VW faces battle with workers over cost cutting plans

Volkswagen CEO Martin Winterkorn - VW faces battle with workers over cost cutting plans

Volkswagen faces a battle with workers over cost cuts at its biggest car division, a central plank of its drive to meet profit margin targets.

VW CEO Martin Winterkorn today called for swift results when outlining an efficiency drive to a gathering of more than 20,000 workers at the automaker’s base in Wolfsburg, Germany. “Over the short-term, we urgently need more efficiency and higher profit,” he said. “Without an appropriate financial basis, any strategy must and will fail.”

Profitability gains at the VW brand are not keeping pace with surging deliveries for the group, which is set to meet a 10 million vehicle sales goal in 2014, four years early.

But Winterkorn’s plea drew a cold response from VW’s top labor representative, who blamed management for mistakes that have hindered stronger productivity growth. “What’s now at stake is how we will together with management achieve the target” of boosting profit, VW works council chief Bernd Osterloh said. “This will not be a walk in the park. It’s already clear now that one or two issues will be particularly hard fought.”

Osterloh, who as member of VW’s supervisory board has a say over decisions such as factory closures and takeover bids, urged management to refrain from taking any steps to cut labor costs and instead improve production plans to cut needless overtime.

“We’ll tackle this together after the summer break,” he said. “This won’t be possible completely without conflicts.”

Winterkorn told the workers that the multibrand automotive group “urgently” needs higher profit to help fund future expansion. He plans to cut costs by €5 billion ($6.7 billion) a year from 2017 as part of efforts to streamline work processes at all levels of VW’s namesake brand, its biggest division by revenue and deliveries.

VW’s main brand is lagging a medium-term profit margin target of at least 6 percent because of fixed production and personnel costs that it said are high relative to Toyota. VW brand’s 2013 profit margin was 2.9 percent, compared with auto division margins of 8.8 percent at Toyota and 9.5 percent at Hyundai.

While there is no suggestion that the carmaker plans to cut any jobs, the efficiency drive also indicates that VW workers in Germany could be facing more difficult times ahead after years of generous wage increases and annual bonus payments.

Osterloh previously has urged management to cut out its own mistakes as it reviews corporate strategy. Management must prepare production plans — especially in car-body making — more carefully to reduce unnecessary overtime, and improve sales operations in foreign markets, he wrote in an internal document dated July 17 obtained by Reuters.

“Costs are slowly beginning to run out of control,” said Stefan Bratzel, head of the Centre of Automotive think tank near Cologne. “Inefficiencies are growing, that cannot be entirely avoided at a company as big as VW.”

To boost efficiency across its whole 310-model empire, Winterkorn has urged “painful action” such as ceasing to make low-profit cars, reining in costs of r&d as well as new factories, speeding up model launches and catering more to the needs of foreign markets.

“It’s not just the world outside that is putting us to the test,” the CEO told managers on July 14. “We have taken a critical look at ourselves and found that we’re also dealing with homemade problems.”