Volkswagen agrees 30,000 job cuts in landmark US$3.9b savings pact

The Volkswagen AG (VW) logo sits on a sign outside the VW factory in Dresden, Germany, on Nov 17, 2016.
The Volkswagen AG (VW) logo sits on a sign outside the VW factory in Dresden, Germany, on Nov 17, 2016. PHOTO: BLOOMBERG

WOLFSBURG, GERMANY (BLOOMBERG) - Volkswagen reached a landmark agreement with workers to cut as many as 30,000 jobs globally and save 3.7 billion euros (S$5.52 billion) in expenses as the company tries to claw back from the emissions-cheating scandal and invest in electric vehicles.

Reducing headcount by nearly 5 per cent will come through attrition as the automaker agreed to refrain from forced layoffs until 2025, the company said Friday. After months of intense talks, labor and management agreed on a package to balance cost-cutting with investment as the auto industry shifts away from traditional combustion engines and adapts to car-sharing services and self-driving technologies.

"This is a big step forward, maybe the biggest in the company's history," VW brand chief Herbert Diess said at a press conference. "All manufacturers must rebuild themselves because of the imminent changes for the industry. We need to brace for the storm."

The labor agreement is critical to Volkswagen's efforts to accelerate restructuring at its biggest unit and emerge from the worst crisis in its history. The VW brand, which accounts for almost half of the group's sales, was struggling even before the emissions crisis erupted last year, tarnishing the carmaker's reputation and burdening the company with at least 18.2 billion euros in costs for fines and repairs.

Volkswagen shares rose 1 per cent to 118.75 euros at 10:09 a.m. in Frankfurt, reducing the drop since the scandal broke in September 2015 to 27 per cent.

In a concession to workers, the manufacturer agreed to build two electric cars at German sites, one in Wolfsburg and one in Zwickau. The company, which employs 624,000 people globally, will add as many as 9,000 positions for future-oriented projects such as electric vehicles and digital features. 

The job cuts will come through early retirement and not replacing workers that leave, and the savings comprise 3 billion euros at its German factories and another 700 million euros abroad. Weighed down by unwieldy labor contracts, a bloated lineup of vehicles and a convoluted structure, the VW brand has struggled with weak profitability. In the first nine months, the unit's operating profit margin narrowed to 1.6 per cent from 2.8 per cent a year earlier. The goal of the labor agreement is to reach a 4 percent profit margin by 2020.

The deal was a prerequisite for Volkswagen's plans to push ahead with investment in new models and upgrading factories. The labour talks, which started in June, went down to the wire, with the supervisory board meeting on Friday to approve the company's budget for the coming years as it pushes to sell as many as 3 million electric vehicles a year by 2025 and expand in services like ride-sharing. Volkswagen is under pressure to reduce annual capital expenditures, which currently stand at 12 billion euros, making the company one of the biggest corporate spenders in the world.