Why Volkswagen Has Had to Slam the Brakes On

Volkswagen is planning to shut at least three factories in Germany, lay off thousands of workers and cut pay by 10% for 140,000 more.

Thomas Schäfer, CEO of the VW brand, said: “We currently don’t make enough money from our cars, while our costs for energy, materials and personnel have continued to rise. We cannot continue as before.

“These cuts aren’t just Volkswagen trying to bolster its margin … the company needs them to survive.”

VW is aiming for a fundamental restructuring to cut costs. It had initially warned last month that it had the equivalent of two factories of extra capacity in Germany.

If announced closure plans go ahead, this would be the first time Volkswagen has shut a factory on home soil in its 87-year history.

Its remaining manufacturing sites will reduce capacity.

VW currently has 10 plants and 300,000 employees in Germany.

Real-terms pay cuts could amount to as much as 18% after a two-year pay freeze, the company’s worker representative General Works Council warned. 

“All German VW plants are affected by these plans,” General Works Council Chairwoman Daniela Cavallo said, speaking at VW’s main plant in Wolfsburg. “None is safe.”

The Works Council said the factory in the northern city of Osnabrück, in Lower Saxony, which recently lost a major contract with Porsche, VW’s subsidiary, was threatened with closure.

However, that could prove politically contentious as Lower Saxony’s government is Volkswagen’s second-largest shareholder, with 20% of voting rights. The state’s leader, Stephan Weil, last month said plant closures should not be considered.

Cavallo also raised the prospect of industrial action if VW management did not back down. 

She said the company was “playing with the massive risk that everything will soon escalate here” and workers will “do what a workforce has to do when it fears for its existence”.

Why Volkswagen has had to slam the brakes on

The deeper-than-expected cuts come as the company faces weak sales and slow expansion in the electric vehicle (EV) sector facing tough competition from Chinese manufacturers.

Observers say the unheard-of German restructuring is what amounts to comeuppance for having allowed issues at Volkswagen to fester for years.

Overcapacity and high costs 

The would-be actions reflect the scale of the challenges facing a company that has neglected to address overcapacity and persistent high costs. 

Schäfer said: “Our factory costs are currently 25 to 50 per cent above target. This means that some of our German plants are twice as expensive as our competitors.”

Falling Chinese demand

Car companies are complaining of falling demand in many key markets after interest rates rose in recent years after the historic lows of more than a decade following the global financial crisis. Chinese sales in particular have struggled.

Electric switchover

Volkswagen has had to invest heavily to switch production from petrol and diesel cars to battery electric, while Chinese rivals have enjoyed lower switchover costs. At the same time, slowing demand for EVs have made incumbent carmakers such as Volkswagen less keen to make the job-saving investments.

Meanwhile, the VW brand has stumbled while shifting to electric cars, with its ID family of EVs selling poorly at home and abroad amid early issues with software. 

Volkswagen’s other mass-market brands — Spain’s Seat and Škoda in the Czech Republic — offer comparable models that tend to be cheaper, competing for similar customers.

Stagnating European market

VW still has a quarter of the European automobile market but the market itself has shrunk by two million vehicles each year since 2020. The sector was “stagnating and will not recover in the foreseeable future”, VW said.

Contracting economy

Major job cuts in Germany would exacerbate the woes of Europe’s largest economy, which is expected to contract in 2024 for the second straight year. Germany’s industrial giants have lamented high energy costs following the loss of cheap natural gas, due to Russia’s invasion of Ukraine.

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