Volkswagen is grappling with a tough decision that could see some of its factories in Germany shut down for the first time in its 87-year history. The automaker, known for its iconic brand, is struggling to meet cost-cutting goals and remain competitive in a challenging market.

CEO Oliver Blume recently announced that the company must end a three-decade-old job protection pledge, sparking outrage among workers and concern among German politicians, reports AP News.

The Core Issue: Cost Savings and Market Decline

Volkswagen’s core brand needs to achieve 10 billion euros ($11.2 billion) in cost savings by 2026. The company has been relying on retirements and voluntary buyouts to reduce its workforce, but with Europe’s car market smaller than before the pandemic, Volkswagen now has more factory capacity than it needs.

Chief Financial Officer Arno Antlitz explained that Europeans are buying around 2 million fewer cars per year compared to pre-pandemic levels, translating to a shortfall of about 500,000 cars for Volkswagen, equivalent to around two plants.

Financial Performance and Electric Vehicle Challenges

The Volkswagen Group, which includes brands like SEAT, Skoda, and Porsche, turned an operating profit of 10.1 billion euros ($11.2 billion) in the first half of this year.

However, the core Volkswagen Passenger Car division saw a 68% earnings drop in the second quarter, with a profit margin of only 0.9%. The division is grappling with high costs, sluggish electric vehicle (EV) sales, and increasing competition from Chinese automakers.

Volkswagen must sell more electric cars to meet stricter EU emission limits, but it’s facing lower profit margins due to high battery costs and weaker demand for EVs in Europe. The slow rollout of public charging stations and the withdrawal of consumer subsidies have also impacted EV sales.

Political and Labor Backlash

Volkswagen’s potential plant closures and job cuts have sparked significant backlash in Germany. The company has never closed a German factory before and employs 120,000 workers in the country. With the current political climate already tense, plant closures could exacerbate discontent.

Chancellor Olaf Scholz has spoken with VW management and workers but emphasized that the decision ultimately lies with the company and its employees.

Employee representatives, who hold significant influence at Volkswagen, have voiced strong opposition to the proposed cuts. Daniela Cavallo, chair of the company works council, stated, “Volkswagen’s problem is upper management isn’t doing its job… We have to have competitive products, we don’t have the entry-level models in electric cars.”

EVXL’s Take

Volkswagen’s current predicament reflects the broader challenges facing traditional automakers in the rapidly evolving EV market. As we reported earlier, European automakers, particularly Volkswagen, are losing ground to Chinese rivals and Tesla in the EV race. The company’s struggle to balance its EV transition with cost-cutting measures highlights the complexities of this industry shift.

Moreover, Volkswagen’s situation is further complicated by its long-standing labor agreements. As our recent article pointed out, a 1994 deal protecting workers from layoffs until 2029 has limited the company’s flexibility to adapt to market changes. This standoff between management and workers underscores the need for a delicate balance between maintaining a skilled workforce and achieving the agility required in the EV era. The outcome of this situation will likely serve as a bellwether for how other traditional automakers navigate similar challenges in their EV transitions.

What are your thoughts on Volkswagen’s current situation and the broader implications for the EV market? Leave your comments below.