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VW says cost cuts are do or die

2006-03-08 10:52

Christiaan Hetzner

"There is no alternative for our group," embattled Chief Executive Bernd Pischetsrieder said, sticking to his hard line despite a boardroom split between shareholder representatives and labour leaders who have half the seats.

Finance chief Hans Dieter Poetsch underlined the critical importance of "ForMotion Plus", which aims to eliminate considerable productivity deficits, reorganise its non-core components business and reduce its overcapacities.

"Unless in particular the traditional German plants are restructured, no long-term future for the Volkswagen Group would be conceivable, even if all the other parts of the group reach their earnings targets," he told reporters in Wolfsburg.

Losses in the high-hundreds-of-millions of euros at its traditional western German VW plants, the highest labour costs in the industry and an earnings collapse in its two key foreign markets, the US and China, have kept the company reeling.

As a result, Pischetsrieder said up to 20,000 jobs at its core VW brand are at risk over the next three years as Europe's largest carmaker strives to reach a pretax profit target of 5.1 billion euros in order to at least earn its cost of capital.

After years of protecting western German jobs at all costs - by reducing working hours per week, for example - the VW CEO's blunt message has unleashed a backlash among the powerful labour leaders that have a say in extending his contract.

Chairman Ferdinand Piech said recently it remained open whether Pischetsrieder would keep his job beyond next year, adding that he knew of no one that could survive the united opposition from its workers' representatives on the board.

Pischetsrieder showed no signs of backing down on a revamp that has made Volkswagen a top restructuring play for investors.

When asked whether Piech's comments are a sign he should step down, the VW CEO told reporters: "Dr Piech said in this interview that he would speak out in favour extending my contract, so why should I actually resign then?"

He admitted needing staff support but said the debate over his role should be discussed by the board, not in public.

After rising as high as 2 percent earlier in the session, shares in VW traded 0.6 percent down at 56.65 euros by 1434 GMT and in line with the DJ Stoxx European autos index.

"The comment that there is no long-term future without restructuring, especially for its German plants, is decisive," said analyst Michael Punzet of Landesbank Rheinland-Pfalz.

"This strengthens confidence that restructuring will be driven forward no matter how the power struggle at the top of the company turns out," he continued.

Union resistance

A key element of its plan that has rattled its workforce is the ongoing analysis of whether to keep or dump portions of its car parts business such as its aluminium foundry.

"Following a comprehensive analysis, we determined ... that the competitiveness at a sizeable portion of our components business is endangered and a considerable portion are far removed from being competitive at all," VW brand chief Wolfgang Bernhard told the news conference.

While options ranging from boosting efficiency to closure or a spin-off from the group were being discussed internally, management assured its workers though that it doesn't plan to close either its assembly or its car parts plants.

Moreover, Pischetsrieder defined its engine and gearbox operations as a core operation that would not be sold, but he warned they too would have to improve their results.

Volkswagen reaffirmed it expects higher operating profit this year, but only before one-off effects, which were impossible to quantify as yet due to restructuring costs as well as possible disposal gains from the sale or stock market listing of its Europcar rental agency.

While the group managed to slightly narrow losses in North America thanks to a strong fourth quarter, Poetsch said results would considerably improve but fall short of a profit in 2006.

In China, where its parts export business and its two joint ventures together managed a small profit last year, the VW CFO also forecast a significant improvement in earnings this year.

Dresdner Kleinwort Wasserstein analyst Arndt Ellinghorst warned that workers might take the defence that the VW brand group had its best fourth-quarter operating profit since 2001.

"It will be especially hard to convince the market and especially the unions that Volkswagen brand can only survive with deep restructuring," he said, particularly after VW raised its 2005 dividend and cancelled all the treasury shares it held.

  • (Additional reporting by Hakan Ersen and Michael Shields)

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