Oliver Blume, the CEO of Volkswagen, has to put aside his reputation as a team player in order to take on Germany’s strong labour unions, on top of the declining demand for electric vehicles and competition from Chinese manufacturers.
Volkswagen announced that it was considering closing its German plants in addition to discontinuing a 30-year-old job security programme that exposed the pressure on the leading automaker in Europe.
The company refers to these as its “two holy cows,” according to Moritz Kronenberger, portfolio manager at Volkswagen shareholder Union Investment.
Oliver Blume’s decision to take on these organizations puts him at odds with the IG Metall union, one of the strongest stakeholder groups in Germany, whose primary objective is to defend favourable working conditions, jobs, and sites in the largest economy in Europe.
Daniela Cavallo, head of the VW works council, ruled out factory closures during her tenure, stating that unions would “fiercely resist” the proposals.
“It would be extremely uncomfortable,” she said, for management to address employees at a staff meeting. Since 1988, when it closed its Westmoreland facility in Pennsylvania, Volkswagen has not shut down a plant. It announced in July that it may close the Audi factory in Brussels, citing a precipitous decline in the market for premium electric vehicles.
Volkswagen has not closed a plant since 1988 when it shut its Westmoreland site in Pennsylvania. In July 2024 it said it might close an Audi factory in Brussels citing a sharp drop in demand for high-end electric cars.
Cost Factor Kicks In
Germany’s heavy engineering industry, which includes some of its most illustrious companies like Thyssenkrupp, is further lagging behind international competition as a result of high energy and labour costs. Among the major European automakers, Volkswagen has performed the worst, with its shares down nearly a third over the last five years. This has alerted investors.
Oliver Blume’s problem is that the Volkswagen Group has become increasingly thinly spread due to growing competition, chiefly from China, which leaves him with little option but to take on IG Metall.
It is behind schedule on a 10 billion euro (USD 11 billion) cost-cutting programme at its namesake brand while needing to fund critical international projects, including a potential USD 5 billion investment in US EV maker Rivian, and a partnership with China’s Xpeng.
“If more investments, such as in Rivian and XPeng, want to be achieved, those savings need to come from somewhere, and it appears underutilised plants are no longer a taboo, marking a massive cultural change. Decades of CEOs who wanted to do something similar…will feel vindicated if Oliver Blume can make the move stick,” Matthias Schmidt, a European auto markets analyst said.
Is The Crisis Going Out Of Bounds?
Oliver Blume, who became the group’s CEO in 2022, has kept up positive relations with the unions and the influential Porsche and Piech families, who own Volkswagen. This is essential for navigating the interests of various stakeholders.
With the group for three decades, he is credited with implementing change at the Porsche AG division he also heads while usually avoiding high-profile clashes with labour representatives.
“With Volkswagen, there’s always this tension between what’s needed and what is achievable, and so this is why we’ve been down this road many times before,” Stephen Reitman of Bernstein, who has covered Volkswagen since the mid-80s said.
“Oliver Blume is meant to be the peacemaker, was meant to be … the one who could bridge all the different constituencies,” he said, adding the current situation suggested that approach was not necessarily working.
Volkswagen’s long-standing governance structure gives labour unions and the surrounding state of Lower Saxony enormous influence.
After the company was taken over by the federal government, which later sold its stake and the state after World War Two, Lower Saxony was granted a 20% voting share and the ability to veto important decisions.
On Volkswagen’s Supervisory Board, which has a two-thirds majority for decisions regarding production sites, labour representatives make up half of the members.
The relevant law states, without mentioning actual closure, that a two-thirds majority is required for the “construction and relocation of production facilities.”
That might give management some leeway; while unions might counter that relocation is essentially a closure, according to people with knowledge of the situation.
The market appeared to support Oliver Blume’s willingness to take on the task, as evidenced by the 1.2% increase in Volkswagen shares following the announcement that management would accept closures.
However, Moritz Kronenberger of Union Investment stated that unless there is a sign that the unions will cooperate, a larger rally is unlikely.
