Shareholders, labor representatives to try to break gridlock over CEO's restructuring plan

By William Boston

BERLIN -- Volkswagen AG's efforts to cut costs amid mounting burdens of its emissions-cheating scandal face a new roadblock, as core shareholders and labor representatives meet for an extraordinary shareholders meeting on Friday to try to break an impasse over restructuring.

Chief Executive Matthias Müller, who took command a year ago following reports that the car maker had installed illegal emissions software in some models, is trying to realign the company's businesses. He aims to slash costs and boost profits by scrapping unprofitable models, cutting thousands of jobs and shrinking the company's massive capital expenses.

His efforts are encumbered by Volkswagen's governance system, which grants labor representatives half the seats on the board. Two more seats are taken by the state of Lower Saxony, which owns 20% of the company and where Volkswagen is the largest employer. The state routinely sides with labor to reject job cuts or efforts to move production out of Germany to lower costs.

While the restructuring affects all of Volkswagen's brands -- including its highly profitable Audi and Porsche brands -- Mr. Müller's focus is the namesake Volkswagen passenger-car brand. The company's biggest business by sales, it posted a profit margin of only 1.6% in the third quarter. Its core operations in Germany are inefficient and bloated, analysts say.

Herbert Diess, a former BMW AG executive who took the helm at the Volkswagen brand last year, has clashed repeatedly with labor chief Bernd Osterloh over how to restructure the brand and make the German operation profitable. Volkswagen employs more than 600,000 people world-wide, nearly half of them in Germany, at more than 100 factories.

Insiders say Mr. Diess is aiming to cut Volkswagen brand costs by nearly EUR4 billion ($4.4 billion) over the next three years, but he needs Mr. Osterloh's backing to achieve that. Unions refuse to support Mr. Diess unless management commits to production in Germany. Without that, Mr. Osterloh is threatening to block approval of the company's five-year investment plan at the regular supervisory board meeting on Nov. 18.

The extraordinary supervisory board meeting on Friday was called to ensure decisions can be taken at the meeting later this month, a person close to the supervisory board said.

In the wake of thediesel scandal, which so far has cost Volkswagen more than EUR18 billion in compensation and legal fees, Mr. Müller opened wide-ranging talks with labor. They aim to agree on streamlining and an investment shift to ensure the company remains competitive against new-technology rivals such as Uber Technologies Inc. and Tesla Motors Co.

Arndt Ellinghorst, automotive analyst at brokerage Evercore ISI, said Volkswagen needs to follow PSA Peugeot Citroën of France, which has lowered its break-even point and in the third quarter delivered a 6.6% margin in the company's auto division despite lower revenue.

"It would be monumental if Diess could achieve the same," Mr. Ellinghorst said.

One of the biggest changes affecting Volkswagen and other auto makers is a massive shift toward electric vehicles. The shift could render thousands of jobs in conventional engine and components production obsolete.

Volkswagen wants its continuing talks to cut costs by around EUR8 billion over the next three years, about half coming from the Volkswagen brand, two people familiar with the situation said.

Karlheinz Blessing, Volkswagen's board member in charge of human resources, said recently that the company pledged not to resort to mass layoffs, but would seek to eliminate at least 10,000 jobs world-wide through normal fluctuation and by offering early retirement.

Production of electric vehicles is less complex and they contain fewer components than conventional gasoline or diesel cars, he said. "That means we will need fewer employees in the long-term," he added.

Talks between Volkswagen's management and worker representatives have been held up by union demands that Volkswagen agree to build new electric vehicles and a giant battery factory in Germany.

Write to William Boston at william.boston@wsj.com

(END) Dow Jones Newswires

November 04, 2016 02:47 ET (06:47GMT)

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