Volkswagen Group will be able to come up with enough money to cover the costs of its emissions-rigging scandal, which is estimated to be as high as 40 billion euros by some analysts. That's the good news.
The bad news is that VW brand workers in Germany are now asking for a 5 percent pay increase in the middle of the company's biggest ever business crisis.
The upcoming start of collective bargaining talks for most VW brand employees in Germany on April 26 has largely gone unnoticed as the automaker faces crucial deadlines related to the diesel scandal.
But the outcome of the wage negotiations could have as big an impact on the company as the diesel cheating, and possibly a bigger one in the long term.
Ferdinand Dudenhoeffer, the head of the Center Automotive Research at the University of Duisburg-Essen in Germany, believes chronic low profitability at VW brand linked to its uncompetitive German plants costs shareholders as much as 5 billion euros every year.
Worse, these deep-seated structural issues won't disappear simply by throwing money at the problem, unlike with the diesel scandal. An "unholy alliance," as he puts it, between German unions and key VW shareholder Lower Saxony, continues to block any attempt to overhaul of the brand’s inefficient domestic plants.
Lower Saxony, home to five of VW’s traditional six western German plants that employ 112,560 people, controls a fifth of the automaker's voting rights and has a blocking minority on crucial decisions. The state's government recently insisted that profitability and employment remain equal corporate goals. Globally the automaker has more than 600,000 people on its payroll, more than General Motors and Toyota combined.
"The core business is effectively stuck in a productivity trap, cemented in place," Dudenhoeffer concluded in an analysis of VW labor costs published this month.
He found that the VW brand's German operation effectively pays each of its workers from the cleaning lady to management on average 88,000 euros a year. That is 12 percent more than what the average Audi worker earns. The Audi number is derived from a global tally but is relevant because three out of four employees at the premium brand work in Germany.
Operating profit per vehicle sold by the VW brand was 540 euros on average for 2014, the last full year of data, and 667 euros for the first nine months of this year excluding one-off items. This compares with 917 euros at GM’s automotive operations and 1,862 euros at Toyota’s car business, the latter both based on more recent 2015 full-year data.
VW brand would have posted earnings of 7.5 billion euros in 2014 instead of just below 2.5 billion if it had achieved the average margin of GM, Ford, Skoda and Toyota of 7.5 percent, Dudenhoeffer wrote.
Granted this calculation is somewhat unfair since it does not include the substantial profits from VW’s unconsolidated Chinese joint ventures, and it ignores certain externalities that play a role such as currency effects. One indisputable problem, however, remains VW’s high level of manufacturing depth concentrated in high-wage Germany.
Whereas, for example, even as a large supplier Johnson Controls decided its seating and interior business was no longer attractive enough to keep and sold the majority to China’s Yangfeng, Dudenhoeffer points out that VW continues to keep 2,400 employees on its payroll to build car seats in high-wage Germany at its Sitech unit in Lower Saxony.
This is because both so-called federal VW Law as well as corporate statutes require German labor leaders, who hold half of the 20 seats on VW's supervisory board and vote as a bloc, to consent to any plant closure in Germany. Recently VW's small factory in Dresden got a new lease on life as a museum after Phaeton production ended.
This should be remembered as VW prepares to begin negotiations with its German unions over two major deals. The first could forbid compulsory redundancies over the next 10 years in exchange for some form of worker concessions to boost efficiency.
VW's workers in its six traditional western German plants are separately demanding 5 percent higher pay over a 12 month period – a significant rise given that Bundesbank forecasts that consumer prices domestically will rise by only 1.1 percent in 2016 and 2 percent next year. This means that VW will have to squeeze out an equivalent 5 percent productivity gain over the same period just to stand still.
Volkswagen is supposed to be a corporate role model in Germany, showing just what can be accomplished when management and workers cooperate closely. VW’s former chairman Berthold Huber, himself from organized labor, argued this stems from VW's historic responsibility to its workers since the company was built using expropriated funds of trade unions smashed under the Nazi regime.
As long as senior executives insist on cashing in high bonuses despite the diesel crisis, however, unions will demand rewards for themselves.
As I argued recently, why should workers help those who only help themselves? But at the end of the day, this kind of mutual selfishness will only further undermine VW at a time when both sides need to work to put the automaker on more solid footing.