Volkswagen AG challenged its workers with a tough pay plan yesterday ahead of wage talks seen as a gauge of their readiness to favour job security over pay rises.

Wolfsburg, Germany-based Volkswagen, the world's fourth-largest car maker, will ask German workers to forego pay hikes for two years as part of a broader plan to lop about 2-billion euros ($3.2-billion) from labour costs by 2011, the company said.

There is "no leeway" for increased wages, said VW personnel chief Peter Hartz, who wants to use the talks as a starting point to slash the labour cost base by 30 per cent in six years.

This comes on top of VW's plans to boost earnings by well over 4.1-billion euros over the next two years.

Mr. Hartz rebuffed a demand from German metal workers union IG Metall that 103,000 workers at six western German plants get a 4-per-cent pay rise and a job guarantee for the next decade.

IG Metall's top negotiator for VW's home state of Lower Saxony later fired back at Mr. Hartz, sharply criticizing the company's terms. "Should management stick to its exorbitant demands, this round [of wage talks] will be rife with conflict," warned Hartmut Meine. "But one for which we're superbly prepared," he said, referring to the 97 per cent of VW workers who are unionized.

Volkswagen, which recently warned it would fail to meet its 2004 profit target by about 600-million euros, is grappling with currency headwinds, high production costs, slack demand and an erosion of prices in its key markets. VOW (Frankfurt) rose 87 euro cents to 31.76 euros.