Volkswagen’s restructuring is moving into a more difficult phase because the company must now translate a broad turnaround strategy into decisions about factories, workers, markets and products. The central problem is not simply the size of its workforce. It is that Volkswagen has more production capacity than current market demand can support while facing weaker profitability in China, intense competition from Chinese manufacturers, trade barriers in the United States and the expensive transition toward new vehicle technologies.

The company’s supervisory board has approved a long-term transformation plan that calls for an additional reduction of about 50,000 jobs across the group, on top of earlier workforce reductions. Volkswagen also wants to reduce production capacity by roughly 500,000 vehicles annually in Europe and a similar amount in China. The scale of the adjustment shows that management views the problem as structural rather than temporary.

That makes the period ahead more complicated than the initial approval of the restructuring plan. Volkswagen now has to determine where production should remain, which facilities can be made competitive, how much capacity can realistically be removed and how the company can reduce costs without weakening the product pipeline needed for future growth.

Excess Capacity Is Driving the Restructuring

Volkswagen’s most immediate problem is the gap between the production system it built and the number of vehicles it can realistically sell. Before the pandemic, the group’s production network was designed around demand of roughly 12 million vehicles a year. Volkswagen now expects a sustainable market level closer to 9 million.

The company has already reduced about 2 million vehicles of excess capacity over the past two years and plans further reductions. Management argues that maintaining factories that cannot operate at competitive utilisation rates creates a permanent cost burden because fixed expenses are spread across fewer vehicles.

This explains why the restructuring goes beyond conventional cost cutting. Reducing administrative positions can lower expenses relatively quickly, but leaving excessive manufacturing capacity untouched would continue to burden the company through factory costs, equipment, logistics and labour.

Volkswagen therefore needs to reshape its industrial footprint at the same time as it changes its workforce. The two issues are closely connected: fewer vehicles being produced require fewer production resources, while lower profitability makes it harder to justify maintaining capacity built for a larger market.

Germany Faces the Most Difficult Decisions

The German operations are likely to be among the most politically and economically sensitive parts of the restructuring. Volkswagen has identified Emden, Zwickau, Hanover and Neckarsulm as plants for which it currently cannot guarantee competitive future production in the 2030s.

That does not mean that Volkswagen has formally decided to close those factories. The company has said that alternative uses are being examined and that the future production structure will be developed by June 2027. This leaves considerable room for negotiations, particularly because German plants are deeply connected to regional employment and the country’s industrial base.

The challenge is that alternative uses must make economic sense. Volkswagen has already considered possibilities ranging from new industrial activities to partnerships with other sectors. At some locations, the company is examining whether existing infrastructure can be used for businesses outside conventional vehicle production.

The earlier agreement with German labour representatives also complicates the process. Volkswagen and employee representatives had already agreed on a package involving significant capacity reductions and labour-cost savings through the end of the decade. The new restructuring therefore adds another layer to an adjustment process that is already underway rather than starting from zero.

The Workforce Question Is Bigger Than Job Numbers

The planned reduction of about 50,000 additional positions has attracted much of the attention, but the underlying objective is to change the structure of Volkswagen’s organisation. Management has identified the need to reduce management positions substantially while simplifying the group and removing duplicated activities.

This is important because Volkswagen’s complexity has grown over decades through the development of numerous brands, technologies, markets and organisational layers. A large multinational group can benefit from scale, but scale becomes a disadvantage when different divisions duplicate development work or maintain capacity that is no longer economically justified.

The transformation plan therefore aims to reduce organisational complexity as well as manufacturing capacity. Volkswagen wants clearer divisions between technologies it develops internally, technologies obtained through partnerships and technologies acquired from outside.

That approach could allow the company to concentrate investment on areas where it believes it can establish a competitive advantage. It also reflects a wider change in the automobile industry, where manufacturers increasingly need to manage software, batteries, electric vehicles, conventional powertrains and digital services without allowing development costs to expand indefinitely.

