Volkswagen brand group is shifting the focus of its cost-cutting drive to its in-house parts factories, according to Automotive News Europe.

VW group Chairman Bernd Pischetsrieder and Volkswagen brand Chairman Wolfgang Bernhard have threatened to move VW production jobs out of Germany if labour unions refuse management’s demands for concessions on wage rates and worker flexibility.

Analysts and union officials say VW is considering deep job cuts in Germany, with estimates ranging from 10,000 to 30,000 workers – as much as one-third of its German work force.

But in recent weeks, Pischetsrieder and Bernhard have turned their attention from assembly plants to VW factories that make a wide range of castings, axles, transmissions, exhaust systems and other parts. Workers there are paid the same wages as workers in VW assembly plants. In Germany, VW brand workers are paid 20% more than their counterparts at sister brand Audi. The Germany-based VW employees get 25% more than VW workers in France.

Most automakers buy their parts from outside suppliers because parts makers typically pay their factory employees lower wages than carmakers do. The result is lower cost components. Since VW gets so many parts from within, it pays more than its competitors for many components widely available elsewhere.

“Certainly, many of the components it needs are available for purchase on the market,” said a VW supplier executive who asked not to be identified. “VW does not need to make them by itself.”

Insiders said that if VW cannot get its labour unions to reduce wages, the automaker’s options would include selling, closing or spinning off the company’s parts operations.

“VW has a vertical integration like no other carmaker,” said Jochen Siebert, vice president Europe at CSM Worldwide in Frankfurt. “They will try to reduce personnel, but I don’t believe the plants will be spun off,” he said.

“They likely won’t create anything like Delphi and Visteon, which are troubled and heavily subsidised.” Delphi, which used to be part of General Motors, is trying to avoid bankruptcy; Visteon has needed to be bailed out twice by former parent Ford.

Volkswagen wants to implement new wage agreements to reduce its labour cost.

The company wants to increase the scope of its Auto 5000 agreement, which is used for production of the Touran minivan.

VW managers insisted workers accept that concept – including lower wages and higher flexibility in working hours – before the Wolfsburg plant would be considered to build an upcoming, Golf-based SUV. If the works council does not agree, VW would build the model in Portugal, Bernhard threatened last month.

“The ultimate threat is terminating the house wage agreement,” said the supplier source. “So the unions will just have to follow.”

Volkswagen has publicly ruled out voiding the agreement, which runs until 2011. But the terms state each new model must be economically viable, giving VW a chance to renegotiate. A company insider predicts that every new vehicle produced in Germany will be built under special agreements similar to Auto 5000.