Volkswagen (VOWG_p.DE) and its labor unions agreed to cut 30,000 jobs at the core VW brand in exchange for a commitment to avoid forced redundancies in Germany until 2025, a compromise which leaves the carmaker’s profitability still lagging rivals.
The turnaround plan announced on Friday will lead to 3.7 billion euros ($3.9 billion) in annual savings by 2020 and lift the Volkswagen (VW) brand’s operating margin to 4 percent that year, from an expected 2 percent in 2016.
That target still remains below rival European carmakers such as Renault (RENA.PA) and Peugeot Citroen (PEUP.PA), which is targeting an operating margin of 6 percent in 2021.
VW, Europe’s largest carmaker, is seeking to move beyond an emissions-cheating scandal that has tarnished its image and left it facing billions of euros in fines and settlements.
The cuts came with a management pledge to create 9,000 new jobs in the area of battery production and mobility services at factories in Germany as part of efforts to shift toward electric and self-driving cars.
“We have to invest billions of euros in new cars and services while new rivals will attack us – the transformation will surely be more radical than everything we have experienced to date,” VW brand CEO Herbert Diess said at a press conference.
DEEP ENOUGH?
Some experts argued the cost cuts were not deep enough.
Spending on R&D and staff across VW’s automotive operations has been growing for years with the need to overhaul the cost base dating back to before the diesel emissions scandal broke 14 months ago.
New Volkswagen models Golf Cabriolet and Passat are stored at the ‘CarTowers’ in the theme park ‘Autostadt’ next to the Volkswagen plant in Wolfsburg March 9, 2011. REUTERS/Christian Charisius/File Photo
“The deal may be the best the company could negotiate with labor but it’s not a victory for either side,” said Erik Gordon, a University of Michigan business professor.
“The cuts are too small to make VW cost competitive with Toyota (7203.T) and other global rivals.”
With 610,000 workers globally, VW last year built slightly fewer vehicles than Toyota which has 350,000 staff. The German company has also been slow to cease production of unprofitable vehicles in its 340-model range.
VW’s labor leaders said management had agreed to avoid forced redundancies in Germany until 2025, a step which clears the way to cutting 23,000 jobs via the more palatable methods of buyouts, early retirements and reducing part-time staff.
Jobs will also be cut in North America, Brazil and Argentina, VW said, without being more specific. Around 120,000 employees work for VW brand in Germany including 6,000 temporary staff.
UNIONS PLEASED
Many analysts and investors nonetheless welcomed the deal, sending the shares more than 2 percent higher to the top of the blue-chip DAX .GDAXI index in early Frankfurt trading. At 1324 GMT (8:24 a.m. ET), the stock was still trading up 0.8 percent at 118.5 euros.
Activist hedge fund TCI, which has been critical of Volkswagen management, said it looked like a good deal all round provided it could be made to stick.
“As long as they are net savings – the savings are not given back by increased costs elsewhere in the organization,” said TCI partner Ben Walker.
“They’ve just to deliver now. It’s easy to talk. They now have to deliver and execute,” he added.
Labor leaders were pleased with the outcome.
“The most important message is the jobs of the core workforce is secure,” VW’s works council chief Bernd Osterloh said at the news conference in Wolfsburg, where the company has its headquarters.
Management and labor agreed to outsource production of plastic parts from the German Braunschweig plant but will compensate workers by assigning more orders for chassis and steering assembly needed with rising investment in self-drive cars.
In a further sign of its shifting focus, VW said it will build electric cars at its German factories in Zwickau and Wolfsburg.
Electric motors will be built in Kassel, and VW will start battery cell production and development in Salzgitter.
Volkswagen will also build battery packs for electric and hybrid cars in Braunschweig, it said.
