Following a tumultuous year of declining sales as a result of its emissions-cheating scandal, today Volkswagen agreed to cut 30,000 jobs at the core VW, roughly 5% of its global salesforce of 624,000. After months of intense talks, labor and management agreed on a package to balance cost-cutting with investment as the auto industry shifts away from traditional combustion engines and adapts to car-sharing services and self-driving technologies.
The job cuts will come through attrition in the form of early retirement and not replacing workers that leave; the company vowed to refrain from forced layoffs until 2025. The savings comprise 3 billion euros at its German factories and another 700 million euros abroad. Argentina and Brazil will be hit hardest by the staff reduction outside Germany, with Volkswagen’s personnel chief Karlheinz Blessing describing the Brazil cuts as “brutal.”
“This is a big step forward, maybe the biggest in the company’s history,” VW brand chief Herbert Diess said at a press conference in Wolfsburg. “All manufacturers must rebuild themselves because of the imminent changes for the industry. We need to brace for the storm.”
The deal is expected to result in €3.7 billion in expense reductions as the company tries to streamline operations and cut costs. However the compromise leaves the carmaker's profitability still lagging rivals: the plan is expected to lift the VW brand's operating margin to 4% by 2020, from 2% this year, but still below rival European carmakers such as Renault and Peugeot Citroen which are targeting an operating margin of 6 percent in 2021.
Volkswagen, Europe's largest automaker is trying to increase savings at its biggest business in its home base of Germany, where its costs are high. Reuters notes that VOW must also find billions of euros to pay fines and settlements stemming from its diesel emissions cheating scandal as well as fund a strategic shift toward electric and self-drive cars. Volkswagen's labor leaders said management had agreed to avoid forced redundancies in Germany until 2025 a step which clears the path to cutting 23,000 jobs via buyouts, early retirements and by reducing part-time staff.
Jobs will also be cut in North America, Brazil and Argentina, VW said. Around 114,000 employees work for VW brand in Germany.
Labor leaders agreed to the cuts in exchange for a management pledge to create new 9,000 new jobs in the area of electric cars, mainly at factories in Germany. As all mass layoff announcements, this one too was initially cheered by markets, which sent the company's shares more than 2% higher to the top of the blue-chip DAX index in early Frankfurt trading, and reducing the drop since the scandal broke in September 2015 to 27 percent. However, later in the day, the gain was all but wiped out.
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 delivery and execute," he added.
Labour leaders were also pleased with the outcome. "The most important message is the jobs of the core workforce is secure," Volkswagen's powerful works council chief Bernd Osterloh said at a news conference in Wolfsburg. "We have agreed that forced redundancies are ruled out until end 2025. When I see what is going on at other companies, this is a big success in difficult times," Osterloh said.
There was also some bad news for Tesla. In a concession to workers, Bloomberg notes that the manufacturer agreed to build two electric cars at German sites, one in Wolfsburg and one in Zwickau. The company will add as many as 9,000 positions for future-oriented projects such as electric vehicles and digital features. The state of Lower Saxony, where Volkswagen is based, will become a technology hub for the manufacturer, and many of the 1,000 jobs to be created there will be for software engineers and cloud-technology experts. 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 at its plant in Braunschweig, the company said.