From peacemaker to taboo-breaker, VW CEO Blume takes on the unions

Volkswagen Group CEO Oliver Blume, already battling slowing demand for electric cars and Chinese rivals, must now put aside his mantle as team player to tackle yet another tough opponent -- Germany's powerful labor unions.

The pressure on VW was laid bare this week when the automaker disclosed it was not only planning to scrap a 30-year old job security agreement but also weighing the closure of plants in Germany.

Moritz Kronenberger, portfolio manager at Volkswagen shareholder Union Investment, calls these the company's "two holy cows."

By taking them on, Blume sets a collision course with one of Germany's mightiest stakeholder groups, the IG Metall union, whose main goal is to protect jobs and sites and safeguard the favorable working conditions in Europe's biggest economy.

VW works council head Daniela Cavallo said unions would "fiercely resist" the plans, ruling out any factory closures on her watch. She said a staff meeting on Wednesday, where management will face workers, would be "very uncomfortable."

VW has not closed a plant since 1988 when it shut its Westmoreland site in Pennsylvania. In July, it said it might close an Audi factory in Brussels citing a sharp drop in demand for high-end electric cars.

Little choice

The problem: German industry is falling further behind global competition due to high energy and labor costs, forcing some of its most storied companies, including Thyssenkrupp, to review deals with workers long seen as sacrosanct.

Investors are taking note, with Volkswagen shares down by almost a third over the past five years, making it the worst performer among major European carmakers.

The problem for Blume, 56, and the reason he has little choice other than to square off with IG Metall, is how thinly spread the sprawling VW Group has become amid growing competition, most notably from China.

VW is behind schedule on a 10 billion euro ($11 billion) cost-cutting program at its namesake brand while needing to fund critical international projects, including a potential $5 billion investment in U.S. EV maker Rivian and a partnership with China's Xpeng.

"If more investments, such as in Rivian and XPeng, want to be achieved, those savings need to come from somewhere, and it appears underutilised plants are no longer a taboo, marking a massive cultural change," said Matthias Schmidt, a European auto markets analyst.

"Decades of CEOs who wanted to do something similar ... will feel vindicated if Blume can make the move stick," Schmidt said

Former VW Group CEOs, including Herbert Diess and Bernd Pischetsrieder, failed in their attempts to make far-reaching changes to the Wolfsburg-based carmaker as the unions stood firm.

Success at Porsche

Blume, who took over as VW Group CEO in 2022, has maintained good relations with the unions as well as with the powerful Porsche and Piech families that control Volkswagen, a key requirement to navigate different stakeholder interests.

With the group for three decades, Blume is credited with implementing change at the Porsche division he also heads while usually avoiding high-profile clashes with labor representatives.

"With Volkswagen, there's always this tension between what's needed and what is achievable, and so this is why we have been down this road many times before," said Stephen Reitman of Bernstein, who has covered VW since the mid-80s.

"Oliver Blume is meant to be the peacemaker, was meant to be the one who could bridge all the different constituencies," he said.

The current situation suggested that approach was not necessarily working, Reitman added.

'Ungovernable'

VW's decades-old governance structure hands massive influence to the regional state of Lower Saxony as well as labor unions.

Lower Saxony retains a 20 percent voting share and can block key decisions after the company was placed in the hands of the German federal government, which later sold its stake, and Lower Saxony following World War Two.

Labor representatives make up half of VW's supervisory board, where decisions about production sites require two-thirds approval.

The law on the matter specifies that the two-thirds majority is needed for the "construction and relocation of production facilities," without referring to actual closure.

That could leave wiggle room for management, while unions could argue that a relocation is similar in nature to a closure, according to people familiar with the matter.

Its leadership structure is "paralysing VW - making it 'ungovernable' and destroying it," said Ferdinand Dudenhoeffer, head of the CAR think tank at the University of Duisburg-Essen. "That's why we have been seeing VW crises erupting again and again for 40 years, just as is the case now."