[Business & Issues] Volkswagen Employing 680,000, German Factory Closed but Restructuring Pains Expected...

Continuous Stock Price Decline Due to Profit Margin Decrease
Employee Count Reaches 680,000, Low Profitability
Concerns Over Strong German Government Intervention in Restructuring

[Image source=AP Yonhap News]

Volkswagen, Europe's largest automobile manufacturer, has sparked controversy by announcing plans to consider factory closures in Germany and intensive restructuring measures to overcome its worsening management situation. Volkswagen executives argue that labor costs for more than 300,000 employees compared to competitor Toyota are deteriorating profitability, making restructuring inevitable.

However, with the German state government of Lower Saxony, Volkswagen's second-largest shareholder, as well as the German federal government signaling active intervention, restructuring is expected to be difficult. Instead, the German government plans to resume electric vehicle subsidy programs to support Volkswagen's electric vehicle sales. As negative and positive factors overlap, Volkswagen's stock price is expected to experience increased volatility.

Volkswagen Stock Falls Below 100 Euros... Sharp Decline Amid Consideration of German Factory Closures

According to CNBC, on the 5th (local time), Volkswagen's stock price closed at 94.82 euros, down 0.21% from the previous session. Since Volkswagen announced on the 2nd that it was considering factory closures in Germany, the stock price has remained below 100 euros. Compared to 112.88 euros at the beginning of the year, it has fallen nearly 16%, showing little sign of rebound.

In terms of market capitalization, the gap with Toyota, the world's top automobile seller, has widened significantly. Last year, Toyota sold 11.23 million vehicles globally, while Volkswagen sold 9.24 million. However, Volkswagen's market capitalization stands at 52.2 billion euros (approximately 78 trillion KRW), which is 4.97 times less than Toyota's market capitalization of 42 trillion yen (approximately 388 trillion KRW).

The main reason is analyzed to be weakened investor sentiment due to Volkswagen's deteriorating profitability. Volkswagen's sales in the second quarter of this year increased by 4% year-on-year to 83.3 billion euros, but operating profit decreased by 2% to 5.5 billion euros, and the operating profit margin fell by 0.4 percentage points to 6.6%.

Employment Guarantee for 680,000 Employees and Profitability Decline... 300,000 More Than Toyota

On the 4th (local time), Volkswagen union members are protesting at the labor-management council meeting held at Volkswagen headquarters in Wolfsburg, Lower Saxony, Germany.
[Image source=Reuters·Yonhap News]

An obstacle to improving Volkswagen's profitability is the employment guarantee system and its massive workforce of 680,000 employees. According to the German local media Der Spiegel, as of the end of last year, Volkswagen had 684,025 employees worldwide, including those in Germany, about 300,000 more than Toyota. Of the total employees, approximately 290,000, or 43.7%, work in Germany, where their employment is guaranteed until 2029 under a 'job security agreement' between labor and management.

Accordingly, Volkswagen's management has declared its intention to abolish the job security agreement along with intensive restructuring in Germany. Oliver Blume, CEO of Volkswagen Group, stated in a press release, "The situation is extremely difficult and serious to the extent that continuing the job security agreement is challenging," emphasizing, "We will undergo comprehensive restructuring, and factory closures cannot be ruled out."

Volkswagen management is currently considering closing two of its six factories in Germany, including one vehicle assembly plant and one parts plant, with the possibility of additional closures. Der Spiegel reported that this could result in the loss of at least 20,000 and up to more than 120,000 jobs.

The Volkswagen labor union strongly opposes the restructuring plan, refusing to accept it. Daniela Cavallo, chairwoman of the Works Council, said, "Management has questioned the decades-long agreement that profitability and job security hold equal status," calling it "an attack on our jobs, workplaces, and collective agreements."

Effectively a Public Enterprise System, German Government Intervention Expected... Restructuring Pain Anticipated

[Image source=Reuters Yonhap News]

Although Volkswagen management has proposed intensive restructuring plans, the company's effectively public enterprise system suggests that German government intervention is expected, likely intensifying difficulties.

According to German local media Deutsche Welle (DW), Volkswagen operates under the 'Volkswagen Law' enacted in 1960, which requires more than an 80% quorum for shareholder meetings and limits voting rights of major shareholders holding more than 20% of shares to 20%. Even if the largest shareholder, holding 35.4% through the holding company Porsche SE, and Volkswagen management push for restructuring, it is difficult to proceed if other major shareholders oppose it. This law was created to prevent Volkswagen, a symbol of German automobiles since 1937, from being acquired by foreign companies.

In particular, Volkswagen's second-largest shareholder is the Lower Saxony state government, where its headquarters are located, holding 20.2% of Volkswagen shares. If the Lower Saxony state government exercises its veto power against restructuring and factory closures, implementation becomes difficult. Additionally, Volkswagen has a supervisory board composed equally of management and labor representatives, and major decisions such as factory relocations or new constructions require approval by at least two-thirds of the supervisory board, without which actions cannot be executed.

Robert Habeck, Germany's Minister for Economic Affairs and Climate Action, stated at a bureaucratic meeting on the 4th, "Decisions currently being discussed regarding Volkswagen must be made responsibly. Close consultation with social partners is necessary," expressing opposition to factory closures and restructuring. Hubertus Heil, Germany's Minister of Labor, also emphasized, "Factory closures and layoffs must be avoided."

DW quoted experts saying, "Volkswagen's governance structure makes it closer to a state-owned enterprise than a market-based private company," and "The Volkswagen Law is a stumbling block, and it will be difficult to push through restructuring plans against the opposition of the Lower Saxony state government."

However, the German government announced plans to resume the electric vehicle tax credit system, which was abolished in November last year, as a stimulus measure. From July this year until December 2028, tax credits will apply to electric vehicles purchased, with the German government estimating the tax reduction effect to reach 580 million euros (approximately 870 billion KRW) next year alone. It is expected that the revived enthusiasm for electric vehicle purchases, which sharply declined after the tax credit ended, will partially help Volkswagen's management difficulties.