Volkswagen and German unions are set for a showdown over wages and potential plant closures: Can high labor costs maintain competitiveness in a fiercely contested market?

Volkswagen and German unions are set for a showdown over wages and potential plant closures: Can high labor costs maintain competitiveness in a fiercely contested market?News broke on November 21st that Volkswagen, the German automotive giant, is on the verge of intense negotiations with unions representing approximately 120,000 German employees. The contentious issues at hand are wage adjustments and the potential closure of factories

Volkswagen and German unions are set for a showdown over wages and potential plant closures: Can high labor costs maintain competitiveness in a fiercely contested market?

News broke on November 21st that Volkswagen, the German automotive giant, is on the verge of intense negotiations with unions representing approximately 120,000 German employees. The contentious issues at hand are wage adjustments and the potential closure of factories. Underlying this negotiation is Volkswagen's escalating cost pressure, particularly its high labor costs in Germany, severely impacting its competitiveness against lower-priced vehicles from China and elsewhere.

Internal Volkswagen data and industry analysis reports reveal that Volkswagen's labor costs as a percentage of sales significantly exceed those of its main competitors, BMW, Mercedes-Benz, and Stellantis. An internal memo from the Volkswagen works council reveals that while Volkswagen's global labor cost ratio has decreased from 18.2% in 2020 to 15.4% in 2023, it still substantially surpasses the 9.5% to 11% of its competitors. More concerning is the estimated 15.8% to 17.5% ratio for Volkswagen's six relevant German plants. Volkswagen has stated it will not disclose more specific labor cost data for its German subsidiary at this time.

The data in this internal memo, based on Volkswagen's annual reports, encompasses personnel expenses as a proportion of revenue for all employees, from factory workers to administrative staff. Daniel Schwarz, an analyst at investment bank Stifel, points out that Volkswagen's higher labor costs are partly due to its in-house manufacturing of numerous components and software. While this model ensures supply chain stability and product quality control to some extent, it also increases expenditure.

Facing intense competition from the Chinese automotive market, Volkswagen urgently needs to control costs. Schwarz analyzes, "The Volkswagen brand has been the European market leader since 2005 the problem isn't the product, it's the excessive costs." This view is supported by data from the German Association of the Automotive Industry (VDA): Germany has the highest labor costs in the global passenger car industry, with an average hourly wage of 62 (approximately $66) in 2023, a roughly one-third increase compared to a decade ago. Considering that approximately 45% of Volkswagen's workforce is located in Germany, high labor costs pose a significant challenge to its profitability.

However, the unions don't entirely agree that labor costs are the primary cause of Volkswagen's difficulties. They argue that labor costs represent only a small portion of the company's overall cost structure and urge management to explore other avenues for profit improvement. In an internal leaflet to employees, the union highlighted that other group divisions, such as Porsche, Audi, and Volkswagen Financial Services, experienced sharp declines in earnings during the first nine months of the year, resulting in a 5.5 billion (approximately $5.8 billion) loss for the company. The leaflet stated, "This alone is enough to show that focusing solely on labor costs is insufficient."

The complexity of these negotiations stems from the fact that the German Volkswagen Group is the only German automaker (excluding Tesla) that doesn't determine factory wages based on the collective agreement of the automotive and engineering industry, instead relying on individual agreements. In September, Volkswagen canceled this agreement, planning cost cuts within the Volkswagen brand, claiming it is crucial for the company's survival. For German unions, significant wage reductions represent a difficult compromise, especially given that in November, unions just reached an agreement for a 5.5% pay raise across the industry, and Tesla also announced a 4% pay raise for its German employees.

Volkswagen's proposed wage cut is 10%, while the union demands a 7% increase, demonstrating a vast discrepancy in positions. While Volkswagen management argues that even after a pay cut, salaries would remain highly attractive, their argument that "German factory production efficiency is insufficient" has been met with union rebuttal. Thomas Schaefer, head of the Volkswagen brand, stated last month: "Our factory costs are currently 25% to 50% higher than expected. This means that the costs of some German factories are even double those of competitors."

This claim is supported by VDA data, which shows average hourly wages in the automotive industry in France, Italy, and Spain at 47 (49.6 USD), 33 (34.8 USD), and 29 (30.6 USD) respectively. These countries host most of the European factories of Volkswagen's competitors, Stellantis and Renault.

The high costs at the German Volkswagen Group are partly due to many employees fulfilling administrative functions for the entire Volkswagen Group, including sales, management, and technical development roles that typically command higher salaries. Although Volkswagen has announced plans to cut tens of thousands of jobs in Germany in recent years, including a deal reached between former CEO Herbert Diess and the union to reduce the Volkswagen brand workforce by 23,000 by 2025, the transition to electric and software-driven vehicles, coupled with stricter regulatory environments, has led to a significant increase in software and administrative positions.

A source familiar with the matter revealed that the number of white-collar employees at the German Volkswagen Group is now approaching that of blue-collar employees. An internal document shows that from June 2019 to September 2024, the number of factory workers at the German Volkswagen Group decreased by over 8,000, while the number of administrative staff increased by approximately 4,000. Volkswagen declined to comment on this data.

The outcome of these negotiations will have a profound impact on Volkswagen's future development strategy and labor relations within the German automotive industry as a whole. Whether Volkswagen can maintain its global competitiveness while controlling costs will be a key observation point. These negotiations also reflect the challenges facing the global automotive industry in navigating the transition to electric vehicles, intense market competition, and rising labor costs.