German manufacturing giant Volkswagen plans to close at least three factories within Germany, lay off tens of thousands of employees, and reduce the scale of all remaining factories in the country.

First-time closure of domestic factories

On October 28th, local time, Daniela Cavallo, the chairperson of the labor committee of the Volkswagen Group in Germany, revealed that the group plans to close at least three factories located in Germany and lay off tens of thousands of workers.

According to Cavallo, the group's management has made it clear that such layoffs are necessary in Germany to continue operations, and it is expected that all Volkswagen factories in Germany will be affected by this plan.

The labor committee stated that the specific list of closures is not yet clear. However, the factory in Osnabrück, Lower Saxony, is considered particularly at risk because it recently lost an expected order from Porsche.

Regarding cost-cutting measures, Gunnar Kilian, a member of the Volkswagen human resources board, said that the company would not be able to afford future investments if comprehensive measures are not taken to restore competitiveness.

According to a German government spokesperson, Chancellor Scholz has a clear stance on the plan, which is that the current "focus is on protecting and ensuring jobs." Past management decisions that may have been mistakes should not be borne by employees. The government will await further clarification from the company's management on these plans.

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Volkswagen employs about 120,000 people in Germany, with about half working at the headquarters and main factory in Wolfsburg. Volkswagen currently has ten factories in Germany, six of which are in Lower Saxony, three in Saxony, and one in Hesse.As Germany's manufacturing industry declines, overseas demand weakens, and more competitors enter the European market, Volkswagen is under heavy pressure and has to take drastic cost-cutting measures to remain competitive.

In September, Volkswagen announced plans to consider massive layoffs and the closure of some factories in Germany. If implemented, this will be the first time the company has closed domestic factories since its inception. Volkswagen also announced the end of a 30-year employment protection agreement, which promised no layoffs until the end of 2029. After ending the agreement, Volkswagen can start layoffs from mid-2025.

The German Metalworkers' Union severely criticized Volkswagen's factory closure plan. Regional director Thorsten Grégoire said that these plans "deeply hurt the hearts of hardworking Volkswagen employees... completely unacceptable, betraying everything we have experienced in this company over the past few decades."

There was already a plan to reduce labor costs.

In a press release last December, Volkswagen planned to reduce administrative labor costs by 20%. The company said that if necessary, it would also selectively negotiate contract terminations with employees. There is currently no general plan. In the future, positions to be reduced will not be filled unless they are specially necessary.

For a series of recent changes, the Volkswagen Group has also explained the reasons to the media before, saying that this is to reduce costs globally.

At the end of May this year, the Volkswagen Group claimed to achieve a 20% increase in efficiency over the next three years based on 2023. However, at that time, the Volkswagen Group pointed out that a 20% increase in efficiency does not mean layoffs, but refers to indirect labor costs, such as administration, travel, and training. As time goes on, the group seems to have chosen the most direct way to reduce costs.

Volkswagen's net profit in the first half of the year decreased by 14% year-on-year. In the third quarter of this year, Volkswagen's global sales decreased by 7.1% to 2,176,300 vehicles.Volkswagen is expected to have a profit margin of approximately 5.6% in 2024, which is lower than the previously anticipated range of 6.5% to 7%. The company forecasts a 0.7% decrease in annual sales revenue for 2024, reaching €320 billion, compared to the earlier expectation of a 5% annual growth. The global vehicle deliveries for 2024 are projected to be around 9 million units, which is lower than the previous target of a 3% increase from the 2023 deliveries (9.24 million units).

Among these figures, Volkswagen Group's "cash cow," Porsche, saw a 5.2% year-on-year decline in revenue to €28.56 billion in the first three quarters, a 27% decrease in operating profit, a 63% year-on-year drop in automotive business cash flow, and a 41% decline in operating profit.

Porsche's Chief Financial Officer, Lutz Meschke, revealed that Porsche plans to cut billions of euros in costs by 2030.

As for the planned cost-cutting measures, Volkswagen Passenger Cars CEO Thomas Schäfer provided a compelling reason: "We must find the root cause of the problem: our productivity in German factories is not enough, and our factory costs are currently 25% to 50% higher than the original target. This means that the prices of some of our German factories are twice as much as our competitors'."