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VW profit falls in second-quarter, increases pressure to cut costs

Volkswagen said operating profit declined 3.1 percent in the second quarter as emerging-market volatility and a plunge in earnings at its core passenger-car division weighed on earnings.

Operating profit fell to €3.33 billion ($4.46 billion), from €3.44 billion a year ago, VW said in a statement today.

Group revenue dropped 2.2 percent to €51 billion amid “significant negative exchange rate effects,” VW said, adding: “The weak currencies of key emerging economies pushed prices up and thus put pressure on demand.”

Operating profit at VW’s namesake brand tumbled by more than one third to €572 million ($765.4 million) reflecting falling sales, spending on technology and high fixed costs. By contrast, premium brand Audi, which contributes more than 40 percent to group profit, reported a single-digit gain.

The profit decline reinforces the pressure on VW to cut costs. CEO Martin Winterkorn has already called on VW managers to increase cost-cuts to €5 billion per year from 2017 in a bid to boost the brand’s flagging profitability.

“The pressure to cut costs is definitely up now,” said Hanover-based NordLB analyst Frank Schwope. “There’s no doubt that VW must work on its margins.”

“In light of the continued strong competitive pressures, the tense situation in some emerging economies and the fundamental technical and economic changes happening in our industry, we are working hard to create all the conditions we need today to ensure success tomorrow,” Winterkorn said in the statement.

Economic imbalances and currency slides in developing markets are hurting European automakers as demand in their home region revives after a six-year slump. VW group sales have declined in double-digit terms this year in Brazil, Russia and India which, together with fast-growing China, accounted for about half of VW’s 9.73 million record 2013 deliveries.

VW said first-half vehicle deliveries for its brands in North America decreased by 3.2 percent to 421,981 in the first half, falling 5 percent to 287,952 units in the United States. The lower sales figures and a negative exchange rate trend saw North America revenue decline 7 percent to €19.9 billion ($17.3 billion), it said.

Globally VW brand’s first-half operating profit fell 32 percent to €1.01 billion as vehicle sales decreased by 3 percent to 2.3 million units, mainly due to declining South American markets. The brand’s revenue dropped 2.2 percent to €49.3 billion. Operating margin fell to 2.1 percent from 3 percent.

Audi’s operating profit at €2.7 billion was slightly higher than the previous year’s €2.6 billion. Operating margin dropped to 10 percent from 10.5 percent with earnings hit by the brand’s investments in technologies and new factories. Unit sales increased by 8 percent to 750,000 vehicles. Revenue grew by 6 percent to €26.7 billion.

Skoda’s profit improved to €425 million from €243 million thanks to new car launches and a better product mix. Operating margin rose to 7.1 percent from 4.9 percent. Revenue rose 20 percent to € 6 billion as unit sales grew 17.5 percent to 426,000.

The Spanish unit Seat reduced its loss to €37 million from a loss of €40 million in the first half of 2014. Units sales grew by 6 percent to 258,000 with revenue up 9 percent to €3.9 billion.

Bentley’s operating profit climbed 65 percent to €95 million. The brand’s operating margin rose to 10.7 percent from 8.3 percent. Vehicles sales increased by 33 percent to 5,632. Revenue rose 28.5 percent to €887 million.

Porsche recorded an operating profit of €1.4 billion, up from €1.3 billion. The brand’s operating margin was 17.1 percent, down from 18.4 percent. Vehicle sales increased by 13 percent to 89,000 with revenue rising 16 percent to €8.2 billion euros.

After years of emphasizing sales growth in its goal of surpassing Toyota as the world’s biggest carmaker, Volkswagen is now shifting focus to profit margins. At the VW car brand, the group’s biggest unit, Winterkorn plans to cut costs and boost productivity by €5 billion by 2017.

In addition to lowering purchasing expenses at the VW brand, the company is mobilizing a team of 40 to 60 top managers to accelerate vehicle and technology development to mimic the fast-paced roll outs of consumer electronics companies such as Apple.

Robust sales growth in China is keeping VW on track to exceed 10 million annual deliveries worldwide for the first time in 2014, four years earlier than initially anticipated. It plans to introduce 100 new or revamped vehicles through next year to put pressure on Toyota, which held a slim lead in the first half.

VW shares advanced as much as 1.6 percent and were up 0.7 percent at €176.85 at 11:20 a.m. in Frankfurt trading. The stock has fallen 13 percent this year, valuing the company at €83.7 billion.

Volkswagen stuck to its forecast that operating profit will amount to 5.5 percent to 6.5 percent of revenue, which may rise or fall by 3 percent. Operating profit was 5.9 percent last year.