Volkswagen is contemplating the unprecedented step of shutting down factories in Germany for the first time in its 87-year existence, as part of an intensified cost reduction strategy in response to heightened competition from Chinese electric vehicle manufacturers.
On Monday, the automotive giant announced that plant closures in its homeland could not be discounted as it seeks to make the company more resilient for the future. This includes potentially ending a long-standing job security pact with its workers, effective since 1994.
Volkswagen Group CEO Oliver Blume described the situation in the European automotive sector as both "demanding and serious," pointing out the increased economic challenges and the entry of new competitors into Europe. He highlighted that Germany's appeal as a manufacturing hub is waning. Despite a significant cost-saving initiative aimed at saving €10 billion ($11.1 billion), Volkswagen's market position in China, its largest market, has weakened, with a 7% drop in deliveries in the first half of 2023 compared to the previous year, and an 11.4% decline in group operating profit to €10.1 billion ($11.2 billion).
The company's struggles in China are exacerbated by local electric vehicle competitors like BYD, which are also beginning to encroach on Volkswagen's European territory.
Blume has emphasized a focus on slashing costs across factory operations, the supply chain, and labor, stating on a recent earnings call that the focus is now squarely on "costs, costs, and costs." However, these cost-cutting measures are set to meet strong opposition from labor unions. IG Metall, a leading German union, has criticized the management for these plans, vowing to protect jobs and calling the board's strategy irresponsible and a threat to Volkswagen's core.
With nearly 683,000 employees globally, of which about 295,000 are in Germany, Volkswagen's potential moves are causing significant unrest. Thomas Schaefer, CEO of Volkswagen's passenger car division, reaffirmed the company's commitment to Germany but stressed the urgent need for discussions with workers' representatives to find sustainable restructuring solutions.
The company acknowledges that the current crisis cannot be alleviated by simple cost reductions alone, signaling a complex battle ahead in balancing cost-cutting with job preservation.