VW warns of plant closures, forced layoffs in Germany in cost-cutting drive

BERLIN -- Volkswagen Group said it can no longer rule out plant closures in Germany as it seeks ways to save an extra several billions of euros at its core VW brand.

The automaker could also implement compulsory lay offs in Germany, terminating a job security program that ruled out forced redundancies until 2029.

VW considers one large vehicle plant and one component factory in Germany to be obsolete, according to the automaker's works council.

Any shutdowns would mark the first closures in Germany during the company’s 87-year history, setting VW up for a clash with powerful unions.

The IG Metall union promised "fierce resistance" to the plans.

"The board of management has today presented an irresponsible plan that shakes the foundations of Volkswagen and poses a massive threat to jobs and sites," IG Metall's Thorsten Groeger said in a statement.

"We will not tolerate plans that the company makes at the expense of the workforce and that massively disrupt the regions in our country," Groeger added.

The VW brand, which fuels most of the automaker's vehicle sales, is the first of the group's brands to undergo a cost-cutting drive targeting €10 billion ($11.07 billion) in savings by 2026 as it attempts to streamline spending to survive the transition to electric cars.

Raising returns at the VW brand has become tougher with higher logistics, energy and labor costs. The brand's margin fell to 2.3 percent during the first half, compared to 3.8 percent a year ago. Efforts are becoming harder amid a sputtering transition to EVs and a consumer spending slowdown.

VW has also lost momentum in China, its largest market, as fast-moving Chinese rivals roll out consumer-friendly, affordable electric cars. Those same Chinese automakers are now starting to expand into Europe, placing additional pressure on VW to develop cheaper EVs quickly or risk losing out on sales at home.

VW Group CEO Oliver Blume said a difficult economic environment, new competitors in Europe, and the falling competitiveness of the German economy meant the carmaker needed to do more.

"The economic environment has become even tougher and new players are pushing into Europe,"  Blume said in a statement. "Germany as a business location is falling further behind in terms of competitiveness."

A full-blown labor dispute would be a major test for Blume, who also heads the Porsche sports car brand, after union clashes felled a number of his VW predecessors.

Previous clashes ended or shortened the tenures of top executives including former CEO Bernd Pischetsrieder, ex-VW brand chief Wolfgang Bernhard and Herbert Diess, Blume’s predecessor as CEO. All three tried to push through efficiencies particularly at VW’s domestic German operations.

VW employs about 650,000 workers globally, almost 300,000 of which are in Germany. Half the seats on the company’s supervisory board are held by labor representatives, and the German state of Lower Saxony, which owns a 20 percent stake in the automaker, often sides with trade union bodies.

The group last year build about 9 million vehicles globally, compared with total capacity of 14 million units.

Sites under threat

VW brand has component production sites in Brunswick, Kassel, Salzgitter, Hanover and Chemnitz, as well as carmaking plants in Wolfsburg, Emden, Zwickau, Dresden, Osnabrueck and Hanover.

Analysts have in the past named VW sites in Osnabrueck and Dresden as potential targets for closure.

VW Group's latest plans for further cutbacks follow a July announcement detailing the potential closure of a site in Brussels making electric Audis. The factory has been struggling with high costs and poor demand for the luxury Q8 e-tron, the sole model it produces.

Works council chief Daniella Cavallo said management had made "many wrong decisions" in recent years, including not investing in hybrids or being faster at developing affordable battery-electric cars.

Instead of plant closures, the board should be reducing complexity and taking advantage of synergies across the group's plants, Cavallo said in an interview on VW's intranet.

Cavallo criticized the automaker's "documentation madness" and "salami-slicing tactics." Cavallo was referring to VW not only weighing plant closures, but also dissolving wage agreements and dropping its commitment to both job security and efficiency.

Cavallo also said VW's management have claimed that making the Golf and Tiguan models threatens to become loss-making.

The works council said VW is also "questioning" the production of a compact electric SUV at the main carmaking site in Wolfsburg from 2026, key to filling the factory's capacity.

The brand's Trinity flagship electric model, currently planned for Zwickau, is also at risk of being delayed.

VW's market valuation has sunk to around €51 billion ($56.5 billion), even as the company continues to rake in profits with operating income of €22.6 billion last year.

Reuters and Bloomberg contributed to this report