German state to facilitate defence company Rafael's operations on Volkswagen site, sources say

BERLIN, July 16 (Reuters) - The German state of Lower Saxony is interested in supporting plans by Israeli defence company Rafael to establish operations at Volkswagen's Osnabrueck site, two people familiar with the matter told Reuters on Thursday.

The sources said various structures were being examined to facilitate Rafael's entry into the site, where production of Volkswagen's T-Roc Cabriolet is due to end next year. 

One model under discussion is a split of the Osnabrueck operation into two companies, an option first reported by the Handelsblatt news outlet, though the sources said this was only one of several strategies being considered.

Rafael is interested in manufacturing components for Israel's Iron Dome missile defence system at the plant. Reuters reported in April that the Israeli state-owned defence company had signed a letter of intent with Volkswagen regarding the site.

A second source familiar with the discussions said on Thursday that Lower Saxony — where Volkswagen is based and where it operates five ​of its six western German assembly plants — was optimistic the project would succeed despite reservations from Qatar, one of Volkswagen's major shareholders.

The sources, who spoke on condition of anonymity due to the sensitivity of the matter, said Volkswagen has also explored whether Lower Saxony could take over the entire plant before transferring it to Rafael. This would leave the state government responsible for the workforce and any potential restructuring costs, making the issue more complex.

Volkswagen and Rafael did not immediately respond to requests for comment. 

Volkswagen is under unprecedented pressure to restructure ‌the business model that underpinned its success for decades, as it grapples with high costs and excess capacity at home. 

Those factors, along with rising Chinese competition, regulation, and U.S. import tariffs, sliced its profit margins in half between 2021 and 2025.

As a result, Volkswagen plans to ​drastically cut its model lineup, further pare back capacity and implement a far-reaching overhaul that sources say could cost around 100,000 jobs.

(Reporting by Andreas Rinke and Christina Amann, Writing by Friederike Heine, Editing by Rod Nickel)