(Bloomberg) -- Volkswagen AG is pushing for more cost reductions to better compete in a slowing market marred by a spending slump in China and waning electric-car demand.
Europe’s biggest automaker is reducing capacity at high-cost plants in Germany, Chief Financial Officer Arno Antlitz said in an interview. VW has also stopped hiring and put in place productivity measures at plants as part of a goal to save 20% in overhead costs by 2026.
“We have to step up cost work as competition is increasing,” Antlitz told Bloomberg Television. “The focus should be even more on fixed cost measures and productivity measures as well as more synergies within the group.”
On Thursday, VW reported a decline in its second quarter operating margin, which fell due to restructuring charges at its mass-market brands and lower deliveries in China. Raising returns remains a key challenge for the company, with the VW brand margin falling to 2.3% during the first half, compared to 3.8% a year ago.
Key profit center Audi last month lowered its profitability goal after sales slumped.
Carmakers including VW are confronting a weakening market, with Renault, Nissan and Stellantis all reporting lower profits for the first half of the year. Aside from stagnating demand in China, EV sales have cooled after governments in several countries pulled subsidies and inflation sapped consumer spending.
Performance programs have started to deliver results, Chief Executive Officer Oliver Blume said during an earnings call. The company has cut output at Emden, Zwickau and other German factories by 25% and 30% in Wolfsburg, its headquarter. Overall, the company is targeting to reduce production capacity in Europe by 10% after demand has stayed well below pre-pandemic levels.
“We are still in the ramp up curve” of the savings efforts, Blume said. “It will pay off in the upcoming years.”
Operating returns fell to 6.6% in the three months through June, down from 7% a year earlier. The company’s shares declined 5.3% at 4:58 p.m. in Frankfurt, the most since April, to take the drop this year to around 13%.
What Bloomberg Intelligence says:
Volkswagen’s 2Q results were muddied by €900 million of one-offs however good free cash of €2.9 billion was reflected in a robust underlying Ebit margin of 7.6% (6.6% reported) that shows sequential improvement despite €800 million of negative pricing that remains a 2H risk. New models assist 2H, bar Porsche which is hit by 911 supply constraints. Revised July 9 guidance was reiterated with a lowered free cash €2.5-€4.5 billion target due to €2 billion of investment in Rivian expected in 2H.
— Michael Dean, BI automotive analyst
On Thursday, VW said that new orders rose 2% during the first half in Western Europe, its home region, and orders for battery-powered cars more than doubled. The order book reaches “well into the fourth quarter,” the company said with a record number of new models during the second half.
The manufacturer is under pressure to catch up on EV uptake to meet tighter European Union fleet emissions levels as of next year, or face fines. A significant boost to EV sales will be challenging as consumers show little appetite, according to UBS analyst Patrick Hummel. VW may face a €2 billion ($2.2 billion) negative impact on earnings next year as a result, he said.
Blume said there was still a “gap” on meeting the upcoming EU targets. The company will wait and analyze EV orders from new model launches before turning to measures such as pooling emissions with other carmakers, he said.
The slowdown in overall EV demand has prompted manufacturers to temper strategies and investments. Volkswagen is “adapting” its battery-making plans under its PowerCo unit. Blume said the carmaker could change the sequence and pace of production ramp-up in Germany, Spain and Canada based on investment constraints and fluctuations in demand.
VW, struggling with an EV rollout marred by delays and glitches, in June announced a tie-up with Rivian Automotive Inc. The pact will see VW throw a $5 billion lifeline to the loss-making EV maker in exchange for access to battery-vehicle technology and software.
The deal will reduce the costs of developing VW’s next generation EV architecture, Blume said. It’s expected to contribute to a €5 billion reduction in its €170 billion five-year investment plan through 2029.
The Rivian deal marked Blume’s second major partnership after last year’s $700 million investment in China’s Xpeng Inc. The move aims to help reverse the company’s slide in the country, where its EV offering has fallen flat. During the second quarter, deliveries in China slumped 19% amid intense competition and a real estate crisis.
(A previous version of this story corrected time references throughout)
©2024 Bloomberg L.P.
