Annual Report 2023

Group Management Report

Environmental and social risks

For this risk category, the likelihood of occurrence is classified as high (previous year: medium) and the potential extent of damage is classified as medium (previous year: high).

The most significant risks from the QRP arise from non-fulfillment of CO2-related requirements.

Personnel risks

We use a range of instruments to counter economic risks as well as changes in the market and the competitive situation and shortages of supplier components. These help the Volkswagen Group to remain flexible in terms of staff deployment when faced with a fluctuating order situation – whether orders are in decline, or there is an increase in demand for our products. These instruments include time accounts to which hours are added when overtime is necessary and from which hours are deducted in quiet periods, enabling our factories to adjust their capacity to production volume with measures such as extra shifts, closure days, flexible shift models and legally regulated instruments such as Kurzarbeit (short-time working). The use of temporary workers also allows us to be more flexible in our planning. All of these measures help the Volkswagen Group to generally maintain a stable permanent workforce, even when orders fluctuate.

The technical expertise and individual commitment of employees are indispensable prerequisites for the success of the Volkswagen Group. We counter the risk of not being able to develop sufficient expertise in the Company’s different vocational groups with our strategically oriented and holistic human resource development, which gives all employees attractive training and development opportunities. By boosting our training programs, particularly at our international locations, we are able to adequately address the challenges of technological change and the structural transformation of the automotive industry.

To counter the potential risk of a shortage of skilled specialists – especially in the areas of digitalization and IT – we continuously expand our recruitment tools. Our systematic talent relationship management, for example, enables us to make contact with talented candidates from strategically relevant target groups at an early stage and to build a long-term relationship between them and the Group. In addition to the standard dual vocational

training, programs such as our Studium im Praxisverbund integrated degree, Faculty 73 traineeship scheme, and the Volkswagen-sponsored non-profit École 42 in Wolfsburg, Berlin and Prague, ensure a pipeline of highly qualified and motivated employees. By systematically increasing our attractiveness as an employer, we are able to gain talented people in areas that are crucial for the future, such as electrical engineering, chemistry or information technology. With tools such as these, we want to ensure that our demand for qualified new staff is covered, even amid a shortage of skilled labor.

We counter the risks associated with employee fluctuation and loss of knowledge as a result of retirement with intensive, department-specific succession planning and training.

The advancing digitalization of our human resources processes entails risks arising from the processing of personal data, but also system-based improvements so that Volkswagen can ensure compliance with data protection laws when processing personal data. Volkswagen is aware of its responsibility in the processing of this data. To make processing compliant with data protection requirements, we address risks as part of our data protection management system by implementing a wide range of measures.

The basis of successful occupational health and safety is complying with legal requirements, identifying and assessing work-related risks, determining appropriate measures and monitoring their effectiveness. This makes a positive contribution to maintaining the health of our employees as part of society. Ensuring a safe and healthy working environment is an important element of corporate sustainability, particularly during our transformation. It is also a major component of employer attractiveness, as it helps to effectively reduce the associated risks and minimize process disruptions and production stoppages.

Environmental protection regulations

The specific emission targets for all new passenger car and light commercial vehicle fleets for brands and groups in the EU for 2020 and subsequent years are set out in Regulation (EU) No 2019/631. This regulation is a material component of the European climate protection policy and therefore forms the key regulatory framework for product design and marketing by all vehicle manufacturers selling in the European market.

Adopted and published by the EU in 2019, the regulation states that, from 2021 onward, the average emissions of European passenger car fleets must be no higher than 95 g CO2/km. Up to and including 2020, European fleet legislation was complied with on the basis of the New European Driving Cycle (NEDC). From 2021 onward, the NEDC target value was replaced by a WLTP target value through a process defined by lawmakers; this change has not led to additional tightening of the target value. A similar approach applies to light commercial vehicles, where a target of 147 g CO2/km has applied to the entire fleet since 2021.

