In a warning to Oliver Blume, VW’s chief executive, she said that staff could “break off the talks and do what a workforce has to do when it fears for its existence”.
Thousands of staff gathered outside VW’s Wolfsburg headquartered on Monday, blowing horns and whistles, and brandishing signs.
Ms Cavallo’s remarks will be seen as a major escalation of the conflict between Volkswagen’s workers and management over the company’s future direction.
A Volkswagen spokesman declined to comment on the details of the company’s plans, but said: “This is the only way to finance further investments in the future from our own resources.”
The company said it would outline public proposals for how to cut its operating costs alongside third quarter results due on Wednesday.
Gunnar Kilian, Volkswagen Group board member, said: “Without comprehensive measures to regain competitiveness, we will not be able to afford essential investments in the future.”
As well as the Volkswagen brand, the group owns Skoda, Seat, Audi, Lamborghini and Bentley – as well as much of Porsche.
Ms Cavallo said Berlin needed to urgently come up with a master plan for German industry to ensure it does not “go down the drain”.
A spokesperson for the German government said: “It is well known that Volkswagen is in a difficult situation. There is also a constant dialogue with both the employer and employee sides at Volkswagen.”
“The Chancellor’s position on this is clear, namely that possible wrong management decisions from the past must not be at the expense of employees. It is now a matter of preserving and securing jobs.”
Volkswagen employs 680,000 people around the world. The company recently warned it would have to consider closing German factories for the first time in its history in order to get the business back on track.
Last month it was claimed that VW was looking at cutting as many as 30,000 jobs. At the time, the company refused to confirm the job cut figures.
Reports came after boss Mr Blume told employees that the company was abandoning a pledge not to make any lay-offs until 2029.
