Volkswagen's Cultural Revolution
The automaker and its workers recently tauted a deal that would save jobs at the company rather than send them to Eastern Europe or Asia. But between the many concessions the union made and a three-month out clause if VW's prospects dim, there's little to celebrate.
Car production in Wolfsburg: High wage costs and luxury market adventures have driven Volkswagen into the red.
The canal in Wolfsburg is lined with factory hall after hall. It's all part of the huge complex Hitler ordered built to manufacture the family car that was part of his "Strength through Joy" program. Later the assembly lines here produced the Volkswagen Beatle, a symbol of Germany's post-World War II "economic miracle." Then came the Golf, which in the last decade has represented Germany's position as a world champion in exports.
Currently, the fifth-generation of the Golf is being manufactured here -- but this time it has a different meaning: it stands for VW's current crisis and, to a certain degree, for that of Germany as an industrial giant.
Behind the brick facades, VW employees produce 3,000 cars each day. But if things were going well, that number could be 4,000. One assembly hall is empty and in another cars are only produced during one shift -- the early shift has been eliminated. That hall will soon be empty too because assembly of the "Bora" model is moving to Mexico in order to cushion the company from flunctuations in currency rates in the North American market.
These factory halls also provide the answer to why, last week, Volkswagen and the IG Metall union came to a surprise agreement -- surprising because it would cut deep into workers' pockets. The roots of the deal are clear: German jobs are being outsourced by the thousands to Eastern Europe and Asia. The result? The best deals many unions can expect are guarantees that jobs won't be eliminated. The deal at VW could be a watershed moment, with other companies following suit.
The employees and the workers' councils all know that VW's 30,000 jobs in Germany will be in danger if the company is unable to massively sink costs. Part of the problem lies in the company's previous contracts with the union, which guarantee its employees salaries that are 20 percent higher than the standard industry collective bargaining agreement, 11 percent higher than the average auto-industry contract and even higher than the wages being offered at Mercedes-Benz. Meanwhile, amidst cut-throat competition in the automobile market, Volkswagen has been forced to offer rebates that hamper the bottom line. Add to that the fact the company is operating at a loss and it's little surprise the VW is in a deep crisis.
When the news came last Wednesday that chief IG Metall negotiator Harmut Meine and VW's Josef-Fidelis Senn had reached a tentative agreement, the relief was palpable. By 2006, personnel costs at the company will shrink by 1 billion, and the jobs appear, at least for now, to be safe. More important, however, is the message that companies in Germany -- and even tough unions -- can reach flexible solutions.
"VW shows how it's done," said German Chancellor Gerhard Schroeder. And Economics Minister Wolfgang Clement believes the agreement sets a "signal for the global economy" that Germany can solve its problems.
But analysts are griping about the deal, saying that by agreeing to secure its employees' jobs until 2011, VW has committed itself too firmly, giving it less flexibility to deal with future problems -- and they've kicked the stock price down into the cellar, at least for now.
Part of the reason was that both sides refused to disclose details of the agreement. The deal still requires final approval and employees have demanded secrecy.
"A good wage agreement shuns the daylight," said IG Metall negotiator Meine, alluding to the fact that deals are often cut at night. But his statement was also ambiguous.
Union negotiators hoped the details of their deal with Volkswagen would never get outside the company's headquarters, Auto City, in Wolfsburg.
The contract contains a review clause that allows Volkswagen to quit the contract with only three month's notice if its "base earnings or general economic conditions change." That's sufficiently vague to allow the company to react quickly in a crisis and, in an emergency, also push through layoffs. And it can do so with less notice period than before. In past contracts, VW also agreed to rule out firing employees, and it could only do so if it provided one year's notice.
On the other hand, it's not even possible to provide an enforceable employment guarantee. If customers don't buy enough cars, then the company can't keep its workers busy. The only chance of saving jobs in Germany is if new car models are produced in domestic factories and not in the Czech Republic or Poland. Volkswagen has already promised to do this: the planned Golf sport utility vehicle will be built in Wolfsburg, the new Passat in Emden and a new transmission in Kassel.
Still, VW employees must feel deceived by the one-time payout of 1,000 the company announced. IG Metall calculated this as the equivalent of a 1.35 percent pay hike annually. But in reality, this will result in a cut in pay for employees next year, because up till now they received a bonus each May that would have been 1,500 this year. In 2005, the bonus will be discontinued. Instead, employees will get the 1,000.
A new bonus system will be introduced in 2006, but it will be dependent on company profits.
It's also possible VW workers will earn even less as a result of a provision in the agreement that will eliminate overtime pay. "Overtime will, in principal, be reimbursed through paid work release," the paper states. Only in instances when freetime can't, for the foreseeable future, be used will "monetary compensation" be arranged.
However, even in cases where overtime will be paid, they won't be getting time and a half or weekend pay. Even this union achievement, which was valid for years among German industrial companies, is being eliminated, de facto, by Volkswagen. Supplements will only be paid when employees work longer than 40 hours per week. Given VW's current predicament few are likely to.
For Volkswagen, this agreement is tantamount to a cultural revolution. For decades, the workers at Wolfsburg were the forerunners in the wage movement. Because the workers' councils were so strong and the company's biggest shareholder, the state of Lower Saxony, was less interested in high profits than secure jobs, the unions were able to negotiate generous raises. Later, IG Metall tried to follow suit with its standard industry-wide wage agreements.
But they haven't had success with that for a long time now, and the gap between VW wages and the rest of the industry continued to grow. That's why the current cuts have to be deep enough so that Volkswagen, at the very least, can reduce the wage cost disadvantage it has compared to its German competitors.
- Part 1: Volkswagen's Cultural Revolution
- Part 2: Expensive tastes led to current crisis