Transcript: Volkswagen’s dire warning

This is an audio transcript of the FT News Briefing podcast episode: ‘Volkswagen’s dire warning’

Kasia Broussalian
Good morning from the Financial Times. Today is Thursday, September 5th. And this is your FT News Briefing.

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President Joe Biden wants to say no thanks to Nippon’s offer for US Steel, and Volkswagen is warning that it needs to take drastic measures to shore up the company. Plus, Egypt bet big on a new gasfield. It’s not paying out. I’m Kasia Broussalian and here’s the news you need to start your day.

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Steel is quickly becoming the latest political football in the US. President Joe Biden is saying that he would block Japan’s Nippon Steel from buying US Steel. He says that the nearly $15bn deal might be a national security risk. But critics are saying, hey, are you kidding here? This is about politics. You see, US Steel employs blue-collar workers, and it’s headquartered in Pennsylvania. That’s kind of like a double whammy for Democrats. It’s a swing state, and these union workers are exactly who they need to win over. At a rally this week, Vice-President Kamala Harris drilled home the importance of keeping US Steel in the family, so to speak.

Kamala Harris voice clip
And I couldn’t agree more with President Biden. US Steel should remain American-owned and American-operated.

Kasia Broussalian
Former president Donald Trump also isn’t a fan of the merger. But US Steel says that blocking it could actually put thousands of jobs at risk. And investors, they’re also worried. Shares in the company dropped more than 17 per cent on the news of Biden’s plans.

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Volkswagen issued a dire warning yesterday. It said it only has a, quote, year, maybe two, to adapt to lower sales in Europe. This is happening as the carmaker plans to shut down factories in its home country of Germany. And it’s not just a big problem for VW. The company’s issues could hit the German economy. I’m joined now by the FT’s Patricia Nilsson. Hey, Patricia.

Patricia Nilsson
Hi, Kasia.

Kasia Broussalian
So unpack that statement from VW’s finance chief for me. A year or two to adapt. What exactly did he mean by that? And just how bad is the company doing?

Patricia Nilsson
Volkswagen, like many other carmakers in Europe, have struggled with lower demand, especially for electric vehicles. On top of that, a lot of people are struggling economically right now and are not buying cars. And Volkswagen already last year announced that it wanted to save €10bn by 2026. This week, Volkswagen’s management are saying that they’re going to have to go further. That means backtracking on a promise that the company has made to its works council not to cut any jobs until 2029, and also specifically to close factories in Germany, something that the company has never done.

Kasia Broussalian
And that two years, I’m just kind of curious, like what happens if they aren’t able to turn things around?

Patricia Nilsson
That is not clear yet. Management is arguing that they can still turn the company around, make it a profitable one or more profitable one rather, but that they will have to act quickly and decisively. Do I think that Volkswagen might not be here in two years’ time? No, I don’t think that. Volkswagen is basically synonymous with Germany, and to many here it’s simply too big to fail.

Kasia Broussalian
Got it. And so just pack up and give me some context here. You mentioned that VW was struggling a lot with demand for cars. What else is causing all these troubles for the company?

Patricia Nilsson
Oh, well, that’s a big question. Another big issue that Volkswagen has is China. China is Volkswagen’s largest market, and they have been quite rapidly losing market share over there as they face growing competition from homegrown brands such as BYD. What’s happening now is that these Chinese EV makers, they’ve also announced quite ambitious plans to expand in Europe, and it is yet not clear how that is going to impact the market share of the European incumbents.

Kasia Broussalian
So now, you mentioned that VW is already looking at some potential cost-cutting measures. You know, closing some factories and even cutting some jobs. Do you think that will solve the problem?

Patricia Nilsson
I mean, that is exactly what is up for debate. The works council has heavily criticised Volkswagen’s management, saying they have failed to make the company more efficient, failed to develop a successful technology and software strategy, and would argue that cutting costs at this point won’t address the main issue, which is that consumers are choosing to buy other cars than Volkswagen cars.

Kasia Broussalian
And now VW is Europe’s largest carmaker. It has this huge history in Germany. What does it mean for the country more broadly that the company is struggling?

