Volkswagen is facing significant challenges, including potential factory closures and a historic reduction of 35,000 jobs as part of a cost-cutting strategy. Despite a 10% rise in global sales, the company has seen a 4% drop in revenue, with after-tax profits down 31%. The transition to electric vehicles is hindered by delays and internal conflicts, complicating its competitive position against rivals like Tesla. Analysts warn that aggressive measures may not suffice to navigate the automotive sector’s turbulent landscape.
Volkswagen Faces Tough Times Ahead
The union representative has warned of a challenging winter, ready to spearhead “the most formidable collective bargaining struggle Volkswagen has ever encountered.” On the management side, unsettling decisions are on the table: for the first time since its foundation in 1937, the automotive giant is contemplating the closure of three factories. However, a deal with the unions was finalized on Friday, December 20, ensuring that no sites will be closed, but resulting in the elimination of 35,000 jobs without forced layoffs. This drastic measure signifies a historic reduction, equating to one-third of the workforce in Germany. Employees will also forfeit a planned 5% salary increase over two years, a concession better than the initial proposal of a 10% salary cut under existing agreements. “Job security hinges on thriving operations,” stated Arne Meiswinkel, Volkswagen’s chief negotiator, emphasizing the need to reduce labor costs.
Challenges Beyond Borders
The crisis enveloping Volkswagen is not confined to Germany alone. The Audi factory in Brussels is set to halt operations in February 2025, while the company plans to close a site in Xinjiang, China, with rumors swirling about another potential factory closure in Nanjing. Despite a 10% global sales increase in 2023, the automotive titan is grappling with a brutal downturn, reflected in a 4% revenue decline between January and September 2024. Although the company remains profitable, its after-tax profits have plummeted by 31%. The abrupt cessation of the ecological bonus in Germany at the close of 2023, paired with similar cuts in France, has severely impacted electric vehicle sales. “These uncertainties hinder market vitality. The vehicle fleet age in France is currently unprecedented,” noted Xavier Chardon, president of Volkswagen Group France. Additionally, the electric vehicle market disruption may leave the company without the batteries it expected from Northvolt, a Swedish manufacturer in which Volkswagen held a significant stake, which declared bankruptcy in November 2024.
While sales stagnate, the company miscalculated the end of the post-Covid era, characterized by shortages of components and a slowdown in production. This was a golden age for automakers, who capitalized on demand outstripping supply. Economist Bernard Jullien had previously cautioned against the sustainability of this “pricing power,” stating, “The extraordinarily high profits of the post-Covid years acted as a potent drug, and now the automotive sector is struggling to move on.” As the shortage of components begins to ease and a price war reignites, new car sales in Europe have yet to rebound to their 2019 levels, with projections suggesting they may not recover by 2035, the year thermal vehicles will be banned from production. “Volkswagen represents a quarter of the European market, making it particularly vulnerable,” remarked German analyst Matthias Schmidt, indicating a significant shortfall of half a million cars to meet demand at Volkswagen’s German factories.
In contrast to its competitors, Volkswagen has significantly lessened its workforce. For instance, Renault reduced its ranks by 21% and Stellantis by 15% between 2019 and 2023, while Volkswagen’s workforce shrank by only 2% before the recent plan was announced. However, will aggressive cost-cutting measures be sufficient for Volkswagen to navigate through these turbulent waters, akin to strategies employed by Carlos Tavares at Stellantis? The unexpected ousting of a performance-driven leader in early December served as a reminder that such drastic measures may not guarantee success. “Outsourcing and global purchasing can have limitations, as evidenced by quality issues at Stellantis,” warned an industry insider, referencing substantial vehicle recalls, particularly concerning the Citroën C3 and its defective airbags.
In addition to staffing issues, Volkswagen has faced challenges in transitioning to electric vehicles. Despite a concerted effort to recover from the “dieselgate” scandal, the company initially positioned itself as a leader in electrification. In 2019, the former CEO Herbert Diess praised Elon Musk as a visionary while announcing a massive investment plan of €60 billion for electrification and software from 2020 to 2024. However, Diess’s ambition led him to pursue an independent path, launching Cariad, a division focused on software and electronics with 6,000 employees. Meanwhile, competitors formed strategic alliances, like Renault with Google and Stellantis with Amazon. “Volkswagen’s decision to operate independently may reflect a lack of humility, in contrast to Renault’s more pragmatic choices,” noted Michaël Foundoukidis, a financial analyst at Oddo BHF.
The Cariad initiative has encountered numerous hurdles, leading to delays in the development of models like the Volkswagen ID.Golf and Audi Q6 e-tron. Unlike Tesla, which benefits from a streamlined electronic architecture, Volkswagen’s extensive network of 114 factories and 12 brands complicates their operations. “Despite ample financial resources and talented engineers, the group’s culture has posed significant challenges,” shared a former employee of Cariad. The division, intended to operate with a degree of autonomy, became entangled in internal conflicts between brands, complicating decision-making processes. “If an additional cost of 10 euros arises, Porsche is unconcerned, while Audi and Volkswagen are much more cost-sensitive, making consensus challenging,” added another ex-Cariad employee.
Furthermore, Tesla’s success can be attributed in part to their simplified electronic systems, featuring fewer computers that facilitate updates. “At Volkswagen, every computer is tied to a specific department, complicating coordination,” explained a developer familiar with the company’s operations.