Volkswagen AG (VWAGY) is facing a challenging market reaction following the announcement of a significant union deal that involves cutting over 35,000 jobs and reducing production capacity by nearly a quarter. The agreement, reached after extensive negotiations with the German union IG Metall, aims to address overcapacity and reduce costs in response to competitive pressures from Chinese automakers and the slow adoption of electric vehicles in Europe.

The deal, described by union leaders as a "Christmas miracle," avoids immediate plant closures and layoffs, but analysts have expressed concerns about its sufficiency and timing. Jefferies analyst Philippe Houchois noted that the agreement fell short of market expectations and lacked urgency, while ODDO BHF analysts warned that the benefits might arrive too late to make a significant impact.

Volkswagen's shares dropped by 3% in early trading, reflecting investor uncertainty about the company's ability to achieve its cost-cutting goals of 15 billion euros annually. The deal's impact on costs is expected to become apparent only after 2025, marking the beginning of a five-year process. Despite these concerns, J.P. Morgan analysts viewed the agreement as a positive step forward.

The market's reaction was not limited to Volkswagen alone. Shares of other German automakers, including BMW, Mercedes-Benz, and Porsche, also experienced declines, indicating broader concerns about the automotive sector's future in Europe.

Volkswagen's management, including CEO Oliver Blume, emphasized that the agreement sets a decisive course for the company's future, aiming to secure its competitiveness in a rapidly changing market. However, the deal's long-term success will depend on its implementation and the company's ability to adapt to ongoing market challenges.