As Volkswagen considers first German car plant closure, workers aren’t the only ones worried

FRANKFURT, Germany — Volkswagen is considering closing some plants in its home country for the first time in the German automaker’s 87-year history, saying it would otherwise fail to meet the cost-cutting targets it needs to remain competitive.

CEO Oliver Blume also told employees Wednesday that the company must end a three-decade-old job protection pledge that would have banned layoffs through 2029.

These statements have sparked outrage among workers’ representatives and concern among German politicians.

Here are some things to know about the struggles facing one of the world’s most famous car brands:

Management estimates that the company’s core brand, which bears the company’s name, must achieve €10 billion in cost savings by 2026. It recently became clear that the Volkswagen Passenger Car division was not on track to achieve this after relying on retirements and voluntary buyouts to reduce headcount in Germany.

With the European car market smaller than before the coronavirus pandemic, Volkswagen says it now has more production capacity than it needs – and keeping underused assembly lines running is costly.

CFO Arno Antlitz explained it this way to the 25,000 employees gathered at the company’s headquarters in Wolfsburg: Europeans are buying around 2 million fewer cars per year than before the pandemic in 2019, when sales reached 15.7 million.

With Volkswagen holding about a quarter of the European market, that means “we are short 500,000 cars, the equivalent of about two factories,” Antlitz told workers.

“And it has nothing to do with our products or our poor sales performance. The market simply doesn’t exist anymore,” he said.

Volkswagen Group, whose 10 brands include SEAT, Skoda, CUPRA and commercial vehicles, posted an operating profit of 10.1 billion euros ($11.2 billion) in the first half of this year, down 11% from the first half of last year.

Higher costs offset a modest 1.6 percent rise in sales, which reached 158.8 billion euros, but were hampered by sluggish demand. Blume called the results “solid” in a “challenging environment.” Volkswagen’s luxury brands, which include Porsche, Audi and Lamborghini, are outselling VW models.

The cost-cutting debate is focusing on the brand and its employees in Germany. Volkswagen’s passenger car division posted a 68% drop in second-quarter profits, and its profit margin was just 0.9%, down from 4% in the first quarter.

One reason is that the division has absorbed most of the billion euros it spent on layoffs and other restructuring costs. But rising costs, including higher wages, and weak sales of the company’s electric vehicle line are a deeper problem. And new, competitively priced Chinese competitors are increasing their market share in Europe.

Volkswagen needs to sell more electric vehicles to meet the European Union’s ever-lower emissions limits that come into effect next year. Yet the company is seeing its profit margins on those vehicles shrink because of high battery costs and falling demand for electric vehicles in Europe, driven by the withdrawal of consumer subsidies and the slow rollout of public charging stations.

At the same time, VW’s electric vehicles also face strong competition in China from models made by local companies.

Carmakers around the world are racing to build a future, spending billions to pivot to low-emission electric cars, in a race to offer vehicles that are competitive in price and have enough range to convince buyers to switch brands. China has dozens of automakers that are making electric cars at lower costs than their European counterparts. Increasingly, these cars are being sold in Europe.

Profits at German automakers BMW and Mercedes-Benz also fell due to the same pressures.

Volkswagen has 10 assembly and parts plants in Germany, where 120,000 of its 684,000 employees worldwide work. As Europe’s largest automaker, the company is a symbol of the country’s consumer prosperity and economic growth after World War II.

VW has never closed a plant in Germany before. The last time it closed a factory was in 1988, in Westmoreland, Pennsylvania. Its Audi division is currently discussing closing an underutilized plant in Belgium.

Far-right parties, fueled by popular disenchantment with German Chancellor Olaf Scholz’s three-party coalition government, made major gains in the September 1 elections in the former communist East German states of Thuringia and Saxony. National polls show the government’s approval ratings are at an all-time low. Factory closures are the last thing the Scholz government needs.

The Chancellor spoke to VW management and employees after the possible plant closures were announced, but she was careful to stress that the decision was a matter for the company and its employees.

Employee representatives have a lot of influence at Volkswagen. They hold half of the seats on the board of directors. The state government, which is a co-shareholder in the company, also holds two seats on the board of directors – with employee representatives a majority – and 20 percent of the company’s voting rights. Lower Saxony Governor Stephan Weil said the company had to meet its costs but had to avoid plant closures.

This means that management will have to negotiate – a process that will take months.

Executives at the employee meeting faced several minutes of boos, whistles and horns before they could begin their presentation of the potential explanation. “We are Volkswagen, you are not,” the employees chanted.

Daniela Cavallo, chairwoman of the works council representing employees, said the council “will not tolerate plant closures.” Cutting labor costs will not improve Volkswagen’s financial situation, she said.

“The problem with Volkswagen is that management is not doing its job,” Cavallo said. “There are many other areas where the company is responsible… We have to offer competitive products, we don’t have entry-level models in the electric car field.”