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VW seeks cost-cutting deal by Friday, devil is in the detail

Employees work on the assembly line inside the Volkswagen factory in Wolfsburg, Germany, on May 20, 2016.
Krisztian Bocsi | Bloomberg | Getty Images

Volkswagen is pushing for a cost-cutting deal with workers at its core brand by Friday to help fund investment in electric and self-drive cars, but accounts of discussions in just one area show how difficult it is.

The need for a turnaround plan at the VW brand has been amplified by the billions of costs it is facing for its diesel emissions scandal but union leaders do not want workers to carry the can for what they see as the mistakes of managers.

The main sticking point of the talks is how to ensure the future of its German factories as it seeks to cut some traditional roles making combustion engines in favor of new positions producing batteries and electric engines.

Neither VW nor its powerful labor unions would comment on the progress of the talks but details from three company sources of discussions over the assembly of plastic parts shed light on their complexity.

One year on: What next for Volkswagen

VW brand chief Herbert Diess, a former executive at BMW, which is less vertically integrated than VW, has sought to end production of some plastic parts including fuel tanks and bumpers at the Wolfsburg base, the three sources said.

In a sign of the scale of the challenge, a new 1,500-square meter hall with blow-molding technology to make more plastic tanks went on stream only in September, the sources said.

Unions have so far blocked Diess's plan, which would involve cutting several hundred of the 3,000 jobs involved in making plastic parts, an area competitors have long since outsourced.

Management and labor are also discussing the outsourcing of some production of plastic parts at Braunschweig near Wolfsburg, one of the sources said. Those talks involve compensating staff by assigning more orders for chassis and steering assembly which will become more relevant with self-driving cars.

Two VW factories in particular are hoping to benefit from the post-dieselgate expansion into zero-emission technology: Salzgitter, which now makes combustion engines and Kassel, VW's biggest component plant making gearboxes, engines and emission systems.

One company source indicated an overarching deal could be reached by Friday, but others did not confirm the prediction.

Board meeting

The supervisory board of VW, part owned by the state of Lower Saxony and Qatari Investment Authority, is due to meet on Friday to approve spending on plants, equipment and models across the multi-brand group until the end of the decade, but needs prior agreement with the works council on restructuring and jobs.

VW emissions scandal deepens

Managers want to cut annual costs at the core brand by 3.7 billion euros ($3.99 billion) through 2021 to help fund VW's transformation while facing billions of euros in costs from its emissions scandal.

But labor leaders, who occupy almost half the seats on the group's 20 member supervisory board, have said they will not approve any cutbacks without management committing to fixed targets and quotas for product, output and investment.

That could have an impact on the share price.

"They urgently need to bring about change and not settle for a shaky compromise," said Bankhaus Metzler analyst Juergen Pieper who last week lowered his recommendation on the stock to "Hold" from "Buy" because of the reported discovery of cheat software at luxury brand Audi.

Toyota built slightly more vehicles than VW last year with 40 percent fewer workers, the Center of Automotive Research said. First-half earnings per car were 395 euros at VW brand, 715 euros at Renault and 844 euros at PSA Peugeot Citroen.

Pieper argued that the group should be able to shed a third of its global 610,000-workforce and shut about 10 of its 120 plants. VW has ruled out forced layoffs but may cut up to 25,000 staff by waiting for people to retire.

Sources have said it plans to double this year's expected operating of 2 percent by 2020 and lift it to 6 percent by 2025. That is below current profitability benchmarks at rivals Ford, PSA and Toyota.

Evercore ISI analyst Arndt Ellinghorst who has a "Buy" recommendation on VW, said that may not last. "It goes without saying that a 4 percent target by 2020 would jeopardize what we believe could be a credible turnaround story," he said.

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