Since its founding, VW has been on the government’s leash. Even Hitler once liked Volkswagen. Even today, politicians still interfere with managers and cement the power of the unions. Can VW ever free itself from its shackles?
Shrill whistles, red IG Metall posters and thousands of angry employees – in Hall 11 of VW’s main plant in Wolfsburg, the mood was heated up inside on Wednesday with an outside temperature of 30 degrees. The employees’ anger was directed at the managers present, Volkswagen Group CEO Oliver Blume and Thomas Schäfer, head of the struggling core brand VW. At the beginning of the week, the two had dared to question two taboos: for the first time in history, they are considering closing at least one factory in Germany and want to terminate the job guarantee that has been in place for 30 years.
Great excitement about VW also in Berlin
The news also caused a stir among the political elite in Berlin, 200 kilometers away, because Volkswagen is more than just an ordinary company. Despite various scandals, Europe’s largest car manufacturer is considered one of the most important companies in the country, and is also partly owned by the state of Lower Saxony.
From Chancellor Olaf Scholz to Economics Minister Robert Habeck and Labor Minister Hubertus Heil to Lower Saxony’s Prime Minister Stephan Weil, no one missed the opportunity to comment on the “VW case” and offer advice. There is great fear that the crisis at Volkswagen will be seen as definitive proof of the decline of the location and its declining competitiveness.
The company has been in trouble for a long time. Experts have long considered the core VW brand, the headquarters in Wolfsburg and several other plants in Germany to be chronically inefficient and expensive, which has an impact on the entire company. Volkswagen used to be able to compensate for its weak performance in Germany with profits from its business in China and from the profitable Audi and Porsche brands. But those days are over. Things are going badly in China and Audi is only slowly emerging from its own crisis.
This is why Blume, CEO for two years, prescribed a fitness program and cost and profit targets for all brands last autumn. He was probably particularly interested in the core VW brand, which was expected to increase the return on sales from 4 to 6.3 percent in the coming years. Blume was also hoping for economic tailwind – but that didn’t materialize. The slump in the car business has even become more pronounced, especially in Europe.
The margin of the core brand VW fell to a meager 2.3 percent in the first half of the year, the Spanish sister company Seat/Cupra achieved more than double the return at 5.2 percent, and the Czech brand Skoda even achieved far more than triple at 8.4 percent. VW CFO Arno Antlitz pointed out on Wednesday that car sales in Europe are 2 million units lower than before the coronavirus. Since Volkswagen has a market share of 25 percent, the group is missing 500,000 vehicles sold. That corresponds to two factories. There is apparently no prospect of improvement in sight.
High labor costs in German industry
It is not surprising that management is considering closing German locations in view of the high labor costs. In Germany, the cost per hour worked in the manufacturing industry was 46 euros in 2023. In Eastern European countries such as the Czech Republic, Hungary and Poland, labor costs are between 19 and 13 euros. The EU average is 32 euros.
At Volkswagen, they are likely to be significantly higher than in the country as a whole, as the unions there are in a particularly strong negotiating position due to the structure of the group and can therefore repeatedly secure outstanding conditions.
This is due to the ownership structure. 53.3 percent of the voting shares belong to the Porsche Holding, owned by the Porsche and Piëch families. But Lower Saxony also holds 20 percent of the voting rights, which is why the state is allowed to send two representatives to the supervisory board, usually the Prime Minister and the Minister of Economic Affairs.
In Germany, due to co-determination, supervisory boards of companies are traditionally filled on an equal basis between shareholders (capital side) and employees. The chairman of the supervisory board usually comes from the capital side, which ensures that the latter has the majority in contested votes.
At VW, the representatives of the state of Lower Saxony, who actually represent the capital side, often vote with the union on critical issues such as job cuts and plant closures for politically opportunistic reasons. This is all the more true as Lower Saxony has been governed predominantly by the SPD for the past 30 years. This means that it is almost impossible for management to set up the German locations efficiently, especially since Lower Saxony has a blocking minority in some areas.
Many a CEO has already failed because of the Wolfsburg system and its cliques. The same fate now threatens Oliver Blume, who has been conciliatory up to now. The head of the general works council, Daniela Cavallo, has already announced bitter resistance. There will be no factory closures under her leadership, and Weil has also supported this. It will therefore be difficult to free the company from its shackles.
Hitler liked Ferdinand Porsche’s ideas
Volkswagen has been a politically strongly influenced company since it was founded around 90 years ago. The legendary engineer Ferdinand Porsche’s idea for a German Volkswagen for four adults – for 990 Reichsmarks and a “highway-proof” constant speed of 100 km/h – fell on fertile ground with Adolf Hitler in 1934. The German Labor Front (DAF) played an important role in implementing the idea, and when laying the foundation stone for a factory, Hitler coined the term KdF-Wagen (Strength through Joy).
The DAF of the Nazi regime was the successor organization of the destroyed free trade unions. Fallersleben, near Wolfsburg Castle, was chosen as the location for the first factory, from which the city of Wolfsburg eventually emerged.
After the war, in 1960, the Volkswagenwerk GmbH was privatized by the so-called VW Act and turned into a stock corporation. At that time, Lower Saxony received its 20 percent share. In the 2000s, the EU Commission finally sued Germany to abolish anti-capital market provisions of the VW Act. The EU was annoyed, among other things, by the fact that it protected the company from hostile takeovers. At least one relaxation was achieved.
Today, most of the paragraphs of the VW law are no longer valid. However, paragraph 4 still states that the construction and relocation of production facilities requires the approval of the supervisory board with a two-thirds majority. And resolutions of the general meeting, for which a three-quarters majority is required under the Stock Corporation Act, require a four-fifths majority at VW, so that Lower Saxony often has a right of veto.
This construction explains why VW management was always interested in getting on good terms with the unions. However, the closeness between employer and employee sides repeatedly led to derailments and excesses. In 2005, VW works councils were at the center of a corruption scandal after the media uncovered luxury trips and visits to brothels in Brazil at company expense. And in recent years, prosecutors have been investigating possibly excessive salaries for members of the works council, although this did not only affect Volkswagen.
It would certainly be wrong to attribute Volkswagen’s problems solely to outdated governance. Management errors and market developments are also responsible for the misery. In China, the world’s most important car market, Volkswagen has lost ground in electric cars. However, this segment is growing strongly in the Middle Kingdom. Therefore, the “check from China”, i.e. the profits from the market there, are unlikely to materialize for the time being. This also affects other brands in the group, such as Audi.
At the same time, VW is struggling with the transition to electromobility, problems at its software subsidiary Cariad and unattractive infotainment offerings. To speed up development, the company has entered into partnerships in China and the USA, but these increase the complexity due to the necessary interaction with Cariad.
Ups and downs on subsidies and combustion engine ban
The situation is further exacerbated by the low sales of vehicles and the weak demand for purely electric cars in Germany for months. The latter was also due to the completely unexpected abolition of subsidies for electric cars by the traffic light government at the turn of the year, under the Green Economics Minister Habeck of all people. This week, Berlin suddenly created tax incentives for electric company cars. This back and forth is contributing to consumer uncertainty, as is the discussion about whether there will be a ban on combustion engines in the EU from 2035 – or not.
It is not yet clear what management can and wants to achieve in negotiations with union members and politicians. At VW, the next round of wage negotiations is just around the corner. The IG Metall union is demanding a whopping 7 percent pay increase, far more than the expected inflation in Germany next year. This is likely to intensify the clash of cultures. So tough arguments are on the horizon in Wolfsburg, so whistles and IG Metall flags will continue to be in high demand.
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