How Volkswagen’s Huge Workforce Became a Liability

The news of Volkswagen planning to cut up to 100,000 jobs from its massive workforce of 630,000 has sent shockwaves through the automotive industry. The company’s decision to downsize is a necessary response to challenges posed by Chinese electric vehicle makers, but it also raises questions about how VW got itself into this predicament.

A major factor contributing to Volkswagen’s bloated workforce was its strategic decision to control more stages of production than its peers. This approach, while once beneficial, has become a significant burden. Meghan Ostertag from the Information Technology and Innovation Foundation points out that VW’s self-sufficiency has led to higher labor costs and factory expenses in Germany, which can be twice those of its competitors.

Volkswagen’s aggressive acquisition strategy over the years has also played a role in its workforce woes. The company’s decision to acquire brands such as Skoda, Porsche, SEAT, and Bugatti, among others, while successful in expanding its market share, has made VW a complex and difficult entity to manage. Daniel Harrison from Ultima Media notes that integrating these brands, supply chains, and designs has been a significant challenge for the company.

The consequences of Volkswagen’s failure to adapt to changing market conditions are evident in its slow transition to electric vehicles. While Chinese EV makers have gained traction and technological edge, VW lagged behind, contributing to slower sales in China, which accounted for a third of total VW sales, as well as softening demand in Europe and other key markets.

The parallels between Volkswagen’s situation and the US auto industry’s struggles in the 1960s and 1970s are striking. At that time, the Big Three – Ford, GM, and Chrysler (now part of Stellantis) – were bloated and slow to adapt when Japanese and European competitors began eating into their market share. By the time they shifted toward leaner production methods, a decade had passed, and they had fallen significantly behind.

Toyota, which produces a similar number of vehicles as VW, operates with nearly half the workers by relying more on suppliers, higher automation, and a simpler management structure. Volkswagen’s reliance on its massive workforce has made it vulnerable to the changing market landscape.

Analysts warn that current proposals for job cuts and factory closures are only a temporary solution. While they will bring savings and reduce overcapacity at German plants, VW’s underlying cost base and slow decision-making culture mean deeper reforms may be needed. Ostertag notes that investing more heavily in automation would allow the company to better compete with leaner firms like China’s BYD.

The Volkswagen Group’s woes also highlight the need for European policymakers to act quickly to address the challenges posed by Chinese competition. The German government is providing subsidies and loans for domestic EV battery plants to reduce reliance on Chinese imports, while the EU has imposed tariffs of up to 45% on Chinese-made EVs. However, more needs to be done to shield strategic industries from unfair competition.

Historian Niall Ferguson warns that Europe has been slow to respond to China’s strategy. The Volkswagen case serves as a reminder that companies must adapt quickly in today’s rapidly changing industry landscape or risk being left behind.