VW brand plans $6.8 billion savings and productivity boost to improve margin

Article by Andrew Christian, on July 18, 2014

Volkswagen AG is planning to cut costs and boost productivity at its namesake brand by EUR5 billion ($6.8 billion) annually by 2017 as it bids to hike its profitability. Chief executive Martin Winterkorn, in an internal presentation to managers as obtained by Bloomberg News and Reuters, said that efficiency gains at the company didn’t grew enough to tackle rising labor costs.

VW is intending to save money by cutting purchasing expenses, reducing complexity and trimming factory costs. VW said other moves may include improving its sales channels.

Winterkorn remarked that the carmaker may stop building non-profitable models, citing convertible cars that while generating over a third of the group's EUR47.8 billion revenues in the first quarter of 2014, it only accounted for around 15 percent of operating profit.

Winterkorn noted that research and development costs had spiked 80 percent across the group since 2010. He admitted that VW has a lot of catching up to do with its main rivals in terms of productivity.

The German group also has the largest workforce among carmakers at 575,000 people and it is trying counter its wage bill by sharing parts and development costs among its 12 brands.

The VW brand saw its profit margin dropped to 1.8 percent of sales in the first three months of 2014, no thanks to more stringent competition in Europe and to high costs related to introducing new models.

The group wants the brand to have a 6-percent profit margin, more than double its 2013 profit margin of 2.9 percent. Other carmakers like Toyota and Hyundai had margins of 8.8 percent and 9 percent respectively.

According to analysts, VW's profitability growth is disappointing given the carmaker’s steady expansion. The carmaker is expecting to hit its sales target of 10 million vehicles in 2014, four years ahead of target. [source: WallStreetJournal]

Topics: vw

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