VW brand to phase out slow-selling car models to revive earnings

[BERLIN] Volkswagen AG's namesake brand will discontinue slow-selling models, such as the two-door Polo compact, and scale back equipment options in a bid to revive profitability.

Operating profit at the VW passenger car unit fell 14 per cent to 2.48 billion euros (S$3.65 billion) in 2014, even as sales edged up 0.4 per cent to 99.8 billion euros, the Wolfsburg, Germany-based company said on Thursday. That reduced the operating margin to 2.5 per cent of revenue from 2.9 per cent in 2013.

"We want to get better in every respect in 2015 and take the next step towards the top," Chief Executive Officer Martin Winterkorn said at a press conference in Berlin.

Volkswagen, the world's second-largest carmaker, set a target last year of lifting profit at the VW marque by 5 billion euros by 2017 through reduced spending and higher productivity. The goal is for the brand to generate margins of at least 6 per cent by 2018 to reduce the parent company's reliance on the Audi and Porsche luxury divisions for profit.

Efficiency gains of "well over" 1 billion euros will lift earnings at the VW brand this year, Mr Winterkorn said. The company has identified about 50 per cent of the measures needed to reach the 5 billion-euro earnings-improvement goal, he said.

Phasing out cars that contribute only a small portion of sales volume will generate savings in the "triple-digit millions" of euros, Mr Winterkorn said. VW will also abandon optional features and equipment ordered in fewer than 5 per cent of a particular model to reduce production complexity and development costs.

After years of pushing for growth in its bid to surpass Toyota Motor Corp, Volkswagen has shifted focus to profitability, even as it boosts investment to upgrade factories and develop technology for electric cars and self-driving vehicles.

Efficiency efforts have yet to pay off as VW faces slowing market growth in China and plunging demand in Russia and Brazil. The manufacturer is targeting group operating profit this year in a range of 5.5 per cent to 6.5 per cent of revenue, compared with 6.3 per cent in 2014. Passenger-car operations are forecast to generate a margin of 6 per cent to 7 per cent.

Volkswagen fell as much as 1.6 per cent and was trading down 0.7 per cent at 240.50 euros as of 1:56 pm in Frankfurt. The stock has gained 30 per cent this year.

VW plans to increase deliveries, revenue and operating profit in 2015, even as "political uncertainty, strong currency fluctuations and tough environments in certain markets present major challenges," Chief Financial Officer Hans Dieter Poetsch said.

Audi, the largest contributor to Volkswagen's earnings and the world's second-largest maker of premium cars, is increasing spending on additional manufacturing capacity and new models to catch up to luxury-vehicle market leader BMW. Audi's profit margin narrowed to 9.6 per cent last year from 10.1 per cent. The return on sales this year will be in a range of 8 per cent to 10 per cent, the division said Tuesday.

Porsche's profit margin shrank to 15.8 per cent from 18 per cent after the sports-car maker spent money on introducing the Macan compact sport-utility vehicle and revamping the best- selling Cayenne SUV. Even so, Porsche's return on sales remained one of the highest among global automakers.

Volkswagen's profit from its operations in China jumped 21 per cent to 5.18 billion euros. Deliveries in the world's largest car market rose 12 per cent to 3.68 million vehicles.

The automaker, which sold a record 10.1 million vehicles worldwide last year, expects to "moderately" increase deliveries in 2015, backed by 50 new or revamped models including the VW Touran compact van, Skoda Superb sedan and Audi Q7 SUV.

BLOOMBERG