Volkswagen’s surprise turnaround deal averts showdown as job cuts loom

Volkswagen's shares surged to an 11-week high after the supervisory board approved a groundbreaking restructuring deal on Thursday, averting a potential showdown between major stakeholders. The agreement, the largest in the company's 89-year history, mandates another 50,000 job cuts, bringing the total to 100,000 and threatening the fate of four German plants.

The automotive giant is grappling with high tariffs in the United States, declining sales in China, and fierce competition from Asian manufacturers, all of which have eroded its operating margin to 3.8% in the first half of 2023, down from 7.9% in 2022.

Shareholders and analysts expressed relief at Volkswagen's ability to make decisive moves despite its vast workforce of over 650,000 employees and complex organizational structure. Although the agreement is a significant breakthrough, the real challenge lies in the execution. Ingo Speich of Deka Investment, a major shareholder, emphasized that the hard work is yet to begin, stating, "Does this mean Volkswagen is out of the woods?

Definitely not." Union Investment's Moritz Kronenberger echoed the sentiment, asserting that the pressure is now squarely on management to deliver on their promises.

Management, facing opposition from unions and Lower Saxony on the supervisory board, had previously contemplated a shareholder vote to push through their demands, which would have resulted in an unprecedented conflict among stakeholders. The directive to slash costs is expected to be primarily met by cuts in Germany, with around 25,000 positions targeted.

Volkswagen CEO Oliver Blume indicated that half of the savings would need to be realized domestically, suggesting a reduction of approximately 25,000 jobs at local operations.

While the deal offered little insight into the specifics of the job cuts, Volkswagen's executives noted that half of the savings must come from within Germany, potentially amounting to 25,000 positions. The details of the job reduction program will be negotiated between management and unions, who secured a job guarantee for most of Volkswagen's German workforce until 2030 as part of an earlier turnaround package in 2024.

Analysts from Citi commended the accomplishment but reiterated that the agreement alone would not alter Volkswagen's competitive landscape in Europe, nor would it alleviate China's market-share losses or the pressure from rising raw material costs. The company is contemplating alternatives for its German plants in Emden, Hanover, Zwickau, and Neckarsulm, which may include repurposing them under new ownership or finding new uses for them in the coming decade.

Lower Saxony's premier, Olaf Lies, while acknowledging the looming plant closures, urged management to seek alternative solutions rather than an automatic decision to cut capacity in Germany.