Thread by @daveg

As if it wasn’t clear already VW illustrates the giant, ticking time-bomb at the heart of Europe’s economic model.

The European economy is based on two things, industrial production and selling the past.

Selling the past includes tourism, where nice places have a history and the story increases the margins. Selling the past also includes things like fashion, perfume and luxury goods where the brand associations with history, also increases margins.

Industrial production is obviously about making things. But it is no longer about making industrial era things. Cars are a great example here. as although EVs look the same as the type of cars that Germany produces, the way they are produced and their business model and margins are totally different.

ICE (internal combustion engine) vehicles are industrial era products. They have five times as many moving parts as electric vehicles and most of their margins are from expert assembly and wholesale sales to dealerships and then maintenance and replacement of these parts over time, via dealerships, who can sell at low retail margins. A vast ecosystem of companies surrounds the OEMs (car brands).

The economic model of these large industrials is based on the, ‘them and us’’, industrial era social pact between workers and owners and mimics the state itself. Industrial workers are unionised and get defined benefit pensions but there is no shared ownership or options pools and all profits go to the top, often family dynasties.

Over time, these companies become more like a family owned pension funds rather than a manufacturer. They are highly resistant to change, structurally, so they can only innovate within the existing paradigm, not for expertise reasons (BMW management went all in on electric a decade ago, but the unions pushed back) but structural ones.

People are currently blaming management for the disaster that is unfurling at VW, but this is mistaken. The entire organisation resists structural change outside of the industrial paradigm.

EVs, on the other hand, are digital era products. Their margins come from batteries and software. Asia has control of the entire battery supply chain and Asia and the US have control of the software one. Europe is nowhere. The German, French and Italian car manufacturers are like Nokia, post smartphone.

EVs are much simpler and do not need the vast ecosystem of parts suppliers or the dealerships, since the maintenance model that the dealerships depend on doesn’t work.

EVs, as digital era companies have not accrued the legacy of past workers’ pensions or family dynasty ownership and are able to offer more equity to both workers and capital markets. With interests diversified and aligned and with workers’ skin in the game (in the US style, options pool model) they are also able to change.

This is the digital era model, and all companies will eventually follow it. Digital era manufacturing is completely different and requires a complete restructuring of the manufacturing model. But this is almost impossible to achieve with existing companies unless there is massive innovation via insulated vehicles such as corporate venturing and m&a.

Germany is very, very good at making things that will not change in the digital era.But it is making the wrong things in the wrong corporate structures and with the wrong bureaucratic and fiscal incentives. It needs a massive, strategic shift to the digital era, or Europe’s manufacturing core will implode and take the rest of Europe with it.