The car crisis

Volkswagen, strikes start. The risk is a new profit warning

If the negotiations fail to find an outlet, the return to the old collective bargaining rules would weigh in at a cost of up to two billion

by Finance Review

2 December 2024

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Workers at nine Volkswagen car and component production plants across Germany are set to go on strike for several hours starting today, the IG Metall union announced. The work stoppages will bring assembly lines to a halt, intensifying tensions between workers and management over the future of the carmaker's German operations.

Thousands of people are expected to gather at the Volkswagen headquarters in Wolfsburg, with further demonstrations planned at the Hanover plant, where some 14,000 people are employed, and at other sites such as Emden, Salzgitter and Brunswick.

Hypothetical indefinite unrest

These strikes could extend to 24 hours or even indefinitely if the next round of wage negotiations does not lead to an agreement. This disruption comes at a difficult time for Volkswagen, which is already facing declining deliveries and reduced profits. 'How long and how intense this confrontation should be is Volkswagen's responsibility at the negotiating table,' warned Thorsten Groeger, leader of IG Metall. Volkswagen said that while respecting workers' right to strike, the company has taken measures to maintain essential supplies to customers and limit the consequences.

The cost node

Last week, the union proposed cost-saving measures worth EUR 1.5 billion (USD 1.6 billion), including the suspension of bonuses for 2025 and 2026, a proposal that Volkswagen rejected. Instead, the carmaker is pushing for a 10 per cent reduction in wages, arguing that cost-cutting is crucial to protect market share and profitability.

In 2023, Volkswagen allocated 15.4 per cent of global revenues to personnel costs (down from 18.2 per cent in 2020), a far higher percentage than competitors such as Bmw, Mercedes-Benz and Stellantis, which are between 9.5 per cent and 11 per cent, according to an internal works council note viewed by Reuters. In absolute terms, this is on average 51% higher. Even in terms of hourly costs, the gap is clear: in Germany, VW pays EUR 62 per hour, the highest value in the world in the automotive sector, compared to EUR 47 in France, EUR 33 in Italy and EUR 29 in Spain. The average difference to the largest EU countries is therefore over 77%.

In addition, the costs of the group's German factories are 25-50% higher than the company's targets, with some facilities being twice as expensive as their competitors. Thomas Schaefer, CEO of the Volkswagen brand, said that this situation is eroding the productivity of the group, which is already under pressure from more competitive Chinese players, Byd above all, entering the European market.

The spectre of a new profit warning

But the risk for Europe's leading car manufacturer is that if the negotiations do not lead to an agreement in the coming weeks, it could face significant additional costs, forcing it to revise its plans.

The crux of the matter is the return to the old rules on collective bargaining, which could come into force as early as next year if no compromise is reached. This eventuality, according to rumours in the business daily Handelsblatt, would lead to additional burdens estimated at up to two billion euros.

This scenario could push Volkswagen towards a new profit warning. The tough confrontation with the trade unions over the additional plan to cut costs by EUR 4 billion adds to the challenges Volkswagen is already facing, including declining deliveries, particularly in China, and falling profits and profitability. Volkswagen has even put on the table the possibility of closing up to three German plants, something that has never happened in its 87-year history.

The previous agreement providing for a truce on strikes expired on Saturday, paving the way for abstention from work as of yesterday. The next round of negotiations is scheduled for a week from now.