Volkswagen is planning to shut at least three factories in Germany and lay off tens of thousands of staff.
Its remaining plants in Germany are also set to be downsized, according to the head of the company's works council Daniela Cavallo.
Europe's biggest carmaker has spent weeks negotiating with unions over its plans to revamp its business and cut costs, which have spiralled thanks to labour and energy prices.
The German firm employs about 300,000 people in its home country and operates 10 plants, but has said a major restructuring is needed.
Ms Cavallo told workers at VW's biggest plant in Wolfsburg that the company was "absolutely serious about all this" and the proposals were not "sabre-rattling".
Threatening to cut off talks with the unions, she said: "This is the plan of Germany's largest industrial group to start the sell-off in its home country of Germany."
She did not specify which plants would be affected or how many employees could be laid off.
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Tap hereThe carmaker is under severe pressure from rising costs, strong competition from Asia, weakening demand in Europe and China, and a slower-than-expected transition to electric vehicles.
It said it would put forward proposals for how to cut labour costs on Wednesday, when workers and management meet for the second round of wage talks and the carmaker releases third-quarter results.
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The company said it was committed to finding a solution with the unions.
Thomas Schaefer, who heads the Volkswagen brand division, said German factories were not productive enough and were 25-50% above targeted costs - meaning some sites were twice as expensive compared with the competition.
Shares in Volkswagen were down more than 1% after the announcement, while shares of Mercedes Benz also fell.
Calls have been made for the government to step in and help Germany's industrial sector.
A government spokesperson said Berlin was aware of Volkswagen's difficulties and remained in close dialogue with the company and worker representatives.
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