By Victoria Waldersee, Ilona Wissenbach and Christoph Steitz

Volkswagen’s Struggle with Labour Unions

BERLIN/FRANKFURT (Reuters) — Volkswagen (ETR:VOWG_p) boss Oliver Blume is facing a dual challenge: declining demand for electric vehicles and fierce competition from Chinese carmakers. Now, he must also confront powerful labour unions in Germany.

This week, Volkswagen disclosed plans to eliminate a 30-year-old job security scheme and consider shutting down plants in Germany. Moritz Kronenberger, a portfolio manager at Volkswagen shareholder Union Investment, described these decisions as the company’s “two holy cows.”

Taking on these issues puts Blume on a collision course with the IG Metall union, known for protecting jobs and maintaining favourable working conditions in Europe’s largest economy. Volkswagen’s works council head, Daniela Cavallo, emphasized that unions would “fiercely resist” any closures, making a staff meeting with management likely “very uncomfortable.”

The company has not closed a plant since 1988, and in July mentioned the possibility of shutting down an Audi factory in Brussels due to a steep decline in the market for high-end electric cars.

The Cost Dilemma in Germany

German industry is struggling to keep up with global competition, mainly due to high energy and labour costs. This situation has driven established companies like Thyssenkrupp (ETR:TKAG) to rethink long-standing agreements with workers.

Investors are noticing these challenges, and Volkswagen shares have fallen nearly a third over the past five years, making it the poorest performer among significant European automakers. Blume, 56, faces the dilemma of the company’s sprawling structure amid intensifying competition, particularly from China.

Volkswagen is lagging on a €10 billion ($11 billion) cost-cutting plan while needing funds for crucial international projects, including potential $5 billion investments in U.S. electric vehicle maker Rivian (NASDAQ:RIVN) and partnerships with Chinese firm Xpeng (NYSE:XPEV).

He has to find savings to facilitate these investments, and unused plants may no longer be considered untouchable, indicating a significant cultural shift. Matthias Schmidt, an auto market analyst, suggested that if Blume succeeds in these changes, previous CEOs who attempted similar moves would feel vindicated.

Previous Volkswagen leaders like Herbert Diess and Bernd Pischetsrieder struggled to implement significant changes due to union resistance.

Blume’s Position as Mediator

Blume, who became CEO in 2022, has maintained positive relations with unions and influential families that control the company, essential for navigating diverse stakeholder interests. His thirty-year tenure at Volkswagen has allowed him to foster change within the Porsche AG division while avoiding major confrontations with labour representatives.

Stephen Reitman of Bernstein noted the ongoing tension between necessary actions and feasible outcomes, often leaving Volkswagen in a challenging position. Blume was intended to be a “peacemaker,” yet current circumstances suggest his approach might not be effective.

Volkswagen’s governance structure grants significant influence to the state of Lower Saxony and labour unions. Lower Saxony holds a 20% voting share and can block significant decisions; labor representatives form half of the supervisory board, requiring a two-thirds majority approval for production site decisions.

While the law necessitates a two-thirds majority for construction and relocation, it does not explicitly mention closures, which could provide management with some leeway. However, labour unions could argue that relocation is akin to closure.

Volkswagen shares rose 1.2% when the company hinted at plant closures, indicating some market backing for Blume’s initiative. Nevertheless, a more significant rally is deemed unlikely without union cooperation. Kronenberger remarked that the leadership structure is paralyzing VW and rendering it “ungovernable.” Ferdinand Dudenhoeffer, head of the CAR think tank, noted that this paralysis has led to persistent crises at Volkswagen for the past 40 years.

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