At Volkswagen Group, underutilized and costly plants in Europe are under scrutiny. CEO Oliver Blume plans to reduce overcapacity in China and Europe while avoiding plant closures in Germany through ‘intelligent measures’. These measures can include selling plants to other industries or to (Chinese) competitors.

Ex-Porsche boss and now VW Group CEO Oliver Blume describes 2019 as the last year in a predictable market environment before the Covid crisis. At that time, the Volkswagen Group sold around 11 million vehicles globally across all its brands, Blume told German Manager Magazin in an interview.

The group had built capacity for approximately 12 million units per year, which, on average, yielded a solid utilization rate, although differences between individual plants persisted.

Since the Covid crisis, however, Volkswagen’s annual sales have declined to around nine million vehicles in significantly changed market conditions. According to current plans, the group now needs to reduce costs by 20%.

The new normal

“Tariffs in the US, immense competitive pressure in China, the shrinking European market, and now the war in the Middle East. Who knows what will come next?” Blume asked in the interview. “These developments are not simply passing. This is the new normal. And we will rise to meet it.”

Regarding its products, Blume considers Volkswagen to be highly competitive. However, the recent operating profit margin of 2.8% is not sufficient to finance major investments from the company’s own resources. Blume therefore plans to address costs to make the group more resilient and better positioned in a challenging environment, even in a low-growth market.

“Overcapacities are not sustainable for our company in the long term. And in today’s market and competitive landscape, the volume planning of the past is unrealistic,” Blume said. In China, the carmaker has already reduced capacity by 1 million vehicles, and in Europe, VW and Audi are set to cut another 1 million.

Reducing the cost of factories, not closing them

While Blume does not name specific sites at risk in the interview, nor differentiate between combustion and battery-electric production, overcapacity within Volkswagen is well known in the industry. This applies not only to the Wolfsburg headquarters, but also to the battery-electric vehicle plants in Emden and Zwickau, which are not operating at full capacity.

Although plans from late 2024 have already been adjusted, Zwickau is expected to produce just one battery-electric model in the future. Previously, even five model lines from different group brands were not sufficient to fully utilize the site.

A similar picture emerges at Volkswagen Commercial Vehicles in Hanover, where the remaining models, the Volkswagen ID. Buzz and the Volkswagen T7 Multivan are also unable to utilize the plant fully.

“In Germany, we are currently reducing factory costs together with the works council, and making progress unlike anything previously seen at Volkswagen,” Blume declared. “Nevertheless, we continue to be burdened by excessive capacities, which ultimately cost a lot of money. We need to find a suitable way to address this.”

The CEO wants to avoid plant closures and cites the example of Osnabrück, where VW vehicle production is set to end as planned, but the site itself will be retained. “We are negotiating with companies in the defense industry that could use this plant and retain the workforce. That is what I mean by intelligent. We must develop pathways to reduce our own overcapacities similarly.”

Recently, Bastian Ernst, a German CDU MP, announced that it could be the Israeli defense specialist Rafael who will be taking over Osnabrück. Until 2025, Ernst was part of the management at Dynamit Nobel Defense (DND), the German subsidiary of Rafael, which produces the anti-tank weapon ‘Panzerfaust’.

According to the local newspaper, Osnabrücker Zeitung, the factory would be transformed to produce components for the ‘Iron Dome’ air defense system. Ernst thinks that it will concern heavy trucks and rocket-launching installations.

Blume does not rule out selling a plant to a Chinese competitor seeking to expand into Europe and avoid EU tariffs by producing locally. However, he tempers expectations for such a deal. VW’s plants are considered expensive due to their utilization rates and collective bargaining agreements. And for Chinese companies, “factory costs are, of course, highly relevant”.

Blume thinks that a kind of ‘co-production’ with Chinese manufacturers could be interesting to remediate overcapacity in his European plants. At the same time, he sees possibilities of also selling ‘Chinese VW products’ in Europe. As we state further in this article, the VW Group wants to reduce the number of models globally but is launching a significant number of new models in China.

Reducing models, improving profitability

As said, the VW Group plans to cut costs by reducing the number of models. Globally, the German group currently offers around 150 different models. According to Blume, this number is expected to fall below 100 in the future.

“We need to plan this strategically across brands, regions, and segments. For powertrains, we will align with regional markets. For equipment variants, we will focus our offering even more,” the CEO explained.

When one sees the avalanche of models, the VW brand and the group as a whole are planning in China (under VW and Audi badges, but also Jetta and AUDI), the reduction of the model number will most probably have to take place elsewhere.

Nevertheless, the VW Group is also hard at work on its affordable EV segments, with cars like the ID. Polo, ID. Cross, Cupral Raval, and Skoda Epiq are on the brink of launch, and an even smaller, cheaper ID. Up (name not set yet).

These and numerous other measures are aimed at improving Volkswagen’s profitability, from the current level of 2.8% to an ambitious range of 8 to 10% by 2030, as outlined by Oliver Blume. He emphasizes that, given the current challenges, this target is significantly more demanding than previous results and goals, but also necessary in light of the high-risk environment.