FRANKFURT - German tax reform, a persistent price war in Europe and big losses in South America are straining Volkswagen group profits.
But VW insiders say the company's multi-brand strategy also contributed to a disappointing earnings forecast.
The group reported a pretax profit of DM3.30 billion (euro 1.67 billion) for the first nine months of 1999, down from DM3.38 billion in the same period last year.
After-tax profits slipped 0.3 percent to DM1.5 billion. In spite of a sharp rise in market penetration, VW said net earnings for the full year may not match last year's level.
The company said the added tax burden cost it DM370 million in the first nine months.
VW declined to say how much money it lost in South America, but company sources say the deficit was huge.
'The market is in a terrible state in Brazil,' said a VW insider. 'Our business is affected not only by shrinking numbers, but also by merciless competition for each customer.
'Prices are under extreme pressure and the decline in earnings is exorbitant, creating an enormous loss.'
VW group sales in Brazil fell by nearly 16 percent to 290,000 units in the nine-month period. Sales in Argentina fell 17 percent to 41,000.
Despite a very competitive market, VW group share in western Europe grew from 17.6 percent to 18.8 percent in the first nine months.
In Germany, the group's market share of 29.4 percent (up from 27.8 percent in 1998) is approaching the 30 percent target set by VW boss Ferdinand Pi'ch as the company's objective for 2000.
But VW appears to be paying a high price for its increased share. The Bora, Lupo and New Beetle are being heavily supported by sales incentives.
'The multi-brand strategy of the group naturally results in higher marketing costs,' the VW executive said. 'And the more attractive the products of the subsidiary brands get, the more costly are the incentives and advertising campaigns for the parent company.'
Volkswagen is turning out a glut of new cars for its VW, Audi, Seat and Skoda brands by basing them on common platforms. Some dealers and marketing executives in the group have complained about the deluge.
'Some consumer reports already ask why buy an Audi or VW if you can get a Seat or Skoda with the same technology, size, equipment and quality at a better price,' said the executive. 'There is still an image gap but we have to upgrade our advertising and marketing efforts for the VW brand to get that message over.'
In its nine-month report, Volkswagen also cited new product launch costs for the Audi A2 and the Skoda Fabia. Analysts cite other factors, including extra costs in the third quarter for the Audi TT recall. VW replaced suspension stabilizers and added firmer shock absorbers to improve steering control when the TT is driven at high speeds.
'It appears to have cost several hundred million marks,' said a report by Salomon Smith Barney in London.
Volkswagen said it was forging ahead with an ambitious product expansion plan and boosting investment nearly 10 percent.
But some analysts expressed concern that VW may be carrying its growth strategy too far. New VW cars planned include a luxury sedan and an entry-level sub-Lupo.
Reuters News Service contributed