Will Volkswagen’s radical revamp be enough?
A year after revealing plans for capacity cuts and job losses in Germany, some think more retrenchment is needed
Saying goodbye to Volkswagen was a hard decision for Martin Maatz. Accepting the car maker’s voluntary redundancy offer after 15 years at the company’s Dresden factory involved a lot of “hand wringing”, the 40-year-old tells the FT.
Getting a job at Volkswagen had been a “dream” for him. The German auto giant “was simply the brand with the biggest draw,” he recalls, before adding that its image has “suffered a lot in recent years”.
Maatz, who works on the assembly line and acts as a shop steward, is one of 35,000 German workers whose jobs will disappear by the end of the decade, under a sweeping cost-cutting plan.
That deal, struck with the country’s powerful labour unions last year, was a milestone. It will lead to more than one in four domestic roles at the VW brand being axed and — for the first time in its 88-year history — the end of car production at one of its sites in Germany.
Volkswagen is struggling to adjust to the rise of electric vehicles, big sales declines in China and lacklustre demand in Europe. Its chief executive, Oliver Blume, warned at the time that the core VW brand faced an unprecedentedly “serious situation”.
“The general conditions haven’t improved. In fact, they’ve gotten worse”, says Stefan Bratzel, director of the Center of Automotive Management in Germany. The crisis has spilled over to the carmaker’s premium marques, Porsche and Audi, which historically have driven high growth and rich profits. US President Donald Trump has imposed tariffs on imported cars.
These will cost Volkswagen up to €5bn this year alone, putting it among the hardest hit carmakers in the world. “US tariffs, in particular, are having a lasting negative impact on our results,” chief financial officer Arno Antlitz tells the FT.
Auto industry experts are now asking whether last year’s landmark cost-cutting plan will be enough. “Another multibillion-euro funding gap has emerged,” says Helena Wisbert, professor for automotive economics at the Ostfalia University of Applied Sciences in Wolfsburg, the Lower Saxony city long dominated by the auto giant.
She questions whether the fragile compromise between Volkswagen and its powerful labour unions will hold until 2030, and says the carmaker could be forced to sell off business units or make more drastic cuts.
“I’m curious to see what Volkswagen comes up with, because this major cost-saving programme has already examined all possible cost reduction options.”
Analysts polled by Reuters forecast that the group’s net profit will more than half to €5.2bn this year compared to last. Porsche, the maker of the iconic 911 rear-engined sports car, fell into a loss in the third quarter after writing off €1.8bn because of delays to new electric vehicle models.
Even if a forecast rebound materialises as expected, Volkswagen’s group profit in 2027 will still be 16 per cent below its post-pandemic peak in 2023.
Its shares have dropped 60 per cent from the highs of 2021, wiping out €94bn in market capitalisation and making it one of the worst performing German blue-chips.
The group has responded by vowing to improve profits by €6bn by the end of the decade, with €2bn of the uplift coming from a long-term wage deal with unions that limits pay rises and trims perks, as well as another 15,000 job cuts at other business units.
“We must accelerate the implementation of the existing programmes and increase our efforts on the cost side — without making any concessions on the products,” Antlitz says.
Rival German carmakers BMW and Mercedes-Benz have also been hit hard by the downturn in China sales and the imposition of tariffs. But Volkswagen, the global symbol of German carmaking prowess, is more reliant on lower-margin mass market cars and employs a disproportionately large number of staff in Germany — two-fifths work there, even though only 19 per cent of its vehicles are manufactured domestically. Production costs in the country are among “the highest worldwide”, says Wisbert.
In China, Volkswagen has sought to shore up its position by localising development and says it can halve production costs for a new battery car compared with Germany, thanks to lower labour costs, quicker development times and stronger supply chains for key components.
For many, the surprise is that the company’s dramatic retrenchment has taken so long. Maatz, who will undertake a training course before looking for another job in the auto sector, says “it’s been a long time since anyone expected another outcome”.
The glass-walled “transparent factory” in Dresden where Maatz worked was conceived as a showcase for both German reunification and Volkswagen’s engineering prowess.
