Investing.com -- Volkswagen (ETR:VOWG) is reportedly planning major layoffs as part of a major cost-cutting move aimed at reducing expenses by €4 billion.
“As we understand it, this is the amount necessary to achieve the targets laid out in the initial EUR10bn performance plan for the VW brand,” said analysts at Stifel in a note.
The restructuring plan includes a proposed 10% wage cut for all employees, along with a two-year wage freeze.
This stark move follows ongoing wage negotiations, where unions have been seeking a 7% increase.
Volkswagen's management has invited unions to gatherings at all German factories, signaling the seriousness of the situation.
Daniela Cavallo, head of the works council, is expected to address employees and clarify the company's stance.
While she has previously assured that there would be no factory closures in Germany during her tenure, the current proposals suggest otherwise, with scenarios for several factory closures being discussed.
The decision to pursue aggressive cost-cutting comes amid reports of weak financial performance, with the company poised to announce its Q3 results soon.
Stifel analysts note that while these cuts may be painful in the short term, they could ultimately benefit Volkswagen's investment case.
The Volkswagen brand generates approximately €85 billion in revenue, making the potential €10 billion performance plan—including €4 billion in cost reductions—significant.
The gatherings held by union leaders are part of a broader push to negotiate better terms, but tensions are expected to rise as the proposed cuts are met with employee resistance.
Cavallo has expressed dissatisfaction with management's focus on labor costs, indicating that a coherent long-term strategy is lacking.
She has emphasized that other critical issues need to be addressed, beyond just wages and factory expenses.
Despite the turbulent negotiations and the likelihood of strikes, analysts at Stifel suggest that Volkswagen's proactive steps towards restructuring can be viewed positively from an investment perspective.
The German automobile manufacturer’s strategy appears more robust compared to competitors like Mercedes, which is currently facing challenges with a reported 4.7% EBIT margin.
However, there are risks involved. A difficult transition towards electric vehicles, which are central to Volkswagen's strategy for reducing CO2 emissions, poses a substantial downside risk to the company's valuation.
Other concerns include weaker demand potentially leading to underutilized production capacity, pricing pressures, and rising refinancing costs that could negatively impact demand.
Volkswagen remains a leading vehicle manufacturer, operating 124 production plants across 31 countries and employing around 670,000 people globally.
The company has historically capitalized on scale effects within its automotive platforms, which have provided it a competitive advantage in the market.
However, analysts at Stifel warn that replicating this advantage in the burgeoning battery electric vehicle sector may prove challenging.
Shares of the company traded 2% lower on Monday.