Volkswagen's Dilemma: Cut Costs by Firing Union Workers or Face Bankruptcy
Volkswagen's recent announcement that it is considering closing factories in Germany has caused a stir among unions and government leaders. This move is unprecedented in the German automaker's 87-year history. The situation is further complicated by the potential termination of a job security program that has been in place since 1994 and prevents job cuts until 2029.
Unprecedented Plant Closures
The Wolfsburg-based company's decision to potentially close plants is a shock to its 680,000 employees worldwide. The regional state of Lower Saxony, which holds one-fifth of the company’s shares and a permanent seat on the supervisory board, has always prioritized job and factory security as a matter of state interest.
Volkswagen launched a cost-cutting program last year aimed at saving €10 billion ($11.06 billion) by 2026. However, according to a report by German business daily Handelsblatt, the mass-market carmaker would need to cut an additional €4 billion.
Restructuring and Job Cuts
Volkswagen's brand chief, Thomas Schäfer, described the situation as “extremely tense” and beyond the scope of “simple cost-cutting measures.” CEO Oliver Blume added that the European automotive market is in a “highly challenging and serious situation,” and that Germany has fallen behind in terms of competitiveness.
As a result, the 10 car brands within the VW Group must be comprehensively restructured, and “plant closures are no longer excluded,” according to Blume. He also stated that layoffs through early retirement and severance packages are no longer sufficient, leading to the potential termination of the employment protection agreement that has been in place since 1994.
Union and Government Reaction
Labor union leaders and the VW works council have expressed strong opposition to the proposed plant closures and potential job cuts. The works council, in particular, is angered by VW’s reluctance to clarify who might be affected and how.
CAR founder and director Ferdinand Dudenhöffer sees an “age-old VW problem” because the carmaker is “more like a state enterprise than a market-driven company.” The problem will persist, he told DW, as long as VW’s company structure remains “flawed.”
Stuck in the Past
The core problem of Germany and the EU is that they are both stuck in the past. The union’s most important outside trading partner, China, has turned into an existential problem for some of the key industries of the future, like cars or renewable energy infrastructure.
The EU has fallen behind, and its economic and industrial system is stuck in the past. The Chinese electric car, battery, and solar companies that now dominate these markets are relatively new, and there are a lot of them.
Challenges with Electric Vehicles
EV sales in Germany have plummeted this year, with Tesla’s registrations in the country down 41% for the year through July, compared with the same period of 2023. Volkswagen can’t easily dial back its profit-sapping EV investments or production because its cars need to meet much stricter European emissions standards starting next year.
Meanwhile, labor costs in Germany are the highest in Europe, according to an analysis by the German Association of the Automotive Industry.
US EV Market Struggles
In the US, Ford has reported a huge loss on every EV. Sales are down 20 percent holding the losses to $1.3 billion. Ford also had to cancel plans for an electric SUV, expecting a $1.9 billion loss.
Bottom Line
Government setting ambitious goals and dictating how businesses should achieve them often leads to complications. Despite significant subsidies, Ford still cannot make ends meet on EVs. Yet, due to government coercion, Ford is forced to try, try, and try again.
This situation raises questions about the viability and sustainability of the electric vehicle market and the role of government in shaping industry trends. What are your thoughts on this issue? Share this article with your friends and join the conversation. Remember to sign up for the Daily Briefing, which is delivered every day at 6pm.