It was a pet project of Ferdinand Piëch, who spent more than two decades as chief executive and then chair and died in 2019. He was the grandson of Ferdinand Porsche, who had designed the cheap and dependable “people’s car” that handed Germany’s 1930s Nazi government a propaganda coup and gave Volkswagen its name.
But it was the domineering and autocratic Piëch, who took over at Volkswagen in 1993 during a profitability crisis, who transformed the group into a sprawling portfolio of automotive and truck brands and built up its commanding position in the Chinese market.
Piëch slashed procurement costs by squeezing suppliers and widened the group’s global footprint by acquiring luxury brands such as Bentley and Lamborghini and truckmakers MAN and Scania.
He and his protégé Martin Winterkorn, who became chief executive in 2007, pursued a grandiose vision of becoming the world’s biggest mobility group. In 2012, the enlarged group reported €25.5bn in pre-tax profit, the highest ever for a listed German company, and would later dethrone Toyota as the world’s biggest carmaker by volume.
During this era, sales growth and profitability was driven by high-margin premium brands such as Audi and Porsche — and its spectacular success in China. Volkswagen was a pioneer there, setting up the Shanghai Volkswagen Automotive Company, or SAIC, as early as 1984.
In the years leading up to the Covid-19 pandemic, Volkswagen cashed in close to €5bn of profit annually from its joint ventures. China became the single biggest market for Porsche and Audi, with the country’s nouveaux riches snapping up gas-guzzling luxury sedans and SUVs.
Piëch’s obsession with engineering expertise, detail and quality played well in premium models, such as the 570-horsepower Porsche Cayenne that famously towed a 285-tonne Airbus A380 across Paris airport in 2017.
But his managerial priorities did not wring the same benefits from the group’s main volume marque. Profitability at the Volkswagen brand was underwhelming even in better times for the wider group. Its operating margin averaged 3.2 per cent across the five years before the coronavirus pandemic, just half of management’s current target and far behind that of Škoda, another of the group’s volume brands whose manufacturing base is largely outside Germany.
The transparent factory came to symbolise such shortcomings. It was originally built to produce the flagship Phaeton, a luxury sedan named for a mythological Greek god with some variants costing €90,000 or more. But the car, widely derided as boring and overpriced, was a commercial flop and production finally ceased in 2016.
By that time Volkswagen was embroiled in a much deeper crisis. Early in 2015, Piëch and Winterkorn had a spectacular falling out, with Piëch quitting as chair of the group’s supervisory board as a result. Winterkorn resigned later that year, after US authorities discovered that the group had installed software to detect when diesel-engined cars were being tested for emissions and alter engine performance to ensure they complied.
“Dieselgate” erupted into one of the biggest frauds in German corporate history and dragged Volkswagen into a maelstrom of litigation around the world that has so far resulted in over €30bn worth of fines and settlements.
Former Audi boss Rupert Stadler pleaded guilty to fraud in 2023 and was handed a suspended jail sentence and fined €1.1mn. Proceedings against Winterkorn were suspended this year due to the former chief executive’s poor health.
The long years of success, particularly in China, “masked many structural problems in Wolfsburg”, says Bratzel. Governance experts and investors link Volkswagen’s many blunders to its byzantine corporate structure.
It has two classes of shares. The Porsche-Piëch family controls 53 per cent of the voting rights through its holding of ordinary shares. The Qatar Investment Authority owns a further 17 per cent. But most other institutional shareholders are reduced to owning so-called preference shares, which are far more liquid but do not carry votes.
VW is not “transparent” with its shareholders and its supervisory board is not truly independent, according to Ingo Speich, head of corporate governance at VW shareholder Deka Investment. He is also unhappy that such a large and complex conglomerate has, for the past three years, been run by a part-time chief executive, since Blume also runs Porsche — a role he will pass on only at the end of this year.
VW said it met all corporate governance requirements and that the supervisory board acted “in shareholders’ best interests”.
