Volkswagen’s high-stakes reset: factory closures, layoffs, and wage cuts

Volkswagen is planning a major downsize in its home country to maintain competitiveness amidst market losses in China and a shift toward electric vehicles.

Driving the news: The German automaker reported a 7% decline in global deliveries at the end of Q3, negating a 6% surge in the U.S. and forcing the brand to develop a desperate cost-cutting strategy.

• Volkswagen now plans to shutter three facilities in Germany, marking the first factory closure in its home country in the company’s history. The news was confirmed this morning by Daniela Cavallo, head of the brand’s work council (an employee organization similar to unions).

• While Cavallo did not explain which sites would be terminated or how many employees would be affected, the automaker is also considering a 10% wage cut and a two-year wage freeze, despite receiving stiff pushback from labor groups.

• These and other measures are aimed at cutting 4 billion euros in costs and boosting operating return on sales from their current level of 4% to 6.5% by 2026.

Zooming in: The announcement highlights ongoing uncertainty among Volkswagen leaders as they grapple with the ongoing shift to electric vehicles and declining demand in China.

• Although EV adoption remains underwhelming in most key markets, sales have been rising rapidly in China. Deliveries of electric cars (including hybrids) to Chinese residents jumped 47.9% in September to 1.12 million units, compared to 4.3% growth in the U.S. and Canada.

• China is also where foreign car brands continue to see the most weakness: Volkswagen sales in the country were down 15% in Q3. Conversely, the few automakers that reported higher demand in China (namely Tesla) did so thanks to better EV sales.

• However, while EVs may represent a way to retake market share in China, Volkswagen’s own electric car strategy remains confusing. While its floundering Audi EV factory is likely to be one of the German plants sold off in the coming months, the company just last week announced plans to launch two new EVs under its Scout Motors brand.

Bottom line: Volkswagen is making desperate moves to clear a path forward, even if it means making wildly unpopular decisions among its workforce. At the same time and despite the sense of urgency, the company’s plans for growth remain conflicting, suggesting that its struggles are far from over.

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