors.”

German companies have been heeding the warnings coming from Germany for some time, sensing that the country’s current downturn could indicate the start of a long-term trend.

Last year, German companies poured $15.7 billion in capital projects into the U.S., pivoting away from both China and their homeland. In 2022, the figure was just $5.9 billion. 

Other international companies that have invested billions in Germany are also beginning to have second thoughts.

Intel, another embattled company, is considering its options in the country.

Reuters reports that Intel will consider pausing or halting plans for its €30 billion ($33 billion) factory in the east German city of Magdeburg as the semiconductor manufacturer looks for cost savings. Germany had committed €9.9 billion ($10.9 billion) to the project when it was announced in June last year.

A representative for Intel didn’t immediately respond to a request for comment.

News of more major companies reconsidering their activities in Germany is a headache Chancellor Scholz could do without. 

Amid a flagging economy and rising populism, Scholz is battling a new surge from the country’s political far right.On Sunday, the Alternative for Germany (AfD) party became the first far-right party to win a state election in the country since 1949, emphasizing the battle Scholz faces to convince not just German companies but also citizens of his government’s direction.