Volkswagen’s turnaround plan might be just delaying its demise

Volkswagen has won support from its unions to carry out the most sweeping overhaul in the German automaker’s 89-year history. But the biggest tests for the company and its chief executive, Oliver Blume, lie ahead.

After surprising investors this past week with an agreement to cut about 50,000 additional jobs, Blume needs to put his plan into action, reducing costs that he estimates are 30 per cent higher than those of rivals and slashing production capacity by more than 500,000 vehicles a year.

The labour deal “gives Volkswagen some breathing space, but essentially the problem is merely being postponed,” said Matthias Schmidt, an auto industry analyst in Germany.

Volkswagen must confront an array of challenges, from intensifying Chinese competition to the US tariffs that have eroded profit margins and threatened its survival. The deal has spurred hope that the company, and Germany’s ailing industrial sector more broadly, can overcome those obstacles, while also underscoring the pain that companies and their employees are likely to endure as businesses become leaner and less complex.

Volkswagen’s shares gained nearly 6 per cent on Friday, the biggest daily gain in nearly nine months. Even so, the company has lost about a quarter of its value so far this year.

The plan would bring total job cuts to about 100,000 by 2030, or 15 per cent of the company’s global workforce. It would also halve the number of Volkswagen models and reduce annual production to 9 million cars, compared with a target of 12 million before the COVID-19 pandemic. Many details, including the fate of four German factories, remain unsettled.

The company has said plants in Emden, Hanover, Zwickau and Neckarsulm don’t have a clear future beyond 2030. Still, there could be ways to avoid shutting factories, potentially by converting them for use by the defence industry as Germany ramps up spending to deter Russia’s military threat. Blume has said talks with defence companies are under way.

Such steps are unlikely to offset Volkswagen’s declines.

“People forget how big the car industry is,” said Harald Hendrikse, a managing director at Citi Research. “The chance of saving all of these jobs and all of this capacity with the defence industry is zero.”

Other options include selling its cars developed in China to the European market, or sharing capacity in Europe with Chinese partners.

After decades of growth in China, the world’s largest car market, Volkswagen’s sales in the country have plunged as Chinese companies have raced ahead in the shift to electric cars. The company also faces fierce competition from Chinese rivals at home. It has struggled in the United States– where, via very high tariffs and other restrictions – the government has effectively banned cars made by Chinese companies.

China’s “rapid rise really caught foreign automakers off guard, and it especially caught the German automakers off guard,” said Jacob Gunter, a China specialist at the Mercator Institute for China Studies.

Cheaper imports from China are fuelling calls for tougher measures to counter what businesses see as unfair competition. Encouraged by government subsidies, Chinese brands began focusing on electric vehicles years ago and making investments that have allowed them to take advantage of brisk demand for such models. Of new vehicles sold in Europe, about one in five is electric.

More than half of companies in Germany support stronger European Union measures to address “distortions of competition,” even if they face higher prices, tariffs or Chinese retaliation, according to a survey by the German Chamber of Commerce and Industry.

If the current policy environment remains unchanged, Chinese makes could triple their share of the European auto market to as much as 30 per cent by 2035, said Citi analyst Hendrikse. A more aggressive stance towards Beijing could slow China’s advance, if modestly. Extending tariffs on Chinese electric vehicles to plug-in hybrids could limit China’s market share to about 25 per cent, he estimated.

“It gives Volkswagen more time to deal with these factories,” he said. “If we don’t protect the European profit pool, these companies simply won’t be here.”

As a measure to improve European competitiveness and take on China, Volkswagen’s deal could provide a blueprint to other companies. Investors had doubted the company could pull off a labour deal, setting off speculation that the management team might try to bypass the supervisory board and go directly to investors through an emergency shareholders meeting.

Workers at Volkswagen, as with counterparts Mercedes-Benz and BMW, hold half the 20 seats on the supervisory board. Shareholders also have 10 seats – at Volkswagen, two of those are held by the state of Lower Saxony, which owns 20 per cent of its voting stock.

“The market debate was never about whether Volkswagen had challenges,” Deutsche Bank analysts wrote in a note on Friday. “It was about whether those challenges could realistically be addressed within Volkswagen’s complex governance structure. [The] agreement does not end that debate, but it provides the strongest evidence yet that the answer may be yes.”

This article originally appeared in The New York Times.

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