Volkswagen seeks new era in Germany with old methods

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Berlin: Volkswagen’s cost-cutting deal in Germany, for all its talk of radical change, relied heavily on a tradition of mutual cooperation between managers and workers, according to details disclosed by company sources. is

That has led some investors and analysts to question whether he can deliver on promises to cut capacity and 35,000 jobs. These are changes that managers say are necessary for business survival amid weak demand and competition from cheap China.

The deal was reached just days before Christmas, and as workers returned from the holidays unions held meetings at factories in Germany – attended by some board members – according to two labor sources.

According to two sources close to management, the agreement gives each factory its own cost-cutting target, with project teams of labor representatives and managers responsible for figuring out how to deliver it. and boost productivity, measured by the number of cars produced per worker. .

Senior figures from both sides will give progress reports at a quarterly meeting, the administration source added, stressing that if interim cost-cutting targets are not met, talks may resume. may be required.

It’s a model that has all the hallmarks of Volkswagen’s tradition of collaboration and compromise, rather than imposing change as surely as possible, but it also runs the risk of damaging strikes.

So many questions remain, from how the automaker will lose so many workers without laying off anyone, to when promised production cuts will be made, to when the long-term future for empty hall plants will be held.

Ahead of a dip in quarterly profits, some investors have been underwhelmed with the trading of Volkswagen shares in October.

“People don’t have the patience to invest in auto stocks that trade primarily on next year’s earnings, with the expectation that 3-5 years out,” said UBS auto analyst Patrick Hummel. The company will restore its profitability.” “The market will expect them to talk about building blocks – what’s the impact on the bottom line in 2025?”

The stakes are high. While the Volkswagen Group has expanded brands from upmarket Audi to mass-market Seat and Skoda, its core name brand—most of its German business—will account for more than half of its vehicle sales in 2023. .

Cutting capacity

During protracted negotiations, unions said the company raised the possibility of closing three to four factories. Volkswagen declined to give a specific figure, but repeatedly said it could not rule out plant closures.

In the final agreement, the two sides agreed to end production in 2025 at the Dresden facility, which employs 300 people, and in 2027 at the Osnabrück plant, which employs about 2,300, but alternate sites. are committed to finding uses, which may include new Investors

An all-electric factory in Zhukau will lose a production line but go into production from 2027, according to a labor spokesman from the factory. Investments will be made.

But the new investment is contingent on meeting cost-cutting targets, as finance chief Arno Antlitz made clear in recent comments to investors seen by Reuters. The remaining capacity reductions will come from cutting two production lines at the company’s Wolfsburg headquarters.

Investors and analysts are unclear how much this approach will reduce fixed costs compared to closing plants. Volkswagen has said the deal will save 15 billion euros ($15.6 billion) in the “medium term,” without elaborating. A spokesman declined to comment on any interim targets.

“With this deal, it’s hard to square the very tight narrative of reaching a tipping point and going all guns blazing,” said Bernstein Research analyst Stephen Reitman, who has followed Volkswagen for decades. “

‘Weak and responsive’

Also uncertain is how the company will make 35,000 jobs from its workforce. Volkswagen promised to cut 30,000 jobs in 2016, but failed to reduce the total size of the workforce due to hiring in other areas.

It hopes to achieve its goal by not replacing retiring workers, and offering early or partial retirement schemes, a Labor spokesman said, highlighting that There is a clause in the deal that guarantees jobs until 2030. The guarantee agreement in September – this meant that any departure would be voluntary.

Moritz Kronenberger, portfolio manager of investments at the Volkswagen Shareholder Union, said that while the deal may look disappointing from the outside, it was a much deeper cut than some had expected for unions and local governments. Politicians hold veto power on Volkswagen’s supervisory board.

“(CEO Oliver Bloom) stuck his neck out too far, made big promises, and stirred up a storm, inside and outside the company,” Kronenberger said.

“Bloom remains the right CEO and is taking the right steps. But the company’s cost structure needs to look very different in two years. Volkswagen has to show that it is armed for the future and can make attractive products,” he added: “Bloom has made himself vulnerable and accountable. “