VW Group's plans to add a new plant come as some existing factories struggle

Volkswagen Group's plan to build a new plant in Turkey, a move that is currently on hold, raises questions as to the future of its existing sites -- especially in Europe -- just as the industry grapples with a difficult shift to electromobility.

The European auto industry has many underutilized factories that weigh heavily on many automakers' income statements.

Once battery-powered cars, which are easier to manufacture than conventional models, are added to the productivity equation the problem could get worse, analysts argue.

"The pace and market success of the shift to electrification is the key risk for VW," said Justin Cox, director of global production for market forecaster LMC Automotive. "The timing of the production capacity switch toward battery-electric vehicles is a delicate process both operationally and commercially."

Workers at VW Group premium brand Audi are already wrestling with management over the future of its German plant in Neckarsulm, where it builds its second most popular model, the A4 midsize sedan.

Although the Neckarsulm factory's capacity utilization rate is likely to stagnate at about 60 percent for the third consecutive year, VW was ready to approve a new multibrand factory in Turkey to build the similarly-sized VW Passat and Skoda Superb models. VW has put the investment on hold amid international criticism of the Turkey's military operations in Syria.

VW brand manufacturing boss Andreas Tostmann said the automaker needs the added 300,000-unit annual capacity that the Turkey plant would bring. "Not just for us, though. We are also helping out our Skoda colleagues suffering from production bottlenecks," Tostmann said in late September at a press briefing.

Tostmann is responsible for 16 assembly plants worldwide that employ nearly 104,000 people In addition to the roughly 3.5 million Volkswagen brand vehicles that leave the assembly line annually, these factories also churn out costs: 10 billion euros to be specific, with half of that expended on staff.

Tostmann aims to contribute a cumulative 2 billion euros in savings at VW brand by the end of 2023. This year alone he expects to squeeze out about a quarter of that because of improvements at plants such as VW Group's factory in Bratislava, Slovakia.

The savings push should finally reverse this year the trend in manufacturing costs, which had been steadily rising since 2013. One of the sites that has so far been a drag on overall productivity is VW's home plant in Wolfsburg, where production of the eighth-generation Golf has just begun.

Picking Turkey for a new plant would be controversial following the country's military incursions into Syria that have sparked outrage across Europe. VW Group's powerful labor unions last week said they would to block the plan until violence triggered by Turkey's cross-border offensive in northern Syria has stopped.

Tostmann said last month that VW is monitoring the situation in the region, adding that the automaker had enough cushion built into its timetable before a decision was needed.

Meanwhile VW's Emden factory in Germany, is slated to receive an investment of 1 billion euros to become VW brand's second EV-only plant after Zwickau, home of the ID3 compact hatchback.

If the Turkey plant moves forward, Emden's Passat output is expected to move there. Turkey is traditionally a major destination for the Passat sedan, although sales have had suffered in part due to a sharp downturn in the country's auto market as well as a plunge in the value of the Turkish Lira.

Emden would be making as many as 120,000 units of a midsize full-electric sedan internally referred to as the ID Aero. Tostmann said earlier plans to build in Emden up to 200,000 VW Polo-size EVs called MEB Entry (after the EV architecture) have been changed and it will likely be built in Bratislava. What product might replace it in Emden has yet to be announced.

"We anticipate utilizing the capacity installed," Tostmann said. "I don’t know of another company willing to invest that kind of money in a northern German site, so Emden has a very good prospects as the second MEB transformational plant."

VW Group CEO Herbert Diess justified the Emden move earlier this year in part by warning that Skoda's plants are running at 120 percent capacity utilization, in essence operating six days a week. Paradoxically, he also warned that headcount reductions were a real possibility given that EVs can be built with 30 percent less effort. Should the rate of output growth not keep pace, the remainder would need to be offset by a matching reduction in workforce size to protect margins.

"Achieving this [workforce cut] purely through fluctuation and early retirement programs will be difficult," Diess said in March.

Tostmann said EVs may not lead to a sharp drop in capacity utilization of car plants. He expects EVs to lead to productivity gains between 15 percent to 20 percent in his sites. That means the brunt of any pain from staff downsizing due to EV production would be felt in the group’s parts plants.