(Adds comments from German trade union, closing share price)
By Jan Christoph Schwartz
WOLFSBURG, Germany, Aug 23 (Reuters) -challenged its workers with a tough wage plan on Monday ahead of talks seen as a gauge of their readiness to favour job security over pay rises, a swap that could make Europe's biggest economy more competitive.
, the world's fourth-largest carmaker, will ask German workers to forego pay hikes for two years as part of a broader plan to lop about 2 billion euros ($2.51 billion) from labour costs by 2011, the company said on Monday.
There is "no leeway" for increased wages, said VW personnel chief Peter Hartz, who wants to use the talks as a starting point to slash the labour cost base by 30 percent in six years.
This comes on top of VW's plans to boost earnings by well over 4.1 billion euros over the next two years via its ForMotion performance enhancement programme.
Hartz rebuffed a demand from German metalworkers' union IG Metall that 103,000 workers at six western German plants get a 4 percent pay rise and a job guarantee for the next decade.
Reuters reported on Saturday that VW would insist on a pay freeze of at least one year, quoting a company source.
IG Metall's top negotiator for VW's home state of Lower Saxony later fired back at Hartz, sharply criticising the company's terms.
"Should management stick to its exorbitant demands, this round (of wage talks) will be rife with conflict," warned Hartmut Meine. "But one for which we're superbly prepared," he said, referring to the 97 percent of VW workers that are unionised.
Volkswagen, which recently warned it would fail to meet its 2004 profit target by about 600 million euros, is grappling with currency headwinds, high production costs, slack demand and an erosion of prices in its key markets.
Germany's DaimlerChrysler last month managed to wring 500 million euros in labour cost savings from German employees at its flagship Mercedes car unit in exchange for job guarantees, after threatening to axe 6,000 jobs at one plant.
Labour market experts greeted VW's plans, saying the two German carmakers could help bring about a watershed in the country's struggle to revive its moribund job market, as wage decisions reached within the industry ultimately spread through all sectors and regions in the span of just a year or two.
"There will be a wave of similar events happening throughout the country," said Martin Werding of the Munich-based Ifo institute. "For the first time in 20 years we have a very good chance to reduce the structural unemployment in Germany."
He said VW was going to the heart of the problem in Germany: unsustainably high labour costs even when compared with other western European nations and the United States.
"If VW succeeds in its plans to reduce costs by 30 percent, this would restore its competitiveness," he said.
One out of every seven jobs in Germany depends directly or indirectly on the automotive industry.
Shares in Volkswagen closed 2.8 percent higher at 31.76 euros on Monday, outperforming a 1.9 percent gain by the DJ Stoxx European autos index .
NO PRODUCTION SHIFT
VW's Hartz, also the architect of Germany's broader labour market reforms, demanded greater flexibility from a workforce that earns about a fifth more than other German metalworkers.
He said, though, that this did not mean current employees would have less money in their pockets: "It's much more about an intelligent, structural re-orientation of the labour costs."
Unlike Mercedes boss Juergen Hubbert, Hartz did not unleash the heavy guns by threatening to move some auto manufacturing abroad. "We're offering alternatives to relocating production," he said.
The company presented a seven-point plan to be implemented in the coming six years that included reducing the number of wage tiers to 12 from 22 and linking bonuses to earnings.
Labour market expert Viktor Steiner of the DIW economic think tank in Berlin said he did not believe VW's workforce had much bargaining leeway in view of their relatively high pay.
"Employees won't quit and go elsewhere as a result since they are still better off in relation to others in the industry," Steiner said.
For a FACTBOX detailing VW's wages plan, please double click on [ID:nL23625486]