China Has Become a Structural Problem

China represents another major part of the restructuring because Volkswagen’s previous strength in the market has weakened as local manufacturers have become more competitive. Chinese companies have expanded rapidly in electric vehicles and increasingly compete on price, technology and product development.

Volkswagen has already reduced its workforce in China and plans further capacity reductions. The company has acknowledged that its production network in the country has become too large relative to demand and its competitive position.

The Chinese problem is particularly difficult because simply reducing production does not restore market share. Volkswagen must also improve the competitiveness and appeal of its products. That requires faster product development and a better response to consumer preferences in electric vehicles and digital technology.

Partnerships with Chinese companies could become part of that response. Local partnerships can provide access to technology and shorten development cycles, but they also require Volkswagen to determine how much control it wants to retain over products and intellectual property.

The restructuring in China therefore involves more than cost reduction. It is an attempt to align the company’s industrial footprint with a market where the competitive balance has changed significantly.

The United States Requires a Different Strategy

Volkswagen’s American strategy creates another challenge because the company needs to improve its position in a market where large sport utility vehicles and pickup trucks account for a substantial share of demand.

The group has also been dealing with the financial impact of United States trade tariffs. That increases the importance of deciding where vehicles are produced and which models should receive investment.

One of the unresolved questions concerns whether Audi should establish its own production facility in the United States. Such a decision would involve substantial investment but could potentially provide greater local production capacity and reduce exposure to import costs.

Volkswagen is also considering a stronger focus on larger and more profitable vehicle segments in the United States. That would represent a shift in product strategy because the company has historically had a stronger presence in smaller passenger vehicles than some of its American competitors.

The difficulty is that moving toward larger vehicles requires investment at a time when Volkswagen is simultaneously trying to reduce costs and capacity elsewhere. The company therefore has to decide where additional investment can generate the strongest returns rather than simply cutting spending across all markets.

Profit Pressure Makes Delay More Expensive

The urgency of the restructuring increased after Volkswagen issued a significantly weaker financial outlook. The group expects major one-time costs, including a large impairment related to Porsche, while its projected operating margin for 2026 has been reduced sharply.

Porsche’s deterioration is particularly important because the brand had historically provided Volkswagen with strong profitability. Weak demand in China, difficulties in the electric vehicle transition and pressure in the United States have weakened that contribution, making the parent company’s broader restructuring more urgent.

This changes the financial context for the turnaround. Volkswagen cannot rely indefinitely on strong profits from its premium businesses to offset weaker performance elsewhere. The group needs to improve the underlying profitability of its core operations while simultaneously funding new products and technologies.

That creates a difficult balance. Cutting too slowly could leave Volkswagen carrying excess costs for years, while cutting too aggressively could weaken the organisation’s ability to develop competitive vehicles.

The Next Phase Will Be About Allocation

The most important stage of Volkswagen’s restructuring will therefore be the allocation of production, investment and people. The company needs to determine which plants receive future models, which facilities require alternative uses and which operations can no longer be supported economically.

The deadline for developing a future European production structure in June 2027 provides a framework for those decisions. Until then, the four German plants without confirmed competitive future production remain exposed to possible changes, but their final fate has not been determined.

Volkswagen also needs to align those industrial decisions with its strategy in China and the United States. Reducing capacity in one market while expanding elsewhere will only improve the company if the additional investment is directed toward markets and vehicle segments capable of generating sustainable returns.

That makes the restructuring fundamentally different from a simple programme of job cuts. Volkswagen is attempting to redesign a global manufacturing system built for a larger and less competitive market while simultaneously financing a technological transition.

The success of the plan will ultimately depend on whether the company can make that adjustment quickly enough to improve profitability without sacrificing the products, technology and production capabilities required for its next phase of growth. The immediate approval of the restructuring has therefore settled only the broad direction. The harder decisions over factories, jobs, investment and markets are still ahead.

(Adapted from Reuters.com)

Categories: Economy & Finance, Strategy