Volkswagen to further cut costs at core brand image

Volkswagen AG managed to outsell General Motors last year and placed second – only behind Toyota – in the global sales race. Still, the German automaker hasn’t yet made the same advancements when it comes to earnings.

In order to match the record profits made by its Japanese rival, Volkswagen AG plans to further decrease spending at its namesake passenger car brand by around 5 billion euros ($6.8 billion) per year from 2017. Most of the Group’s profits come from the high-margin luxury divisions Audi and Porsche, while the VW core division lags behind Toyota’s earnings margins.

“Let’s be honest: We have a lot of catching up to do with our core competitors,” said Chief Executive Martin Winterkorn in an internal letter to VW managers. “That is why we must now take action that is clear, effective and sometimes painful,” the CEO added.

“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 wants the brand’s earnings to rise from 2.9% in 2013 to at least 6%, decreasing fixed costs and even “killing” unprofitable models – like the convertibles, which only account for 15% of the unit’s operating profits. The numbers compare to Toyota’s 8.8% margin or the 9% achieved by South Korea’s Hyundai.

Via Reuters