Volkswagen to Keep Factory Running in China’s Xinjiang Region

“We both came to the conclusion that it is very difficult to close a factory and to open it thereafter,” said Mr. Wöllenstein, referring to a conversation he had with Chen Hong, the chairman of Shanghai-based SAIC. Executives at the Chinese car maker told Volkswagen that the company would do more harm than good if it were to shut down the factory for political reasons, Mr. Wöllenstein said.

Volkswagen is facing pressure at home to consider closing the factory. In June, the German government declined to renew a risk insurance for Volkswagen’s operations in China, citing Beijing’s treatment of the Uyghur minority group. Germany’s influential metalworker trade union has also urged the company to reconsider its presence in Xinjiang.

Xinjiang has become a geopolitical flashpoint for multinational companies in recent years. Western researchers say China’s government has detained hundreds of thousands of people, mostly Muslim minorities, in a network of internment camps in Xinjiang as part of an assimilation campaign. U.S. officials, some lawmakers from other Western countries and some human-rights activists, have said Beijing’s treatment of Uyghurs amounts to a form of genocide.

China has rejected those allegations, describing its policies in the region as aimed at preventing terrorism and protecting national security. This week, Chinese President

Xi Jinping

made a rare appearance in Xinjiang, his first in over eight years.

Volkswagen’s new human rights officer, Kerstin Waltenberg, will take on the role in August at the company’s headquarters in Wolfsburg, Germany, a spokesperson said. Ms. Waltenberg will oversee the car maker’s activities globally, including in China, while building a team of specialists. From January, a new German law will require more due diligence against human rights abuses along supply chains.

Volkswagen’s plant in Xinjiang’s provincial capital of Urumqi was established in 2013. It once produced around 20,000 vehicles a year, but its output has since declined, Mr. Wöllenstein said.

The plant now manufactures two vehicle models and hires about half the labor force it used to, he said, with ethnic minorities making up more than a quarter of its workers. The company didn’t give priority to allocation of chips to the plant when the industry struggled with shortages, given lackluster demand for the vehicles produced there, he said.

All the staff at the plant are employed under direct contracts and the German car maker has found no forced labor involved at the plant, the executive said.

Volkswagen conducts random checks on suppliers and relies on their self-declarations, though the process can often be complex, he said. A U.S. law that went into effect in June presumes that all items produced in Xinjiang or by entities linked to the government there are made with forced labor, and blocks companies from importing such products into America.

Separately, the German auto maker said vehicle sales globally dropped by 22% in the first half of this year compared with the same period in 2021, with car sales in Central and Eastern Europe down by almost 41%.

The company’s sales in China also fell about 20% in the first six months of the year.

Volkswagen’s deliveries were hampered by plant closures due to Covid-19 outbreaks in the Shanghai region and in the northeastern city of Changchun, Mr. Wöllenstein said. “Quarter two was really a dark phase in our recent history in China,” he said.

Volkswagen said it saw a strong rebound in June, demonstrating pent-up demand, he said. The chip shortage that affected Volkswagen’s production last year has since improved, although the issue still plagues manufacturers globally, Mr. Wöllenstein added.

Mr. Wöllenstein is to be succeeded by

Ralf Brandstätter

in August, the company said in June.

—Yoko Kubota contributed to this article.

Write to Selina Cheng at selina.cheng@wsj.com