The state government of Lower Saxony, which Bratzel describes as economically “dependent” on Volkswagen, holds another 20 per cent of the voting rights. It also has a special veto on key decisions and can name two supervisory board members that do not require approval from other shareholders.
Another 10 seats on the 20-member supervisory board are held by workers representatives, as is normal at larger German companies. That means the two entities which share a desire to preserve jobs are able to outvote the representatives of the Porsche-Piëch family and the QIA.
Despite their control of the voting rights, “the owners cannot do what they want,” says Bank of America auto analyst Horst Schneider, adding that Volkswagen’s current cost-cutting plan might not be “sufficiently ambitious” and that its eventual scope would “depend on what management could do with the unions”.
After the Phaeton was abandoned, the Dresden factory was converted into a laboratory for VW’s electrification efforts, producing an electric version of the Golf hatchback and more recently the battery-powered ID.3.
But with an annual output of just 6,000 vehicles, the plant accounts for a tiny fraction of the group’s global output. Doubling up as a showroom, it is visited by tens of thousands of tourists a year who watch the live production through its massive glass walls.
After all production stops in mid-December, the site is set to become an “innovation campus” for Dresden’s Technical University, although VW plans to maintain a presence. Heiko Rabe, who joined Volkswagen almost 25 years ago and now works in the visitor centre, plans to stay on. But the looming end of carmaking was “sobering” for 300 or so remaining employees at the factory, he says.
A similar fate awaits for the much larger Osnabrück plant, which employs 2,300 staff and produced 35,000 vehicles last year. In mid-2027, the production of the final model made there — the T-Roc convertible — will end, and Volkswagen has not named a new model for the site.
Instead it is searching for a buyer, with defence group Rheinmetall initially expressing an interest but later pulling back. “Unless some kind of miracle happens, it will be extremely difficult [to save Volkswagen car production in Osnabrück],” says Jürgen Placke, the head of the local works council.
He insists that the site’s issues are not caused by German wage levels but poor managerial decisions. The Osnabrück factory has long specialised in low-volume niche models, and was the birthplace of the famous Karmann Ghia sports car in the 1950s. But demand for convertibles has been declining around the world.
When running at full capacity, the plant was not only profitable but — according to Volkswagen’s own internal benchmarking — “a top performer”, union representatives stress. They blame management’s flawed model strategy and the lack of EV models that appealed to consumers for the crisis.
The situation has become so dire that even Volkswagen’s headquarters in Wolfsburg — which has for decades been the largest car factory in Europe, cranking out more than half a million cars — will be stripped of two of its four production lines. Overall, the VW brand is slashing production capacity in Germany by 40 per cent, shutting production lines for 734,000 vehicles.
A year since agreeing the cuts, the company says it has made some palpable progress. It identified 70 per cent of the German workers who will leave by 2030. Factory costs at three of its largest sites — Wolfsburg, Emden and Zwickau — have been cut by 30 per cent on average already, it adds.
There are other positive signs, too. Drivers in Europe have started to warm to Volkswagen’s new electric vehicles, even as a wave of cheap imported Chinese cars threatens to undercut them. One in every four battery-powered vehicles sold in Europe so far this year has been produced by the German group.
In its home country, the VW brand’s electric car sales have risen by almost three-quarters so far this year, partly at the expense of Tesla, whose sales have halved. Some of its models, including the mid-sized ID.7 sedan, are regarded as being among the best battery-powered vehicles.
“We are currently very successful in the electric segment. That was not always the case,” says Alexander Sauer-Wagner, head of the German Volkswagen and Audi dealership association. He hopes that smaller and cheaper electric models, planned for launch over the coming two years, will bring a “big boost” to sales. He stresses that a strong offering in the entry segment was a must. “That’s ultimately what makes Volkswagen strong.”
Optimists point to Volkswagen’s overall heft as it owns some of the industry’s most coveted and emotional global brands, boasts deep engineering expertise and, despite the financial impact of dieselgate, still has a robust balance sheet; its automotive division had €31bn of net cash and short-term deposits at the end of September.
For the VW brand, “things are already looking up”, says Wisbert. “It has already reached the bottom.”
