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Hitt og þetta 6. september 2006

DJ THE SKEPTIC: VW Must Hold Firm In Brazil

By Steve McGrath

Of DOW JONES NEWSWIRES

LONDON (Dow Jones)--Volkswagen risks setting a dangerous precedent for the difficult cutbacks it's planning at its German factories if fails to push through job cuts at its Brazilian plants.

Any sign of weakness by VW management will likely be seized upon by German employees facing far heavier job reductions, particularly because the German company isn't necessarily bargaining from strength.

In Brazil, VW workers have agreed to suspend a strike in Sao Paulo for a week after the carmaker agreed to suspend 1,800 job cuts it announced last week, a first sign of compromise from VW's management. The two sides are set to restart talks to thrash out a deal.

The situation in Brazil is a microcosm of VW's German problems, exaggerated by the Brazilian real's appreciation against the U.S. dollar. That's hurt VW's exports from Brazil to the rest of the subcontinent.

VW's Brazilian operation is using too many people to make its cars and parts. It has to reduce a high wage bill with more drastic action than voluntary redundancies.

In Germany, VW wants to cut around 20,000 jobs. That's a big ask, even if weren't for the fact that in November 2004, management agreed to rule out compulsory layoffs until the end of 2011.

But VW also wants to raise productivity and limit wage increases. Its plan is to raise working time at its German plants to 35 hours a week, from 28.8 hours a week, without extra pay, following by an agreement capping wage increases.

The unions aren't happy, seeking guarantees on job tenure as a quid pro quo.

For VW, these measures look critical for its medium-term future. But in talks slated to start this month, IG Metall will no doubt make much of the fact that VW is profitable.

The catch is that a lot of those profits come from the automaker's prosperous financial services division and its operations outside Germany. The core VW brand is being propped up by its Czech Skoda marque and Spain's Seat.

As Ford Chairman Bill Ford said in a memo to the struggling U.S. auto maker's employees last week, a car maker needs to make profits building and selling cars if it's going to survive long term.

For VW, that means stripping out some of the labor costs that are currently the highest in the global motor industry. Citigroup estimates that its German workers are paid 20% above the norm for other engineering-sector employees.

Like all other car manufacturers, it is facing global overcapacity, higher raw material costs, and tough competition from Asian car makers like Toyota making major inroads in the western European and U.S. markets.

Of course, if VW's talks with IG Metall fail, the current deal ruling out compulsory layoffs is in danger. But has VW got the stomach for a protracted strike at its Germany plants that might result from forced layoffs?

That seems unlikely. Which is why the German unions' will be scrutinizing the performance of VW's negotiators in Brazil to see how firm management's resolve is.

(Steve McGrath is EMEA News Editor for Autos, Transport and Industry and has been a reporter and editor at Dow Jones Newswires for the past nine years. He can be reached at +44 207-842-9284 or by e-mail: steve.mcgrath@dowjones.com)

(END) Dow Jones Newswires

September 05, 2006 07:25 ET (11:25 GMT)

Copyright (c) 2006 Dow Jones & Company, Inc.

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