Germany's economy has seen some of its largest corporations make significant moves away from the country since its manufacturing sector entered a recession over two years ago. Now, both Volkswagen and Intel appear ready to inflict further damage on the nation's financial stability, contributing to what increasingly resembles a downward spiral for the beleaguered nation.

Volkswagen, once the pride of Germany's industrial sector, is growing disillusioned with its home market, which it perceives as exacerbating its challenges in enhancing profit margins.

For the first time in its 87-year existence, Volkswagen is contemplating the closure of its plants in Germany, where it employs approximately 300,000 individuals, as the company intensifies its efforts to achieve €10 billion in cost savings.

In a statement released on Monday, Volkswagen CEO Oliver Blume lamented the decline of Germany's industrial strength and its impact on his company, which is facing sluggish electric vehicle adoption, decreasing consumer demand, and the looming threat posed by inexpensive Chinese electric vehicles.

“The economic landscape has become increasingly challenging, and new competitors are entering the European market,” Blume remarked in his statement. “Germany, in particular, is losing its competitive edge as a manufacturing hub.

“In this context, we must take decisive action as a company.”

The German Dilemma

Germany's manufacturing landscape is facing significant challenges, placing Chancellor Olaf Scholz in a precarious situation.

Since early 2022, the manufacturing sector in Germany has been in a recession, primarily due to the loss of affordable Russian energy following the invasion of Ukraine, a decrease in demand from its major export partner, China, and waning consumer confidence domestically.

In August, the manufacturing Purchasing Managers' Index (PMI) for Germany, which has not seen growth for over two years, dropped to a five-month low of 42.4, in stark contrast to a global increase in manufacturing activity. A PMI reading below 50 indicates a contraction in the sector.

"The prolonged recession in Germany's manufacturing industry is lasting much longer than anticipated," stated Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. "August recorded a significant decline in new orders, extinguishing any hopes for a swift recovery."

"Historically, over the past three decades, the industry has typically bounced back within 20 months of the onset of a recession. However, this time is different, with China emerging as a key factor," de la Rubia noted.

"The nation is intensifying its efforts, competing directly with German industrial firms—not only in China but also within Germany and other vital markets, particularly in the automotive and mechanical engineering sectors."

German businesses have been attentive to the warnings emerging from within the country, recognizing that the ongoing economic downturn may signal the onset of a prolonged trend.

In the previous year, German firms invested $15.7 billion in capital projects in the United States, shifting their focus away from both China and Germany itself. This investment was significantly higher than the $5.9 billion recorded in 2022.

Additionally, other international corporations that have previously invested heavily in Germany are starting to reconsider their commitments.

Intel, facing its own challenges, is evaluating its future in the country.

According to Reuters, Intel is contemplating the possibility of pausing or even canceling its plans for a €30 billion ($33 billion) factory in Magdeburg, eastern Germany, as the semiconductor giant seeks to implement cost-saving measures. The German government had pledged €9.9 billion ($10.9 billion) to support the project when it was announced in June of the previous year.

An Intel spokesperson did not provide an immediate response to a request for comment.

The news of major corporations reassessing their operations in Germany presents a significant challenge for Chancellor Scholz.

In the context of a struggling economy and increasing populism, Scholz is contending with a resurgence of the political far right. Recently, the Alternative for Germany (AfD) party made history by becoming the first far-right party to win a state election in Germany since 1949, highlighting the difficulties Scholz faces in persuading both German businesses and the public regarding his government's direction.