VW faces defining test as CEO pushes for deep cost cuts

Automobiles on the VW Tiguan and Tayron SUV assembly line at a factory in Wolfsburg, Germany. (Krisztian Bocsi/Bloomberg)

Volkswagen AG’s Oliver Blume has spent nearly four years raking Europe’s biggest carmaker for savings. On July 9, the CEO  will try to convince its warring factions that much more is needed.

Gathering at the Wolfsburg headquarters, the supervisory board will consider the CEO’s plan for a sweeping restructuring that could ultimately eliminate as many as 100,000 jobs and close four German factories, according to people familiar with the discussions.

The proposals rank among the most drastic changes in Volkswagen’s postwar history. They set Blume on a collision course with labor unions and politicians who hold unique sway on defending jobs. Management is arguing the automaker needs an all-hands overhaul, including a carve-out of the VW brand, to withstand mounting competition from Chinese rivals led by BYD Co. 

“The German auto industry is in restructuring mode,” said UBS analyst Patrick Hummel in a recent note. “Companies need to intensify their efforts in light of sales declines in China and the growing market shares of Chinese carmakers in Europe.”

The risks are personal as well as corporate. Blume’s predecessor Herbert Diess lost his job after repeatedly clashing with powerful internal factions over the pace of reform, adding to a string of executive exits. After winning significant concessions on job cuts in 2024, accelerating pressures mean VW is still too bloated, expensive and slow to ensure a profitable future.

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Blume 

VW’s market valuation has shrunk to a decade-low of 38.6 billion euros ($44.1 billion), less than one-fifth of global rival Toyota Motor Corp. The pair used to compete for the global vehicle sales crown, though the Japanese company of late has led with over 11 million sold last year, compared with 9 million at its European rival. 

Driving efficiencies in Germany has significant potential. Average plant costs across Portugal, Romania and Spain are roughly one-third of those in Germany, highlighting “above average scope for cost reduction,” according to Jefferies analysts led by Philippe Houchois.

The drivers forcing the overhaul are structural rather than cyclical, in Blume’s view, with competition from China, domestically as well as in Europe, set to intensify. China remains the biggest single country market for vehicle sales, but profits have collapsed. Efforts to bring out new models made with local partners are running into a declining market.

In the U.S., where Volkswagen has long struggled with muted sales, executives expect President Donald Trump’s import tariffs will last regardless of changes in the White House, according to people familiar with the matter. The fear is that options for an orderly restructuring are fading ahead of market forces imposing even harsher choices.

VW strategists believe Chinese manufacturers like BYD and Chery Automobile Co. are making deeper inroads in Europe than headline sales figures suggest. They’re advancing quickly in individual countries, such as the U.K., before expanding further. Internally, a majority of senior managers recently described Volkswagen as facing an existential threat, according to people familiar with the findings of an internal survey.

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Yet VW’s unique set of power structures with extensive voting rights for labor leaders and the state of Lower Saxony mean piecemeal progress on strategic decisions at Germany’s most important industrial company. Specifically, VW’s 2024 pact with workers rules out compulsory cuts and limits reductions to no more than 35,000 positions at the VW brand in Germany by 2030.

Following last month’s revelations about a push to shed more staff and close plants in Germany, VW’s works council sent out a lengthy post on its intranet, detailing how the 2024 agreement cannot be canceled.

Up until now, the system has fostered stability and a long-term industrial base. Especially in Germany, VW plants are economic anchors for towns that guarantee industrial security. Closures would threaten the social bargain that has underpinned VW for decades.

“VW’s governance is Germany Inc. in miniature,” said Oliver Falck, professor of economics at the University of Munich. “It embodies the corporatist bargain at the heart of the German model: institutions shaped by consensus among large firms, unions and government.”

The pressure for change has become so intense that management has examined legal options to break the stranglehold. 

One possibility discussed internally involves seeking shareholder backing through an extraordinary general meeting, according to people familiar with the matter. This unprecedented step may be necessary should the supervisory board reject key parts of the restructuring, the people said.

Apart from further job cuts and more capacity reduction, which target closing the Zwickau, Emden, Hanover and Neckarsulm sites, Blume is seeking to walk back duplication, overlap and internal fiefdoms. At internal meetings, he has presented an eight-point plan that calls for fewer parallel projects, sharper choices on technology spending and more power for regional managers.

One agenda point the board might be able to agree quickly is a reduction in the number of models and variants. VW currently offers roughly 150. Getting that down to 100 or so would deliver savings and cut down on overlap, according to a person familiar with the plans. 

Some of the changes are in motion. Porsche AG CEO Michael Leiters and Audi boss Gernot Döllner are among the executives working on their own turnaround plans, with details expected later this year. For VW’s brand chiefs, the message is clear: scale will no longer be enough to cover weak performance.

The likely outcome is a compromise that softens the most severe options. With labor already signed up to a total of roughly 50,000 cuts across Volkswagen, including the Audi and Porsche brands as well as the Cariad software unit, unions will push management to fix products, software and decision-making before agreeing to more cutbacks to improve competitiveness.  

That points to voluntary reductions, lower investment, fewer management layers and production shifts rather than immediate plant closures.

If Blume cannot force that break, Volkswagen is unlikely to face an immediate crisis. The danger is slower and more corrosive: Europe’s biggest carmaker keeps defending jobs, factories and brands that struggle to earn their cost of capital, while Chinese rivals take more of the growth VW once counted on.

Moritz Schularick, head of the Kiel Institute for the World Economy, has warned that VW’s survival as an independent company could, eventually, come into question.

“I do think that the automotive industry, mobility and autonomous driving are areas where we want to continue to play a role,” Schularick said in emailed comments to Bloomberg. “But whether VW is the right horse for us to bet on, I’m very skeptical about that.”