Volkswagen Avoids Crisis, Strikes Deal To Cut Workforce By 35,000 Without Redundancies. What Got One Of The Leading Auto Manufacturer Here And What’s The Story In India?

After intense negotiations that appeared headed for a deadlock, Volkswagen and the German workers’ union IG Metall have struck a landmark agreement to prevent plant closures, redundancies, and wage cuts. The deal marks a significant turning point for one of the world’s leading automotive manufacturers, securing its operational stability in Germany while addressing workforce concerns.

Agreement Details

The resolution, achieved after more than 70 hours of deliberations, ensures that Volkswagen’s 10 manufacturing plants in Germany will remain operational. The company has committed to avoiding compulsory redundancies until 2030, instead opting to reduce its workforce by over 35,000 through early retirement schemes and voluntary buyouts.

Additionally, Volkswagen and IG Metall have agreed to revise the company’s decades-old salary structure. While some concessions on collective pay have been made, these are counterbalanced by assurances of long-term job security and investment in future manufacturing prospects.

Union’s Role and Employee Protests

The deal follows weeks of intense protests, with nearly 100,000 Volkswagen employees rallying against the management’s initial cost-cutting proposals. IG Metall attributed the successful outcome to this mass mobilization, which it claimed was instrumental in halting the company’s drastic measures.

Daniela Cavallo, Chairwoman of Volkswagen’s General and Local Works Council, praised the agreement, stating:

“No site will be closed down, nobody will be made redundant, and our company wage agreement will be secured for the long term. This agreement demonstrates that changes opposed by our workforce cannot succeed.”

Cavallo also emphasized the solidarity-driven preservation of jobs and manufacturing sites, calling the agreement a victory for the workforce’s collective effort.

Volkswagen’s Cost-Cutting Challenges

The company had initially aimed to reduce wages by 10% and achieve €10 billion in cost savings. Plans included factory closures and significant layoffs—a first for the company in Germany. However, this approach faced fierce resistance from both employees and union leaders, forcing a reconsideration of its strategy.

Volkswagen, which employs approximately 120,000 workers in Germany, is primarily owned by the Porsche-Piëch family through the holding company Porsche SE, the controlling shareholder of Volkswagen Group.

The agreement not only averts immediate disruptions but also indicates the growing challenges faced by legacy automakers in balancing profitability with workforce and community commitments.

Volkswagen’s Debt Crisis

€230 billion ($240 billion). That’s the jaw-dropping figure representing Volkswagen’s (VW) debt, making it one of the most indebted publicly listed companies globally. But debt isn’t the only concern the German automotive giant needs to work around, the company is also struggling with a slew of challenges that threaten its profitability and future course.

Volkswagen’s profits have hit a significant roadblock, plummeting 20% in the first nine months of 2024 compared to the previous year. Hence, the automaker was contemplating a drastic move—shutting down three of its factories in Germany.

The Scandal That Changed Everything

Volkswagen’s troubles can be traced back to a key moment in 2015, when the US Environmental Protection Agency (EPA) uncovered a shocking emissions scandal. The company had been using a deceptive “defeat device,” a software engineered to cheat emissions tests. This device manipulated engine performance during testing, making vehicles appear far cleaner than they were.

On the road, however, these “clean diesel” cars emitted up to 40 times the legal limit of nitrogen oxide, polluting the environment for over a decade. The revelation tarnished VW’s reputation, tanked its stock, and alienated customers, particularly in the US.

The financial fallout was monumental—€31 billion ($35 billion) in fines and settlements, which drained the company’s resources until 2021. Rebuilding its reputation became VW’s top priority, and it began focusing on producing competitive, high-quality vehicles to regain trust.

Economic and Geopolitical Headwinds

Just as VW began recovering, external challenges compounded its woes. The COVID-19 pandemic slowed global economies, with Germany being particularly hard hit. By 2024, Germany’s GDP had barely grown 1% above pre-pandemic levels, lagging behind the Eurozone’s 5% growth and the US’s 10% surge.

The Russia-Ukraine war further worsened the situation. With Russia cutting off gas supplies to Europe, energy costs skyrocketed, severely impacting energy-intensive industries, including automakers like Volkswagen. Rising input costs squeezed margins, leaving VW to at the crossroads with precarious financial troubles.

