Volkswagen Group (ETR: VOW3), Europe’s largest automaker, is contemplating the closure of factories in Germany for the first time in its history. The company informed its works council on Monday that it is considering shutting down “at least one larger vehicle manufacturing plant and one component factory in Germany” as part of a cost-saving initiative worth billions of euros.

“The European automotive industry is in a very demanding and serious situation. The economic environment became even tougher, and new competitors are entering the European market,” Oliver Blume, Volkswagen’s CEO, highlighted the challenges facing the industry.

This move comes as Volkswagen struggles with the transition from profitable but polluting petrol and diesel cars to cleaner but currently less profitable electric vehicles. The company is also facing increased pressure from Chinese EV manufacturers, which have lower costs and higher profit margins.

Thomas Schäfer, the chief executive of the Volkswagen brand, said bluntly: “Plant closures at vehicle production and component sites can no longer be ruled out.”

The proposed closures have met with strong opposition from labor representatives. Daniela Cavallo, chair of Volkswagen’s works council, vowed to resist the plans, saying, “With us, there will be no site closures.” 

“Instead of making one-sided savings at the expense of the workforce, we now need a strategic boost for the actual weaknesses: product, complexity, processes, synergies. That is the plan we need,” she added.

Thorsten Gröger, a lead negotiator for the union IG Metall, described the plan as “irresponsible” and said it “shakes the foundations of Volkswagen and poses a massive threat to jobs and sites.”

The potential factory closures could have significant implications for Germany’s economy, which has been on the edge of recession for almost two years. It also adds to the political challenges faced by Chancellor Olaf Scholz, who is grappling with economic woes and the rise of far-right parties in recent state elections.

Volkswagen’s stock has underperformed in recent years, losing almost a third of its value over the past five years. The company is targeting 10 billion euros in savings by 2026 as it attempts to streamline spending to survive the transition to electric cars.

The company is scheduled to meet with the works council on Wednesday, where Chief Financial Officer Arno Antlitz and Schäfer are expected to face tough questions about Volkswagen’s future direction and its commitment to its workforce.

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