In high-wage Germany, VW's labour costs outstrip the competition

As Volkswagen and unions gear up for the next round of talks over wages and plant closures in Germany, company and industry data show that the automaker spends a higher proportion of sales on labour costs than major rivals.

The data, in an internal memo by Volkswagen’s works council reviewed by Reuters, underscores the company’s challenge to remain competitive in its pricey home market as cheaper models from China arrive.

Management will start the next round of negotiations with unions representing roughly 120,000 German workers on Thursday. Unions are demanding a seven per cent pay rise, while Volkswagen is threatening a 10 per cent cut.

The proportion of revenue spent on labour at Volkswagen globally has fallen from 18.2 per cent in 2020 to 15.4 per cent in 2023 — but that ratio still exceeds BMW, Mercedes-Benz, and Stellantis, which spent between 9.5 per cent and 11 per cent in 2023, according to the works council memo.

At VW AG, the German subsidiary that governs the six plants in question, the ratio was estimated at 15.8-17.5 per cent. Volkswagen says it does not release separate figures for VW AG.

The findings by the works council, an elected body of employees representing them in negotiations with management, are based on annual reports showing companies’ global spending on personnel compared to revenue. The figures include all staff, from factory to white-collar workers. Reuters checked and confirmed the calculations.

Part of the reason the company spends more on labour is that it makes many components, and software, in-house, Stifel analyst Daniel Schwarz said. But pressure on margins from China means the company needs to cut fixed costs.

“The VW brand has been market leader in Europe every year since 2005 ... its cars are competitive. The problem is not the product, but the costs,” he told Reuters.

Germany, where Volkswagen employs nearly 45 per cent of its workforce, has the highest labour costs of any passenger car industry worldwide, averaging 62 euros ($66) per hour in 2023, up around a third from a decade ago, according to the German autos association VDA.

Still, union representatives say labour is a small part of the company’s cost base, challenging management to make cuts elsewhere to boost flagging profits.

In an internal flyer to staff, the works council pointed to steep drops in earnings at other parts of the group - Porsche , Audi, and VW Financial Services - in the first nine months of the year, which it said cost the company 5.5 billion euros ($5.8 billion).

“That alone is an argument for why it’s not enough to put labour costs at the centre of communication,” it wrote.

VW AG’s plants are the only car factories in Germany, except Tesla’s, where wages are not determined by an industry-wide collective agreement for the auto and engineering sectors, but by a separate agreement.

Volkswagen cancelled that agreement in September to seek cuts at the VW brand which it says are vital to its survival.

Big pay cuts would be a bitter pill for German unions after they negotiated a 5.5 per cent increase in the industry-wide agreement this month, and Tesla raised wages for German staff by 4 per cent.

Twice as pricey

Volkswagen declined to comment on the figures.