What genocide? Volkswagen’s morally expensive bet on China – POLITICO

An annual meeting of Volkswagen shareholders in Berlin in May was disrupted by protesters, one of whom hurled the creamy confection at the assembled executives, forcing Chairman Hans Dieter Pötsch to flinch out of the way.

Among the subjects of their ire: A car plant some 3,500 miles away in the Chinese region of Xinjiang, where Beijing has carried out a campaign of mass detention, reeducation and forced labor that the United States has described as genocide of the Uyghur ethnic minority.

One topless woman in the room waved a banner with the words “End Uyghur Forced Labor” before the protesters were escorted away. Outside, other activists held up signs saying “Camps, forced labor, family separations: VW major shareholders in Lower Saxony must not remain silent about crimes against Uyghurs.”

Volkswagen denies it has ever utilized forced labor in Xinjiang. But it has been less willing to grapple with the broader accusation: That by maintaining the facility at the request of Beijing, the company — and by extension the German government, which supported the carmaker’s investments in China — is providing political cover for crimes against humanity.

“Even if there is no forced labor, it is such a big symbol for the Chinese government to show the world that they bring prosperity to the region,” said Eva Stocker, senior project officer from the World Uyghur Congress, an advocacy group for Uyghur rights and self-determination. “But we see it as a genocide.”

The rising criticism over Volkswagen’s presence in Xinjiang has been accompanied by a shifting in the political and economic winds. Russia’s war on Ukraine has kicked off a broader conversation about strategic dependency, with officials in Brussels and Washington calling for “de-risking” with regard to Beijing. At the same time, worries about climate change are upending the automobile market, with Chinese electric carmakers preparing to challenge legacy brands in Europe on their own soil.

This all poses a conundrum for Volkswagen, which led the Western charge into the Chinese market in the 1980s and remains dependent on business there for 15 percent of its pretax profit and 37 percent of its new car sales last year.

China’s treatment of Uyghurs is unlikely to be central to the discussions as German Chancellor Olaf Scholz hosts a Chinese delegation led by Prime Minister Li Qiang this week. But Volkswagen’s relationship to China, and the human rights abuses being carried out there, is illustrative of Berlin’s increasingly uncomfortable dependency on Beijing — and the challenges Germany is likely to face as the West seeks to turn de-risking from a slogan into action.

Slave labor

Potential complicity in genocide is a charge to which one might expect Volkswagen to be sensitive. When the company was founded in 1937 by the national labor organization of the Nazi Party, it used concentration camp prisoners as slave labor. Hundreds of infants kept at a children’s home run by Volkswagen were starved to death.

During the Holocaust, the Nazis sent their perceived enemies to extermination camps. In Xinjiang, human rights groups have documented mass incarceration, forced sterilization, the suppression of religious practices, including the burning of mosques, and the separation of hundreds of thousands of schoolchildren from their parents. Many believe these practices meet the definition of genocide as acts intended “to destroy, in whole or in part, a national, ethnic, racial or religious group.”

The United States government has denounced human rights abuses in Xinjiang as genocide, as have national legislatures in France, the Netherlands, the United Kingdom, Lithuania and Canada. The German Bundestag has not, though Foreign Minister Annalena Baerbock has called for a ban on goods made with forced labor and for investigations into China’s actions in Xinjiang.

Investigative journalists have found traces of forced labor camps within 15 miles of Volkswagen’s Xinjiang plant, which is a joint venture initiative with SAIC Motor, the largest state-owned automobile manufacturer in China. As POLITICO and other media reported, the use of forced labor was so rampant in the region that schoolchildren were organized by schools to carry out manual labor.

“By the plant, there are seven concentration camps … so this is what Volkswagen cannot deny, but they say they are not connected with them,” Erkin Zunun, the chief coordinator of the World Uyghur Congress based in Munich, said. “Nobody can say 100 percent there is no connection to forced labor.”

Ralf Brandstätter, the head of Volkswagen’s China operations, said after a visit to the Xinjiang plant in March that he’d found no evidence of forced labor. “I can talk to people and draw my conclusions. I can try and verify the facts [from joint venture partner SAIC], and that’s what I did,” Brandstätter said. “I didn’t find any contradictions,” he added, citing seven staffers he’d spoken to via translators.

Over the past few years, European diplomats based in China have made repeated inquiries into Volkswagen’s presence in Xinjiang, according to three diplomats granted anonymity to speak frankly about their exchanges. Time and again, they received the same answer. “They always insist there’s no forced labor, and that the minorities they hire in the local plant are not forced labor,” one of them said. “They don’t care what happens outside the factory.”

Volkswagen rejected the accusation that by being in Xinjiang, the company is complicit in the human rights violations being perpetrated there. “Will something change if Volkswagen leaves?” said a Volkswagen spokesperson speaking on condition of anonymity. “We have doubts about this.”

The spokesperson said the company pays its employees at the plant on average 30 percent more than other automakers in the region and has had practically no staff turnover in recent years. “We are offering around 250 workers and their families a good … living in the region,” the spokesperson said.

‘Devil’s agreement’

On its own, Volkswagen’s investment in Xinjiang — and the company’s decision to stay there despite human rights violations in the area — makes little reputational or economic sense.

Since the COVID shutdowns, the plant hasn’t been used for vehicle assembly or production, but rather as a sorting center for cars heading to local dealerships. Last year, Volkswagen says some 10,000 cars — an average of less than 28 a day — were cleared through the facility, with plans to increase this over the next few years. Staff at the site carry out water resistance checks, quality controls and assess driver assistance systems, a spokesperson said.

