Volkswagen seriously considers employee layoffs and factory closures in Germany

Volkswagen is considering closing factories in Germany for the first time in its 87-year history, as CEO Oliver Blume warns that the European automotive industry is in a ‘very… serious situation,’ reported the Financial Times. This move comes after a cost-cutting program launched last year failed to save several billion euros, as the company managed to reduce costs only through offering early retirement and voluntary layoffs to employees.

– The economy has become even more challenging, and new competitors are entering the European market. In such an environment, we as a company must now act decisively – Blume told the FT.

The company announced that it plans to withdraw its promise not to reduce the number of jobs in Germany until 2029, which could lead to a conflict with their works council. Lower than expected demand for electric vehicles in Europe has hit automakers in the region, including VW, which is also facing a loss of market share in China, its most profitable market.

The main brand of VW announced in June last year that it aims to cut costs by 10 billion euros by 2026, with the goal of achieving operating margins of 6.5 percent by the same year. In the first half of 2024, VW brand operating margins fell to 2.3 percent.

On Monday, VW stated that ‘restructuring based solely on demographic developments’ (meaning relying on not filling positions after workers retire) was ‘insufficient to achieve urgently needed structural adjustments for greater competitiveness in the short term.’

VW employs about 300,000 people in Germany – which accounts for just under half of its total global workforce. Maintaining jobs is a major priority for the German state of Lower Saxony, which owns 20 percent of the company and often aligns itself with the company’s works council, which holds half of the seats on VW’s supervisory board.

The Prime Minister of Lower Saxony, Stephan Weil, stated on Monday that ‘it is undisputed that VW must take measures,’ but added that closing factories is just one of the options available to the company.

– We expect that (factory closures) simply will not happen – he emphasized, adding that the state will ‘pay special attention to this.’

‘Extremely tense’ financial situation

Daniela Cavallo, the chairwoman of VW’s works council, which under German rules represents the interests of workers at the supervisory board level, sent a letter to employees on Monday, warning that management is considering closing German factories as the company could face serious losses.

– As a result, the executive board is now questioning German factories, collective agreements within VW, and the job security program that lasts until the end of 2029 – said Cavallo, whose conflict with former VW CEO Herbert Diess contributed to his dismissal in 2022.

VW stated that its ‘extremely tense’ financial situation means that ‘even closing factories for the production of vehicles and components can no longer be ruled out,’ adding that it will begin negotiations with employee representatives. However, Cavallo emphasized that the plans of VW’s executive board will face strong resistance. ‘There will be no closing of VW factories with me,’ she told employees.

The growing conflict over the restructuring of the largest European car manufacturer comes at a time of reduced demand both in the domestic market and in China, as well as the entry of new competitors into the European market. Several Chinese electric vehicle manufacturers, such as BYD, plan to enter Europe, while VW and other traditional brands are racing to develop cheaper electric vehicles.

Analysts have long urged Volkswagen to consider layoffs to achieve savings at a time when significant investments are needed to transition to electric vehicles.

– This is a major cultural change happening at Volkswagen. I think the unions are likely facing reality… and that this time they will probably be more accommodating – said Matthias Schmidt, an independent automotive analyst, to the FT.

Despite the opposition signaled by Cavallo, Daniel Schwarz, an automotive analyst at Stifel, also noted a change in her communication, which acknowledges the scale of the problems facing Volkswagen’s brands and avoids direct criticism of Blume. ‘The union’s reaction has been quite encouraging,’ he added.