By Christina Amann and Christoph Steitz
HANOVER, Germany (Reuters) -Powerful trade unions and executives at Volkswagen (ETR:VOWG_p) kick off talks over pay on Wednesday that are likely to determine how aggressively Europe's biggest automaker pursues layoffs and potential factory closures in Germany.
Tensions at the carmaking giant are running high as the spectre of plant closures, which would be a first for the company in Germany, has set it on a collision course with the IG Metall union, which has vowed to fight any such moves.
IG Metall must also negotiate new labour deals for the core VW brand's 130,000 workers in Germany, after the group earlier this month ended agreements that had safeguarded employment at six of its plants in western Germany since the mid-1990s.
Volkswagen argues that high energy and labour costs in Germany, Europe's top economy, put it at a disadvantage to European peers as well as Chinese rivals that have set their sights on a big slice of the region's electric vehicle market.
Reinforcing that message at the start of the talks in the city of Hanover, the VW brand's personnel chief said the division must cut costs to stay competitive.
"Germany is falling behind the competition. Our core brand Volkswagen is particularly affected by this. International competition is threatening to overtake us," Arne Meiswinkel said. "We must work together to restructure our company. The situation is serious."
The task was to find viable solutions, he added.
The talks will take place at Schloss Herrenhausen, a 19th century residence for Hanoverian royalty.
They come as Germany's industry as a whole is struggling with high costs, labour shortages and rising competition, leading heavyweights including BASF and Thyssenkrupp (ETR:TKAG) to consider paring back their activities.
Other German automakers are feeling the pain too, with Mercedes-Benz (OTC:MBGAF) and BMW (ETR:BMWG) cutting their profit forecasts in recent weeks due to weak demand in China.