Volkswagen faces labor cost pressure as German wage talks loom

Volkswagen (VW) is grappling with rising labor costs as it prepares for critical wage negotiations with unions representing 120,000 workers in Germany. The company spends a larger portion of its revenue on labor than its competitors, according to an internal works council memo reviewed by Reuters.

While VW’s global labor cost ratio fell from 18.2% in 2020 to 15.4% in 2023, it still surpasses rivals BMW, Mercedes-Benz, and Stellantis, which spend between 9.5% and 11%. For VW AG, the subsidiary managing six German plants, labor costs range from 15.8% to 17.5% of revenue, highlighting the financial strain in its home market.

Germany, where Volkswagen employs nearly 45% of its workforce, has the highest labor costs in the global automotive sector—averaging 62 euros (USD 66) per hour in 2023, up 33% over the past decade, according to the German auto association VDA.

Unions are demanding a 7% wage increase, while Volkswagen is pushing for a 10% cut, citing soaring energy, materials, and personnel costs. VW brand chief Thomas Schaefer has warned that factory costs in Germany are currently 25-50% higher than planned, making some plants twice as expensive as competitors.

Despite these pressures, union representatives argue that labor constitutes a small portion of the company’s overall costs. In an internal memo, the works council pointed to a 5.5 billion euros decline in earnings from other Volkswagen divisions, including Porsche, Audi, and VW Financial Services, during the first nine months of 2023, questioning management’s focus on labor costs.

Volkswagen is also contending with broader competitive challenges in Europe. While competitors Stellantis and Renault operate plants in lower-cost countries like France, Italy, and Spain – where hourly wages range from 29 euros to 47 euros – Volkswagen’s German operations face steep labor expenses.

The automaker has undertaken workforce reductions, including a pact to cut 23,000 jobs by 2025. However, its pivot to electric vehicles and software-driven technologies has required hiring in areas like software and administration, increasing white-collar staff by 4,000 since 2019, even as factory jobs declined by 8,000.

As talks begin, the stakes are high for VW to balance cost-cutting with maintaining competitiveness in a shifting industry landscape.