TM Toyota Motor Corporation

By William Boston 

WOLFSBURG, Germany -- Volkswagen AG's plan to cut 30,000 jobs in coming years in a restructuring of its embattled VW brand marks a radical shake-up, though on Friday it failed to convince investors the gap will narrow with more profitable rivals Toyota Motor Corp. and General Motors Co.

Volkswagen executives framed the move as audacious and necessary, entailing a reduction of the VW brand's German workforce by about one-fifth. Management, with crucial support from powerful labor representatives, aims to boost productivity by 25%, increase annual earnings by EUR3.7 billion ($3.9 billion), and double pretax profit margins to 4% by 2020.

The overhaul comes as Volkswagen is still trying to move past an emissions-cheating scandal that has cost it nearly $20 billion so far to settle lawsuits and recall nearly 11 million tainted diesel-powered vehicles world-wide.

Deep cuts are also needed to boost profits so that Volkswagen can invest in electric cars, digitization and self-driving car technology to keep up with its traditional rivals and new competition from tech upstarts such as Tesla Motors Inc. and ride-hailing service Uber Technologies Inc.

"We're shaking up the entire VW brand and making it fit for the future," said Herbert Diess, head of the VW brand.

Outside investors weren't impressed. One, Arndt Ellinghorst of London-based brokerage Evercore ISI, called the restructuring plan "underwhelming" and also "undemanding given peer mass makers' margins today."

"It is a good start, but now management has to execute and deliver," said Ben Walker, a partner at activist fund TCI, which sharply attacked Volkswagen management this year in open letters complaining about the company's poor governance and weak profits.

Volkswagen shares barely moved in the trading session Friday, closing down 40 European cents at EUR117.15 on the Frankfurt Stock Exchange.

Volkswagen management plans to carry out the job cuts through natural attrition and early retirement. Planned buyouts will be very aggressive, even covering workers under 50 years of age, which is rare in Germany, according to a person familiar with the plan.

The iconic VW brand, made famous by the Beetle and the best-selling Golf, struggled to remain profitable even before the diesel crisis. It is weighed down by high labor and manufacturing costs in Germany, too many unprofitable or low-margin car models, and years of unbridled capital spending as the company raced to overtake Toyota and GM with little regard to cost.

Volkswagen's drive to be number one went well for a decade as the company doubled the number of factories it operates around the world, expanding its business in Russia, China, Brazil and other emerging markets. But high volatility of currencies in these markets and weak economies in the wake of the financial crisis caused VW sales in Russia and Brazil to plunge. In the first nine months of this year, only China provided any significant growth for Volkswagen new-car sales.

Mr. Diess, the VW brand chief, recently said his unit in its current state couldn't survive without the support of Volkswagen's more profitable brands, especially luxury-car maker Audi and sports-car maker Porsche.

With Volkswagen beleaguered by the diesel crisis and facing a tectonic shift in the industry from conventional diesel and gasoline engines to electric cars, labor representatives and the state of Lower Saxony, which owns 20% of Volkswagen, reluctantly agreed to the massive job cuts in German factories.

"Volkswagen is in a difficult situation," said Bernd Osterloh, the chief of Volkswagen's works council. "All the colleagues know that."

In exchange for labor's concession on jobs, Volkswagen management agreed to replace about 9,000 of the lost manufacturing positions with employment in other areas, such as planned production of electric cars and a new battery factory. Volkswagen agreed to make Wolfsburg the center for its development of electric car platforms and digitization, which was a key concession to win Lower Saxony Prime Minister Stefan Weil's backing for job cuts.

"There is a deep transformation of the entire auto industry that will hit Volkswagen especially hard," Mr. Weil said. "Lower Saxony is going to grasp this chance."

The support of labor and the state of Lower Saxony, where Volkswagen is the largest private sector employer, is crucial because together they hold 12 seats on Volkswagen's 20-member supervisory board. That gives them the power to block key decisions.

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

(END) Dow Jones Newswires

November 19, 2016 02:47 ET (07:47 GMT)

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