€230 billion ($240 billion)!

That’s the staggering debt Volkswagen (VW) has sitting on its books. That makes it one of the world’s most indebted companies. But if you think that’s the only problem the German automaker has, fasten your seatbelts.

Its profits have also hit a speed bump – down 20% year-on-year in the first nine months of 2024. Now, VW is considering a drastic move – closing three factories in its home country of Germany.

If that happens, tens of thousands of people could be left unemployed – a blow to the heart for a country where VW is the largest employer.

That spells trouble for the world’s second-largest carmaker.

So what’s driving this crisis, you may ask.

To understand this, we need to go back in time and look at where it all started.

In 1937, the German government led by Adolf Hitler founded Volkswagen.

What was the idea? To make an affordable, fast car that was priced below 1,000 Reichsmarks, the currency of the time. The engineer behind the design, Ferdinand Porsche, designed the KdF-Wagen, which we now know as the Beetle.

Of course, World War II halted production, but VW got back on its feet after the war.

Of course, the car’s Nazi origins and its tiny size didn’t convince Americans at first. But in 1959, a brilliant advertising campaign increased the Beetle’s appeal. Suddenly, it was America’s favorite foreign car.

Then came a major change. The German government sold 60% of VW’s shares to the public, privatizing the company. Soon after, VW reached a historic turning point. The Beetle broke new records, surpassing Ford’s legendary Model T, which had held the record for 15 million vehicles produced worldwide since the early 1900s.

From that point on, VW was unstoppable. By the 1990s, it went on a buying spree, buying up flashy brands like Škoda, Bentley, Lamborghini, Ducati and Scania trucks. Its market share in Europe grew from 12% in 1980 to 25% in 2020. At one point, it even overtook Toyota to become the world’s largest carmaker. It was on the rise with a bold, or some would call cheeky, slogan – “Das Auto” (The Car).

But 2015 changed everything.

That year, the US Environmental Protection Agency (EPA) revealed a shocking scandal. VW wasn’t playing fair. It had been manipulating its cars to cheat emissions tests, and had been allowing them to exceed 40 times the legal nitrogen oxide limit for over a decade!

If you’re wondering how it managed to do this for so long, it actually had a little trick up its sleeve: a “spoofing device”. It was a sneaky piece of software designed to beat emissions tests.

It would track details like speed, engine activity, air pressure, and even steering wheel position to determine whether the car was in a controlled test environment. This would put the car into a special “clean mode.” In this mode, the engine emits far less pollution than it does on the road. But as soon as the test was over, the car returned to its normal polluting mode.

By the time the truth came out, VW’s so-called “clean diesel” vehicles had managed to generate a great deal of interest, accounting for nearly a quarter of U.S. sales.

When the scandal broke, the backlash was swift and brutal. VW’s once pristine image was tarnished. Its shares plummeted, and customers were reluctant to buy its cars, especially in the U.S.

The financial blow was immense; €31 billion ($35 billion) in fines and payments would have left its coffers empty by 2021.

But VW knew it had to bounce back and repair its reputation. It had to make great cars again and face its competition squarely.

Then came another blow.

The pandemic hit global economies hard, but Germany’s struggles were particularly dire. Its economy crawled and never fully recovered. Germany’s GDP has barely risen to 1% above its pre-pandemic level, far behind the 5% growth in the rest of the eurozone and the more than 10% growth in the US.

Things got worse with the Russia-Ukraine war. Russia’s invasion sent energy costs soaring, especially after it cut off gas supplies to much of Europe. Germany, which is heavily dependent on Russian energy, has been left scrambling. Energy-hungry industries—chemicals, metalworking, and yes, even automakers like VW—have felt the pinch. Rising input costs have squeezed VW’s margins even further.

As if that weren’t enough, the EU (European Union) has added another challenge. In 2023, it announced plans to ban gasoline and diesel cars from 2035. This meant VW had to make a drastic pivot away from the internal combustion engines it had long been known for, and toward electric vehicles (EVs).

But the transition to EVs wasn’t without its problems. VW was late to the EV party, and the timing couldn’t have been worse.

Germany has ended EV subsidies after spending €10 billion to support 2 million electric vehicles since 2016, declaring the subsidy program a success. Without these incentives, Germans had little reason to switch to expensive EVs, especially the VWs with their higher price tags.

On top of that, VW faced another obstacle: a shrinking pool of skilled workers. An aging population made it difficult to find the young talent it needed to keep production running smoothly.

It was a perfect storm of challenges.

So what’s left?

Exports?

Well, that didn’t work either.

Take Germany’s trade with China, for example. In the 2010s, trade between the two countries was a win-win situation. Germany sold cars, chemicals, and machinery to China, while China supplied consumer goods, batteries, and electronics in return. But now, China produces most of these locally, at much lower costs. So, VW cars are no longer as competitive in China as they used to be.

Even in the US, VW struggled to understand the market. The cars it produced were either too small, too expensive, or both. By the time VW understood what Americans wanted, automakers in Japan and Korea had learned from VW’s mistakes and seized market share.

So yes, with domestic and international sales falling, VW expects to deliver only 9 million cars worldwide this year, down from 9.24 million in 2023.

Perhaps it sees cutting costs as the only way out.

But here’s the thing. Even if it does, it will affect the entire automotive sector. After all, the automotive sector is Germany’s largest, contributing 5% to GDP and employing around 800,000 people – around 40% of whom are at VW.

Cutting costs, even if it means dragging down its own country’s economy, may not help VW get out of its recession.

So the German automotive sector must urgently find a way out, or the inevitable end is not very promising.