Volkswagen’s recent cost-cutting agreement, hailed as crucial for its survival amidst increasing competition and declining demand, leans heavily on the company’s longstanding tradition of collaboration between management and workers. However, this approach has sparked concerns among investors about the company’s ability to meet its ambitious targets, including reducing capacity and cutting 35,000 jobs.
The deal, which was reached just before Christmas, aims to tackle the company’s challenges, with workers and unions now engaging in discussions at factories across Germany to clarify the details. According to company sources, each plant will be given its cost-reduction target, with mixed teams of managers and labor representatives working together to devise strategies that enhance productivity. These targets will be reviewed quarterly, and if any interim milestones are missed, new negotiations may be necessary.
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This method aligns with Volkswagen’s history of compromise and cooperation, but it also raises questions about its effectiveness in driving the required changes. The model avoids a top-down restructuring approach that might have been more decisive but could have led to unrest or strikes.
Investors have been left underwhelmed by the deal, with Volkswagen shares trading below the levels seen in October, before a sharp decline in quarterly profits. Analysts like Patrick Hummel from UBS believe the market needs to see concrete plans for long-term profitability, with a focus on how the cost-cutting measures will impact the company’s bottom line in the next two years.
Capacity Reductions And Plant Closures Remain Uncertain
As the deal progresses, questions persist about how Volkswagen will reduce its workforce and production capacity. Unions have been informed that the company is considering closing three to four plants, though Volkswagen has declined to confirm specific closures. The final agreement does include the closure of two factories: one in Dresden by 2025, and another in Osnabrueck by 2027. However, both sites may be repurposed for alternative uses, with potential new investors involved.
The company’s Zwickau plant, which produces electric vehicles, will lose one production line but will receive investment in a new recycling facility, which is set to begin operations in 2027. These new investments, however, are contingent on meeting cost-cutting goals, as Volkswagen’s finance chief Arno Antlitz made clear in recent comments to investors.
The company has also identified capacity reductions at its Wolfsburg headquarters, where two production lines will be cut. While Volkswagen has stated that the deal will result in savings of €15 billion over the “medium term,” investors remain uncertain about how this approach compares to the more direct route of plant closures.
Job Cuts Remain A Major Challenge
Another pressing concern is how Volkswagen will achieve its target of shedding 35,000 jobs. While the company previously promised to cut 30,000 jobs in 2016, its workforce size has remained largely stable due to new hires in other areas. The current plan to meet the target relies on not replacing retiring employees and offering voluntary early or partial retirement options. A clause in the deal guarantees jobs until 2030, a concession won by unions after Volkswagen canceled a previous job guarantee agreement in September.
Despite the uncertainties surrounding the cost-cutting plan, some analysts believe that Volkswagen’s CEO, Oliver Blume, has done well in navigating the complexities of dealing with unions and local politicians, who have significant influence over the company’s decisions. Moritz Kronenberger, portfolio manager at Union Investment, notes that although the deal may appear underwhelming, it represents deeper cuts than many had anticipated.
Blume’s leadership is under scrutiny. As Kronenberger points out, “Blume remains the right CEO, but the company’s cost structure must look very different in two years. Volkswagen needs to prove it’s ready for the future and can continue to produce attractive products.” For now, Blume’s ambitious promises have left him both vulnerable and accountable as Volkswagen seeks to secure its future in a rapidly changing industry.
