Volkswagen's Overhaul

Dieselgate's Next Victims

  • Why it matters

    Why it matters

    Volkswagen needs to cut costs and boost sales to get out from under the losses stemming from the Dieselgate emissions scandal.

  • Facts

    Facts

    • VW plans to slash costs by €3.7 billion, or $3.9 billion, annually by 2020.
    • The cost-cutting program will result in 23,000 layoffs at VW plants in Germany and another 7,000 layoffs in North and South America.
    • The goal is to double profit margins to 4 percent at VW’s core brand by 2020 and then boost those margins to 6 percent afterward.
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    Audio

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VW's executive and supervisory board members announced the job cuts on Friday. Herbert Diess, second from left, and CEO Matthias Müller, middle, did not address Dieselgate during their presentations. Source: Philipp von Ditfurth / DPA

Faced with the biggest crisis in its history – Dieselgate – Volkswagen on Friday confirmed its most expansive reform program since its founding in 1937.

The automaker’s core brand plans to slash annual costs by €3.7 billion ($3.9 billion) by 2020 and lay off tens of thousands of workers, the chief executive of VW’s core brand, Herbert Diess, said Friday.

The cost cutting will result in 23,000 layoffs at VW plants in Germany and further cuts in the Americas, Mr. Diess said at a joint press conference with VW Group CEO Matthias Müller and works council chairman Bernd Osterloh, confirming a story in Handelsblatt.

The VW Group, which also makes Audi, Porsche, Skoda and other car brands, had 624,000 employees worldwide at the end of September. The VW core brand had 125,000 employees in Germany at the end of 2015. The non-executive supervisory board, which has to sign off on all major strategic decisions, will meet later Friday to discuss the savings plan.

“In the next few years our sector will change stronger than ever before.”

Hebert Diess, Head of VW core brand

The overhaul comes as VW faces massive and growing costs associated with the ongoing diesel emissions scandal. Experts estimate that Dieselgate will cost VW €30 billion when all the regulatory and consumer claims are finally settled.

The majority of the Dieselgate bill will be shouldered by the core VW brand led by Mr. Diess. When spread out over the next five years, the estimated €30 billion in costs amount to €120 per car at the VW brand, more than it currently earns per unit.

During their presentations, neither Mr. Diess nor Mr. Müller referred to the Dieselgate scandal, which U.S. regulators revealed September last year and plunged Europe’s largest carmaker in crisis. The artificial lowering of diesel emissions during testing has already cost the Wolfsburg-based firm more than $15 billion.

VW Group, which made a loss of €1.4 billion last year, is still working to resolve Dieselgate in Europe, the United States and elsewhere. It is expected to reach a new settlement in the United States soon, which will further raise its Dieselgate bill.

Mr. Diess, a former BMW manager lured to VW last year, said there would be no forced redundancies and layoffs will primarily take place through early retirement and letting employees work part-time. He spoke of a car industry facing upheaval as new technologies were altering the way we drive.

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These workers' meetings will become a bit smaller in future. Source: Julian Stratenschulte / DPA

“In the next few years our sector will change stronger than ever before,” Mr. Diess said. “We have to invest billions in new electric cars and digital services. New, powerful competitors will hit us.”

VW and German luxury carmakers BMW and Mercedes have changed strategies to focus on producing electric and self-driving cars as Tesla Motors, the Silicon Valley-based company, has quickly gained popularity with its electric cars and Google experiments with autonomous driving. Japan’s Toyota has been at the forefront of hybrid car technology for a decade.

The core VW brand was currently not equipped to face new rivals and made too little money to invest in new technologies, Mr. Diess said. “Therefore, it was time for a massive reform program. VW has to earn money again quickly to weather the coming storm.”

In addition to job cuts, VW will also invest €3.5 billion over the next four years to expand its electric vehicle and autonomous driving expertise and create 9,000 new jobs, for instance in software development, Mr. Diess said.

Currently, the VW core brand’s profitability was “far below those of competitors” and a higher efficiency and rate of productivity were needed.

Sources told Handelsblatt before the announcement that VW also intends to significantly reduce the number of models and configurations its offers in an effort to boost productivity by 25 percent.

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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, the sources said.

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.

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VW's CEO Matthias Müller said it was no time to close eyes to problems and fundamental changes in the car industry. Source: Philipp von Ditfurth / DPA

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.

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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. Gilbert Kreijger, an editor with Handelsblatt Global in Berlin, contributed to this article. To contact the authors: fasse@handelsblatt.commenzel@handelsblatt.com, murphy@handelsblatt.com

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