(Bloomberg) -- Volkswagen AG is embarking on an unheard-of German restructuring in what amounts to comeuppance for having allowed issues at its namesake brand to fester for years.
The manufacturer plans to close at least three German factories, shrink all other remaining sites in the country and slash wages by 10% for around 140,000 workers. It’s also looking to freeze pay next year and in 2026, and abolish one-off payments to long-tenured employees.
The would-be actions are astonishing in their breadth and depth, reflecting the scale of the challenges facing a company that’s neglected to address overcapacity and persistently high costs. While Volkswagen staff still have the protection of a powerful works council, as well as government ownership and supervisory board representation, this may no longer be enough to insulate the namesake VW brand’s bloated and increasingly uncompetitive operations.
“We currently don’t make enough money from our cars, while our costs for energy, materials and personnel have continued to rise,” Thomas Schäfer, the VW brand’s chief executive officer, said Monday. “We cannot continue as before.”
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.
Volkswagen declined to comment on the specifics of the cuts it’s seeking. The details emerged Monday from assemblies of more than 50,000 employees across Germany, including in the company’s hometown of Wolfsburg, where works council chief Daniela Cavallo summed up the plans as “starvation” and “a weakening in installments.”
Although workers cheered, whistled and applauded at several points in Cavallo’s speech, the energy quickly dissipated after she concluded her remarks. At the Wolfsburg train station, men arriving for their afternoon shifts shook their heads and stared down at the sidewalk, waving off requests to discuss the announcements.
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.
Schäfer did say VW brand locations in Germany aren’t productive enough, adding that some are twice as expensive to run than rival plants. The nation’s industrial companies have lamented high energy costs following the loss of cheap natural gas, due to Russia’s invasion of Ukraine. Many are now increasingly investing abroad.
“This is a huge cultural shift taking place at Volkswagen,” said Matthias Schmidt, an independent auto analyst based near Hamburg. “It used to be practically impossible to get cuts like these by the unions and the local government.”
Labor representatives control half of Volkswagen’s supervisory board seats. This, along with the company’s home state of Lower Saxony owning a significant stake in the company and controlling seats of its own, combined to largely shelter VW’s German operations from past restructuring efforts.
Volkswagen long dominated car sales in Europe and helped power Germany’s post-war economic renaissance with mass-market models like the Beetle and Golf hatchbacks. The latter was Europe’s best-selling car from 2007 until 2022, when it lost the lead spot to Stellantis NV’s Peugeot 208. Tesla Inc.’s Model Y topped Europe’s rankings last year, with the Golf sliding all the way to No. 7.
The VW brand managed an operating margin of just 2.3% in the first half of the year, barely more than half its return on sales last year and nowhere close to the 6.5% management is aiming for in 2026.
Monday’s rallies kicked off what could be a contentious week for the company: It’s expected to post declining sales and profit when it reports third-quarter results on Wednesday. A second round of negotiations with the labor side over the cuts will start later that day.
“These cuts aren’t just Volkswagen trying to bolster its margin,” Schmidt said. “The company needs them to survive.”
--With assistance from Monica Raymunt.
(Updates with details on VW brand’s stumbles in fifth paragraph.)
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