VW costs are out of control, says analyst

It’s not often that you hear that the German’s are letting things get out of control (well not since the late 30’s anyway). But it would seem that Germany’s biggest auto-maker, VW, has let its costs run out of control. So much so in fact that its profit margin was just 2.9% in 2013, compared with 8.8% for Toyota and 9.5% at Hyundai. In response the CEO wants to cut costs by a whopping 5 billion euros a year from 2017, through what he calls more intelligent use of resources. Apparently that doesn’t include job-cutting. 

What it does include is a move to improve sales operations in foreign markets. Given that VW leads the way in South Africa’s NAAMSA reported passenger vehicle sales, we should be safe. The only worry is what might happen to the Uitenhage plant when the big-boss catches wind of our disruptive labour force. MD

* Wolfsburg HQ plant gathering planned for Wednesday

* VW CEO and works council chief to address employees

* Inefficiencies growing at VW – analyst

BERLIN, July 22 (Reuters) – Volkswagen’s chief executive will address thousands of workers at its biggest plant on Wednesday as he attempts to win their support for cost cuts at the carmaker’s core VW brand.

Europe’s largest carmaker keeps boosting sales to new records but profitability gains are not keeping pace with the 12-brand group’s rapid expansion.

CEO Martin Winterkorn plans to cut costs by 5 billion euros ($6.74 billion) a year from 2017 as part of efforts to streamline work processes at all levels of VW’s namesake brand, its biggest division by sales and deliveries.

After telling managers on July 14 to step up their game, Winterkorn will on Wednesday address a special closed staff gathering at VW’s main factory in Wolfsburg, Germany that could draw about 20,000 blue-collar workers, two company sources said.

Analysts have said the cost-cutting could expose rare differences between management and labour at VW where employee representatives, occupying half of the 20 seats on the carmaker’s supervisory board, enjoy considerable influence over corporate decisions.

While there is no suggestion that the carmaker plans to cut any jobs, the efficiency drive also indicates that VW workers in Germany could be facing more difficult times ahead after years of generous wage increases and annual bonus payments.

Bernd Osterloh, VW’s works council chief who also sits on the supervisory board, has urged management to cut out its own mistakes as it reviews corporate strategy.

Management must prepare production plans – especially in car-body making – more carefully to reduce unnecessary overtime, and improve sales operations in foreign markets, he wrote in an internal document dated July 17 obtained by Reuters.

“What’s at stake is an intelligent use of our resources rather than cost-cutting,” said Osterloh, who will address Wednesday’s gathering after Winterkorn.

At 1.8 percent, the VW brand’s first-quarter profit margin lagged a margin target of at least 6 percent because of fixed costs that it says are high relative to Japan’s Toyota.

The VW brand’s 2013 profit margin was 2.9 percent, compared with auto division margins of 8.8 percent at Toyota and 9.5 percent at Hyundai Motor Co of Korea.

“Costs are slowly beginning to run out of control,” said Stefan Bratzel, head of the Centre of Automotive think-tank near Cologne. “Inefficiencies are growing, that cannot be entirely avoided at a company as big as VW.”

To boost efficiency across its whole 310-model empire, Winterkorn has urged “painful action” such as ceasing to make low-profit cars, reining in costs of R&D as well as new factories, speeding up model launches and catering more to the needs of foreign markets.

“It’s not just the world outside that is putting us to the test,” the CEO told managers on July 14. “We have taken a critical look at ourselves and found that we’re also dealing with home-made problems.”

($1 = 0.7418 Euros) (Reporting by Andreas Cremer and Jan Schwartz; Editing by Pravin Char)