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VW aims to lift profitability and save €5 billion

Volkswagen chief executive Martin Winterkorn -  VW aims to lift profitability and save €5 billion

Volkswagen Group plans to cut costs at its namesake passenger cars brand by €5 billion ($6.8 billion) by 2017 and boost productivity as it seeks to lift sagging profitability.

Efficiency gains have failed to keep pace with rising r&d and labor costs, CEO Martin Winterkorn said in an internal presentation to company managers.

The VW brand, the carmaker’s biggest division by sales and deliveries, is lagging a profit margin target of at least 6 percent because of fixed costs that it said are high relative to Japan’s Toyota.

The brand’s 2013 profit margin was 2.9 percent, compared with auto division margins of 8.8 percent at Toyota and 9 percent at Hyundai.

The unit’s operating margin dropped to 1.8 percent of sales in the first quarter from 2.4 percent a year ago. The company’s target for the VW brand is a 6 percent margin.

Analysts have said VW’s profitability gains are disappointing given its steady expansion.

“Let’s be honest: We have a lot of catching up to do with our core competitors,” CEO Martin Winterkorn wrote in a letter to VW managers. “That is why we must now take action that is clear, effective and sometimes painful,” the CEO said, pointing out that r&d costs had surged 80 percent across the multi-brand group since 2010.

VW employs nearly 575,000 people, more than any other carmaker. Much of VW’s production is in its home market of Germany, where workers secured a significant pay increase last year. The company has sought to offset its heavy wage bill by sharing parts and development costs among its portfolio of 12 brands.

VW toned down its 2014 profit outlook in February, saying core profit may only improve if economic conditions, especially in Europe where VW sells about 40 percent of its vehicles, improve more than expected.

To boost efficiency across its 310-model empire, Europe’s biggest automotive group is reviewing its strategy. A post-2018 plan dubbed “Future Tracks” will set out priorities on technology and model policy and may be outlined later this year.

“VW’s and Audi’s product momentum remains tough for 2015,” said Arndt Ellinghorst, London-based analyst at investment researchers ISI Group. “We see a real chance that margins keep slipping.”

Winterkorn said VW brand may decide to stop making non-profitable models, citing convertible cars.

Other steps may include lowering purchasing expenses, reducing complexity, cutting factory expenses and improving sales channels, according to VW.

VW brand accounted for over a third of the group’s 47.8 billion euros in first-quarter revenue but only about 15 percent of operating profit. VW brand’s global sales rose 4 percent to 3.07 million in the first half.

Separately, VW declined comment on a report by Germany’s Manager Magazin published on Tuesday saying that Winterkorn had agreed with leaders of the supervisory board to extend his contract by two years until 2018.