Volkswagen’s (VOWG_p.DE) 10 billion euro ($10.9 billion) savings program will include staff reductions; managers told staff on Monday as brand chief Thomas Schaefer warned that high costs and low productivity were making its cars uncompetitive. The German carmaker is amid negotiations with its works council over a cost-cutting scheme at its VW brand, the first step in a group-wide drive to boost efficiency in the transition to electric cars. Management and workers’ union IG Metall have yet to agree on details, but the plan is expected to result in redundancies.
Currently, the VW brand is not profitable. According to Schaefer, it cannot compete against rivals that can offer cheaper electric vehicles, who added that the existing operations could be simpler, faster, and more flexible. “There are many spheres where we have to reduce the number of employees,” he said. “We have to take decisive action.”
The brand is expected to save as much as 10 billion euros by 2026, to double the return on sales to around 6 percent. This will require measures including reshaping production, workforce reductions, a shift to flexible working arrangements, and the rationalization of platforms. The management board, including Schaefer and IG Metall representatives, said it would leverage early retirement and pension rules to trim positions without dismissing. The bulk of the savings target would be realized through measures other than personnel reduction, human resources board member Gunnar Kilian added. The full details of the program are due to be defined by year-end.
Investors have hesitated to back Volkswagen shares because of a clunky management structure that allows unions to dominate, blocking attempts to turn the company into a regular corporation where profit-conscious shareholders call the shots. VW’s supervisory board has 20 seats, with labor representing half of the votes and politicians from Lower Saxony often voting with them. This union domination contributed to the early demise of former CEO Herbert Diess earlier this year and may continue to push investors away from the company.
VW’s strategy shift is aimed at proving to investors it can protect market share in the shift to electric vehicles, which have higher upfront costs than combustion alternatives. The brand has already committed to putting 30 fully electric vehicles on the market by 2025 to capture a substantial part of the growing global demand for electric cars. This requires a massive investment in electric vehicle production and a change in business models that will see the firm shifting from selling vehicles to renting, leasing, or sharing them. This will generate new revenue streams and help make the company more efficient. This will be key as it faces competition from established and start-up companies in the mobility sector. As a result, it is looking to cut costs and improve profitability by offering its vehicles at a lower price point.