(Bloomberg) -- Volkswagen AG is considering unprecedented factory closures in Germany, setting up a showdown with powerful unions as the country’s most important industry fights for its future.
The potential measures also include trying to end the company’s three-decades-old pact with workers to keep jobs secure, the company said Monday. VW’s main target is its underperforming namesake passenger car brand, whose profit margins are getting squeezed amid a sputtering transition to EVs and a consumer spending slowdown.
Any shutdowns would mark the first closures in Germany during the company’s 87-year history. VW shares closed 1.3% higher after the news, paring this year’s losses of 13%.
“The economic environment has become even tougher and new players are pushing into Europe,” VW Chief Executive Officer Oliver Blume said in a statement. “Germany as a business location is falling further behind in terms of competitiveness.”
A full-blown labor dispute would be a major test for the CEO — who also heads up the Porsche sports car brand — after union clashes felled a number of his VW predecessors.
Raising returns at the VW brand has become tougher with higher logistics, energy and labor costs. The nameplate’s margin fell to 2.3% during the first half, compared to 3.8% a year ago. The company has also lost momentum in its biggest market, China, with its EV model range far behind competitors, while cheaper Chinese electric cars are pushing into Europe.
The looming clash at one of Germany’s biggest companies threatens a postwar consensus where workers hold significant sway. Decades-old codetermination agreements are coming under pressure as new competitors target Germany’s industrial bedrock and populist parties surge.
On Sunday, election results in two eastern German states delivered another humbling for Chancellor Olaf Scholz’s Social Democrats and his two coalition partners. The Alternative for Germany party placed second in Saxony, where VW owns an EV-making plant in Zwickau, and won the elections in neighboring Thuringia, the first triumph for a far-right party in a German state ballot since World War II.
“I am deeply concerned that the VW Group management is no longer ruling out plant closures and compulsory redundancies,” SPD lawmaker Bernd Westphal, economic policy spokesman for Scholz’s parliamentary group, told Bloomberg News. “The SPD parliamentary group is firmly on the side of the employees and expects constructive talks” with the works councils and unions.
Supervisory Board
VW employs about 650,000 workers globally, almost 300,000 of which are in Germany. Half the seats on the company’s supervisory board are held by labor representatives, and the German state of Lower Saxony — which owns a 20% stake — often sides with trade union bodies. The setup is part of a labyrinthine governance system where management must gain the billionaire Porsche-Piech family and labor side support for major decisions.
Works council head Daniela Cavallo said VW’s management warned that the brand making the Golf and Tiguan models risks losing money, according to a separate statement. The company is weighing the closure of at least one larger carmaking factory and one component site in Germany, it said, alongside abolishing wage agreements.
VW is also “questioning” the production of a compact electric SUV model at the main carmaking site in Wolfsburg from 2026, key to filling the factory’s capacity, the works council said. The Trinity model, currently planned for Zwickau, is at risk of being delayed.
Volkswagen last year made roughly 9 million vehicles, compared with total capacity of 14 million.
Lower Saxony said it supports VW’s cost-cutting efforts, adding alternative options must be explored in talks with labor representatives.
“We expect that the issue of factory closures will not arise due to the successful use of alternatives,” said Stephan Weil, Lower Saxony premier and VW supervisory board member. “The state government will pay particular attention to this.”
Other Clashes
Previous clashes ended or shortened the tenures of top executives including former CEO Bernd Pischetsrieder, ex-VW brand chief Wolfgang Bernhard and Herbert Diess, Blume’s predecessor as CEO. All three tried to push through efficiencies, particularly at VW’s domestic German operations.
The plans risk worsening the economic malaise in Germany, where industrial companies are reining in investments. VW’s market valuation has sunk to around €51 billion ($56.5 billion), even as the company continues to rake in profits, with operating income of €22.6 billion last year.
Germany’s unpopular ruling coalition government, led by Scholz’s Social Democrats, is beset by infighting with abrupt policy changes wreaking havoc. Last year, the government suddenly removed EV incentives after lawmakers struck down budget plans. Cratering sales in Europe’s biggest car market have been a drag since, wrong-footing a range of major suppliers including Robert Bosch, ZF Friedrichshafen and Continental.
“The automotive industry is facing major challenges worldwide and is undergoing a profound transformation that requires companies to make strategic decisions,” the Economy Ministry said in a statement. “It is essential that companies and management act responsibly and in close consultation with the social partners.”
VW’s plans on further cutbacks follow a July announcement detailing the potential closure of a site in Brussels making electric Audis. The factory has been struggling with high costs and poor demand for the luxury Q8 e-tron, the sole model it produces. At the time, the carmaker cut its outlook for the year, in part because of likely costs involved in shuttering the plant.
The last time VW closed a major car factory was more than 30 years ago, when the company shut down what was then its lone US assembly plant, near Pittsburgh.
The Volkswagen brand has component production sites in Brunswick, Kassel, Salzgitter, Hannover and Chemnitz, as well as carmaking plants in Wolfsburg, Emden, Zwickau, Dresden, Osnabrück and Hannover.
--With assistance from Kamil Kowalcze and Michael Nienaber.
(Updates with SPD comment in 10th paragraph, Economy Ministry comment in 22nd paragraph)
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