Faced with the biggest crisis in its history, Volkswagen is planning its most expansive reform program in decades. The automaker’s core brand plans to slash costs by €3.7 billion ($3.9 billion) every year through 2020 and lay off tens of thousands of workers, Handelsblatt has learned.
The cost cutting will result in 20,000 layoffs at VW plants in Germany, according to Handelsblatt sources at the company. Another 10,000 layoffs will hit VW plants abroad, primarily in North and South America where sales have plummeted. The VW group has more than 600,000 employees worldwide.
VW also intends to significantly reduce the number of models and configurations its offers in an effort to boost productivity by 25 percent.
The automaker aims to more than double its profit margins to 4 percent by 2020 and then boost its margins to 6 percent after that.
A failure to boost sales could ultimately force VW to withdraw from a major market such as the United States.
“The package for the future could be the largest reform program in the history of Volkswagen,” Herbert Diess, the chief executive of VW’s core brand, told Handelsblatt.
The supervisory board will meet on Friday to discuss the savings plan. VW has declined to comment on the specifics of the plan.
The extensive savings program comes as VW faces massive and growing costs associated with diesel emissions scandal. Experts estimate that Dieselgate will cost VW €30 billion when all the regulatory and consumer claims are finally settled.
And the majority of the costs will be shouldered by the core brand led by Mr. Diess. When spread out over the next five years, the estimated €30-billion Dieselgate bill costs around €120 per car at the VW brand, more than it currently earns per unit.
Even before the emissions scandal, the head of VW’s works council, Bernd Osterloh, recognized the need to reduce costs and boost savings at the automaker, proposing billions in cost-cutting measures.
But given the severity of the new savings plan, Mr. Osterloh is under pressure from the works councils at VW’s German plants to drive as hard a bargain as possible.
“There are very tough discussions over every euro and every car model,” a participant in the discussions told Handelsblatt on condition of anonymity.
Mr. Osterloh has managed to win a few concessions to cushion the layoffs. Older employees will be transitioned into part-time work while others will go into early retirement, and there will be training programs for other workers. And above all, no plants in Germany will be shuttered – at least for now.
The cost-cutting program is only one half of VW’s strategy. The supervisory board also plans to approve a new investment program to see the automaker through to 2021.
For VW to achieve 4-percent profit margins, it needs to boost sales in addition to cutting costs. The main plant in Wolfsburg alone can produce an additional 200,000 vehicles, but right now those vehicles wouldn’t have a market.
Under the investment plan, VW will reorganize its operations in North America, Brazil and Russia and also cut costs and introduce new models there. If the automaker fails to make gains in these markets, calls to shutter a VW plant could grow, according to Handelsblatt sources at the automaker.
VW hopes to lure in more customers in North America, Brazil and Russia by offering more SUVs. Currently, the automaker only has the Tiguan and the Touareg in its lineup.
“VW will significantly expand its SUV offerings to profit from growth in this segment,” a manger told Handelsblatt on condition of anonymity.
The automaker also plans to focus more on previously neglected markets in the Middle East and East Asia, including the Gulf region as well as Indonesia and Vietnam. A failure to boost sales could ultimately force VW to withdraw from a major market such as the United States.
In the meantime, management in Wolfsburg is also considering shuffling money between its 12 subsidiaries to help prop up the core brand. The VW core brand has worked with Audi and Porsche to develop the engine that is used in the Q7 and the Cayenne, but doesn’t see much in the way of profits.
Billions could be transferred from Audi and Porsche, which have much higher profit margins, to the VW core brand. This in turn could trigger cost cutting at Audi, which generates the largest share of profits for VW group.
Audi faces growing scrutiny for the alleged role it played in developing software used to cheat emissions tests in the United States and around the world.
The Dieselgate scandal erupted in September 2015 when it was revealed that the carmaker had systematically cheated in emissions tests, causing its share price to drop and leading to fines and investigations around the world.
Markus Fasse writes about the auto industry for Handelsblatt. Stefan Menzel writes about the auto industry focusing on Volkswagen. Martin Murphy writes about companies for Handelsblatt, specializing in the auto industry. To contact the authors: email@example.com, firstname.lastname@example.org, email@example.com