Volkswagen is considering closing factories in Germany for the first time in its history

For the first time in its history, Volkswagen is considering closing factories in Germany to cut costs. The possible measures, targeting its main car brand as well as other operations of the group, would include ending the company’s pact with unions to keep jobs safe until 2029, the company said on Monday. It would be the first plant closure in Germany in the company’s 87-year history. The announcement was welcomed by markets, with the company’s shares up 2.2% in the hours before the close of trading.

“The economic environment has become even tougher and new players are putting pressure on Europe,” said the group’s CEO, Oliver Blume, in a statement. “Germany, as a business location, is falling further behind in terms of competitiveness,” said Blume. The executive’s words try to reflect the difficult context that the largest European car manufacturer is experiencing: on the one hand, a flood of Chinese brands have landed on the Old Continent with a competitive offer in terms of price and performance, especially in the field of electric vehicles; and, on the other, the uncertainty surrounding the evolution of electric vehicles and the stagnation of their sales have meant that many companies have to share a market that is still too small and that the middle class is not joining due to the high cost of this type of car compared to gasoline or non-plug-in hybrids, the latter an option that has skyrocketed in popularity.

In the first half of the year, the German group had the highest turnover in the world, with almost 159 billion euros, but was far from the top of the list in terms of profits, with just 6.378 billion euros, far behind the more than 14.5 billion of Toyota or the more than 8.8 billion of Hyundai and Kia together. This is an indication of the low profit margin of the group, which is growing in turnover but reducing margins.

A labour dispute would be a major test for Blume, who also heads the Porsche sports car brand, as previous union clashes have led to the departure of several of his predecessors. The company has sought to cut costs at its Volkswagen car brand in the face of shrinking profit margins. The head of the committee representing workers on the company’s board, Daniela Cavallo, has said VW’s management has failed, at a time when the group’s main brand (which also includes brands such as Seat, Skoda, the aforementioned Porsche and Audi) could incur losses. The company plans to close at least one large car factory and a component centre in Germany, as well as suspending wage agreements.

VW employs around 650,000 people worldwide, almost 300,000 of them in Germany. Half of the seats on the company’s supervisory board are held by employee representatives, and the German state of Lower Saxony, which holds a 20% stake, often sides with the unions.

Previous clashes ended or shortened the tenures of top executives such as former CEO Bernd Pischetsrieder, former VW brand chief Wolfgang Bernhard and Herbert Diess, Blume’s predecessor as CEO. All three sought to drive efficiency, especially at VW’s German operations.

The situation of the Volkswagen brand contrasts with that of, for example, Seat, historically the company’s ‘ugly duckling’ due to its low profit margins, but which has been revitalized with the birth of Cupra, a brand that offers better margins with a more premium product. So much so that the company closed 2023 with a record operating profit of 625 million euros, a figure that it aims to exceed in 2024, since up to the middle of the year it increased profits by 9.4%, with 406 million.

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