Car industry closures reveal depth of European crisis

The European economy is facing its biggest crisis in a decade. Over the past few months, announcements of layoffs in France and Germany have come thick and fast. Hundreds of thousands of jobs are at risk as companies attempt to cut costs. At the same time, the European Central Bank (ECB) is cutting interest rates and its growth forecast. This reflects the historic crisis of European capitalism, which offers nothing but a future of austerity and misery.

Mass layoffs in the German car industry

The car industry is at the centre of the latest round of the crisis. This autumn, Volkswagen announced tens of thousands of redundancies and three factory closures, followed by BMW announcing 8,000 job cuts, and car part maker Bosch another 10,000. Ford has also announced 4,000 job losses, mainly in Germany.

On top of the plant closures, Volkswagen executives have demanded that remaining workers take a 10 percent wage cut and agree to a two year pay freeze. Naturally, the company executives have refused to make such sacrifices themselves. No wonder that 100,000 car workers in Volkswagen went on strike against these proposals from management.

On top of the plant closures, Volkswagen executives have demanded that remaining workers take a 10 percent wage cut and agree to a two year pay freeze. No wonder that 100,000 car workers in Volkswagen went on strike against these proposals / Image: IG Metall, Facebook

The car industry is crucial to Europe, producing just over $1 trillion added value for Europe which represents about six percent of its total economy. It also employs some 14 million workers, which is something like six percent of the total European workforce. The car industry is struggling worldwide, but the crisis in Europe is particularly severe. 

Capacity utilisation in the global car industry is at 62 percent on average. In other words, factories are producing only 62 percent of what they could, because the market simply isn’t there for them to produce at full capacity. This rate is down from 70 percent in 2018, and anything below 70 percent is considered to be unsustainable. However, in Europe the problem is worse with the car industry running at a mere 58 percent, compared to 66 percent in North America. This is linked to a loss in Europe’s market share, from 31 percent of all vehicle sales in 2008 to 20 percent in 2023.

Now, Trump has Europe’s car industry in his crosshairs. He is determined to force car companies to manufacture the cars in the US, if they are sold in the US, by the use of tariffs. He insists he is going to eliminate the US trade deficit, which stands at roughly €150 billion with Europe (a third of the value of EU exports to the US). This is a massive threat to European production, particularly that which involves traditional combustion engines. It is not a coincidence that German car manufacturers are downsizing now, as Trump is on his way in.

However, the problems for European industry did not start with Trump. 

Lagging behind

Historically, German vehicle manufacturers had a massive advantage in diesel engine production, out of which they made – and continue to make – a lot of money. Dialectically, however, it is precisely that advantage which made them so prone to failure when a new technology came along.

In his book on the German economy, fittingly titled Kaput (‘broken’), former Financial Times columnist, Wolfgang Münchau, points out that the perfection they achieved in diesel engines led them to double down instead of preparing for the next technological leap. They had a massive advantage in this engine type, and rather than using the profits to invest in new technology, they busied themselves promoting diesel as a green alternative. And then they cheated the emission tests to mask the truth.

At the same time, Chinese companies were investing heavily in electric vehicles and the necessary battery technologies. For all the talk of western governments investing in green technologies, it simply wasn’t happening. The Chinese market, however, grew rapidly, and is now, by some distance, the largest market for electrical vehicles. At present, three quarters of electrical vehicles sold in the world are sold in China. This provided an excellent basis for Chinese companies, like BYD, to expand rapidly and develop a dominating position in the electric vehicle market worldwide.

This does not bode well for Germany’s car industry. In 2022, it exported $30 billion-worth of road vehicles and parts to China, but barely any of that would be electric vehicles. Instead, European manufacturers are exporting combustion engine vehicles to China. The tariffs that the EU has introduced might do something to prevent electrical vehicles being sold to Europe, but it would do absolutely nothing to help German combustion engine exports to China, which is what the car industry is looking for. This partly explains why German car makers opposed the tariffs. They are also vulnerable to potential retaliation, and would like to keep on the good side of the Chinese government.

But there is more to it than that. European companies have invested heavily in electric vehicle manufacturing capacity in China. Volkswagen, for example, produced three million cars there in 2022. But now German car makers are losing their market share fast. They still account for 15 percent of the Chinese market, but that is down from 25 percent before the pandemic.

Now the Chinese economy has stalled, and cars by European brands are more expensive than Chinese ones. As a result, electric vehicle plants that were built in China, initially to serve the Chinese market, are now being used to export vehicles to the European Union instead. 22 percent of electric cars sold in Europe were exported from China to Europe by non-Chinese firms (Tesla, Volkswagen etc). Only eight percent of the cars sold were from Chinese companies exporting to Europe. This is another reason why the European car makers were opposed to the tariffs, because it would hurt their own exports to Europe.

