Key Points:
- Volkswagen’s supervisory board approved a major restructuring plan to reduce structural operating costs by over 10 billion euros ($11 billion).
- The plan includes potential closures of German factories for the first time in the automaker’s 87-year corporate history.
- Management scrapped a 30-year job security agreement and proposed a 10% wage cut for 120,000 German employees.
- The core passenger car brand’s operating margin fell to 2.1% amid slowing European electric vehicle sales and stiff Chinese competition.
The supervisory board of Volkswagen AG approved a comprehensive restructuring roadmap to overhaul the automotive giant’s manufacturing footprint and eliminate billions of euros in fixed operational costs. The decision empowers executive management to pursue unprecedented cost-cutting measures, including potential factory closures in Germany for the first time in the company’s 87-year history. The board’s approval marks a decisive turning point for Europe’s largest automaker as it confronts sluggish electric vehicle demand, high German labor costs, and intense competition from Chinese rivals.
Under the transformation plan, Volkswagen aims to achieve more than 10 billion euros ($11 billion) in structural cost reductions across its core passenger car brand by 2026. The automaker’s operating margin for the core VW brand fell to 2.1% during the first half of the year, falling far short of its 6.5% profitability target. Executive leadership warned that lagging profit margins and excess factory capacity leave the company with an annual production surplus of roughly 500,000 vehicles, equivalent to the output of two full-scale assembly plants.
To address the capacity surplus, Volkswagen management is targeting at least two to three German facilities for potential closure or downsizing. Sites under review include the vehicle assembly factory in Osnabruck and the transparent glass factory in Dresden, alongside component production facilities in Kassel and Salzgitter. Shutting domestic assembly lines would break a long-standing taboo in German industrial politics, setting up a historic confrontation between corporate executives and powerful labor representatives.
As part of the restructuring drive, the company officially terminated its 30-year job security agreement, which had protected domestic German manufacturing jobs since 1994. Ending the employment protection pact opens the door for compulsory layoffs of up to 30,000 workers starting next year. Management also demanded a 10% across-the-board wage reduction for roughly 120,000 domestic employees, alongside the cancellation of annual bonuses, to bring German labor costs closer to European competitor benchmarks.
Labor leaders and the powerful IG Metall union responded with fierce resistance to the restructuring plan. Works council leader Daniela Cavallo warned that employee representatives will fight factory shutdowns and compulsory layoffs with widespread industrial strikes across German manufacturing plants. The union argued that management made severe strategic miscalculations in product planning and software development, insisting that executives should reduce executive bonuses and dividend payouts before cutting factory floor paychecks.
The crisis reflects a fundamental shift across the European automotive market, where total new car sales remain nearly 2 million units below pre-pandemic levels. High electricity costs, elevated interest rates, and the sudden termination of government electric vehicle purchase subsidies in Germany caused consumer demand for battery-electric cars to cool rapidly. At the same time, low-cost Chinese automakers like BYD are expanding aggressively across Europe, offering feature-rich electric and hybrid cars at prices up to 30% below comparable Volkswagen models.
The pressure is equally severe in China, previously Volkswagen’s largest and most profitable single market. Chinese consumer preferences have shifted rapidly toward domestic software-defined electric vehicles, eroding Volkswagen’s market share and slashing joint-venture profit contributions by more than 15%. To reverse its fortunes, Volkswagen is pursuing an “in China, for China” strategy, partnering with the Chinese electric-vehicle startup Xpeng and local software firms to accelerate development cycles and reduce component costs by 40%.
Software development challenges have plagued Volkswagen’s electric vehicle rollout for years, triggering costly vehicle launch delays across its Porsche, Audi, and VW brands. In response, the supervisory board endorsed a $5.8 billion joint-venture partnership with American electric truck maker Rivian. The strategic alliance allows Volkswagen to license Rivian’s advanced electrical architecture and vehicle software platform, replacing troubled internal software projects with proven, over-the-air computing technology.
Beyond factory rationalization, Volkswagen is reorganizing its multi-brand corporate structure to eliminate duplicate engineering expenses. The group is consolidating vehicle platforms across mass-market brands Volkswagen, Skoda, and Seat/Cupra, while sharing battery cell production architectures across its PowerCo battery subsidiary. Standardizing prismatic battery cells and vehicle platforms will allow the automaker to lower procurement costs and improve economies of scale across European gigafactories.
As formal collective bargaining negotiations begin with union officials, the supervisory board’s approval of the transformation plan signals that Volkswagen’s leadership is committed to structural reform. Overcoming entrenched labor resistance will determine whether Europe’s automotive flagship can restore its financial health, modernize its manufacturing base, and successfully defend its global position in an increasingly electrified and competitive automotive market.