The investment has to be considered in the broader context of Volkswagen’s engagement with Beijing. Unrestricted access to the Chinese market is mission-critical for all German automakers, but for Volkswagen, it’s what makes it a global heavyweight brand. Nearly 40 percent of Volkswagen’s global car sales were in China last year, up from 31 percent a decade ago, according to data from the Center for Automotive Management in Cologne.

According to a senior Western diplomat, Volkswagen’s Xinjiang presence is part of a “devil’s agreement” that the Chinese government imposed on the German car company 15 years ago. Under the deal, Volkswagen had to agree to build a new factory in Xinjiang — which was and has remained an economic backwater — in return for permission for a dozen new plants in the economically vibrant eastern coastal area, as well as the booming central provinces.

“The misleading assumption is that we were forced, that we opened the plant as a push from the government in Beijing,” said the Volkswagen spokesperson. “That isn’t true. It was part of a greater plan — the Go West strategy,” referring to the company’s ambitions to expand into less developed parts of China.

Today, pulling out would risk jeopardizing relations with Beijing, as China often treats expressions of concern about human rights violations in Xinjiang as endorsements of what it sees as U.S. pressure on the country.

Volkswagen is determined to live with its contractual obligation with SAIC to stay in Xinjiang at least until 2030, Volkswagen chief lobbyist Thomas Steg told journalists in March. “This plant is owned and operated by a non-controlled joint venture, all the decisions have to be taken unanimously,” the company spokesperson said.

In a written statement, Volkswagen Group said it “stands firmly against” forced labor, adding it “takes its responsibility for human rights very seriously in all regions of the world, including China.”

“In a globalized world, we can only really strengthen Germany as a business location if we maintain and further develop our relations with major economic players such as China,” it said.

Green evolution

While Volkswagen has traditionally enjoyed strong support from Berlin for its investments in China, the political winds back home have started to shift.

The main push comes from the Green Party, a junior partner in Germany’s coalition government, and its calls for “values-driven” diplomacy. In May 2022, the German Economy Ministry, led by Green Party heavyweight Robert Habeck, announced it would stop all investment guarantee schemes for companies looking to invest in the Xinjiang region of China due to the deteriorating human rights situation.

Volkswagen’s investment guarantees were not extended because the interministerial committee that decides on them determined that the company “has too little control and knowledge … within the joint venture to adequately counter the human rights risks,” a German official said.

Foreign Minister Baerbock has also taken a tougher line, warning companies that they won’t be bailed out with taxpayers’ money if “things go wrong” in other parts of the world. Her stance has not gone unnoticed by Beijing. When Baerbock visited China in April, her counterpart Qin Gang warned Berlin it should be thinking about its business interests.

“Both sides should maintain and advance existing cooperation, create a favorable environment and stable expectations for cooperation between enterprises of the two countries, and provide stronger growth drivers for the global economy,” Qin said.

Germany’s first National Security Strategy, released last week, criticizes China for disregarding human rights, although the document does not go further into detail. Berlin also plans to release a dedicated China strategy in July.

For the automaker, the Green Party’s China policy has become a headache. “It’s crazy what Habeck and Baerbock are doing at the moment … [They] just try to bring confrontation to the world,” said Ferdinand Dudenhöffer, director of Center for Automotive Research, an industry group with close ties to Volkswagen and to Chinese carmakers. “It’s really crazy.”

Dudenhöffer insisted the German carmaker had done everything within its capacity to ensure good labor standards in the Xinjiang plant. He didn’t believe the company had broached with Beijing the possibility of the plant’s closure or the transfer of its ownership to its Chinese partners. “I think they discussed it internally, but … if you start to talk about that issue [with the Chinese], then you start to go into opposition with the most important market you have in the world,” he said.

The EV threat

The irony is that Volkswagen’s morally expensive bet may not even pay off.

After enjoying decades of market leadership, the German auto giant is struggling to cope with the impending demise of the combustion engine and is facing unprecedented challenges from Chinese-made electric vehicles, which are now set to become the “greatest risk” facing European carmakers, according to a report by Allianz Trade.

Even as Volkswagen doubles down on the Chinese market, Chinese carmakers with cheaper battery technology are making a play for Europe, with brands like BYD, Great Wall, Nio and Xpeng launching across the Continent.

While electric vehicles only make up around 5 percent of European sales, EU regulators have mandated a phaseout of the combustion engine by 2035. One analysis predicts Chinese imports could make up nearly a fifth of all European sales by 2025 — bad news for local legacy brands.

Even if Volkswagen does find a way to hold out at home, its investments in China could be at risk if Europe raises trade barriers against Chinese vehicles, as France has been calling for. Such a move would almost certainly lead to reciprocal action from Beijing, which has not shied away from using its regulatory muscles to push its diplomatic interests.

In 2017, for example, when South Korea sought to buy a missile defense system from the U.S. in order to stave off the threat from North Korea, Beijing vocally opposed the move, and sales of Hyundai and Kia models subsequently plummeted, sparking rows with dealerships and plant closures.

Under President Xi Jinping, China has also sought to diminish the market share of foreign companies. In telecoms, for example, European players like Ericsson and Nokia have been crowded out by homegrown heavyweights Huawei and ZTE. China may have needed Western companies to jump-start its industrial development, but with Xi seeking to present China as an alternative to the West, that utility is quickly fading.

In other words, for Volkswagen’s executives, cake-throwing protesters may be the least of their worries.