Volkswagen makes case for deep cuts as Chinese competitors close in on Europe

By Rachel More

BERLIN, July 24 (Reuters) - Volkswagen must deepen cost cuts to remain competitive against Chinese brands increasingly taking aim at the German auto group's home market, CEO Oliver Blume said on Friday following a mixed quarterly earnings report.

The world's No. 2 carmaker sought to strike a balance between reassuring investors and making the case for restructuring, as it battles tariff woes, weakness in China and plots possible closures of some German plants.

"When we look to the future, we have more and more risks coming," Blume said, pointing to more than 150 competitors in China. "And all are coming to the market," he added, referring to Europe.

Blume has proposed doubling earlier agreed job cuts to 100,000 and warned that four German plants are at risk of closure after 2030. He told reporters that all stakeholders were aware of the current risks.

But the CEO failed to push through his full restructuring plan at a supervisory board meeting earlier this month, setting the stage for another round of tense negotiations with powerful unions following late 2024 talks where the first 50,000 cuts were agreed.

Some analysts said the second quarter showed stabilisation, with revenue above forecast and the group on track to improve its operating margin this year to a forecast range of 4.0% to 5.5%.

"Volkswagen's results suggest the business is starting to stabilise despite a challenging backdrop," said Morningstar analyst Rella Suskin, pointing to strong free cash flow.

"VW management is trying to walk the tightrope of reassuring investors while at the same time telling its workforce that the house is on fire," Bernstein analysts said. "That is an almost impossible needle to thread."

PROFIT GUIDANCE KEPT, SALES GROWTH TARGET SCRAPPED

Volkswagen's operating profit fell 9.5% in the April-to-June period to €3.5 billion ($3.98 billion). With revenues of €82.4 billion, the group was able to keep its operating margin within the 4.0% to 5.5% target range for the full year, at 4.2% in the second quarter.

The group maintained that profit guidance on Friday but no longer expects revenue growth, now forecasting a decline of up to 3% in 2026.

Shares in the company, which spans the mass-market VW and Skoda brands, high-end subsidiaries Porsche and Audi, as well as luxury brands Bentley and Lamborghini, fell by as much as 3.2% following the results, before recovering some of their losses later in the day.

Facing a protracted downturn at home, Chinese carmakers are trying to expand in Europe with the low-cost, high-tech electric vehicles and plug-in hybrids that have already ended Volkswagen's dominance in China.

While exports play a role, Chinese heavyweights, such as BYD and Geely, are also establishing a production presence in Europe, favouring low-cost countries like Hungary and Spain.

Meanwhile, Volkswagen is looking for ways to fill or offload its underutilised plants in Germany, with the production of its Chinese-specific models in Europe under consideration, as well as possible defence partnerships.

Volkswagen's works council said cuts alone would not turn the company around, calling for progress on technology and product development.

After the summer recess in German plants, "employee representatives will continue the necessary discussion with the group executive board about what needs to be done now to ensure the company's long-term viability," a works council spokesperson said.

Blume said he expected decisions to be taken before the end of the year.

($1 = 0.8787 euros)

(Reporting by Rachel More, Editing by Miranda Murray and Tomasz Janowski)