VW targets $6.8 billion in annual cuts to close profit gap with rivals

Unprofitable models may be dropped, Winterkorn says

VW’s Winterkorn: “We have a lot of catching up to do with our core competitors in terms of productivity.” Photo credit: BLOOMBERG

 

BERLIN — Volkswagen AG plans to cut costs and boost productivity at the VW brand by 5 billion euros ($6.8 billion) a year by 2017 to lift sagging profitability.

Efficiency gains have failed to keep pace with rising labor costs, CEO Martin Winterkorn said in an internal presentation to company managers obtained by Bloomberg News and Reuters.

The company is targeting savings by lowering purchasing expenses, reducing complexity and cutting factory costs. Other steps may include improving sales channels, according to VW.

Winterkorn said VW may decide to cease making non-profitable models, citing convertible cars which accounted for over a third of the group’s 47.8 billion euros in first-quarter revenue but only about 15 percent of operating profit.

“We must now take action that is clear, effective and sometimes painful,” Winterkorn, pointing out that research and development costs had surged 80 percent across the multi-brand group since 2010. “Let’s be honest: we have a lot of catching up to do with our core competitors in terms of productivity.”

VW employs almost 575,000 people, more than any other carmaker. The company has sought to offset its heavy wage bill by sharing parts and development costs among its slate of 12 brands.

With stiff competition in Europe and high costs to roll out new models like the revamped Passat, the VW brand’s margin dropped to 1.8 percent of sales in the first quarter from 2.4 percent a year ago. The company’s target for its biggest nameplate is a 6 percent margin.

The brand’s 2013 profit margin was 2.9 percent, compared with auto division margins of 8.8 percent at Toyota and 9 percent at Hyundai Motor Co. of Korea.

Analysts have said VW’s profitability gains are disappointing given its steady expansion. The company looks set to hit a sales goal of 10 million autos a year in 2014, four years ahead of target.

“VW’s and Audi’s product momentum remains tough for 2015,” said Arndt Ellinghorst, London-based analyst at investment researchers ISI Group. “We see a real chance that margins keep slipping.”

Winterkorn is focusing on profitability with sales more robust than ever before. It plans to introduce 100 new or revamped vehicles through next year as part of a strategy to dethrone Toyota Motor Corp. as the global industry leader by 2018.

Production of an additional variant of the VW Tiguan SUV was determined to be “not economically feasible” to produce in Germany and such setbacks need to be addressed, Winterkorn said. “Our shared task is to create the ability to profitably produce these vehicles here in Germany.”

Auto workers in VW’s home country cost 48.40 euros per hour last year, the highest in the world, according to data from Berlin-based auto-industry group VDA. That compares with 25.63 euros in the U.S. and 29.96 euros in Japan.

While VW plans to intensify efforts in areas poised to shape future mobility like connected vehicles and electric cars, it intends to outsource production of components that can be produced more profitably by suppliers.

“This is not about cosmetic change,” said Winterkorn. “This is about asking fundamental questions.”

To boost efficiency across its 310-model portfolio, Europe’s biggest automotive group is reviewing its overall strategy. A post-2018 plan dubbed “future tracks” will set out priorities on technology and model policy and may be outlined later this year.

The CEO’s call for greater cost discipline follows a similar plea in February, when Winterkorn urged senior managers to keep costs down to weather tough market conditions.

VW toned down its 2014 profit guidance in February, saying core earnings may only improve if economic conditions improve more than expected, especially in Europe where VW sells about 40 percent of its vehicles.

Separately, VW declined comment on a report by Germany’s Manager Magazin published on Tuesday saying that Winterkorn had agreed with leaders of the supervisory board to extend his contract by two years until 2018.

Bloomberg and Reuters contributed to this report.

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