Analysis-Volkswagen seeks a new era in Germany with old methods

By Victoria Waldersee and Christina Amann

BERLIN (Reuters) – For all its talk of sweeping changes, Volkswagen’s cost-cutting deal in Germany is largely based on the automaker’s tradition of cooperation between managers and workers, according to details disclosed by company sources.

That has led some investors and analysts to question whether it can deliver on promises to cut capacity and 35,000 jobs, changes executives say are vital to the company’s survival amid weak demand and Chinese competition cheap

The deal was signed days before Christmas, and since workers returned from the holidays, unions have held meetings at German factories – some with board members – to explain it, according to two labor sources.

The deal involves each factory having its own cost-cutting target, with project teams of labor representatives and managers tasked with figuring out how to deliver it and increase productivity, as measured by the number of cars produced per worker, according to two sources close to the management. .

Some figures from both sides will give progress reports at a quarterly meeting, the management sources added, stressing that if interim cost-cutting targets are not met, they may have to start over. negotiations

It is a model that bears all the hallmarks of Volkswagen’s tradition of cooperation and commitment, rather than a top-down change that might have brought more certainty, but also risked damaging strikes.

Many questions remain, from how the automaker will shed so many workers without laying off anyone, to when the promised production capacity cuts will take place, to the long-term future of idle plants.

That has left some investors underwhelmed, with Volkswagen shares trading below levels seen in October, before a drop in quarterly profits.

“People don’t have the patience to invest in auto stocks that trade primarily on next year’s earnings, hoping that in 3-5 years, the company will restore profitability,” he said. said Patrick Hummel, auto analyst at UBS. The market will be waiting for them to talk about the building blocks – what is the ultimate impact in 2025?”

The stakes are high. While the Volkswagen Group spans brands from stylish Audi to mass-market SEAT and Skoda, its main namesake brand – the bulk of its German business – accounted for more than half of its vehicle sales in 2023.

CUTTING CAPACITY

During protracted talks, unions said the company considered 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 deal, the two sides agreed to end production in 2025 at a Dresden facility, which employs 300 people, and in 2027 at a plant in Osnabrück, which employs about 2,300. but they pledged to find alternative uses for the sites, which could include new investors.

An all-electric factory in Zwickau will lose a production line but receive new investment in the form of a recycling facility for second-hand combustion and electric vehicles, which will go into production from 2027, according to a labor spokesman from the factory

But the new investments depend 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 to what extent this approach will reduce fixed costs compared to closing plants altogether. Volkswagen has said the deal will save 15 billion euros ($15.6 billion) in the “medium term,” without giving details. A spokesman declined to comment on any interim targets.

“It’s hard to square the super-hard narrative of having reached a tipping point and going all guns blazing with the deal that came out,” said Stephen Reitman, an analyst at Bernstein Research who has followed by Volkswagen for decades.

“VULNERABLE AND RESPONSIBLE”

It is also uncertain how the company will cut 35,000 jobs from its workforce. Volkswagen promised in 2016 to cut 30,000 jobs, but failed to reduce the total size of the workforce (roughly 120,000, then and now) due to hiring in other areas.

It hopes to achieve its goal by not replacing retiring workers and offering early or partial retirement plans, a labor spokesman said, noting that a clause in the deal guaranteeing jobs through 2030, a win for workers unions after Volkswagen scrapped an earlier job guarantee. agreement in September – meant that any exit would be voluntary.

Moritz Kronenberger, a portfolio manager at Volkswagen shareholder Union Investment, said that while the deal may look disappointing from the outside, it made deeper cuts than some had expected as unions and local politicians have veto power on Volkswagen’s supervisory board.

“(CEO Oliver Blume) stuck his neck out, made big promises and caused a whirlwind, inside and outside the company,” Kronenberger said.

“Blume is still the right CEO and is taking the right steps. But the company’s cost structure needs to be very different two years from now. Volkswagen needs to show that it is armed for the future and that it can make attractive products,” he said, adding. : “Blume has become vulnerable and responsible.”

($1 = 0.9602 euros)

(Reporting by Victoria Waldersee, Christina Amann in Berlin; Editing by Mark Potter)

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