The Bump Kicks In
The Volkswagen brand, the group’s largest in terms of sales, contributed less than 1/10th of total operating profit in the first half of 2024. Its margin was just 2.3%, or 3.6% excluding the costs of a severance programme.
While the company doesn’t break out results for its electric vehicle business, a big bet on the new technology under former CEO Herbert Diess with products such as the ID.3 and ID.4 is one reason for today’s weak profitability, according to analysts who spoke with the Wall Street Journal.
To make matters worse, the German government unexpectedly cancelled electric vehicle subsidies recently. Also, Volkswagen’s electric line-up may find it difficult to win over domestic buyers, who face problems like patchy public charging infrastructure and high vehicle prices.
EV sales in Germany have plummeted in 2024, with Tesla’s registrations in the country down 41% for the year through July, compared with the same period of 2023.
Daniela Cavallo has blamed the brand’s poor performance on management missteps such as the dismissal of hybrids as a niche technology. Car buyers in 2024 have gravitated toward hybrids as a way to get better fuel economy without the charging hassle and expense of an EV.
Volkswagen can’t easily dial back its profit-sapping EV investments or production because its cars need to meet much stricter European emissions standards starting 2025. Its fleet carbon emissions in 2024 were 24.2% higher than they will need to be in 2025, according to data collated by Bernstein, compared with 19.6% for Mercedes-Benz and 9.7% for BMW.
The company will also need to compete with lower-cost, faster-moving Chinese EV makers, not just in China but increasingly in Europe, too. Chinese manufacturers have a cost advantage of as much as 30%, according to industry estimates.
In Q1 2024, BYD, which overtook Volkswagen in China, sold roughly 17,000 vehicles in Europe, 14,000 more than in the same period of 2023, according to JATO Dynamics. This summer BYD sponsored the high-profile Euro 2024 soccer tournament and has now agreed to buy its German distributor.
While Volkswagen’s profitability in the first half was particularly weak, its performance has long been a drag on the group, which also includes lucrative luxury marques such as Porsche and Audi. Other mass-market brands owned by the group, such as Skoda and SEAT, have reported higher margins than Volkswagen itself in recent years.
Veteran German stock analyst Jurgen Pieper expects the latest war of words that has broken out between Volkswagen’s management and union to end in some kind of compromise that again avoids shuttering plants. One option could be the sale of components businesses, he told the Wall Street Journal.
No Respite Ahead
An electric vehicle made in China and designed in Spain by Volkswagen’s CUPRA brand would be “wiped out” if the European Commission followed through with planned import tariffs of 21.3% on the vehicle, the brand’s CEO told Reuters.
Raising the price of the Tavascan, an all-electric SUV selling for around 52,000 euros ($57,500), to cover the costs was not an option in the current European economic environment, said Wayne Griffiths, who heads up the SEAT and CUPRA brands under Volkswagen’s subsidiary.
“Nor was moving production to another location after the company had already invested in building up capacity at Volkswagen’s Anhui plant, a majority-owned joint venture with China’s JAC Automobile Group,” Reuters reported.
Without the projected Tavascan sales, CUPRA would miss European Union-mandated CO2 reduction targets next year and so face heavy fines, forcing it to cut output with a possible impact on employment at its base in Spain, Griffiths said.
The anti-subsidy tariffs are on top of the European Union’s standard 10% duty on car imports, a measure the Commission says is aimed at levelling the playing field and countering what it dubs “unfair subsidies.”
The Tavascan, like BMW’s electric Mini, was initially hit with a 38.1% tariff in Brussels’ plans, prompting protests from both companies. The tariff on both cars was reduced to 21.3% in August 2024 to be included in the list of companies that cooperated with the EU probe.
Griffiths said CUPRA was in talks with “different levels” of the Commission and the German and Spanish governments to try to convince them to cut or scrap the planned duties. Company representatives will travel with a Spanish delegation to China in several weeks, he added.