VW shields product-based spending from cost cuts

BERLIN (Reuters) -- Volkswagen will keep spending on upgrading and expanding its range of models in the years ahead, despite lowering planned investment in other areas to offset rising costs.

VW will dedicate about 65 percent of overall planned investment of 84.2 billion euros ($113 billion) through 2018 to vehicles and technology, the automaker said today in a statement.

Spending not related to products will drop about half a billion euros per year to 12.7 billion euros between 2013 and 2015, from 13 billion euros in the 2012 three-year program, VW said, citing steps to delay construction projects and streamline capacity.

"In times like these, our disciplined cost and investment management will remain a cornerstone of our activities," CEO Martin Winterkorn said in the statement.

The main focus will be on new vehicles and successor models in almost all vehicle classes, based on the company's new MQB modular architecture. "This will allow the Volkswagen Group to systematically continue its model rollout with a view to tapping new markets and segments," VW said.

The high level of spending also reflects investments needed to develop hybrid and electric motors and to revamp the group's engine range to meet the new Euro 6 standard that mandates lower nitrogen oxide emissions from diesel cars sold in Europe after January 1, 2015.

With costs of its new MQB production platform weighing on profit and price discounts as well as currency effects cutting into sales income, analysts had expected VW to shield product-based spending from cuts in non-model projects.

VW is cutting capital expenditures by postponing construction projects and improving the use of existing capacity, it said today. Investment levels will be equivalent of 6 percent to 7 percent of annual sales in the period.

Expansion binge

VW has been on an expansion binge in recent years as it seeks to sell more than 10 million vehicles and overtake Toyota and General Motors to become the No.1 global automaker.

Since Winterkorn took the helm in 2007, the company added the Porsche, Scania, MAN and Ducati brands. It also more than doubled the number of factories around the world to 105. The spending pace may now slow as VW, which forecasts sales of 9.5 million autos this year, focuses on raising profitability.

"VW invested a lot in recent years," said Daniel Schwarz, a Frankfurt-based analyst at Commerzbank AG. "They almost reached their sales volume target already, but profit margins aren't quite there yet."

VW has become more cost conscious in recent months, saying Sept. 24 that "further belt-tightening" was needed. The same month the company outlined plans to boost profitability for brands including the VW nameplate and the money-losing Seat unit.

Profit goals

The VW car brand is forecast to lift its operating profit margin to more than 6 percent of sales from 3.5 percent last year, according to a Sept. 9 presentation by Chief Financial Officer Hans Dieter Poetsch. Seat, which posted an operating loss of 156 million euros last year, has a target profit margin of more than 5 percent.

VW has sidestepped a slump in European car sales to a two-decade low by expanding in China, the United States and Russia. The company has also invested in technology such as the MQB platform to share parts to lower production costs.

Third-quarter operating profit rose 20 percent to 2.78 billion euros. The company expects full-year operating profit to match 2012's 11.5 billion euros as spending offsets sales gains by the luxury Audi and Porsche brands. VW targets higher profit in 2014.

"Volkswagen's focus on future viability and sustainability also extends to its investments," Bernd Osterloh, head of VW's works council and a supervisory board member, said in the statement. "It is a positive signal, particularly in light of the difficult market environment."

The company's two Chinese joint ventures, which are not consolidated, will invest an additional 18.2 billion euros from 2014 to 2018.

Automotive News Europe and Bloomberg contributed to this report