Volkswagen Trims Work Force, Trying to Restore Profitability

But severe downturn has coincided with a raft of other troubles

By , Staff writer of The Christian Science Monitor

NO other city in Europe is so dominated by a single car company as Wolfsburg, Germany.

It hosts the headquarters of Volkswagen and that company's - and the world's - largest car factory under one roof. Its streets are clogged with Golfs, Passats, Polos, and various kinds of Audis, SEATs, and other Volkswagen cars. Wolfsburg is so car-crazy it has turned an old gas station into a historic monument.

Things have been so good so long in this working-class city that no one seems too concerned with the stream of bad news coming out of Volkswagen. But the problems are building up. Germany's largest car company is:

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* Struggling through its worst economic downturn since World War II. After profits plunged 87 percent last year, the company says it will almost certainly post a loss this year - the first such loss in a decade.

* Battling Spain's unions and federal and regional governments over efforts to cut costs at its money-losing SEAT subsidiary. Earlier this month, SEAT's chairman resigned, apparently in protest at the cutbacks VW was demanding.

* Mired in a legal wrangle with General Motors over charges that an executive who VW hired away from GM stole trade secrets from the American carmaker's German unit, Adam Opel AG.

Company officials say the worst is behind them. ``We have already turned this [corner] and we are coming out of this,'' says VW spokesman Hans-Peter Blechinger. Volkswagen itself, as opposed to the larger Volkswagen group, should earn profits in the second half of the year that will erase its losses in the first half, he points out. The company's cost-cutting measures are already beginning to take effect. By the end of July, VW had eliminated one-third of the nearly 14,000 posts it wants to cut by the end of 1994. It has also slashed its investment plans, most notably in its Czech subsidiary, Skoda.

Such cuts are crucial, analysts say, since no pickup of the German car market is expected before the end of next year at the earliest.

``The management has the right ideas,'' says Michael Geiger, head of German research for NatWest Securities in London. ``It's now a short-term race between the dip in the market and cost cuts.''

Other analysts say that VW needs to cut more.

``They still haven't done enough,'' says Klaus-Jurgen Melzner, an auto analyst with Deutsche Bank Research. ``It's necessary to restructure the total product network in Europe.'' That means closing some plants, including German ones.

At the moment, VW's biggest struggle is in Spain. It projects its SEAT subsidiary will lose 1.25 billion deutsche marks [$774 million] this year. VW has not said what it will do, but there is speculation that it will close the company's Zona Franca plant in Barcelona. VW chief executive Ferdinand Piech has traveled several times to Spain to try to soothe Spanish concerns. But the issue remains hotly contested.

Another challenge is the United States market. In the first nine months of this year, US sales of VW cars have fallen 39 percent - thanks to a four-week strike and quality problems at the company's Mexican plant in Puebla. Mr. Blechinger says the quality problems are fixed and the company is rolling out its new Jetta III and Golf III models for the US market. But it is a far cry from the 500,000-plus VW Beetles the company used to sell in the US during the late 1960s and early 1970s.

An article in this week's influential Der Spiegel magazine contends that the company was considering pulling out of the US market completely. The company denies this.

``It's very unlikely,'' says NatWest's Mr. Geiger. He maintains that VW will wait to see how its new models fare in America.

The bright spots for VW are in developing nations. VW's joint ventures in Brazil and China are seeing sales so far this year grow by one-third and two-thirds, respectively, compared with the same period last year. Skoda is also currently profitable.

If VW cannot fix its problems, then Wolfsburg is in deep trouble. In any case, VW will rely increasingly on foreign operations for production and sales of cars. This will diminish the importance of the Wolfsburg plant and its German workers.

``I am hopeful that VW is going to be prosperous 20 years from now,'' says VW employee Klaus Stormer. But ``things look really bleak.''

One of Mr. Piech's biggest challenges will be keeping the company's German plants going. Here in Wolfsburg, the local plant has the possibility of building VW's new mini-car, the Chico, if it can produce the car just as cheaply as competing factories.

``No matter what happens, this [plant] will be producing cars,'' adds Gunter Seidensticker, who retired from VW in 1988.

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