Volkswagen is considering the unprecedented step of closing its factories in Germany for the first time in its 87-year history as part of a broader effort to cut costs amidst increasing competition from Chinese electric vehicle manufacturers, CNN and Financial Times report. On Monday, the German automaker, one of the largest car companies globally, announced that plant closures in its home country could not be ruled out. The company is also contemplating terminating its employment protection agreement with labor unions, which has been in place since 1994.

Oliver Blume, CEO of Volkswagen Group, described the European automotive industry as facing a "very demanding and serious situation." He highlighted the tough economic environment and the rising competition, particularly from new entrants to the European market. Blume noted that Germany, as a manufacturing hub, is increasingly losing its competitive edge.

Volkswagen, which launched a 10 billion euros (11.1 billion dollars) cost-cutting initiative late last year, is seeing a decline in market share in China, its largest market. Deliveries to Chinese customers dropped by 7% in the first half of the year compared to the same period in 2023, and the group's operating profit fell by 11.4% to 10.1 billion euros (11.2 billion dollars). The company's struggle in China is compounded by the growing presence of local EV brands like BYD, which also threaten its European market position.

Blume emphasized that the company's primary focus is on cutting costs, with planned reductions in factory, supply chain, and labor expenses. He acknowledged that the company has already completed the necessary organizational changes and is now concentrating solely on cost reduction.

Volkswagen's cost-cutting plans are likely to face strong opposition from labor representatives, who hold nearly half of the seats on the company's supervisory board, responsible for appointing executive managers. IG Metall, a major German union, criticized the company's approach as mismanagement and vowed to resist any measures that could jeopardize jobs and locations. Thorsten Groeger, IG Metall's lead negotiator, condemned the plan as irresponsible and dangerous, asserting that it threatens the core of Volkswagen's operations.

Volkswagen employs nearly 683,000 people worldwide, with approximately 295,000 based in Germany. Thomas Schaefer, CEO of Volkswagen passenger cars, affirmed the company's commitment to Germany as a business location and stated that talks with employee representatives would begin promptly to explore sustainable restructuring options. The company acknowledged the extremely tense situation and indicated that simple cost-cutting measures alone would not resolve the issues at hand.