Volkswagen's factory is seen in Sao Bernardo do Campo, Sao Paulo state, Brazil. Reuters

German auto major Volkswagen (VW) faces a major challenge, especially from the workers’ union, as it wants to close down some of the units and end its job security scheme which has been in place since 1994. The company management wants to close some of the unproductive units, which would also mean laying off workers. IG Metall, the workers’ union, had said that it would resist the move at the workers’ council meeting on Wednesday.

The reason for restructuring and downsizing is to face the new market reality of moving to electric vehicles and also to cope with new competition, especially from China’s carmakers. It is felt that the decision should have come quite a long time ago, but it has fallen to Oliver Blume, considered the consensus man, to handle the prickly issue. 

Volkswagen employs 680,000 people, and the 1994 job security scheme is to last till 2029. But there is a general slowdown in economic growth in Europe, especially since the Covid pandemic and the war in Ukraine. Germany has remained the strongest economy through the critical period, but there is no alternative to some of its major players to make necessary changes.

The major challenge comes from China’s carmakers. The China angle is complicated. Germany produces electric vehicles in collaboration with Chinese carmakers. But the European Union (EU) has imposed high tariffs, touching 30 per cent on cars made in China.

For Volkswagen it has been brought down to 21 per cent. The special pleading of the German carmaker that it is not a wholly China product though it is manufactured in China does not seem to cut much ice. But the problem is the high labour costs in Germany make manufacturing cars less competitive. Also, Volkswagen wants to finance its new projects worth $20 billion by cutting costs through closure of some units at home. The management’s argument is that it has no other way to finance the future projects.

The industrial scene in Europe is tough if not bleak, and it is also forced to meet the demands of decarbonising manufacturing and other things to meet the climate change goals. The work council has the Lower Saxony government with 20% of shares in the company, and half of the work council is represented by the union. The federal government too had a share in the company but it had withdrawn.

Before the Second World War, Volkswagen was owned by the government. The Lower Saxony government sources said that they would like to see a settlement which is satisfactory to all. It cannot speak for the workers despite political compulsions and it may support the management on economic grounds but cannot say so.

Any trouble in the German economy would have major ripple effects across the EU because Germany has been the fortress of economic growth and stability through the economic crises that impacted global economy. If there are to be cracks in the edifice of the German economy, then it is a matter of serious concern.

And unlike the United States, many of the EU members, especially Germany, do not look upon China as a rival who cannot be given any ground. Europeans do have their share of mistrust and hostility towards China but it is not absolute as in the case of the Americans.

The Europeans want to do business with China, and they also feel that it is profitable in more than the economic sense. The ideological rift between Europe and China is not a major hurdle that it is between China and the United States. There is however a compelling need for Europe and the US, the advanced industrial countries in general, to restructure their industrial base. They have become antiquated.