The Push Toward Electrification

Adding to the pressure, the European Union announced plans in 2023 to ban the sale of petrol and diesel cars by 2035. For VW, this marked a seismic shift. The company, long reliant on internal combustion engines, now had to pivot aggressively toward electric vehicles (EVs). This transformation requires massive investment in research, development, and infrastructure—a tall order for a company already struggling with debt and declining profitability.

Volkswagen’s shift to electric vehicles (EVs) has been anything but smooth. Arriving late to the EV market, the timing couldn’t have been worse for the German automaker.

Germany had already ended its EV subsidy program after spending €10 billion to support the adoption of 2 million electric vehicles since 2016. While the government deemed the initiative a success, the removal of incentives left little motivation for consumers to purchase expensive EVs, including Volkswagen’s, which carry premium price tags.

Adding to the challenge, VW faced a critical workforce issue—a shrinking pool of skilled labor. Germany’s ageing population has made it increasingly difficult to attract the young talent needed to sustain production and innovation.

The result? A perfect storm of challenges for VW.

Exports. A Waning Advantage

With domestic sales under pressure, one might expect exports to offer a lifeline. However, that hasn’t been the case for Volkswagen.

Consider trade with China. During the 2010s, Germany’s exports to China were a cornerstone of its economic strength. Volkswagen benefitted immensely by selling cars, chemicals, and machinery to a booming Chinese market. But today, China produces much of this locally and at lower costs, eroding VW’s competitiveness.

In the United States, VW faced a different set of challenges. The automaker struggled to cater to consumer preferences, producing vehicles that were often too small, too expensive, or both. By the time VW adjusted its strategy, Japanese and South Korean competitors had already captured the market, leaving little room for recovery.

Falling Sales and Tough Decisions

With both domestic and international sales faltering, Volkswagen expects to deliver just 9 million cars globally in 2024, down from 9.24 million in 2023. To address these headwinds, the company mulled to be doubling down on cost-cutting measures, including the potential closure of factories in Germany.

Volkswagen’s challenges are not just its own. The company is a pillar of Germany’s automotive sector, which contributes 5% to the nation’s GDP and employs nearly 800,000 people—40% of whom work at VW. Any significant downsizing at Volkswagen could ripple across the German economy, affecting not just suppliers and ancillary industries but also the country’s broader economic stability.

What About Volkswagen India

Meanwhile in India, Volkswagen is beginning to show signs of improvement, with recent reports showing modest growth in sales and a strategic shift towards introducing premium vehicles, including electric vehicles (EVs), to capture a larger share of the Indian car market.

However, despite these efforts, Volkswagen remains a relatively small player compared to established competitors and faces challenges such as intense competition and the complexities of enduring India’s unique market dynamics.

Positive Sales Momentum

Volkswagen India reported an 8% year-on-year growth in sales in 2023, surpassing the overall growth rate of the Indian passenger vehicle market. This performance signals a positive trend and demonstrates the company’s potential to carve out a stronger position in the competitive market.

Further, the automaker is actively working to bring electric vehicles to India, with plans to launch the ID.4 EV as a fully built unit in the near future. This move illustrates Volkswagen’s aim to aligning with the global shift toward sustainable mobility and meeting the growing demand for EVs in the Indian market.

Current Product Portfolio

Volkswagen’s Indian lineup includes the Tiguan SUV, Taigun SUV, and Virtus sedan. These offerings cater to a diverse range of customer preferences, with an emphasis on quality and performance. Despite its recent growth, Volkswagen continues to hold a relatively small market share in India. It faces stiff competition from well-established brands that dominate the market with affordable and localized products.

Going forward, Volkswagen must tackle several hurdles to solidify its position in India. These include the price-sensitive nature of the Indian market, the need for further localization of production to enhance affordability, and the challenge of standing out in a crowded and highly competitive segment.

The Last Bit

Volkswagen’s challenges are a microcosm of the upheaval facing traditional automakers worldwide. From the fallout of past missteps to managing geopolitical and economic headwinds, the company finds itself at a critical juncture.

As it races to embrace electrification and regain financial stability, Volkswagen’s ability to adapt and innovate will determine whether it can steer itself back onto the path of sustained growth.