Patricia Nilsson
Well, Volkswagen is a symbol of Germany. It represents Germany’s industrial might. And the woes that the company is facing has sparked wider anxiety about the future of Germany’s industrial base. The automotive industry is not the only German industry that’s struggling. There have been a lot of complaints from business about high energy costs, high labour costs, what many argue is excessive regulation and bureaucracy. And the German economy relies very much on the well-paid jobs that these companies have been offering. And when you add up the issues that so many companies in Germany are facing, you can understand why politicians in Berlin start getting worried.

Kasia Broussalian
Patricia Nilsson is the FT’s Frankfurt correspondent. Thanks, Patricia.

Patricia Nilsson
Thank you.

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Kasia Broussalian
It’s been seven years since a fire killed more than 70 people who are living in a big apartment building in London. The Grenfell Tower fire was the worst in the UK since World War Two, and yesterday a public inquiry into the disaster finally gave its judgment. And it mostly involves government incompetence and corporate greed. The report blames three companies who made the flammable cladding that was used to cover the outside of the tower. It says that these companies deliberately manipulated tests about the safety of their products, and that government ministers and local officials and safety regulators, they turned a blind eye and it was often done in the name of saving some money. Now, UK Prime Minister Keir Starmer said that the government would stop giving public sector contracts to all these companies involved. He also promised to do more to address the problem of unsafe cladding on buildings.

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A giant gasfield called Zohr off the coast of Egypt was supposed to be a bonanza for the country. But it hasn’t exactly gone to plan. Egypt has even faced gas shortages this summer. Heba Saleh has been looking into what went wrong and she joins me now. Hey, Heba.

Heba Saleh
Hello.

Kasia Broussalian
So tell me more about Zohr and the hopes that Egypt originally had for it.

Heba Saleh
Zohr is a giant gasfield which started operating in 2018, and it’s being operated by Eni, the Italian company, and by other international oil companies. And the hope when it was launched was that Egypt would become self-sufficient in natural gas, and it would no longer need to import gas. What’s happened, however, is that after a few years of exports, Egypt’s natural gas output started to decline. And this has led to shortages over the summer.

Kasia Broussalian
Yeah. And explain that a little bit more. What exactly went wrong with this project?

Heba Saleh
Well, what seems to have happened is that Egypt had a foreign currency crunch since 2022, and this has meant that it has accumulated arrears, debts that the Egyptian government has towards the international companies which produce oil and gas. But Egypt’s fallen behind on its payments. Now, these international companies, they’ve slowed down exploration and production. However, we also hear from experts that east Mediterranean gasfields tend to decline quickly. There have been stories about overexploitation of Zohr, but both Egypt and Eni have denied this.

Kasia Broussalian
Got it. And you said that the country has faced shortages. What has that actually looked like?

Heba Saleh
The gas shortage has meant that Egypt could not generate as much electricity as it needed over the summer. This year has been heatwave after heatwave, and this has driven up air conditioning consumption. All this has meant that in the summer, there have been blackouts every day for 2 to 3 hours, sometimes more. And this, of course, is very disruptive for businesses, for individuals. So it did provoke quite a bit of anger, which was expressed mainly on social media.

Kasia Broussalian
Yeah, it sounds like it’s been a pretty painful summer. So I guess then what sort of solutions is Egypt looking at?

Heba Saleh
In the short term, Israel is expected to bring more gas online. A lot of this will be piped to Egypt because Egypt is the nearest accessible market for Israeli gas. Egypt has restarted paying its dues to international oil companies, and the prime minister said Egypt has plans to go back to what he described as its normal natural gas output levels next year. And longer term, developing solar and hopefully finding more gas in Egypt so that at least Egypt would minimise imports because these are very costly. They’re a drain on foreign currency and exports bring in foreign revenue.

Kasia Broussalian
Heba Saleh is the FT’s Cairo correspondent. Thanks, Heba.

Heba Saleh You’re welcome.

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Kasia Broussalian
You can read more on all of these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.

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