Compounding the problem of the export market is the declining size of the European market. The slowdown in the economy over the past year has affected electric cars more than others, because they are more expensive. Workers that are struggling to make ends meet will opt for a cheaper traditional vehicle, rather than paying a premium for an electric. This was exacerbated by the German government withdrawing its subsidies for new cars, resulting in a fall in sales, particularly in Germany.

Chinese companies were investing heavily in electric vehicles and the necessary battery technologies. At present, three quarters of electrical vehicles sold in the world are sold in China / Image: Wikimedia commons

Next year, the EU has set all companies the target of reaching 20g of CO2 per kilometer. Most car companies look like they are not going to reach these targets, which would mean fines. Now, predictably, the companies are demanding that the implementation of the targets be delayed, insisting instead that Europe must develop an ‘industrial policy’, by which they undoubtedly mean direct or indirect subsidies.

They are holding a gun to the heads of European governments, threatening them with massive job losses. And several governments have already blinked, including Italy and France. 

It’s all a bit rich, given that these companies are all making massive profits, handing out record dividends (far higher than their Asian and North American counterparts) and hoarding tens of billions of dollars of cash. Rather than ploughing this money into the business and making bold investments, they are showering their shareholders with money. Not for nothing did the secretary general of IndustriAll, the international union confederation, refer to it as “asset stripping”.

But the central task of a capitalist company is not to ensure jobs, or a transition to electrical vehicles, but to make profits for their shareholders. By that metric, the European car companies are very successful at the moment.

Why invest in building more factories when the workers of Europe are too poor to buy the cars they produce? Factories are already standing idle. Better to hold back, and keep the shareholders happy with massive handouts.

One might argue that they should have prepared for the future, but the truth is that the electrical engine represents a complete overhaul of the car and how it functions. That’s why new companies, who have a background in software, battery production, smart phone production etc, have proven as capable of leaping into these new markets as the old industrial giants. 

The domination that China and South-East Asia has over the production of anything semi-conductor related, and the domination of the US in terms of producing software and online services, leaves Europe completely behind. 

The stakes are high. The consultancy firm McKinsey estimates that Europe could lose as much as $400 billion (36 percent of its current market) by 2035, particularly in the production of components for cars. Many components are already being produced in South East Asia, and European companies are unlikely to be able to enter that market as Europe has largely stood on the sidelines in the development of electronics and software.

This is what is abundantly clear when looking at figures for investment over the past period. 

Lack of investment

Former European Central Bank chief Mario Draghi produced a report on the European economy which highlights just how much Europe is lagging behind in investment.

Draghi suggests that Europe would need an additional €800 billion per year in public and private investment, which would mean an additional 4.5 percent of GDP, and this at a time when most governments and corporations are trying to find areas to cut. 

The reason for this is that Europe has lagged behind the US and China for some time. In the 20 year period between 1997 to 2019, the value of capital per employed person grew by 50 percent in the US, from $197,000 to $293,000. In China it rose eight-fold, from $11,000 to $87,000. In western Europe, it grew by a mere 10 percent. Central Europe with Czechia, Slovakia and Hungary performed a lot better, increasing by 120 percent, but that is by no means enough to make up the difference. Investments in Germany are particularly poor, falling well behind other major European countries, not to mention the US.

Draghi suggests that Europe would need an additional €800 billion per year in public and private investment, which would mean an additional 4.5 percent of GDP, and this at a time when most governments and corporations are trying to find areas to cut / Image: own work

Since 2012, the US has had consistently higher investment than all the major European economies, as a share of economic output. The US has been spending about one percentage point of GDP more on investment than the EU. But looking beyond the overall figure reveals that a greater share of European investment was focused on real estate (houses, offices etc). As regards investment in machinery and intellectual property (research and development), the US is spending two percent more of its GDP on average every year than the EU.

Some of this is because European governments have cut their public investment budget, but most of it is because corporations simply aren’t investing. US corporations are now spending $1.6 trillion on investment, either on fixed capital (machinery, factories etc) or research and development (R&D). Their European counterparts are only spending $900 billion.

Europe is behind in all sectors of the economy except in automotives and materials. Just to give a few examples: European telecoms corporations have invested only ⅕ of their US counterparts. Semiconductor corporations have invested half as much. Even in the pharmaceutical sector, where Europe isn’t as far behind, 43 percent less is spent on either fixed capital or R&D.

Crucially, in software and computing, the US is significantly ahead. There is no major software company or cloud computing company in Europe. As regards the market for AI – which will undoubtedly play a significant role in increasing productivity – Europe plays hardly any role, whether in writing the code, in producing the processors, or hosting the server farms.

