German legacy carmaker Volkswagen is set to cut down its production capacity and model line-up as part of a significant company restructuring.
The basis of the crisis
One of the world’s largest auto brands, Volkswagen, is undergoing a crisis prompted by weakening demand in Europe, the rise of China’s new energy vehicles (NEV), and the US’ imposition of tariffs.
A report from Reuters details the varying factors that have led Volkswagen to its current circumstances. The first of these factors is an outdated conglomerate structure. While Volkswagen is a legacy brand that has persisted for decades, its unique set-up has triggered a stalemate between shareholders, prompting top management to “challenge the status quo.”
The second factor is its declining performance in one of its most important markets, China. According to Reuters, profits generated by Volkswagen’s China business, including its joint ventures, have fallen by more than 80 per cent over the past decade.
The German automaker’s status as the no. 1 automaker in China has been displaced by local competition. While Volkswagen slips to the 3rd biggest manufacturer in the country, its Chinese competitors soar to the top with affordably priced line-ups of NEVs.
Meanwhile in Europe, demand has weakened considerably, even below pre-pandemic levels. Its business in the US, on the other hand, is severely impacted by the country’s tariff impositions.
Lastly, Volkswagen’s profit margins have plunged by more than 50 per cent during the period of 2021 – 2025. The price of its shares has hit its lowest since 2010, a 16-year low that surpassed its crash from the Dieselgate scandal.
Blume’s solution
Struggling with bringing back the company’s profitability, Volkswagen’s CEO Oliver Blume announced in late June that he planned to cut 140,000 jobs and close several factories in Germany. This is also part of a move to revise the company’s traditional corporate structure.
In the wake of Blume’s plans to reduce the company’s workforce, the CEO will also attend a series of “extraordinary staff assemblies” in late August. In these assemblies, staff will be able to communicate their concerns and questions about their occupations and the company’s future with Blume himself.
“Our goal is clear: by 2030, we will make the Volkswagen Group the most attractive automotive company in the world – with iconic brands, inspiring products, leading technologies, robust financial results, reliable capital market performance and a team spirit in action,” Blume said.
Under Blume’s direction, Volkswagen is about to embark on its largest restructure so far, with four of its high-cost German plants expected to close, with thousands of additional job cuts planned. In addition, the company may even divide its passenger car and components businesses into separate divisions. This one of the most contested aspects of the restructuring plan, as the separation of a passenger car division may violate the Volkswagen Law.
Lessening the line-up
Alongside facilities and thousands of jobs, Volkswagen’s existing model line-up will also be downsized. Top management is planning to cut the line-up by 50 per cent and other parts of its business by 75 per cent.
The conglomerate wrote in its press release:
“The model lineup will be gradually streamlined by up to 50 percent and concentrated on the most attractive market segments. Offering complexity – for example, the number of available equipment options – will be reduced by up to 75 percent. This allows investments and development resources to be focused on the products and technologies that deliver the greatest added value for customers and the highest value contribution to the Group.”
Volkswagen’s crisis is a product of several factors that have affected the company in the last decade. It may take the company years to bounce back from its current circumstances.
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