After long talks, VW and the union agree to cut 35,000 jobs in Germany

On Friday, Volkswagen (VOWG_p.DE) announced significant changes to its German operations, including over 35,000 future job cuts and significant capacity reductions. These changes are part of a last-ditch agreement between Europe’s largest car manufacturer and unions to prevent nationwide strikes.

Union leaders celebrated the agreement as a “Christmas miracle” following the most arduous negotiations in the company’s 87-year history, which lasted for 70 hours. There would be no immediate site closures or cutbacks, and VW appeared to have relented on its demand for a 10% wage reduction.

The agreement that prevents costly strikes may also offer investors respite after months of negotiations. There was a 2.4% increase in shares in extended trading following the agreement. They have suffered a 23% decline this year.

Since September, Volkswagen has been in discussions with union representatives regarding the measures it deems necessary to compete with less expensive Chinese competitors, address inadequate demand in Europe, and manage the slower-than-anticipated adoption of electric vehicles.

Protesting against Volkswagen’s cost-cutting initiatives, approximately 100,000 employees have already implemented two distinct strikes within the past month, which are the most extensive in the company’s history.

In a statement, Volkswagen Group CEO Oliver Blume stated, “The company has established a critical course for its future in terms of costs, capacities, and structures with the package of measures that has been agreed upon.”
“We are now back in a position to successfully shape our own destiny.”

According to VW, the agreement would result in annual savings of 15 billion euros ($15.6 billion) over the medium term. The company did not anticipate any substantial changes to its 2024 guidance. Despite the absence of any immediate closures, Volkswagen announced that it was investigating potential solutions for its Dresden facility and the repurposing of the Osnabrueck site, which included the search for a buyer. There would be a transfer of some production to Mexico.

Vehicle production at the Dresden facility would cease by the conclusion of 2025. VW AG’s personnel will not receive salary increases pursuant to a collective wage agreement for the subsequent four years, and certain incentives will be eliminated or diminished.
Production at Volkswagen’s Wolfsburg facility, which is its largest, will be reduced from four to two assembly lines.

According to Daniela Cavallo, the chief of the works council, “No site will be closed, no one will be laid off for operational reasons, and our company wage agreement will be secured for the long term.”

Continues to converse into the night

Negotiators had been engaged in the fifth round of negotiations since Monday and had persevered until the late hours of the night in Hanover this week. They only took brief pauses to rest and replenish their supplies of coffee, curried sausage, and fruit.

The 35,000 future employment cuts would account for approximately 25% of VW’s workforce and would be implemented in conjunction with the reduction of the company’s German plant network by over 700,000 vehicles.

Nevertheless, IG Metall’s chief negotiator, Thorsten Groeger, stated that the cuts, which would not entail compulsory redundancies, were a response to overcapacity and would be implemented in a socially responsible manner.

According to Matthias Schmidt, a European auto markets analyst, the present stagnation in the European market is unlikely to be resolved by 35K job cuts on a demographic curve up to 2030, as it is a too-long time frame.

According to him: “I would say the unions can take more from this than VW but realistically because of the complicated structure of the company this was probably the best they could have realistically hoped for.”

Porsche SE (PSHG_p.DE), Volkswagen’s largest shareholder, expressed his admiration for the agreement reached on Friday, describing it as a “substantial enhancement to Volkswagen’s competitiveness.” He also emphasized the necessity of implementing the reductions.

CAMPAIGN ISSUE

During the discussions, which were conducted in a dated, unadorned business hotel located on the outskirts of Hanover, delegates from both parties engaged in a series of rounds that were occasionally interrupted by breaks, during which they replenished their coffee and fruit supplies well after midnight.

A round of cards was played by a few employees in order to alleviate stress.

At a moment of political upheaval and uncertainty in Europe’s largest economy, as well as broader turmoil among the region’s automakers, the Volkswagen crisis has struck.

In anticipation of a snap election in February, the issue of how to address Germany’s slow development has become a central campaign issue. Chancellor Olaf Scholz, who is currently facing a deficit in the polls, has encouraged Volkswagen to maintain the operation of all of its factories.

Scholz applauded a “good, socially acceptable solution” on Friday night, stating in a statement, “Despite all the hardships, it ensures that Volkswagen and its employees can look forward to a good future.”

Initially, Alexander Krueger, the chief economist at Hauck Aufhaeuser Lampe Privatbank, stated that it appeared to be a compromise that both parties could accept.

“Other companies are also pursuing job-cutting plans, and VW appears to be just the beginning,” said the executive. “Competitive price pressure will probably require further adjustments at a later date.”

Former Volkswagen executives, such as Herbert Diess and Bernd Pischetsrieder, were unsuccessful in their endeavors to implement substantial modifications to the Wolfsburg-based automobile manufacturer due to the unions’ intransigence.

IG Metall’s threat of strikes was a potent bargaining tool. VW may have experienced a revenue loss of up to 100 million euros and an operating profit loss of approximately 20 million euro on each strike day in Germany, according to UBS. This estimate is based on a decrease in the production of 2,000-3,000 vehicles per day.