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VW’s Profit Plunge Sets Stage for Skirmish Over Plant Closings

Tom Narayan, lead global autos equity analyst of RBC Capital Markets, joins BNN Bloomberg and talks about VW's plant closure in Germany would be remarkable.

(Bloomberg) -- Volkswagen AG cast its least-profitable quarter in years as cause for the first factory closures in Germany in its 87-year history, setting the stage for contentious negotiations with labor leaders.

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Operating profit plunged 42% to €2.86 billion ($3.1 billion) in the third quarter, with revenue also slipping from a year ago, Volkswagen said Wednesday. Its operating margin dwindled to just 3.6%, the lowest in over four years.

The results buttress Volkswagen management’s case for taking drastic measures in Germany, where union representatives are resisting the closing of at least three factories and the elimination of thousands of jobs. The company is also looking to reduce wages for around 140,000 workers by 10%, all of which would add to the woes of Europe’s largest economy.

The core VW brand — where most of those cuts would fall — earned just a 2.1% operating margin in the first nine months of the year.

“VW never had really high margins over the course of times, but these are different times,” Volkswagen Chief Financial Officer Arno Antlitz told reporters on a conference call. “VW is not earning the money it needs to spend for all the new products.”

Volkswagen’s preferred shares rose 0.7% as of 11:50 a.m. in Frankfurt trading, with some analysts describing the results as better than feared following two profit warnings in the span of three months. The shares have fallen 20% this year, ranking among the worst performers on Germany’s benchmark DAX Index.

Volkswagen reported earnings hours before the start of a second round of restructuring negotiations with labor leaders in Wolfsburg, where the company is headquartered. Unions are expected to put up a fight that could lead to strike actions in the coming months.

The automaker could save €2.5 billion annually — or about €1,900 per car sold in Europe — by shuttering plants, Bloomberg Intelligence analysts Michael Dean estimated in a note this week. VW’s factories in Emden, Hanover and Osnabrück are its most underutilized, based on just-auto data. Its Audi division already is planning to cease electric sport utility vehicle production early next year at a site in Brussels.

VW’s situation is “no unique phenomenon,” works council chief Daniela Cavallo said ahead of talks resuming Wednesday. The whole car industry is suffering from weak market conditions, especially for volume brands, she said.

Slumping sales in China and increasingly stiff competition in Europe — which has yet to return to pre-pandemic demand levels — contributed to Volkswagen issuing profit warnings, first in July and then in September. Its namesake VW brand has long struggled with low returns, and turnaround efforts have been hampered by flubbed electric vehicle launches.

Antlitz reiterated that the VW brand needs to reap more than €10 billion in cost savings to stay competitive with peers. He warned it will be challenging for the company to comply with stricter limits on CO2 emissions in the European Union next year and said Volkswagen may need to pool its fleet with another manufacturer.

Chinese automakers also are infringing on Porsche and Audi’s performance and premium-car turf, posing a threat both to the Volkswagen-owned brands and their German counterparts Mercedes-Benz Group AG and BMW AG.

Volkswagen cautioned that operating profit from its joint ventures in China may end up toward the low end of its forecast range for the year, at around €1.6 billion instead of as much as €2 billion.

(Updates with CFO’s comments in the fifth paragraph.)

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