The targets will be tightened as from 2025: for new European passenger car fleets, a reduction of 15% in CO2 emissions will therefore be required from 2025 and a reduction of 55% from 2030. For new light commercial vehicle fleets, the required reductions will be 15% from 2025 and 50% from 2030. For 2035, a CO2 reduction target of 100% will then apply to new passenger car and light commercial vehicle fleets. In each case, the starting point is the WLTP fleet value in 2021. These targets can only be achieved through a growing proportion of electric vehicles within the fleet.

If the respective fleet-wide target is not fulfilled, the Commission may impose an excess emissions premium, amounting to €95 per excess gram of CO2 per newly registered vehicle.

At the same time, regulations governing fleet fuel consumption of new vehicles are also being developed or introduced outside the EU27 (plus Norway and Iceland), for example in Brazil, Canada, China, India, Japan, Mexico, Saudi Arabia, South Korea, Switzerland, Taiwan, the United Kingdom and the USA. Fuel consumption regulations in China are being gradually tightened with a fleet average target of 4.6 l/100 km for 2025. More stringent rules are expected for the period after 2025. In addition to this legislation on fleet consumption, a new energy vehicle quota applies in China. This requires every manufacturer to increase the share of electric vehicles in its total production or import volumes. For 2023, this quota was 18% and had to be fulfilled through battery-electric vehicles, plug-in hybrids, or fuel cell vehicles. The quota will be increased further for 2024 and 2025. There is no indication as to possible targets after 2025.

In the USA, the annual CO2 and efficiency targets to be fulfilled by the fleet for new passenger cars and light commercial vehicles are defined by the Greenhouse Gas legislation (GHG) and Corporate Average Fuel Economy legislation (CAFE). In December 2021, the current administration published new CO2 fleet targets for the period from 2022 to 2026. The industry-wide fleet average for passenger cars and light commercial vehicles is to reduce from 137 g CO2/km in 2022 to 106 g CO2/km in 2026, reversing the relaxation of the targets by the previous government. The same applies to the CAFE efficiency targets for 2024 to 2026, which were announced in spring 2022. The fleet targets to be achieved will therefore become more stringent each year in the period up to 2026. The current government has set a goal for 50% of new vehicle sales to be electric by 2030. This is expected to be reflected in ambitious targets in future GHG and CAFE regulations. In addition to this, in California and the other user states in the US, the regulations of the Californian zero-emission vehicle mandate must be adhered to, which prescribes annually increasing electrification rates for the new vehicle fleet. The aim is to fully electrify passenger cars and light commercial vehicles by 2035.

The tightening of fleet-based CO2 emissions and fuel consumption regulations makes it necessary to use the latest mobility technologies in all affected markets. Above all, electrified and also purely electric drivetrains are becoming increasingly common. The Volkswagen Group closely coordinates technology and product planning with its brands so as to avoid breaches of fleet values, for example, which would entail severe payment obligations. Whether the Group meets its fleet targets depends crucially on its technological and financial capabilities, which are reflected in, for example, our drivetrain and fuel strategy.

Alongside technical and portfolio electrification measures, it is also possible to use local statutory mechanisms such as the creation of emission pools in Europe, for example, or the trading of emission credits in the United States and China. Legislation provides further region-specific flexibility to aid target achievement. For example:

  • Additional innovative technologies in the vehicle that apply outside the test cycle to reduce consumption (eco-innovations and off-cycle credits) can be taken into consideration
  • Particularly efficient vehicles qualify for super-credits
  • Special rules are in place for small-series producers and niche manufacturers

The Real Driving Emissions (RDE) Regulation for passenger cars and light commercial vehicles is another of the main European regulations. New, uniform limits for nitrogen oxide and particulate emissions in real road traffic have applied to new vehicle types across the EU since September 2017. This makes the RDE test procedure fundamentally different from the Euro-6 standard still in force, which stipulates that the limits on the chassis dynamometer are authoritative. The RDE regulation is intended primarily to improve air quality in urban areas and areas close to traffic, leading to stricter requirements for exhaust gas aftertreatment in passenger cars and light commercial vehicles. Stricter RDE processes and requirements have resulted in certain challenges, for example relating to test criteria and homologation. The debate on successor emissions legislation (Euro-7) began at European level in late 2022 and ended in late 2023 with a compromise reached during the trilogue negotiations. The final regulation is not expected to be published in the Official Journal until the second quarter of 2024. It is anticipated that this successor regulation will enter into force in the second half of the decade.

