Opinion: Management complacency lies at the heart of Volkswagen’s mess

Gus Carlson is a U.S.-based columnist for The Globe and Mail.

While the term canary in a coal mine may be too dire a descriptor, the dynamics of the situation unfolding in and around VW’s Wolfsburg headquarters in northern Germany are alarming.

Every executive at every automaker in the world should be paying close attention because behind all the clatter and finger-pointing is the real root cause of the crisis: management complacency.

The drastic job actions, plant closings and wage cuts proposed by Europe’s largest automaker – and Germany’s biggest manufacturer – go well beyond its operations and the fortunes of its nearly 300,000 employees. The impending axe-swinging – including shutting factories for the first time in VW’s 95-year history – hint at much deeper cracks in the country’s auto-making prowess, its manufacturing sector over all and by extension its economic clout as a global industrial powerhouse.

Volkswagen has said it plans to close three factories, lay off tens of thousands of workers, impose pay cuts of up to 10 per cent across the board and freeze wages for 2025 and 2026. Some unionized workers would also lose bonuses and other goodwill payments marking employment anniversaries and other personal achievements.

Among the reasons outlined by VW leadership: a sagging European economy, including rising inflation in Germany that has driven up the costs of parts, equipment, shipping, power and labour and put the country on the doorstep of technical recession for the second year in a row. Add to that weakening demand for Volkswagen models in Europe and China, increasing competition from lower-priced Asian vehicles, and high costs related to the company’s transition to electric vehicles, which have been met with a tepid consumer response.

The situation has gone well beyond a simple course correction – it is a desperate time and, the company says, requires desperate measures.

Those measures start with finding ways to trim more than US$4-billion in costs out of VW’s operations through widespread restructuring and recasting the strategy of the company.

The company has said many of its domestic factories are inefficient, with rising production costs squeezing margins. And since the appeal of VW vehicles is their value pricing – and typical VW buyers are price-sensitive – passing along those costs at retail with higher sticker prices is a very risky strategy that plays right into the hands of lower-cost options.

If continuing contract talks with VW’s works council representing the work force fail, the union would be in a position to strike as early as Dec. 1.

Even the union, which wields significant influence at Volkswagen, understands the depth of the problems and has told workers that the company’s proposed cuts are not traditional sabre-rattling that characterize most contract negotiations. They are real and they will hurt.

An extended strike would exacerbate an already dire situation and bring the carmaker to its knees. Could we see a future without “the people’s car”?

Probably not. There would likely be some sort of government intervention to rescue Germany’s flagging industrial sector, including the iconic VW brand, and stem the reputational leakage its demise would represent to German manufacturing prowess.

That being said, even the German government has cast aspersions on the wisdom of VW management’s past decisions and has so far been reluctant to wade into the fray.

And therein lies the dirty secret in all this. Anyone who has been paying the least bit of attention should have seen it coming. Investors saw it. VW stock has lost 44 per cent of its value in the past five years, compared with only a modest decline at Renault and a double-digit rise at Stellantis.

The question seems obvious: Why did VW leadership wait so long – until things were at the crisis point – before taking action? The economic clouds have been hanging over Europe and Germany for some time. The rise of competitively priced Asian imports, including Chinese vehicles, didn’t happen overnight. The struggles legacy automakers have had with EV sales are widespread and well documented.

To say VW management was asleep at the wheel may be too harsh. But it seems they lulled themselves and their workers into a false sense of security in believing Europe’s biggest automaker was too big to fail.