TSLA Tesla Inc

By William Boston 

BERLIN -- Volkswagen AG, the world's biggest auto maker by sales, will cut up to 7,000 administrative jobs over the next five years, in the latest move highlighting how global auto makers are scrambling to shoulder the huge costs of new technology for electric and self-driving cars.

The company said Wednesday the job cuts will be at its namesake VW brand, its biggest division and the source of half its revenues. The cuts would amount to about 6% of the brand's German workforce of 119,394 employees.

The VW brand sold 3.7 million cars last year, more than a third of the group's total vehicle sales, but high costs are eating away at its meager profit margins.

Volkswagen said the restructuring efforts and savings in procurement, raw materials and other areas are expected to boost profit by EUR5.9 billion ($6.7 billion) annually after 2023.

The auto maker disappointed investors on Wednesday with the news that it was setting aside plans for a partial listing of its trucks division as a way to boost the company's valuation. Citing unfavorable market conditions, Volkswagen said it would revisit a possible listing for Traton AG when markets improve.

"We're surprised and disappointed," Arndt Ellinghorst, an auto analyst with brokerage Evercore ISI. "Most investors agree that it would have been good to see action from VW with respect to value unlock -- this was a clear first step."

Volkswagen isn't the only auto maker under pressure. Last year, General Motors Co. said it would shed up to 14,800 and shut several factories in the U.S. and Canada, cutting costs by $4.5 billion to free up cash to invest in electric and self-driving vehicles.

German luxury car makers BMW AG and Daimler AG, which makes Mercedes-Benz, have cast off their decadeslong rivalry to combine forces to develop self-driving car technology and new mobility services such as car-sharing and ride-hailing.

The digitization of routine processes is causing an industrywide shift, in which vehicles and manufacturing processes that have been largely unchanged for a century are being redesigned, rendering many jobs redundant, from the office tower to the factory floor.

Meanwhile, auto makers are hiring armies of software programmers and developers. The job cuts at the VW brand, for example, are expected to be partially offset by 2,000 new hires of software developers and engineers specialized in developing electric vehicles.

"Our core business is still the car," said Christian Senger, VW's newly appointed board member in charge of software development, the first chief of software in the auto industry. "But as we know more about the behavior of our customers, we can improve our cars."

The changes have brought the auto industry in to direct competition with Silicon Valley tech giants such as Alphabet Inc.'s Google, electric car pioneer Tesla Inc. and ride-hailing behemoth Uber Technologies Inc. Investors sizing up the competition have depressed the share prices of conventional auto makers.

Ralf Brandstätter, the VW brand's chief operating officer, said Wednesday it would invest EUR4.6 billion in new information-technology equipment and systems, largely to digitize routine manual tasks in the company's administrative offices.

The job cuts come on top of a 2016 plan, dubbed the "Pact for the Future, " in which VW is cutting 23,000 jobs, about 19% of the VW brand's workforce in Germany, through natural fluctuation and early retirement.

Falling profitability has pressured VW's core brand, which generates nearly half of the Volkswagen group's revenue, but less than a third of its profits. The VW brand said this week that operating return on sales fell last year to 3.8% from 4.2% in 2017, below its target of at least 4%, partly due to heavy investment in new technology. The company is now predicting it will achieve a 6% margin in 2020.

"We must do considerably more in order to deal with the challenges that are coming after 2020," Mr. Brandstätter said. "We will increase the pace of our transformation considerably in order to make Volkswagen fit for the electric and digital age."

These are signs of how the transformation of the automotive industry is beginning to force its biggest players to shed fat and consider new alliances and even mergers to shoulder the huge financial burdens as the car becomes increasingly driven by software rather than horsepower.

Speaking at the annual Geneva Motor Show last week, PSA Group SA CEO Carlos Tavares predicted that the coming years would see a major shakeout in the industry as the costs for developing new technology separates the weak from the strong.

"The period that goes from now up to 2030 is going to be chaos," he said. "It's going to be extremely selective. Because not all the companies are going to be as Darwinian as some others in terms of adapting to the new world. Not all the companies are going to be able to master the new technologies."

Volkswagen is determined to make the "People's Car" of the electric age. It has created standardized technology upon which it plans to roll out around 70 electric vehicle models across its brands in the coming years, producing around 22 million electric vehicles over the next decade. Nearly half of those new electric cars will bear the VW badge, which is why Volkswagen is rushing to shore up the VW brand's profitability.

Write to William Boston at william.boston@wsj.com

(END) Dow Jones Newswires

March 13, 2019 12:46 ET (16:46 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.