Why Volkswagen Wants to Close Its Factories in Germany

Volkswagen (henceforth, VW) scrapped a decades-old agreement that protected workers from layoffs earlier this month. This was just days after the company announced it would consider closing factories in Germany for the first time in its 87-year history.

While VW says these measures would help tackle a sales slump and rising costs, they have invited the fury of IG Metall, the union representing German auto workers. Union members have accused the automaker’s corporate leaders of mismanagement, and putting profit before a sustainable future for the company.

Here is all you need to know.

Why is VW struggling?

The troubles for Europe’s biggest carmaker began around a decade ago, after the “dieselgate” scandal of 2015-16. VW was found to have used software to falsify emission tests that made its vehicles appear more climate-friendly than they were, and ended up paying an estimated 30 billion euros in compensation, worldwide.

More recently, the company has seen its sales slump, as Chinese electric vehicles (EVs) have not only captured the domestic market, but also made major inroads in Europe. Most of VW’s sales come from these two markets.

In an interview to German Sunday paper Bild am Sonntag, Volkswagen CEO Oliver Blume said “the pie has become smaller, and we have more guests at the table. Fewer cars are being sold in Europe. At the same time, new competitors from Asia are forcefully pushing into the market”.

Moreover, the legacy automaker has struggled to develop EV software. Many of its factories dedicated to EVs are running at reduced capacity. Beyond VW’s own struggles with developing technology, this is because the demand for EVs has dipped in Europe due to slow rollout of charging infrastructure and countries withdrawing subsidies.

In Germany, only 360,000 electric cars were sold in the first eight months of this year, more than 20% less than in the same period 2023, according to the VDA, the German auto industry association, the Financial Times reported.

Lastly, VW has been severely impacted by the sputtering European economy. Germany’s economy contracted between April and June, shrinking 0.1% from a year earlier. As Arno Antilitz, VW’s financial chief, told the company’s workers recently, “The market is simply not there any more”.

How does VW plan to tackle the situation?

On September 2, VW announced that it needed to restructure its namesake brand to remain competitive in the face of the ongoing crisis. It said the cost-saving measures could include closing one or two assembly plants in Germany.

Closing of VW’s German factories would be a first for the company, which was established in Wolfsburg in 1937. It would also be the first such event since the manufacturer’s US plant in Westmoreland, Pennsylvania, closed in 1988.

Eight days after this announcement, the company said in a statement that it had scrapped an agreement that offered job security to some 130,000 workers along with several other labour deals, in Germany.

“We must put Volkswagen in a position to reduce costs in Germany to a competitive level in order to invest in new technologies and new products from our own resources,” Gunnar Kilian, the head of human resources and labour at VW, said in the statement.

The agreement, signed between VW and IG Metall, has been in place since 1994. It had given protection to workers from layoffs through 2029, but the company can get out of it with a three months’ notice period, according to a report by The New York Times.

These measures were taken after the company and the union made a deal last year to take steps (including job cuts largely based on attrition) that would save VW 10 billion euros by 2026. The company, however, recently said that those steps were not enough in the face of rising costs.

How have VW’s workers responded?

IG Metall has vowed to fight against the job cuts, and blamed VM’s management and Germany’s government for the company’s economic woes.

“A good shepherd looks after his sheep and keeps them together. Volkswagen’s shepherd is threatening to rip the skin off their bodies and then throw them out in a hurricane,” Thorsten Groeger, IG Metall’s chief negotiator with VW, told workers recently.

The union is currently negotiating a new wage deal with VW for the workers. It is not only demanding no job cuts but also insisting on a 7% pay rise.

Daniela Cavallo, who leads the works council at VW and is a member of IG Metall, told Reuters, “Every single one of the 130,000 employees is reason enough to fight… But it’s not just about the 130,000 colleagues. It’s also about their families, the suppliers and service providers around them and, last but not least, the entire regions where the plants are located.”

On Wednesday (September 25), the first round of talks fell apart after the company rejected the union’s demands. IG Metall has threatened strikes from the start of December if its demands are not met.

Experts say that the closing of VW’s German plants would not be good news for the country’s economy. Stephen J Silvia, a professor at American University’s School of International Service, said in an interview, “the impact of VW’s retrenchment will affect suppliers and other firms that depend on VW and its employees for business.”