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Next Gen Econ > Investing > Will Volkswagen Restructuring Plan Founder, Again, On Union Power?
Investing

Will Volkswagen Restructuring Plan Founder, Again, On Union Power?

NGEC By NGEC Last updated: September 13, 2024 6 Min Read
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Volkswagen wants to close factories in Germany to bring production in line with sales, but union strength means this will be difficult to achieve and the company may have to at least concede a 4-day work week.

Any threat to VW’s worker ownership model doesn’t seem likely, although politics in Germany are currently undergoing an unprecedented upheaval.

European automakers in general and Volkswagen in particular have been weakened by poorly performing electric vehicle sales, in an overall stalling market. High interest rates, high energy prices and a weak Chinese market have harmed VW’s business. VW has said it wants to close factories in Germany and end traditional job security guarantees as it pursues a €10 billion ($11 billion) cost-cutting program, setting off union anger.

In Germany, union power is incorporated into corporate governance. This is particularly strong at Volkswagen, where unions have half the seats on the supervisory board, and with the help of politicians in its home state and shareholder Lower Saxony, a virtual veto on company policy.

Over the decades some investors have kept away from Volkswagen because it was seen as a corporation existing more for workers’ welfare than shareholder’s bottom-line efficiency. It has fallen behind the likes of Toyota, which is of similar global size. VW can’t compete with Toyota in terms of productivity and profitability.

Reuters’ Breaking Views column described VW’s predicament like this.

“There is no doubt that Volkswagen is in bad shape. The stock is down by about a third since current CEO Oliver Blume took over in September 2022, with total returns down nearly 30%, compared with positive returns for its main European rivals. Its operating margin within the core business was just 6.3% in the first half, next to 10% for Stellantis,” Breaking Views columnist Pierre Briancon said.

Investment bank HSBC Global Research said in a report VW had been slower than its peers in adjusting to market realities.

“(VW’s) governance structure makes for tough negotiations, which means it is premature to be bullish on restructuring,” the report said.

Other big automakers have moved to address underlying problems, but VW has been slow.

“Our sales outlook for Europe is unlikely to surprise many – high interest rates, squeezed consumers, ageing populations, and higher car prices (to reflect higher content and material costs) all underpin the weakness. We could also add government policy that seems to generally be anti-car,” according to the report.

HSBC said Renault lowered its European headcount by about 20% between 2019 and 2023. Stellantis cut 15% between 2020 and 2023. Meanwhile, staff numbers at VW in Europe fell 1%. Auto margins for Renault are now about 8%. Stellantis has averaged around a 9% margin over the last four quarters semesters. VW’s own brand group managed a near 5% margin in the first half of 2024.

VW faces another major hurdle in 2025. It is seen as the most vulnerable to tightening EU CO2 rules which seek to force manufacturers to keep raising the proportion of EV sales compared with ICE ones. Failure incurs swingeing fines, and the spotlight is on VW, according to investment bank UBS

“VW stands out as the (manufacturer) with the highest potential fine risk of up to €6 billion ($6.6 billion). VW needs to double EV sales to avoid fines and/or form a pool (with a manufacturer with excess credits),” UBS said.

HSBC Research doesn’t hold out much hope that VW will be able to complete a successful restructuring because of its governance structure and the possible expense. It points to the estimated cost of the closure of VW’s Audi plant in Brussels.

“There is scope for consolidation but looking at the cost of the proposed closure of Brussels with 3,000 workers of about €1.2 billion ($1.3 billion), the closure costs for larger plants like Emden or Hannover would run to €2.5 billion to €4 billion ($2.8 billion to $4.4 billion) on our estimates. Aside from resistance from the Works Council and union, we would expect the State of Lower Saxony would oppose such a move,” HSBC Global Research said.

VW agreed a 4-day week deal with pay cuts with the unions during another crisis in 1993. It ended in 2006 when it was seen as hurting VW’s competitiveness.

The unions have threatened to strike VW if doesn’t engage in what it calls “constructive talks” and that would involve more than 500,000 workers. VW works council head Daniela Cavallo has said the unions would “fiercely resist” the plans. VW Group CEO Oliver Blume’s job will also be on the line if the crisis goes sour. Former CEOs like Herbert Diess and Bernd Pischetsrieder failed to make fundamental changes to its governance.

Any bets that there will be underlying change to the VW model look bound to fail. Unions retained control over the company’s 87-year history. But recent political upheaval in Germany could make real change possible. After all, returning VW to the real world of shareholder control wouldn’t be exactly revolutionary.

Read the full article here

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