Volkswagen CEO Herbert Diess poses before the annual press conference at the company's headquarters in Wolfsburg, northern Germany, on March 12 2019. Picture: AFP/TOBIAS SCHWARZ
Volkswagen CEO Herbert Diess poses before the annual press conference at the company's headquarters in Wolfsburg, northern Germany, on March 12 2019. Picture: AFP/TOBIAS SCHWARZ

Wolfsburg — On Tuesday, mammoth German car maker Volkswagen (VW) massively expanded its plans for electric-car sales in the coming decade, as its scramble to meet tougher greenhouse gas emissions targets has already begun weighing on profitability.

Higher unit sales and increased revenues in 2018 helped VW to a net profit 6% higher, at €12.15bn, the group said. But profit margins were squeezed as the group, with its 12 brands, struggled with new EU emissions tests — introduced following its “dieselgate” emissions cheating scandal broke in 2015 — and huge investments in the switch to electric.

The costs did not put bosses off doubling down on their battery-powered ambitions, saying they now plan 70 new electric models by 2028 rather than 50, and lifting sales targets by 7-million, to 22-million vehicles by the same date.

Job cuts

In 2018, “pressure on our profit margins grew, not least because of electric mobility”, VW CFO Frank Witter told business daily Handelsblatt.

Audi, Porsche and VW — the group’s best-known brands — all suffered lower margins last year as the worldwide harmonised light vehicle test procedure (WLTP) emissions cycle slowed production and money started pouring into electric vehicles.

Flagship VW fell below the 4% floor executives had striven to hold. In response, and to afford the €44bn of investments planned by 2023, “we will have to make progress on efficiency and performance in all areas”, CEO Herbert Diess said.

December saw the group announce a €3bn savings drive for its own-brand division on top of an existing restructuring, which is set to cost some 21,000 jobs worldwide.

Such plans are backed by major shareholders the Porsche-Piëch clan, although the powerful head of the group’s works council Bernd Osterloh has warned in recent days against reported plans to slash a further 5,000 to 7,000 posts. “We will need to make job cuts, and achieving this purely through fluctuation and partial retirement will be difficult,” Diess said on Tuesday.

Quirks in VW’s governance structure mean worker representatives in Germany can make life especially tough for executives who fail to secure their blessing. But bosses’ eyes are turned towards competition from abroad, with Tesla in the US and a slew of Chinese newcomers seeking to achieve an unassailable lead in electric vehicles, while Google and other tech giants have stolen a march in automated driving.

Diesel millstone

While VW has big plans for the future, 2018 saw the group notch up €3.2bn in special items to cover costs relating to dieselgate when the firm admitted to manipulating millions of vehicles worldwide to appear less polluting.

The amount was the same as in 2017, with a sizeable chunk of the costs falling in Germany as VW paid a group-wide fine of €1bn, while high-end subsidiary Audi had to forfeit €800m. Since 2015, legal costs, fines, buybacks, and refits to affected cars have cost VW €29bn, the group said — with most of the cash flowing to the US. 

The company hopes dieselgate will inflict less pain this year, but the legal fallout remains potentially toxic. In Germany alone, massive cases have been launched by both shareholders and owners of manipulated cars — the latter group numbering more than 410,000.

Looking to the year ahead, VW said “continuously challenging market conditions” would weigh on performance.

A slowdown in major market China could see growth in car sales grind to a halt in 2019, with a similar situation expected in the US market. And unpredictable risks, including the possibility of a chaotic British departure from the EU, and potential US import taxes on European cars could yet hurt car makers.

Nevertheless, VW aims for “slightly” higher unit sales this year than in 2018, with revenues “as much as 5%” higher and an operating profit margin of between 6.5% and 7.5% — up from 5.9% last year.