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Downsizing The Volkswagen Experience

April 1, 1999
Related Topics: Downsizing, Featured Article
Volkswagen presents a useful example of how to handle work force reductions. In late 1993, the company was faced with stagnating sales, extremely low profit margins, and the need to dramatically increase productivity, quality, and customer responsiveness in order to be competitive. From a level of 103,000 employees in 1993, it projected a decrease to just 71,900 by the end of 1995, a reduction of some 31,000 people or 30 percent of its work force (1). In fact, it took actions so that it decreased employment to 91,000 people by 1996. The company, moreover, remains committed to maintaining 58 percent of its jobs within Germany, a comparatively high-wage country. Volkswagen's efforts were part of a larger cultural change at the company that involved removing layers of management, instituting teamwork, and increasing the skill level of its work force. What I want to highlight here, however, is how the company handled the downsizing issue.

It is important to note that Volkswagen began this effort with some distinct advantages.

In introducing variable forms of employment, Volkswagen was able to build on certain stable values: a level of wages virtually unrivaled in the region, a high level of social benefits, and finally a strong sense of security—as the jobs concerned had hitherto always carried life-long guarantees... All these values have made Volkswagen such an attractive employer that applicants have often tended to put greater stress on working for the company than on the type of job concerned (2).

Volkswagen proposed reducing the average working week from 36 to 28.8 hours, with a simultaneous reduction in earnings for the entire work force. But, monthly income was not reduced as much because redistribution of other income elements brought salaries back up to near their pre-reduction levels, although annual income fell, on average, about 12 percent. The annual income of Volkswagen employees was comprised of several elements: "monthly salary; a special one-off annual payment amounting to 96% of a twelfth of the gross annual salary earned during the previous yearly holiday pay over and above the monthly salary... paid on two fixed dates; a Christmas bonus calculated according to the number of years' service in the company (3)." The company took some of the once-a-year payments and distributed them equally over the twelve months, brought some negotiated raises forward, and contributed an additional two percent of monthly income to achieve its goal of providing workers with the same monthly income they had previously received, thus allowing them to meet their ongoing financial obligations.

The company instituted two other programs to help manage the necessary reduction in work hours. One was a "block time" program, targeted at workers between 18 and 30 years of age. The program entails a period of limited duration unemployment, during which the employee undergoes training and skills acquisition. "This model converts the 'normal' double load of work and training into a combination which allows the employee scope to work and earn money as well as to upgrade his skills over the course of the year (4)."

The company also recognized that not everyone wants to work the same number of hours throughout their working life. So, it instituted a flexible working program that entails a phased increase or decrease in working time. This program "fits with the idea of Volkswagen being a 'family.' Older employees are able to gradually withdraw from work… The system allows for a working week which progressively increases for freshly qualified employees… and is gradually reduced for older employees (5)."

Volkswagen's experiment with the four-day, shortened work week made headlines when it was announced and was not greeted by universal approval from commentators in the business press or by other executives. The change did cut personnel costs by some 15 percent. More importantly, almost half of a sample of Volkswagen employees said they were "satisfied" or "very satisfied" with the new working arrangements, while only 16.6 percent were "dissatisfied" or "very dissatisfied." And, a survey of over 1,000 people in the country at large found that the Volkswagen model was evaluated positively by 51 percent of the respondents and negatively by only 29 percent (6).

Volkswagen is an unusual company. It is headquartered in a country with a strong union movement and with mandated codetermination. It is a large employer in that country, and its actions, such as laying off people, have important consequences for governmental expenditures on unemployment benefits. Perhaps because of these factors, or because of the character of its leadership, Volkswagen has taken a different approach to the problem of excess employees.

Throughout the world, mass unemployment has become one of the most pressing problems of modern times. The automotive industry has been hit by a crisis of restructuring and excess capacity. It would have been easy enough for Volkswagen to follow the example of many other companies and simply shed jobs. But, as "Every Job has a Face," the company therefore decided... to break out of the vicious circle of mass unemployment. It is all very well for market trends, technological progress, or productivity to define personnel requirements—but these factors alone should not be allowed to dictate the nature of the solution to the problem (7).

Meanwhile, Volkswagen's economic recovery has continued, and its profits have increased. Its program of cultural change might not have been possible or nearly as successful without its heroic efforts to maintain its commitment to its work force. But in any event, the company followed a course of action consistent with its values and its beliefs, and it did so thoughtfully and creatively.

(1) Peter Hartz, The Company that Breathes (Berlin: Springer-Verlag, 1996).
(2) Ibid
(3) Ibid
(4) Ibid
(5) Ibid
(6) Ibid
(7) Ibid

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