The crisis in the European energy market

To make matters worse, European companies have been exposed to sky-high energy prices. European electricity prices have always been high, but now the price for industry is more than double that of the US (20 vs 8 euro cent per kWh). Because of the historically high electricity prices, European industries tended to use gas as their main source of energy. Cheap Russian gas was available in large volumes. 

Since the Ukraine war, however, Europe has cut itself off from Russian gas, and after the initial spike, it has now settled at a rate roughly 50 percent higher than before the war. This has had a particularly devastating impact on the energy intensive industry (metals, chemicals, oil, paper, glass etc) where production has fallen by 20 percent. This act of industrial self-sabotage illustrates how the nation-state, and imperialism, are a barrier to the future development of Europe.

Again, however, the Ukraine war is not so much the cause of the problem as the final straw for the energy sector. Even before the pandemic, public and private investment in European energy production and infrastructure was almost half that of the US ($420 billion vs $260 billion in 2019). Private investment is even further behind, and is half the size of US investment. 

Of course, the US invests lots in oil and gas production, but one would expect Europe to match that investment in alternative energy sources, particularly given all the noise European politicians have made about it. China, for comparison, invested $560 billion in the energy sector in 2019, of which $154 billion was in renewable energy, three times more than what Europe invested. 

Since cutting themselves off from Russian gas the European capitalists have increased their investment in energy to $450 billion per year (as of 2024). But they’re still well behind China’s, which is now at $850 billion, and still three times as high for renewable energy.

So, where is Europe’s future energy supply going to come from? EU governments are pushing industries to switch to electricity-based production and moving away from gas. They’re pushing car owners to use battery-powered vehicles. And of course, they would like to get more investment in server infrastructure for AI and cloud computing. But all these things require a huge amount of electricity, and the investment simply isn’t there to be able to provide this cheaply.

This lack of investment in energy is also one of the reasons why European manufacturers have not been able to replicate the scale of Chinese ones. The market for their products simply wasn’t there, and therefore production quantities remained relatively small and expensive, whereas Chinese manufacturers benefited from economies of scale. This is the main reason why China, as opposed to Europe, now has more than a 60 percent market share in solar panels and their components. The Chinese market was that much bigger, and allowed its companies to develop into massive monopolies, which European companies could not compete with.

The Northvolt adventure

China through its role in the electronics and car market has developed almost complete control of the market for lithium batteries, which are crucial to the use of green technologies. These batteries are used in everything from smartphones to the large scale electricity storage systems linked to solar and wind power. 

Chinese companies have secured a dominant position, led by two companies: BYD and CATL. Tesla also has a small stake in the market.

The European bourgeoisie were, however, completely cut out of this industry. And so, when battery manufacturer Northvolt came along and promised great things, they jumped at the opportunity. Banks, governments and car makers gave them €4 billion in investment. Goldman Sachs brought a 20 percent share in the company, and Volkswagen brought another 20 percent. The company expanded from their one factory in Skellefteå, Sweden, to factories in Germany and the US.

Northvolt’s story illustrates the difficulties faced by new companies that are attempting to enter into an established market / Image: Wikimedia commons

But they were unable to make any money. Last year, the company lost €5 for every €1 of sales, and that’s not even counting administration and research costs. They were nowhere near covering the cost of producing the batteries sold.

To resolve this, they would need to scale up tremendously in order to achieve the same kind of economies of scale as Chinese companies. Northvolt made a loss of $1.2 billion last year. Compare this to Tesla’s record $710 billion loss, which it incurred when the company was attempting to reach necessary economies of scale for the mass market. That was considered a make-or-break year, and it made Tesla. It seems that it has broken Northvolt.

To be fair to the Swedish capitalists, a billion dollars is not a lot for the league they are trying to play in. Chinese battery maker CATL, for example, just announced they are building a €4.1 billion factory in Spain. Northvolt has just proven that it can’t play in that league without billions of additional funding, and that investment seems unlikely to be forthcoming.

The CATL investment is also quite typical of a new type of Chinese investment in Europe. To avoid tariffs, Chinese companies are investing in Europe as an assembly platform. Therefore,  most of the value of the product is added to the components before they arrive at the factory to be put together, meaning that the amount of jobs that this will create in Europe is limited. Most of the supply chain is outside Europe. 

Northvolt’s story illustrates the difficulties faced by new companies that are attempting to enter into an established market. As a result, new European battery startups have decided to leave the electric vehicle market to the Chinese and instead focus on other markets, like massive storage facilities. 

This is what monopoly capitalism looks like. The massive investments that have gone into this industry already, in terms of physical capital as well as research and development, effectively excludes new entrants. Once a company becomes a monopoly somewhere in the world, no amount of tariffs is going to dislodge them from that position.

Where is Europe going?

Capitalism developed first in Europe. Through looting the world and returning the spoils to the home country, European capitalism developed in leaps and bounds. Britain, France, and Germany were the centre of the world economy at the end of the 19th century.

