Despite its reluctance to meet wage demands for German workers, Volkswagen continues to negotiate with the IG Metall union. Were VW to shift production away from its homeland, it risks provoking a storm of controversy that may damage the brand. But VW already has experience of successful car production in low cost markets, and may find the attraction too hard to resist in the long term.
Volkswagen (VW ) has seen contrasting recent fortunes – the first half of 2004 saw company profit fall by 36% prompting second half forecasts to be cut, but forecasts for 2005 are nevertheless more encouraging. The current wage negotiations with IG Metall only complicate matters – VW insists it cannot afford the 4% annual wage rise that the union is demanding if it is to achieve its goal to cut labor costs by 30% come 2011.
The prospect of 30,000 job cuts – a fifth of the company’s German workforce – is one that neither party will wish to see. VW is keen to maintain its current domestic staffing level and has offered a no lay-off pledge for all 176,000 employees in return for a two-year wage freeze.
IG Metall , however, appears less accommodating, “We are ready to discuss the conditions in order to get job security,” spokesperson Jorg Kother told AFX News, continuing: “We’re not saying at this stage that we are ready to discuss concessions.”
Volkswagen will be aware of the risks involved in relocating. The company’s heritage for reliable, high quality cars is recognized worldwide, and moving production away from its German roots risks diluting the core values that have made the VW brand.
On the other hand, VW can point to its own success in building vehicles outside Germany: its Skoda subsidiary – based in the Czech Republic – has performed strongly since being bought in 1991. Arguably, some would say that VW had little to lose in acquiring Skoda , with its previous position as the butt of many a joke, but VW turned the ailing Czech firm around by producing well-received vehicles aimed at a budget-conscious audience.
VW will undoubtedly want to retain its German base, but not at any price. The Wolfsburg based giant cannot ignore the macroeconomic factors affecting auto production costs, and these forces may ultimately force it to wind down some manufacturing processes in its homeland.
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