Volkswagen has won the support of its unions to carry out the most extensive restructuring in the German automaker's 89-year history. But the biggest challenges for the company and its CEO, Oliver Blume, are yet to come.
After surprising investors this week with an agreement to eliminate around 50,000 jobs, Blume needs to put his plan into practice, reducing costs that, according to his estimates, are 30% higher than those of competitors and cutting production capacity by more than 500,000 vehicles per year.
The labor agreement "gives Volkswagen some breathing space, but ultimately the problem is just being postponed," said Matthias Schmidt, an auto industry analyst in Germany.
Volkswagen must face a range of challenges, from growing Chinese competition to U.S. tariffs that have eroded its profit margins and threatened its survival.
The deal has raised hopes that the iconic German company — and, more broadly, the country's struggling industrial sector — can overcome these obstacles. At the same time, it underscores the pain companies and employees are likely to face as businesses become leaner and less complex.
Volkswagen shares rose almost 6% on Friday (4), the biggest daily gain in almost nine months. Still, the company has lost about a quarter of its value this year.
The plan would increase the total number of jobs eliminated by 2030 to around 100,000, equivalent to 15% of the company's global workforce. It would also halve the number of Volkswagen models and cut production to 9 million cars a year, down from the target of 12 million set before the COVID-19 pandemic. Many details, including the fate of four German factories, have not yet been finalized.
The company said these sites, located in Emden, Hanover, Zwickau and Neckarsulm, do not have a clear future beyond 2030. Still, there may be ways to avoid closure, possibly by converting the factories for use by the defense industry as Germany ramps up its spending to counter Russia's military threat.
Blume said that negotiations are already underway with companies in the sector. These measures are unlikely, however, to offset Volkswagen's decline.
"People forget how big the auto industry is," said Harald Hendrikse, managing director of Citi Research. "The possibility of saving all these jobs and all these capabilities with the defense industry is zero."
Other options include selling cars developed in China on the European market or sharing production capacity in Europe with Chinese partners.
After decades of growth in China, the world's biggest auto market, Volkswagen's sales in the country have plummeted as Chinese companies have moved quickly to transition to electric cars. The company also faces stiff competition from Chinese rivals in its home market.
In the United States, the government has practically banned cars made by Chinese companies through very high tariffs and other restrictions, but Volkswagen has still struggled in this market.
China's "rapid rise really caught foreign automakers by surprise, especially German ones," said Jacob Gunter, a China expert at the Mercator Institute for China Studies.
Cheaper imports from China have intensified calls for tougher measures to combat what companies see as unfair competition. Encouraged by government subsidies, Chinese automakers began focusing on electric vehicles years ago and made investments that allowed them to take advantage of strong demand for these models. Around 1 in every 5 new vehicles sold in Europe is electric.
In Germany, more than half of companies support stricter European Union measures to tackle "distortions of competition", even if this means higher prices, tariffs or Chinese retaliation, according to a survey published this week by the German Chamber of Commerce and Industry.
If the current regulatory environment remains unchanged, Chinese automakers could triple their share of the European car market, reaching up to 30% by 2035, said Hendrikse, an analyst at Citi. A more aggressive stance toward Beijing could slow China's advance, albeit modestly. Extending tariffs imposed on Chinese electric cars to hybrid vehicles could limit China's market share to around 25%, he estimated.
"This gives Volkswagen more time to deal with these factories," he said. "If we do not protect the European market and its ability to generate profits, these companies will simply cease to exist."
In an attempt to improve European competitiveness and confront China, the Volkswagen agreement could serve as a model for other companies. Investors doubted the company would be able to reach a labor agreement, fueling speculation that the management team might try to bypass the supervisory board and appeal directly to shareholders through an extraordinary meeting.
Volkswagen workers, as well as those at German automakers Mercedes-Benz and BMW, occupy half of the 20 seats on the supervisory board. Shareholders hold the other 10. At Volkswagen, however, two of these seats are held by the state of Lower Saxony, which holds 20% of the company's voting shares.
"The debate in the market was never about whether Volkswagen faced challenges," Deutsche Bank analysts wrote in a note on Friday. "The question was whether these challenges could realistically be addressed within Volkswagen's complex governance structure. Last night's agreement does not end that debate, but it provides the strongest evidence yet that the answer may be yes."