However, in the gigantic clashes of the imperialist powers in two world wars, the European powers were proven to have fallen behind. The massive potential of the United States was revealed, and it became the dominant power in the capitalist world. 

Devastated by war, the European powers rebuilt on the basis of the newly developed industries, building cars and industrial machinery of all kinds. They were not only able to recover, but at a certain stage they even reached the same level of productivity as the US. All of this was done whilst under the US ‘security umbrella’, as it became known. 

In an area of free trade, protected by US imperialism, European companies could compete on an equal footing anywhere in the capitalist world. The US bourgeois grumbled a bit about having to bear the bulk of the costs of maintaining its massive military apparatus, but in the end, the development of capitalism in western Europe stabilised the political situation for a whole historical period, and prevented the further development of the world revolution. And, of course, US banks and multinational corporations got their share of the growing pie.

In an epoch of free trade, the borders that cut Europe into small nations were less restrictive on the development of the productive forces. The common market and later the EU eased these restrictions further, enabling the emergence of monopolies that could compete on a world scale, like Airbus, a handful of car companies, and even some banks. 

But the creation of the Common Market was done with the support of US imperialism, which for a long time saw the EU and its predecessors as in its strategic interest. The small European nations could piggyback on their great US cousin, who kept the markets of the capitalist world open to them. Some of them, like Finland, Sweden and Austria, could even make good money trading with the bureaucracies of the Eastern bloc. 

With the collapse of the Soviet Union, all that began to change. Initially there was euphoria: new markets opened up for joint exploitation by western imperialism. They were able to loot the former state-owned companies, whilst intensifying the exploitation of the workers in the West. China furthermore provided an excellent avenue for profitable investments, producing furniture, textiles, basic processed goods, and assembly platforms. 

But the limit of this was reached in 2008. The process of unravelling of globalisation, which had already begun, now received a massive new impetus. A new, much harsher reality was taking shape, which required increased state intervention to defend the interests of their own multinationals against those of their competitors. 

The US and European capitalists woke up in 2015 to the realisation that China was no longer just a weak power, producing furniture and assembling western electronics. China had much larger ambitions, as laid out in the ‘Made in China 2025’ document, and they had the means to achieve them.

But whilst the US, under Trump and Biden in particular, conducted a campaign against Chinese development, depriving them of new technologies and access to markets, Europe remained divided, and was pulled in different directions. The Germans, backed by the Dutch and Nordic countries, stuck to their strict fiscal rules, dragging their feet when it came to funding joint debt.

Whilst China and the US were able to sustain massive government deficits, which kept demand and investment up, Europe had to constrain its public spending after the Eurozone crisis of 2010-12. According to the theories of the neoclassical economists, this should have freed up capital for private investment, but as we have seen, that simply didn’t happen. 

Now Trump is coming back to power. He will undoubtedly attempt to sow discord between the European powers, using the carrot for some and the stick for others. From his point of view, the EU is an obstacle to putting ‘America First’. The Chinese and Russian governments have already been attempting to pull different European countries into their orbit. With France and Germany in the midst of political crises, and the EU becoming increasingly unpopular with the masses in Europe, the future of European unity on a capitalist basis looks bleak.

Surviving on old merits

Mario Draghi was relatively candid in his report, particularly for a European politician. It has now become the talking point of the European bourgeoisie. But talk will do little to resolve the deep-seated problems that he points to, and no one has any credible idea of how to raise the €800 billion that he demands.

Even should they succeed in raising the money, European capitalists will face fierce competition from US and Chinese, who all have the same programme: exporting their way out of the crisis. This is a recipe for trade wars, in which Europe is in a weak position.

Draghi warns in his report that without the necessary investment in the economy, the European ‘social model’ is unsustainable. 

On the one hand, he is threatening the workers and their representatives that unless they agree to allow their conditions to be undermined, they will face even worse; on the other, he is threatening the bosses with the prospect of revolutionary upheaval should they fail to deliver. 

For decades the European working class has maintained a relatively civilised existence. But the material conditions for that are fast disappearing. And it is abundantly clear that the European bourgeois are not able to stop it. After the war in Ukraine, which wreaked havoc on German industry, another disaster is looming in the form of Donald Trump’s second presidency. 

The European ‘social model’ is untenable on the basis of capitalism. European capitalism, once at the forefront, is now old and decrepit. The nation state has become an absolute fetter on its future development. Its various national capitalist classes are living on old merits, and of investments made in the past. It can provide no way forward for the European nations. 

Europe is under threat of becoming an industrial graveyard. Only the working class can provide the way forward. By consigning the ruling classes of Europe to the dustbin of history, the working class would be able to unify Europe, and use the continent’s considerable resources to build a new future. A socialist federation of Europe would unlock all the potential which capitalism can never achieve. This is the only way out.