German automotive giant Volkswagen said on Monday it could take the unprecedented move to close production sites in Germany and threatened further job cuts as its savings plans stalled.

Rising costs at the carmaker were cutting into profits, leaving Volkswagen facing "particularly significant challenges", the group said in an internal memo seen by AFP.

"In the current situation, even plant closures at vehicle production and component sites can no longer be ruled out," Volkswagen said in the note sent to employees.

Unions and government officials responded with alarm to the idea of plant closures in the group's home market, a decision never before taken by Volkswagen.

The announcement by one of Germany's blue-chip companies adds to concerns for Chancellor Olaf Scholz after the domestic economy has struggled in recent months.

"The European automotive industry is in a very demanding and serious situation," Volkswagen CEO Oliver Blume was quoted as saying in the memo.

"The economic environment became even tougher, and new competitors are entering the European market," Blume said.

The difficulties were particularly acute in Germany, which "is falling further behind in terms of competitiveness" as a manufacturing location, he added.

"We as a company must now act decisively," the CEO said.

Volkswagen last year announced plans for a $US11 billion savings programme and has flagged cuts to its workforce over the coming years to improve profitability.

But the group said further measures were now required after disappointing results published in August that showed a dip in profits. (AFP)