Volkswagen (VOWG_p.DE) and its labor unions agreed to cut 30,000 jobs at the core VW brand in exchange for a commitment to avoid forced redundancies in Germany until 2025, a compromise which leaves the carmaker's profitability still lagging rivals.
The turnaround plan announced on Friday will lead to 3.7 billion euros ($3.9 billion) in annual savings by 2020 and lift the Volkswagen (VW) brand's operating margin to 4 percent that year, from an expected 2 percent in 2016.
That target still remains below rival European carmakers such as Renault (RENA.PA) and Peugeot Citroen (PEUP.PA), which is targeting an operating margin of 6 percent in 2021.
VW, Europe's largest carmaker, is seeking to move beyond an emissions-cheating scandal that has tarnished its image and left it facing billions of euros in fines and settlements.
The cuts came with a management pledge to create 9,000 new jobs in the area of battery production and mobility services at factories in Germany as part of efforts to shift toward electric and self-driving cars.
"We have to invest billions of euros in new cars and services while new rivals will attack us - the transformation will surely be more radical than everything we have experienced to date," VW brand CEO Herbert Diess said at a press conference.
PHOTOS: See the evolution of Volkswagen below:
History of Volkswagen
History of Volkswagen
circa 1950: Rows of ' Beetle ' cars at a German Volkswagen plant. (Photo by Fox Photos/Getty Images)
View of a Volkswagen Beetle, 1960s. (Photo by Hulton Archive/Getty Images)
circa 1975: Volkswagen Beetle cars parked. (Photo by Keystone/Getty Images)
DETROIT, UNITED STATES: Members of the media surround the new Volkswagen Beetle after its introduction 05 January at the North American International Auto Show in Detroit, Michigan. The Beetle, the best selling car in history, is being offered on the US market after a 19 year absence. AFP PHOTO/Matt CAMPBELL (Photo credit should read MATT CAMPBELL/AFP/Getty Images)
The New 1999 Beetle From Volkswagon. The Trademark Beetle Body Shape Is Immediately Recognizable, Though It Shares No Parts With The Old Beetle. It's Both Larger (161.1 Inches In Length And 96.3 Cubic Feet Inside) And More Powerful Than Its Predecessor And The Engine Is No Longer In The Back. The Car Is Available With A New Turbocharged 150-Horsepower 1.8-Liter Four-Cylinder Engine, A 115-Horsepower 2.0-Liter Four-Banger Or A High-Tech Turbo Direct Injection Diesel Engine That Gets 48 Mpg On The Highway And Has A Driving Range Of 700 Miles. The New Beetle's A Truly Modern Volkswagen, With A Fully Galvanized Body And German Engineered Suspension. Plus A Security System, Airbags* And 6-Speaker Cassette Stereo. (Photo By Getty Images)
NUERBURGRING, GERMANY - OCTOBER 07: INTERNATIONALES ADAC EIFFELRENNEN 2000 Nuerburgring; VW NEW BEETLE CUP (Photo by Christof Koepsel/Bongarts/Getty Images)
384066 02: FILE PHOTO: The new Volkswagen 'Microbus' concept vehicle is displayed for this publicity photo. The Microbus was introduced January 7, 2001 at the North American International Auto Show in Detroit, MI. (Photo courtesy of Volkswagen/Newsmakers)
398508 01: UNDATED FILE PHOTO A redesigned Volkswagen Beetle is displayed in this undated file photograph. Volkswagen officially opened a new assembly hall near Dresden, Germany, December 11, 2001 to produce the new Phaeton luxury car, which represents a dramatic new step for the German car company away from its traditional medium and small car market. (Photo courtesy Volkswagen AG/Getty Images)
A worker walks past a Polo car at a production line in Shanghai Volkswagen Automotive Company, 09 June 2003. One out of every 120 Chinese now own their own car as the government announced that there were more than 10 million privately owned cars plying Chinese roads, state press said. AFP PHOTO/LIU Jin (Photo credit should read LIU JIN/AFP/Getty Images)
SYDNEY, AUSTRALIA - OCTOBER 16: The Volkswagen Golf R32 on display during the Sydney International Motorshow at the Sydney Exhibition Centre October 16, 2003 in Sydney, Australia. The Sydney International Motorshow is the largest collection of automobiles on show in Australia with sixty new production models unveiled and concept vehicles on display. (Photo by Cameron Spencer/Getty Images)
