By Axel Schmidt, Christoph Steitz and Christina Amann

WOLFSBURG, Germany (Reuters) – Volkswagen plans to shut at least three factories in Germany, lay off tens of thousands of staff and shrink its remaining plants in Europe’s biggest economy as it plots a deeper-than-expected overhaul, the company’s works council head said on Monday.

Europe’s biggest carmaker has been negotiating for weeks with unions over plans to revamp its business and cut costs, including considering plant closures on home soil for the first time, in a blow to Germany’s industrial prowess.

Volkswagen reiterated on Monday that restructuring was needed and said it would make concrete proposals on Wednesday.

“Management is absolutely serious about all this. This is not sabre-rattling in the collective bargaining round,” Daniela Cavallo, Volkswagen’s works council head, told employees at the carmaker’s biggest plant, in Wolfsburg, threatening to break off talks.

“This is the plan of Germany’s largest industrial group to start the sell-off in its home country of Germany,” Cavallo added, not specifying which plants would be affected or how many of Volkswagen Group’s roughly 300,000 staff in Germany could be laid off.

Cavallo’s comments mark a major escalation of a conflict between Volkswagen’s workers and the management, as the company faces severe pressure from high energy and labour costs, stiff Asian competition, weakening demand in Europe and China and a slower-than-expected electric transition.

They also heap further pressure on the German government to act to revive the economy, which looks set for a second successive year of contraction with Chancellor Olaf Scholz’s coalition searching for ways to spur growth. Scholz trails in the polls with federal elections due next year.

Volkswagen also plans to cut salaries at the brand by at least 10% and freeze pay in both 2025 and 2026, Cavallo said.

Thousands had gathered in Wolfsburg, where the company has been headquartered for nearly nine decades. Blowing horns and whistles, workers insisted not a single plant should shut.

Volkswagen said in a statement that it would make proposals for how to cut labour costs on Wednesday, when workers and management meet for the second round of wage talks and the carmaker releases third-quarter results.

“The situation is serious and the responsibility of the negotiating partners is enormous … Without comprehensive measures to regain competitiveness, we will not be able to afford essential investments in the future,” Volkswagen Group board member Gunnar Kilian said.

Thomas Schaefer, who heads the Volkswagen brand division, said German factories were not productive enough and were operating 25-50% above targeted costs, meaning some sites were twice as expensive compared to the competition.

Volkswagen shares were down more than 1% after the announcement. Shares of peer Mercedes Benz also fell. VW shares have lost 44% of their value over the past five years, compared with a drop of 12% for Renault and a gain of 22% for Stellantis.

“The plans go far beyond market expectations,” said Daniel Schwarz, an analyst at Stifel. “I believe this reflects a unique combination of unfavourable factors: competition in China, softening of demand in Europe, especially for BEVs (battery-powered electric vehicles), stricter regulation.”

Unions have immense clout at VW, where labour representatives hold half the seats on the supervisory board and are, in theory, legally entitled to hold strikes from Dec. 1 as a tool to further escalate the conflict.

Volkswagen’s situation reflects a broader trend in the world’s third-largest economy, which is seeing its dominance challenged by more nimble and cheaper rivals in key areas, including in the auto industry, its industrial backbone.

“If VW confirms its dystopian path on Wednesday, the board must expect the corresponding consequences on our part,” the IG Metall union’s negotiator Thorsten Groeger said, vowing fierce resistance.

Strikes, which had been threatened for the start of December, were now likely, Schwarz said.

Cavallo said Berlin needed to urgently come up with a masterplan for German industry to ensure it does not “go down the drain”.

A government spokesperson said Berlin was aware of Volkswagen’s difficulties and remained in close dialogue with the company and worker representatives.

“The Chancellor’s position on this is clear, however, namely that possible wrong management decisions from the past must not be to the detriment of employees. The aim now is to maintain and secure jobs,” the spokesperson told a regular briefing.

Scholz and his Finance Minister Christian Lindner are both hosting separate business summits on Tuesday while Economy Minister Robert Habeck last week floated a major plan to stimulate investment.

Industry data suggests there will be no upturn for automakers, said Moritz Kronenberger, a portfolio manager at Union Investment, which owns shares in Volkswagen.

“Significant cost-cutting measures must therefore be taken promptly before the ongoing underutilisation of the plants leads to negative cash flows.”

It follows more bad news for German carmakers last week, with both Mercedes-Benz and Porsche vowing to step up cost-cutting measures after posting profit drops on a weakening Chinese market.

German carmakers also fear being caught in the crosshairs of a trade war between the European Union and China, with hefty EU tariffs on Chinese electric vehicles set to come into force this week.

“I believe that anyone who hasn’t yet understood what it’s all about should now really wake up,” said Stefan Erhardt, an employee at another Volkswagen plant near the German city of Kassel.

“This is really about all our livelihoods for the future, about the suppliers. This is about every small baker here at this location. I have to say, I’m really a bit scared.”

(Reporting by Axel Schmidt, Christina Amann, Christoph Steitz, Andrey Sychev, Rachel More; Writing by Christoph Steitz and Matthias Williams; Editing by Susan Fenton and David Evans)

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