Volkswagen Plans Major Layoffs to Cut Costs

Volkswagen (ETR:VOWG) is reportedly planning major layoffs as part of a cost-cutting initiative aimed at reducing expenses by €4 billion.

> “As we understand it, this is the amount necessary to achieve the targets laid out in the initial €10bn performance plan for the VW brand,” said analysts at Stifel in a note.

The restructuring plan includes a proposed 10% wage cut for all employees, along with a two-year wage freeze.

This decision comes amidst ongoing wage negotiations, where unions are pushing for a 7% increase. Volkswagen's management has invited unions to gatherings at all German factories, indicating the seriousness of the situation.

Daniela Cavallo, head of the works council, is expected to address employees and clarify the company's stance. While she previously assured no factory closures in Germany during her tenure, current proposals suggest potential closures.

The push for aggressive cost-cutting follows reports of weak financial performance, with the company ready to announce its Q3 results soon.

Stifel analysts mention that while these cuts may be painful short-term, they could ultimately benefit Volkswagen’s investment case. The Volkswagen brand generates approximately €85 billion in revenue, making the potential €10 billion performance plan—including €4 billion in cost reductions—significant.

Unions are negotiating better terms, but rising tensions are expected as proposed cuts may meet employee resistance. Cavallo has indicated dissatisfaction with management's focus on labor costs and emphasized the need to address other critical issues beyond just wages and factory expenses.

Despite the turbulent negotiations and likelihood of strikes, analysts at Stifel believe Volkswagen's proactive restructuring steps can be viewed positively from an investment perspective. Volkswagen's strategy seems more robust than competitors like Mercedes, which is struggling with a 4.7% EBIT margin.

However, challenges remain. The transition to electric vehicles is central to Volkswagen’s strategy for reducing CO2 emissions and poses substantial valuation risks. Concerns also include weaker demand, potential production capacity underutilization, pricing pressures, and rising refinancing costs.

Volkswagen remains a leading vehicle manufacturer with 124 production plants across 31 countries, employing around 670,000 people globally. Historically, it capitalized on scale effects within its automotive platforms, providing a competitive advantage. However, analysts warn replicating this in the battery electric vehicle sector may be challenging.

Shares of the company traded 2% lower on Monday.