Summary of Key Issues
Volkswagen Group is facing difficulties in advancing its reform efforts: On one hand, its financial performance continues to deteriorate—profit declines, a significant loss of market share in China, and competition from Chinese automakers in its home market in Europe. Its largest shareholder, Porsche SE, is publicly urging for faster restructuring. On the other hand, due to Volkswagen's unique governance structure (where employee representatives make up half of the supervisory board, and the government of Lower Saxony has veto power), radical plans for layoffs and plant closures have been rejected. The core issues at stake are: Is the reform sufficient? Who will bear the costs (employees losing their jobs or shareholders receiving less dividends)? What will become of the four German factories?
Detailed Analysis
1. Why Is the Major Shareholder So Anxious?
Volkswagen is in a tough spot:
- Declining Profits and Sales: Revenue did not increase in the first half of 2026, but operating profits decreased by 11.6% to just 5.9 billion euros, with sales falling by 8.4% (about 4 million units). Profit margins in 2025 were halved, at only 2.8%, far from the target range of 8%-10%.
- China Market Collapse: Deliveries to China plummeted by 36.6% in the second quarter of 2026, the worst performance in five years. The reason is simple: Volkswagen used to do well in the Chinese market with its fuel-powered vehicles, but now consumers are shifting to electric cars. Local brands like BYD and Chery are outperforming it in terms of smart infotainment systems and pricing, and Volkswagen's electric offerings have not been able to turn the situation around.
- Competition in Europe: Chinese automakers (BYD, SAIC) are making inroads in Europe by setting up factories in Hungary and Spain, reducing tariffs and competing for both Volkswagen's Chinese market share and its home market.
In the past, Volkswagen could cover high costs at its German plants with higher profits from overseas operations. Now, with China's market declining and Europe becoming more competitive, the cost issues are no longer hidden—this is why the major shareholder is pushing for reform.
2. Why Is Restructuring So Difficult?
Volkswagen's governance structure is highly complex:
- Insufficient Shareholder Voting Power: Although Porsche SE holds 53.3% of the voting rights, Volkswagen has a rule that major decisions require more than 80% of the votes to pass (typically, 75% is sufficient for most companies). The government of Lower Saxony holds 20% of the voting rights, giving it a veto power.
- Employee Resistance to Reform: Half of the supervisory board consists of employee representatives. In 2024, when Volkswagen attempted to close plants and cut wages, employees went on strike twice, forcing the company to compromise: no immediate plant closures or forced layoffs, but a reduction of 35,000 jobs (one-quarter of German employees) and no wage increases for four years.
- Slow Decision-Making: This collaborative decision-making process protects employees in good times, but in today's fast-changing market, reform plans need unanimous approval. For example, in July, an aggressive plan to cut another 50,000 jobs was rejected with a vote of 12 to 7.
3. The Four German Plants as a Flashpoint
The four German plants (Emden, Hanover, Zwickau, and Niedersulm, employing a total of 45,000 people) are at the center of the controversy. Interestingly, these plants are not outdated:
- Emden was converted to an all-electric vehicle factory in 2024, and Zwickau invested 1.2 billion euros in electrification, producing the ID series.
- The problem is that German plant costs are high (due to high labor wages and operating expenses). Even with electric vehicle production, insufficient orders mean they cannot make a profit. For instance, Zwickau produced only 212,000 units in 2025, far from covering its costs.
Management fears that even after electrification, these plants may become excess capacity. Employees are concerned about job losses; in July, 6,000 people protested at the Niedersulm plant, fearing closure.
4. Who Will Pay the Price?
The core conflict around restructuring revolves around who will bear the costs:
- Shareholder Pressure: Porsche SE is also struggling financially, with a net loss of 2.2 billion euros in the first half of 2026 due to the depreciation of its Volkswagen investments and a debt of 5 billion euros. It wants reform to prevent further losses that would affect its dividend earnings (it received 600 million euros in dividends from Volkswagen).
- Union Counteraction: Unions argue that shareholders should not benefit while employees lose jobs and suggest that reform needs to include better products and innovation, not just layoffs.
The issue is not about opposing reform in general but about the distribution of costs. The 2024 compromise involved a gradual reduction in jobs without plant closures, but current financial pressures are greater than before, and the major shareholder wants to speed up the process, which the unions oppose.
5. Volkswagen's Self-Rescue Strategy: From “Growing Big” to “Shrinking Down”
Since radical plans have failed, Volkswagen must focus on achievable steps:
- Reducing Model Lines and Complexity: By 2030, the number of models will be cut by half, and the range of configurations will be reduced by 75% to eliminate redundant internal development (e.g., by merging platforms and software).
- Capacity Reduction: Global production capacity will be lowered from 10 million units to 9 million units to match declining demand.
- Structural Adjustment: The company is considering separating its passenger car and parts businesses into separate entities to streamline decision-making (however, this is opposed by unions and the government, which fear it will weaken employee rights).
In short, Volkswagen used to rely on its large scale for success but now needs to shrink to reduce costs and complexity.
Conclusion
Volkswagen's dilemma reflects the challenges faced by traditional automakers in transitioning to electric vehicles and adapting to competitive pressures from both the market (electricity and Chinese competition) and internal governance constraints (employee and local government opposition). The speed of reform depends on whether all parties can find a balance in sharing the costs. Otherwise, the longer the delay, the more severe the consequences will be.
(The next supervisory board meeting is scheduled for early September; let's see if a new compromise can be reached.)