DETROIT - JANUARY 5: Volkswagen displays the Concept T vehicle at the North American International Auto Show January 5, 2004 in Detroit, Michigan. The show, which will feature more than 700 vehicles, opens to the public January 10. (Photo by Bryan Mitchell/Getty Images)
ZOUERAT, MAURITANIA: Finnish Juha Kankkunen drives his Volkswagen Touareg 05 January 2005, during the sixth stage of the 27th Dakar Rally between Smara and Zouerat in Mauritania. Reigning champion Stephane Peterhansel of France won the stage. Peterhansel, hampered by a cold for two days, crossed the finishing line in 4hr 0min 29sec to beat out fellow Mitsubishi driver, and two-time champion, Hiroshi Masuoka of Japan by 5min 58sec and the Volkswagen of Bruno Saby by 7min 26sec. AFP PHOTO MARTIN BUREAU (Photo credit should read MARTIN BUREAU/AFP/Getty Images)
WOLFSBURG, GERMANY - MARCH 13: (L-R) Volkswagen Board members Detlef Wittig, Francisco Javier Garcia Sanz, Horst Neumann, Martin Winterkorn, Chairman of German automaker Volkswagen, Jochem Heizmann and CFO Hans Dieter Poetsch pose at the new Volkswagen model 'Scirocco' during the company's annual press conference on March 13, 2008 in Wolfsburg, Germany. The Volkswagen Group significantly increased its earnings last year. Profit before tax therefore grew to 6.5 billion euros. (Photo by Andreas Rentz/Getty Images)
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Some experts argued the cost cuts were not deep enough.
Spending on R&D and staff across VW's automotive operations has been growing for years with the need to overhaul the cost base dating back to before the diesel emissions scandal broke 14 months ago.
"The deal may be the best the company could negotiate with labor but it's not a victory for either side," said Erik Gordon, a University of Michigan business professor.
"The cuts are too small to make VW cost competitive with Toyota (7203.T) and other global rivals."
With 610,000 workers globally, VW last year built slightly fewer vehicles than Toyota which has 350,000 staff. The German company has also been slow to cease production of unprofitable vehicles in its 340-model range.
VW's labor leaders said management had agreed to avoid forced redundancies in Germany until 2025, a step which clears the way to cutting 23,000 jobs via the more palatable methods of buyouts, early retirements and reducing part-time staff.
Jobs will also be cut in North America, Brazil and Argentina, VW said, without being more specific. Around 120,000 employees work for VW brand in Germany including 6,000 temporary staff.
Many analysts and investors nonetheless welcomed the deal, sending the shares more than 2 percent higher to the top of the blue-chip DAX .GDAXI index in early Frankfurt trading. At 1324 GMT (8:24 a.m. ET), the stock was still trading up 0.8 percent at 118.5 euros.
Activist hedge fund TCI, which has been critical of Volkswagen management, said it looked like a good deal all round provided it could be made to stick.
"As long as they are net savings – the savings are not given back by increased costs elsewhere in the organization," said TCI partner Ben Walker.
"They've just to deliver now. It's easy to talk. They now have to deliver and execute," he added.
Labor leaders were pleased with the outcome.
"The most important message is the jobs of the core workforce is secure," VW's works council chief Bernd Osterloh said at the news conference in Wolfsburg, where the company has its headquarters.
Management and labor agreed to outsource production of plastic parts from the German Braunschweig plant but will compensate workers by assigning more orders for chassis and steering assembly needed with rising investment in self-drive cars.
In a further sign of its shifting focus, VW said it will build electric cars at its German factories in Zwickau and Wolfsburg.
Electric motors will be built in Kassel, and VW will start battery cell production and development in Salzgitter.
Volkswagen will also build battery packs for electric and hybrid cars in Braunschweig, it said.
(Additional reporting by Maiya Keidan in London; Writing by Edward Taylor; Editing by Alexander Smith/Keith Weir)
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