Volkswagen Cost-Cutting Could Shut East German Plants

Volkswagen’s trading exposure in China is considered to be one of the main reasons the German automaker thinking of shutting two of its major vehicle plants in the politically fractious east of the country.

A closure would be a historic move given the state of Lower Saxony's 20% stake in the automaker, an ownership structure that dates back to 1949 when the British authorities transferred control of the company to the state after World War II.

Closure of the plants thought to be at risk, Osnabrueck, in Lower Saxony, and Dresden, in Saxony, is being pressed by Volkswagen Group as part of a much-needed cost-cutting move which would pull the plug on a worker job security program for VW's 680,000 staff, Reuters reports.

The program was instigated in 1994 and was due to run until 2029 but now VW could ask unions to end it early in a bid to meet mounting competitive pressures from battery-electric-vehicle start-up rivals, especially from China.

VW's ratio of employees to sales has long been uncompetitive because of restrictions on cutting workers. VW, for example, has 75% more employees than Toyota while having 25% less revenue.

Beyond an obvious backlash from powerful automotive unions, the move would come at a politically difficult time for Germany’s national government with the rise of the far-right party, Alternative für Deutschland, particularly in east German states. The party won the most votes in the state of Thuringia and finished second in Saxony in state elections over the weekend and the prospect of widespread job losses would secure its popularity still further.

VW’s proposed move is the first major clash between CEO Oliver Blume, seen as more of a consensus builder than his more combative predecessor, Herbert Diess. Surprisingly, the state of Lower Saxony, the company’s second largest investor, supports the review of the plants’ future.

Chief financial officer Arno Antlitz will address staff alongside Volkswagen brand chief Thomas Schaefer at a works council meeting tomorrow.

VW's works council head Daniela Cavallo, a member of the IG Metall union, says she expects Blume to get involved in negotiations, adding that Wednesday's meeting would be “very uncomfortable” for the group's management. The union has thwarted previous attempts at more deep-rooted changes, most recently in 2022 when Diess departed as CEO.

In a company statement, Schaefer says: “The situation is extremely tense and cannot be overcome by simple cost-cutting measures.”

The Dresden plant produces the ID.3 BEV and the Osnabrueck plant assembles the T-Roc Cabriolet CUV, Porsche Cayman and Porsche Boxster. The fate of those models should the plants close was not immediately known.

Volkswagen is the first of the group’s brands to undergo a cost-cutting drive targeting €10 billion ($11 billion) in savings by 2026 as it attempts to streamline spending to survive the transition to BEVs in the face of fierce competition from China’s state-subsidized domestic producers.

Cost cutting is vital to VW's competitiveness. The company is having to invest heavily in electric vehicles and batteries to meet clean-air mandates in Europe and North America. EVs are unprofitable until they reach a critical mass and majority share of total vehicle sales. And going forward, EVs require fewer workers to build them than internal-combustion-engine vehicles.

Add to all that the fact that VW's sales in China are under severe pressure from the rise of cheaper Chinese-made EVs, the produciton costs of which are subsidized by Beijing, and VW has a bleak future with a bloated workforce it has been prevented from trimming to competitive levels.