An attempt by Volkswagen’s top executives this week to defend their unprecedented plan to close some German factories to 25,000 workers at the carmaker’s Wolfsburg headquarters was met with chants of “We are Volkswagen — you are not”.
Since chief executive Oliver Blume took the helm of Europe’s largest carmaker two years ago, the region’s car industry has been buffeted by strong headwinds, weak demand for battery-powered vehicles at home and stiff competition from local electric vehicles in the Chinese market. His solution: rip up a three-decade-old job security guarantee and break the taboo of shutting down plants in Germany for the first time in its 87-year history.
In just a few years, “the automotive industry has changed massively”, Blume told employees.
The transition to EVs has been brutal for Germany’s automotive sector. The industry has had to grapple with rising costs as it invests heavily in battery technology while consumer demand has shifted to hybrids.
Car suppliers such as Bosch, Continental and ZF Friedrichshafen, among the world’s largest, have resorted to cutting tens of thousands of jobs as both margins and demand fall. VW, which agreed a job security agreement in 1994, has been unable to drastically reduce jobs, squeezing margins.
Once the world’s biggest carmaker, its market capitalisation is now just over half of China’s BYD.
For Blume, the stakes are also high. Herbert Diess, his predecessor, was removed just months after he questioned the size of VW’s workforce. Now, even Chancellor Olaf Scholz has weighed in as worries mount over the future of the German car industry. If Blume succeeds in closing one or more German plants, it would be “a revolution”, according to longtime industry watchers.
“We have a problem in Germany with high costs, a lot of inefficiencies as well as government rules,” said Ferdinand Dudenhöffer from the University of Duisburg-Essen. “And the VW problem is that . . . you’re in a situation where you can’t change anything. It’s like a state-owned company.”
Chief financial officer Arno Antlitz pointed to the severity of VW’s situation when he told workers that the European car market has shrunk 13 per cent in annual vehicle sales, compared with pre-Covid levels. For VW, that meant it was selling roughly half a million cars less in the region, equivalent to the annual output of two factories.
“The market is simply no longer there,” Antlitz said.
Daniela Cavallo, chair of VW’s powerful works council, disagreed, arguing that the company’s issues stemmed from its leadership. “Volkswagen is suffering because the board of management is not doing its job,” she told the meeting.
Its executive board is not alone in having difficult negotiations with its works council, which gives employee representatives a right to influence and vote on the company’s strategy. But VW’s works council, which holds half the supervisory board seats, has a strong ally in the northern state of Lower Saxony, which holds 20 per cent of voting rights, and prioritises employment.
VW’s flagship brand last year pledged to reduce spending by €10bn by 2026 — a project that has hinged on early retirement programmes, with some workers offered up to 85 per cent of their full pay, and voluntary redundancy packages for which the carmaker has set aside €900mn.
But after failing to meet the savings target by €3bn, executives want more direct action. On Wednesday, Blume stressed that its car brands that were dependent on volume were at particular risk.
VW’s rivals in the mass market segment have also struggled with softening consumer demand and the rapid pace of change in the industry.
Renault’s chief executive Luca de Meo has described the sector as “radically volatile and unpredictable”, calling for broader co-operation between European carmakers to survive the upheaval even as talks with VW to produce cheaper EVs collapsed this year.
Weak performance in the US has also led to sharp profit and share price declines at Stellantis, which is behind the Jeep, Peugeot and Fiat brands. Like their German peers, the French carmakers face strong resistance from unions and have mainly relied on not replacing retired workers.
European sales growth of EVs has fallen as a rollout of charging infrastructure slowed and governments, including Berlin, withdrew subsidies that were offered to consumers.
Carmakers have responded with cash discounts, hurting profit margins that on average are already lower than for petrol-driven cars, partially due to heavy investments required for the technological shift. VW, for instance, has offered customers in Germany a €3,570 discount when buying a vehicle from its ID range of electric cars, with similar offers in other markets.
For the first half of 2024, the group reported an 11 per cent fall in operating results compared with the year before, while operating margins fell from 7.3 per cent to 6.3 per cent. Margins at the VW brand, which the €10bn cost-cutting programme were meant to boost to 6.5 per cent in 2026, stood at 2.3 per cent in the first half of 2024.
“The challenge is that there is no single factor that you can pinpoint to fix the demand issue for electric vehicles,” said Michael Tyndall, European autos analyst at HSBC.
In Germany, 360,000 electric cars were sold in the first eight months of the year — more than a fifth less than the same period in 2023, according to the VDA, the German auto industry association.
China is a growing concern, too. VW has been losing market share in its most profitable region and Chinese EV brands such as BYD are making plans to conquer Europe.
VW has opposed an EU decision to slap tariffs on cars imported from China, partially as it fears retaliatory measures but also because several of its brands, such as Cupra, make vehicles meant for Europe in Chinese factories. VW would not disclose how much the tariffs are costing it, but noted that it had been paying higher rates than many Chinese rivals.
The tariffs designed to protect the region’s companies, VW said, have had “an additional impact on the price competitiveness of European carmakers”.
Analysts and many investors have responded positively to VW’s new cost-cutting plans. Matthias Schmidt, an independent auto analyst, said the challenges faced by the company were severe enough for its works council to yield.
“This time the unions and Daniela Cavallo are on a head-on course with a reality check,” he said. Elon Musk’s Tesla and Chinese EV makers have in just four years grabbed more than 5 per cent of the European market share from its incumbents, he noted.
But Cavallo is gearing up for a fight. Her fierce opposition to former CEO Diess’s mere hint at cutting up to 30,000 jobs played a pivotal role in his ousting.
Labour costs were only a fraction of VW’s cost savings shortfall, she said. Cash bonuses offered to EV customers and the failure to sell higher-priced cars had cost the company “hundreds of millions of euros”.
Describing the closure of factories in Germany as a red line not to be crossed, she said: “Our plants are the driving force for entire regions around them.”
German deputy chancellor Robert Habeck on Tuesday echoed her sentiment, stating that VW “bears a great deal of responsibility” not only for the country’s famed automotive industry but for its future as an industrial powerhouse “and it should stay that way”.
The crisis at VW has spurred the German government, which ended its EV subsidy late last year, to discuss potential new tax breaks for battery-run cars.
Analysts at Morgan Stanley have warned that attempts to keep cheaper Chinese cars out of Europe and the US were keeping prices high and could “keep EV penetration in developed markets well below 20 per cent through the end of the decade”.
While rivals such as Toyota and Stellantis hedged their bets by developing hybrid cars, VW bullishly opened new factories dedicated only to electric models — many of which have since been running at reduced capacity.
Dudenhöffer at the University of Duisburg-Essen is sceptical that the government and unions are ready to accept Blume’s radical fixes. IG Metall, the German metalworkers’ union, on Thursday indicated that it might be willing to consider reduced working hours for workers. However, he warned that VW could not afford a compromise.
Nor does VW have much time left. “We still have a year, maybe two years, to turn things around. But we have to make use of this time,” Antlitz said.
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