VW Union vs. Management: The Future of VW’s German Operations

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In the pre-Christmas news lull, one of the biggest automotive industry stories of 2024 almost went unnoticed. After weeks of labor disputes, discussions, strikes and tensions, VW Group reached a comprehensive cost-cutting agreement with its workforce, represented by the Volkswagen labor union IG Metall, as well as Works Council leaders.

The "Future of Volkswagen" Settlement: Gradual Job Cuts but No Plant Closures

The agreement is known as "Zukunf Volkswagen" (The Future of Volkswagen) and covers the Volkswagen passenger car brand, Volkswagen Commercial Vehicles and Group Component operations in Germany. The agreement will see VW shed 35,000 jobs across its domestic operations.

However, VW's management made a significant compromise that ensures no plants will close because of the settlement.

VW Job Cuts and Manufacturing Adjustments

VW will reduce the two vehicle brands' manufacturing capacity from more than 1 million units per year to 734,000 units. The 35,000 job cuts will occur gradually through 2030 and will be made in a "socially responsible" manner, which means there will be no compulsory redundancies.

VW claims that these changes will save more than €15 billion per year in the medium term. Of this, more than €4 billion per year will come from labor costs, structural and production measures and plant usage, with labor cost savings alone contributing €1.5 billion a year.

In exchange, IG Metall and the Works Council won a new job security plan for the company's blue-collar workforce that will last until 2030. The plan also outlines ambitions for the core VW passenger car brand to become "the technology leader of the world's volume manufacturers by 2030."

A Compromise for the Future

The plan will allow VW to achieve its medium-term return-on-sales target of 6.5%. According to VW Group CEO Oliver Blume, "With the package of measures that has been agreed, the company has set a decisive course for its future in terms of costs, capacities and structures. We are now back in a position to successfully shape our own destiny."

The agreement appears to be a major victory for VW's Works Council and IG Metall. It makes no mention the 10% across-the-board pay cut or three plant closures that VW's management had sought. The lack of plant closures in particular is a major concession, and further adjustments are likely between now and the end of the decade when the agreement expires.

The Zombie Plant Dilemma: What to Do with Underperforming Plants?

The danger now is that VW's management may end up operating facilities that are effectively "zombie" plants that have extremely low capacity and no real purpose within the company's wider production network.

For example, VW has yet to allocate any production to the Dresden facility beyond the end of 2025 and is exploring a third-party use for the plant, such as for a non-VW Group OEM contract manufacturing facility.

Industry-wide Struggles in Europe

This scenario mirrors challenges faced by other automakers. Audi's Brussels plant is closing next year and Ford's Saarlouis facility in Germany is facing similar struggles. VW may be hoping for a huge uptick in European passenger car market demand in the next year to make its plan viable, but this seems unlikely.

The situation at the Osnabrück facility also seems overly optimistic, particularly given the low demand for the T-Roc convertible—a model that has always been something of a niche proposition. With Porsche moving Boxster and Cayman production away from the facility, this lack of demand for the T-Roc convertible will soon force some action.

The agreement falls short of VW management's original goal to make its German operations more competitive, especially after VW brand head Thomas Schäfer told Reuters in November that plant closures and layoffs were inevitable. This stance may have been a negotiating tactic, but it also could simply reflect reality. In 2015, VW passenger car and commercial vehicle domestic production was at 1.62 million units, but the new planned capacity of 734,000 units is less than half that figure.

The Viability of Maintaining Excess Capacity

VW now faces a tough question: even with job losses, can the company maintain the same number of plants as a decade ago while producing half as many vehicles? In an increasingly uncertain market driven by intense price competition and fierce battles for share across Europe, the answer remains unclear.

Ultimately, consolidation of VW's domestic manufacturing footprint seems inevitable. While this latest settlement has postponed that decision, it may be only a matter of time before the company faces the reality of shrinking operations.

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This article was published by S&P Global Mobility and not by S&P Global Ratings, which is a separately managed division of S&P Global.