The Peter Zeihan Podcast Series - The German Failure & Volkswagen || Peter Zeihan

Episode Date: December 12, 2024

The Germans are on a steep uphill climb trying to figure all their s*** out. On the chopping block today is Germany's automotive and industrial sectors (with Volkswagen being our guinea pig).Join the Patreon here: https://www.patreon.com/PeterZeihanFull Newsletter: https://mailchi.mp/zeihan/the-german-failure-volkswagen

Everybody, Peter Zine here, come to you from the Witt Museum in San Antonio, and we're going to talk today about what's going on in Germany. Specifically, we have several thousand mechanics and machinists that are striking as part of a renegotiation and a cancellation program done by Volkswagen, the German automaker. A very, very short version is Volkswagen's had a really tough time in the last several years. First, they lied about their emissions, then they lied about lying about their emissions. and then they started losing clients around the world. Demand for the cars are down sharply, and the company is trying to right size, which means closing several facilities.

And so the people who work in those facilities are striking unless the facilities are kept open. And if that sounds like it's not a particularly good plan, that's because this isn't a particularly good plan. The people are desperate because the company is going under. In fact, the entire German auto industry is in the process of dying along with the bulk of the German industrial plant. And understand that.

Five big points. First of all, energy. The Germans used to get almost all of their natural gas and the stuff that they used to source their electricity system from Russia at prices that would probably be safe to consider it below the global average. With the Ukraine war, the Germans took a moral stance and decided to stop using that stuff,

which drastically drove up not just the price of power, but of the price of the raw materials that they used to fuel their chemical system. And without their chemical system, it's kind of hard to do any manufacturing down the stream. And so we actually see German chemical companies physically dismantling their infrastructure and shipping it over to places with better economics and cheaper energy places like Louisiana. It makes it really hard to have downstream manufacturing if the core stuff isn't even there.

Second, China. The Germans have made a huge amount of money building industrial plant in the Chinese system. Well, you do that for long enough and eventually the pork backwards country that you're sending stuff to starts making stuff. And now the Chinese are making cars that are competing with the Germans on price around the world. Because, you know, Volkswagen's are great vehicles, but not everyone can spend $50,000, $60,000 on a car. If you only have 20 or 30, a Chinese vehicle will do just fine. And so the entire bottom of the market has been taken over by the Chinese, and that leaves the Germans with a smaller pie. Third piece is technology.

The Europeans thought that electric vehicles with a future invested very heavily in it. Volkswagen is no exception to that. And it turns out it hasn't really worked. Not only are consumer preferences going in a different direction. People are starting to do the math on the production and the full cycle cost of an EV. And they're discovering in most cases it's at best to wash. And in places like Germany, where solar and wind are very poor sources of energy, you actually have increased your carbon footprint.

So sales of those products are down, which has hit Volkswagen very, very hard. But the bigger issues have to do with demographics. The birth rate in any country tends to drop as you urbanize, and Germany was the first country in the world to urbanize over a century ago. Well, you fast forward to today, and it's not that they're running out of children. That happened in the 70s and 80s. They're now running out of people in their 50s, and we're looking at a collapse in two ways. First of all, on the demand side for vehicles, some version of the German story is happening throughout the advanced world, most notably in Europe. And so demand for cars has gone down. If you're a car company, you can see the problem.

The other half is a collapse in workers, worker supply. Because we're looking at a mass retirement of the German system in real time over the next several years. If you fast forward, just about eight years from now, there's not going to be a workforce left. So labor costs are skyrocketing in the interim. So if you've got fewer people buying your cars and fewer people available to make your cars, labor costs go through the roof, the vehicles get more expensive,

you become less competitive. We are looking at some version of this happening throughout not just the German automotive sector, with companies like Mercedes in a very similar position, we're looking at it throughout the entire German economic structure, which means the Germans are going to have to find another way to manage their system that is not based on how we currently understand supply and demand and labor and capital, and they're going to have to invent that before they can transition their system away from it. In the meantime, if you're a highly skilled German worker,

and let's be honest, the Germans are still among the best in the world at doing everything that they're good at. Germany is not the place for you. Now, the last time the Germans had this level of dislocation politically and economically, we saw a massive outmigration of more than 5% of the population of the country within just a few years. The single largest beneficiary of those highly skilled workers was the United States. It was the 1840s, 1850s.

We took in over a million Germans and eventually settled the places. that we currently call Wisconsin and Texas. So there is an amazing play here for the United States, which is already having crippling labor shortages. Being able to extend an offer for Germans to make a new home is a brilliant idea. But first, Americans have to get their politics in order and realize that their desire for fewer migrants doesn't really match up with their labor needs.

But, you know, one miracle at a time.