WOLFSBURG, Germany— Volkswagen AG's plan to cut 30,000 jobs over coming years in a restructuring of its embattled VW brand marks a radical shake-up but disappointed investors who fear it still won't close the gap with more profitable rivals Toyota Motor Corp. and General Motors Co.
Volkswagen executives hailed the move as audacious and necessary, amounting to a reduction of the VW brand's German workforce by about one-fifth. Management, with crucial support from powerful labor representatives, aims to boost productivity by 25%, increase annual earnings by €3.7 billion ($ 3.9 billion), and double pretax profit margins to 4% by 2020.
The overhaul comes as Volkswagen is still trying to move past an emissions-cheating scandal that has cost it nearly $ 20 billion so far to settle lawsuits and recall nearly 11 million tainted diesel-powered vehicles world-wide.
Deep cuts are also needed to boost profits so that Volkswagen can invest in electric cars, digitization and self-driving car technology to keep up with its traditional rivals and new competition from tech upstarts such as Tesla Motors Inc. and ride-hailing service Uber Technologies Inc.
"We're shaking up the entire VW brand and making it fit for the future," said Herbert Diess, head of the VW brand.
Outside investors weren’t impressed. One, Arndt Ellinghorst of Evercore ISI, called the restructuring plan underwhelming.
"It is a good start, but now management has to execute and deliver," said Ben Walker, a partner at activist fund TCI, which sharply attacked VW management this year in open letters complaining about the company's poor governance and weak profits.
Volkswagen shares barely moved throughout most of the trading session Friday, and closed down 40 European cents at €117.15 on the Frankfurt Stock Exchange.
Volkswagen management plans to carry out the job cuts through natural attrition and early retirement. The planned buyouts will be very aggressive, even covering workers younger than 50 years of age, which is rare in Germany, according to a person familiar with the plan.
The iconic VW brand, made famous by the Beetle and the best-selling Golf, struggled to remain profitable even before the diesel crisis. It is weighed down by high German labor and manufacturing costs, too many unprofitable or low-margin car models, and years of unbridled capital spending as the company raced to overtake Toyota and GM with little regard to cost.
Volkswagen's drive to be number one went well for a decade as the company doubled the number of factories it operates around the world, expanding its business in Russia, China, Brazil and other emerging markets. But high volatility of currencies in these markets and weak economies in the wake of the financial crisis caused VW sales in Russia and Brazil to plunge. In the first nine months of this year, only China provided any significant growth for Volkswagen new car sales.
Mr. Diess, the VW brand chief, recently said his unit in its current state couldn’t survive without the support of Volkswagen's more profitable brands, especially luxury car maker Audi and sports car maker Porsche.
The existential threat to Volkswagen from the diesel crisis and a massive shift in the industry away from conventional diesel and gasoline engines to electric cars prompted a change, insiders said. Labor representatives and the state of Lower Saxony, which owns 20% of Volkswagen, reluctantly agreed to massive job cuts in German factories.
"Volkswagen is in a difficult situation," said Bernd Osterloh, the chief of Volkswagen's works council. "All the colleagues know that."
In exchange for the concession on jobs, Volkswagen management agreed to replace about 9,000 of the lost manufacturing jobs with jobs in other areas, such as planned production of electric cars and a new battery factory. VW agreed to make Wolfsburg the center for its development of electric car platforms and digitization, which was a key concession to win Lower Saxony Prime Minister Stefan Weil's backing for job cuts.
"There is a deep transformation of the entire auto industry that will hit Volkswagen especially hard," Mr. Weil said. "Lower Saxony is going to grasp this chance."
The support of labor and the state of Lower Saxony, where Volkswagen is the largest private sector employer, is crucial because together they hold 12 seats on Volkswagen's 20-member supervisory board. That gives them the power to block key decisions.
Write to William Boston at william.boston@wsj.com
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