VW slashes costs to fund its pursuit of Tesla

[FRANKFURT] Volkswagen AG's namesake car brand is accelerating a push to lower costs and lift profits to add financial muscle as the world's largest automaker braces for a fundamental industry shift toward electric vehicles that will squeeze earnings.

"We are confident that we will be able to reach our target of an operating return of at least 6 per cent in 2022, three years earlier than originally planned," Chief Financial Officer Arno Antlitz said Thursday in a statement.

The VW brand, which accounts for about half of the group's global deliveries, intensified efforts under Chief Executive Officer Herbert Diess to lift margins after lagging behind mass-market peers for years. Diess separated some unprofitable sales units from the division's accounts and lifted the return on sales to about 4 per cent. The brand previously targeted a margin of at least 6 per cent by 2025.

The company signed a landmark labor pact two years ago that includes shedding 30,000 jobs worldwide, mainly through natural attrition and early retirement. Due to the strong role of labor unions and the German state of Lower Saxony being the second-largest shareholder, VW is effectively restricted from more dramatic cutbacks, such as the factory closures General Motors Co announced two weeks ago.

The labour pact will generate cost savings of more than 2.2 billion euros (S$3.42 billion) by the end of 2018, VW said Thursday. That suggests the company is well on track to trim costs by 3 billion euros by 2020.

"What we have achieved so far is still not enough," VW brand Chief Operating Officer Ralf Brandstaetter said in the statement.

BLOOMBERG