VW Targets $6.8 Billion in Savings to Bolster Profitability

Jul 15, 2014 11:51 am ET

(Updates with labor chief comment starting in seventh paragraph.)

July 15 (Bloomberg) -- Volkswagen AG, Europe’s largest carmaker, plans to cut costs and boost productivity at its namesake brand by 5 billion euros ($6.8 billion) by 2017 to lift sagging profitability.

Efficiency gains have failed to keep pace with rising labor costs, Chief Executive Officer Martin Winterkorn said in an internal presentation to company managers obtained by Bloomberg News. The carmaker is seeking the savings by lowering purchasing expenses, reducing complexity and cutting factory costs.

“We must now take action that is clear, effective and sometimes painful,” Winterkorn said in the briefing. “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 Wolfsburg, Germany-based manufacturer 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 Volkswagen 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.

Shares Rise

Volkswagen’s shares were little changed at 186.50 euros at the close of Frankfurt trading. The stock has dropped 8.7 percent this year, valuing the company at 88.7 billion euros.

VW’s top labor representative said he supports the push to lift earnings and demanded that benefits determined in collective bargaining agreements remain untouched by cutbacks.

“Regarding productivity, the board and the management have to finally do their job,” Bernd Osterloh, head of VW’s workers council, said in an internal newsletter to employees obtained by Bloomberg News. “It’s right that Winterkorn finally makes it clear that management has to fix its own mistakes.”

Osterloh and other labor representatives account for half of VW’s supervisory board seats and have veto rights on important company decisions.

Winterkorn is focusing on profitability with sales more robust than ever before. VW is on track to exceed 10 million annual deliveries for the first time in 2014, four years earlier than planned. 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.

German Production

Production of an additional variant of the VW Tiguan sport- utility vehicle 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.”