Crisis at the heart of Volkswagen

It could cost as many as 30,000 German jobs to keep Golfs rolling off the line at Wolfsburg

One of the great icons of German industry is under threat. Built to construct one million vehicles a year, Volkswagen's Wolfsburg plant is the largest car factory in Europe. It assembles the Golf, one of the world's most successful cars and Europe's biggest seller. Yet its workforce currently produces 700,000 vehicles a year, making it one of the most costly and least efficient car plants in the world.

"We build great cars. But our costs are far higher than our targets," Wolfgang Bernhard, head of the VW brand, told the Wolfsburg workforce just over a week ago. "Let us all pull together to make this plant viable and your jobs safe. Wolfsburg has to get off the reserves' bench and become our striker."

The striker is severely injured at the moment. With its four chimneys and brick-block construction, Wolfsburg towers like a vast Battersea power station above the North German Plain. It has 75,000 employees, of whom 25,000 work in administration at VW's headquarters, while 10,000 make parts for the assembly line.

Mr Bernard, who was booed and whistled at by the Wolfsburg workforce, unveiled charts showing that VW loses €1,020 (£700) on every Golf it makes. The new Golf, to be launched in 2009, has to be at least €1,500 cheaper to build. This would make it profitable, but if the car is to be competitive, costs would probably have to be even lower than that. Meanwhile, price pressure is hitting home, and traditional Golf drivers are deserting it for other cars, such as SUVs.

Cost-cutting will require dropping over-engineered features, including the Golf's complex rear-axle, to slash construction time from 50 hours to less than 30. Purchasing, logistics and manufacturing processes have to be improved. But, above all, it means fewer jobs.

"We must make our labour costs competitive," Mr Bernhard said. "If we do that, cars can be produced in Wolfsburg competitively. Secure jobs depend upon competitiveness."

Mr Bernhard wants to raise the 28.8-hour working week on the assembly line to 35 hours without raising pay. This would bring Wolfsburg and VW's other plants in line with their German competitors. At the same time, he hopes to persuade 20,000 German workers to leave VW with voluntary redundancy packages worth up to €250,000 each. To date, just 800 workers have opted to do so. The unions point out that VW's plants are located in areas of high unemployment, and the payments would be halved by tax. The chief union negotiator, Hartmut Meine of IG Metall, has flatly refused to renegotiate the current contract, which guarantees job security past 2010.

The crisis at Wolfsburg and VW is so deep that Mr Bernhard recently aired the idea that the next Golf might not be built there. "We want to build the next Golf in Wolfsburg," he said, "but only if the company does not pay for every car sold."

The suggestion that Wolfsburg might, in effect, be closed down caused union outrage. Anger was also expressed about a story, quickly denied by the company, that suggested VW wanted to cut its German workforce by 30,000.

Feelings are running high. The unions are now gearing themselves for strikes and protests as sensitive talks on jobs and wages restart later this week.

Yet fundamental change is inevitable, according to analysts. "Little has happened to date," says Albrecht Denninghoff at HVB Equity Research. "VW announced its profits target last year and we have seen no great change. The unions rightly demand an overall plan, which we have not seen. Frankly, we are rather surprised by the way the company has behaved."

Another analyst, who asks not to be identified, adds: "VW has to move to a 35-hour week without additional pay, then it has to cut its overcapacity. It can make six million cars at its German plants but sells only five. It will need many successful models to make up the difference. I don't see it happening. It is hard to be optimistic for employees."

VW set itself the goal of achieving profits of €5.1bn in 2008. Yet this would only move it close to covering its costs. It would not make it competitive.

Patrick Juchemich, an analyst at Sal Oppenheim, an investment bank, predicts that disposals, including that of the Europcar rental group, will help offset the €1.7bn potential cost of the voluntary redundancy programme. As a result, VW's profits might rise from €1bn to €2.6bn in 2006. Yet, he warns: "The previous programme was not well received at all. This is more generous but reaction has been modest."

There are signs that the unions see the gravity of the situation. Bernd Osterloh, the head of the VW works council, is a member of the company's supervisory board. (Under German law, the supervisory board represents both investors and employees, and approves important corporate decisions.) Mr Osterloh blames management for the problems. "It is not the workforce's fault that it takes 50 hours to build the car," he said. "Competitors need half the time. The Golf is so complicated that we really cannot build it."

Mr Osterloh has said he is willing to discuss labour costs with the board. But: "I want to know what the company is going to do with the money in order to survive in the longer term." He also criticised VW for the decision to build the new Scirocco coupé in Portugal, rather than at Wolfsburg, where it would reduce excess capacity.

The relationship between capital and labour has to change, as HVB's Mr Denninghoff points out. "Is this a company that provides employment to its workforce," he asks, "or returns to shareholders?"

Yet the challenge is so great because so many jobs are threatened at once. Increasing the working week and halving the Golf's construction time will create further overcapacity, not least at Wolfsburg.

"Purely mathematically, the effects of these measures would be 30,000 job losses in Germany. But they are unlikely to see 20,000 under present circumstances," says Mr Juchemich at Sal Oppenheim.

Becoming competitive - Mr Bernhard's stated goal - suggests yet more cuts. Currently, one hour's work on the assembly line in Wolfsburg costs the company €55, compared with €40 at its competitors' plants in Germany - and just €5.50 in VW's plant in Bratislava, Slovakia.

Mr Denninghoff claims a competitive workforce would require 60,000 job losses, leaving VW with just 40,000 German employees, a dire prospect for the country's economy. Yet this simply reflects what is happening in the car industry."Mercedes has reduced the headcount of its Stuttgart headquarters to eight or nine thousand," he says. "There seems no reason for VW to have 25,000 people in administration at Wolfsburg."

It's something VW is apparently only too aware of. As its chief executive, Bernd Pischetsrieder, has already said: "We have 59 plants, too low turnover and too few customers."

If Wolfsburg is to be saved, it seems the unions have little choice but to start working with VW's management.