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Town That Volkswagen Built from Scratch Girds for Trouble

Power plant of the Volkswagen factory in the city Wolfsburg, Germany, the hometown of Volkswagen, Sept. 29, 2015.
Power plant of the Volkswagen factory in the city Wolfsburg, Germany, the hometown of Volkswagen, Sept. 29, 2015.

Wolfsburg is the town that Volkswagen built — literally put on the map in 1938 by the Nazis in pursuit of their dream of a "People's Car."

The town rode the company's postwar boom to financial wealth and today the two are inseparable. There's a top league soccer club that wears the VW logo and plays in the Volkswagen arena; Volkswagen's headquarters and manufacturing plant take up much of its real estate. There's a Volkswagen bank, a Volkswagen real estate dealer, and even a Volkswagen sausage factory.

Caught cheating, defeat device

So when it was revealed this month that the automaker had cheated on U.S. emissions tests, causing its shares to plummet, the mood here darkened.

"People are feeling a little down, like heads will roll, and not up high but at the lower levels," said 65-year-old Mark Graff, waiting outside the VW gates to pick up his daughter after her shift on the assembly line.

Graff, whose son also works full-time at the plant, said there was worry that if sales slumped, shifts would be cut.

"First will be the part-time workers, and there are a lot of them," he said.

Nobody knows quite what to expect, but nobody thinks the coming months are going to be easy as the world's top-selling car manufacturer struggles to deal with myriad legal and technical problems while trying to restore its image. The city is already freezing spending and hiring.

Major employer

This town of 120,000 people has 120,000 jobs, drawing commuters also from the surrounding area. Some 70,000 work for Volkswagen, while many others depend upon the company. Wolfsburg is as dependent on the auto sector as Detroit was in its heyday.

Sumon Ahmed, a 24-year-old who was working at the Volkswagen plant for the summer, said he'd heard people saying they might not get a bonus — a hefty 5,900 euros ($6,610) per employee covered by the union contract last year.

"At least there will be a short-term effect with a decrease in profits, but in the long term we just don't know," he said, still wearing his blue VW shirt as he started his afternoon trek home after his shift on the line helping build the Golf and Polo models this week.

Most others coming off work refused to talk about the situation, circling the wagons — or Volkswagens, as it were — in support of their employer.

"Go to Mercedes; they also have dirty secrets," barked one middle-aged man in a VW shirt.

It's an understandable attitude, considering that Wolfsburg — off the Berlin-Hannover highway in northern Germany — is the country's financially strongest city thanks primarily to Volkswagen. Its economic output per person is the highest in the country. Ingolstadt, home to VW subsidiary Audi, is in fourth place.

Fines and penalties

Volkswagen AG could face fines in the U.S. of as much as $18 billion for 482,000 cars identified with the so-called "defeat device" that allowed them to beat the testers. Other countries, such as South Korea, have also ordered investigations into emission levels of VW cars and some law firms in North America have filed class-action suits.

It remains unclear how widespread the use of the device was, but Volkswagen has said 11 million of its vehicles worldwide contain the same software.

Volkswagen has set aside an initial 6.5 billion euros ($7.3 billion) to cover the fallout and "win back the trust" of customers, though it didn't mention possible fines.

On a country-wide scale, ING economist Carsten Brzeski said at this juncture it is unclear what impact the Volkswagen scandal will have on the German economy, but "needless to say, owning 12 brands in seven European countries and having a global market share of around 13 percent of all passenger cars, there will be an impact."

"In Germany, Volkswagen employs more than 270,000 people," he said. "Adding a proxy of the possible suppliers to the equation, Volkswagen accounts for roughly 1.5 percent of German employment and even more when it comes to the growth impact."

Hiring, spending freeze

So far, one Volkswagen factory, in the city of Salzgitter, has dropped one shift a week, and the VW financial services division imposed a temporary freeze on hiring.

The trickle-down hasn't taken long to reach Wolfsburg.

Mayor Klaus Mohrs announced this week that there would be an immediate spending freeze, and a hiring freeze for town jobs. Projects underway are being allowed to continue, but no new ones are to be undertaken.

"Even though our town is debt-free and we have been able to make contingency provisions, we now expect to receive far less business tax revenue," he said in a statement. "it's still too early to talk about concrete numbers, but it it's clear that we're already this year going to have to count on far less."

Ingolstadt has followed suit, also announcing spending cuts.

Michael Wilkens, head of the Wolfsburg Chamber of Commerce, said it makes good business sense to prepare for leaner times, but noted that the relationship between the town and Volkswagen is one that has been cultivated over decades and that the trust in Volkswagen was deep.

"What is happening now is certainly a difficult phase, but the hope is that VW will come out of it stronger," he said.

At the Carl Hahn high school for business and administration, whose front entrance shares an awning with a pedestrian tunnel that takes VW employees under a road and train tracks to work, students who had been considering the company as a future employer were holding on to that hope.

"Once I'm done then I can imagine working for VW, but that doesn't look so good now," said 17-year-old student Tobias Batzdorfer, who has two years left in school.

"I don't think VW's going to go broke though — it's so huge, it's part of the whole region. There's clearly going to be a phase where they're losing money but after a couple of years they'll regain their image and be back on a good footing."