The other main EU regulations affecting the automotive industry include:

  • the Car Labeling Directive (1999/94/EC), which will be brought into line with Regulation (EU) 2017/1151;
  • the Fuel Quality Directive (FQD −2009/30/EC) updating the fuel quality specifications and introducing energy efficiency specifications for fuel production;
  • the Renewable Energy Directive (RED – EU 2023/2413) introducing sustainability criteria, which contains higher quotas for advanced biofuels and e-fuels (RFNBOs);
  • the proposal for revision (COM/2021/563) of the Energy Taxation Directive (2003/96/EC) updating the minimum tax rates for all energy products and electricity.

Commercial vehicles are increasingly subject to ever stricter environmental regulations all around the world, particularly to regulations relating to climate change and vehicle emissions. With the revised Regulation (EU) 2019/1242, the European Union set manufacturers of heavy-duty vehicles with a permitted gross weight of over 16 tonnes very ambitious targets for reducing CO2 emissions in Europe within the next decade. The target set for 2025 of reducing CO2 emissions of heavy-duty vehicles by 15% has been reaffirmed. The new CO2 emissions targets proposed for the same vehicle category nevertheless aim for a 45% reduction by 2030 (previously 30%) and a 65% reduction by 2035 based on a reference figure from the period July 2019 to June 2020. Furthermore, the European Commission intends to extend the targets to additional vehicle groups (all medium- and heavy-duty vehicles over 5 tonnes, including buses; work vehicles and special-purpose vehicles have yet to be excluded). The Commission has also proposed that all new city buses in Europe should be emission-free by 2030. If emissions exceed these targets, fines amounting to €4,250 per excess gram of CO2/tonne-kilometer (tkm) per vehicle could be imposed from 2025 onwards. The European Council and the Parliament have finalized their positions on the Commission’s proposal to revise the Regulation setting CO2 emission performance standards for heavy-duty vehicles. The EU institutions hope to reach a compromise in the upcoming trilogue negotiations.

In the European Green Deal, the Commission defined the goal of achieving climate neutrality by 2050. Targeting an ambitious reduction in EU CO2 emissions of at least 55% (previously 40%) compared to 1990 levels by 2030, this represents a big challenge for the entire transport sector. The revision of CO2 emission requirements for heavy-duty vehicles in 2023 and the compromise negotiated at the end of 2023 between representatives of the European Parliament and the EU member states for a new Euro-7 standard on the usual air pollutants could further exacerbate these challenges.

New regulations to reduce air pollutant emissions were introduced for commercial vehicle manufacturers in Brazil at the beginning of 2023. In the United States, emission regulations for CO2 and nitrogen oxide (NOx) are also likely to be tightened further for heavy-duty vehicles. CO2 reductions based on 2016 emission levels have already been defined for 2024 and 2027. The United States has also adopted a new NOx regulation that is due to enter into force in 2024 and 2027, respectively. In mid-2023, China set new targets for reducing CO2 emissions for all heavy-duty vehicles.

Adapting commercial vehicles to new emission standards is complex and expensive, especially given the often contradictory regulations applicable to CO2 and other pollutant emissions from internal combustion engines. To meet the targets for the different markets, it is imperative to reduce CO2 and exhaust gas emissions through new technologies. This is why we are making substantial investments in climate-friendly alternative drive systems – especially battery-electric commercial vehicles and buses.

The debate around driving bans for diesel vehicles in Germany has lost some of its heat given the strong improvements in air quality measurements. There were only two cities that failed to comply with the air pollutant limits for nitrogen dioxide (NO2) immissions in 2022. In some cases, these issues have been, and continue to be, the subject of legal proceedings. Individual cities throughout Germany have already imposed zonal traffic bans for older vehicles such as Euro-4/IV diesel. It is argued that only driving bans for diesel vehicles can bring about the necessary short-term reduction in NO2 immissions. The aforementioned debate could negatively affect sales of diesel vehicles and result in financial liabilities and possible official requirements.

Local bans on the use of diesel vehicles are already also in place in a number of other countries, though these mainly affect older vehicles with lower emissions standards. Regulations in Belgium that successively ban older vehicles from larger cities are one example. In addition to major cities such as Paris and London, countries are also discussing future bans on vehicles with internal combustion engines.

A number of special environmental protection requirements apply to the Power Engineering segment. For example, the International Maritime Organization has issued the International Convention for the Prevention of Pollution from Ships (MARPOL – MARine POLlution), which applies to ship engines. The permitted emissions are being lowered in phases under MARPOL ANNEX VI. A reduction of the sulfur content in marine fuel has been implemented globally in recent years. Particularly stringent environmental regulations apply in emission control areas in Europe and the USA/Canada. Expansion to further regions such as the Mediterranean or Japan is being planned; other regions or territories such as the Black Sea, Alaska, Australia or South Korea are also in discussion. Moreover, emission limits are in force under Regulation (EU) 2016/1628 and in accordance with the regulations of the US Environmental Protection Agency (EPA), for example.

We are pushing for a maritime energy transition in specialist bodies and also promote this to the general public. In a first step, we are supporting the switch to liquefied natural gas (LNG) as a fuel for maritime applications, and offer dual-fuel and gas-powered engines for new and retrofitted vessels. For long-term, climate-neutral operation of seagoing vessels, we advocate power-to-X technology, in which excess sustainably generated electricity is converted into carbon-neutral gas or liquid fuel, especially hydrogen, methanol or ammonia.

As regards stationary equipment, there are a number of national rules in place worldwide that limit the emissions permitted in each case. On December 18, 2008, the World Bank Group set limits for gas and diesel engines in its Environmental, Health, and Safety Guidelines for Thermal Power Plants. These guidelines, which are currently being revised, are required to be applied in countries that have adopted no national requirements of their own or have requirements that are less stringent. In addition, the United Nations adopted the Convention on Long-range Transboundary Air Pollution back in 1979, setting upper limits on total emissions as well as nitrogen oxide for the signatory states (including all EU states, other countries in Eastern Europe, the USA and Canada). These are also due for revision. Enhancements to the product portfolio in the Power Engineering segment focus on improving the efficiency and emissions reduction of equipment and systems. While adhering to current and future emissions requirements, we are advancing innovative energy solutions to actively shape the climate transition.

Liquefied Natural Gas (LNG)
LNG is needed so that natural gas engines can be used in long-distance trucks and buses, since this is the only way of achieving the required energy density.
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Plug-in hybrid
Performance levels of hybrid vehicles. Plug-in hybrid electric vehicles (PHEVs) have a larger battery with a correspondingly higher capacity that can be charged via the combustion engine, the brake system, or an electrical outlet. This increases the range of the vehicle.
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Tax rate
The tax rate is the ratio of income tax expense to profit before tax, expressed in percent. It shows what percentage of the profit generated has to be paid over as tax.
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Test procedure
Levels of fuel consumption and exhaust gas emissions for vehicles registered in Europe were previously measured on a chassis dynamometer with the help of the ”New European Driving Cycle (NEDC)“. Since fall 2017, the existing test procedure for emissions and fuel consumption used in the EU is being gradually replaced by the Worldwide Harmonized Light-Duty Vehicles Test Procedure (WLTP). This has been in place for new vehicle types since fall 2017 and for all new vehicles since fall 2018. The aim of this new test cycle is to state CO2 emissions and fuel consumption in a more practice-oriented manner. A further important European regulation is the Real Driving Emissions (RDE) for passenger cars and light commercial vehicles, which also monitors emissions using portable emission measuring technology in real road traffic.
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Vocational groups
For example, electronics, logistics, marketing, or finance. A new teaching and learning culture is gradually being established by promoting training in the vocational groups. The specialists are actively involved in the teaching process by passing on their skills and knowledge to their colleagues.
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Zero-Emissions Vehicle (ZEV)
Vehicles that operate without exhibiting any harmful emissions from combustion gases. Examples of zero-emissions vehicles include purely battery-powered electric vehicles (BEV) or fuel cell vehicles.
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