VW Sees Intensifying Headwind Amid Recovery From Diesel Woes

(Bloomberg) -- Volkswagen AG indicated that the second half of 2017 will be tougher amid intense competition, wobbly economies and continuing fallout from the diesel-emissions scandal nearly two years after the cheating revelations emerged.

While the German automaker slightly upgraded its full-year revenue forecast to growth of more than 4 percent, the outlook for its 2017 operating profit margin remained unchanged at a range of 6 percent to 7 percent. Both guidance figures are below the levels reported in the first half, with the operating profit at 7.7 percent and revenue jumping 7.3 percent.

“We anticipate particular challenges resulting from the economic situation, intense competition in the market, exchange-rate volatility and the diesel issue,” Volkswagen said in a statement, referring to the car-sales environment as “persistently challenging.” 

While still recovering from the diesel scandal and battling with revived competitors like PSA Group, Volkswagen was embroiled in its latest controversy after Spiegel magazine reported on Friday that the Wolfsburg-based manufacturer and Daimler AG informed authorities of discussions among German automakers, including BMW AG, that may have breached antitrust rules. 

Cartel Concerns

The talks, underway since the 1990s, involved coordinating technology strategy, including combustion engines, emissions systems, brakes and transmissions. The European Union’s antitrust overseer as well as Germany’s regulator subsequently confirmed they are studying possible collusion among auto producers.

With allegations of colluding with other automakers threatening renewed disarray, second-quarter operating profit rose 3.7 percent to 4.55 billion euros ($5.34 billion), down from a 40 percent surge in the first quarter. Through the first six months of 2017, Volkswagen spent 4.2 billion euros on capital expenditures in its auto operations, 7.9 percent lower than a year ago despite increasing demands to invest in new technology. 

“With the backdrop of the diesel issue and other risks, it’s difficult for them to be too bullish going forward,” said Michael Dean, a London-based analyst with Bloomberg Intelligence. Growth in China is slowing and the robust European car market might cool down in the second half of the year.

The company took another step toward resolving its diesel issues in the U.S. market by getting Environmental Protection Agency and California Air Resources Board approval for a remedy to 2009-2014 diesel Jetta, Golf, Beetle and Audi A3 models. Volkswagen will offer owners the choice to keep and fix their car or to have it bought back, the EPA said in a statement on its website.

The stock, which dropped in the aftermath of the cartel allegations, declined 1.4 percent to 135.81 euros in Frankfurt.

Strategy Shift

After a supervisory board meeting late Wednesday, Volkswagen defended the practice of talking with rivals about general technical developments, calling discussions with peers a commonplace way to foster innovation. The company declined to comment in detail on allegations of cartel activity other than to say that its policy is to work “very closely with the authorities in a spirit of cooperation and trust.”

Volkswagen has been in the cross hairs of authorities since cheating revelations in September 2015 sparked intensified scrutiny of diesel exhaust. The crisis highlighted the gap between test results and real-world pollution and prompting cities around the world to consider bans to improve air quality. Demand for diesel vehicles in Europe, where the technology accounts for nearly half of car sales, has since declined.

The technology’s battered reputation threatens Volkswagen and other German automakers, who need diesel to meet stricter carbon-dioxide emissions targets while they ramp up electric-car development. The U.K. added urgency to the shift Wednesday by moving to ban sales of diesel and gasoline-fueled vehicles by 2040, joining a similar initiative by France earlier this month.

To help shore up diesel in interim, Volkswagen will offer software updates for 4 million diesel cars in Germany to reduce emissions, according to dpa-AFX. Chief Executive Officer Matthias Mueller met Thursday in Wolfsburg with German Environment Minister Barbara Hendricks and German automakers plan to meet with Chancellor Angela Merkel’s government on Aug. 2 for a so-called Diesel Summit to discuss the future of the technology, which employs tens of thousands of people in Germany. 

The planned fixes, similar to proposals from Mercedes and BMW, include voluntary software updates for roughly 800,000 cars on top of the scandal-related recalls VW has already announced, a company spokesman said. The total tally of mandatory recalls and voluntary fixes stands at about 12.4 million diesel vehicles across the group worldwide. Cleaning up from the scandal is key for Volkswagen to shift its strategy to self-driving electric vehicles.

“The solid footing of our operating business serves as the basis for our work, namely to transform the Volkswagen Group from a pure car maker into a world-leading provider of sustainable mobility,” CEO Mueller said in a statement.

To contact the reporter on this story: Christoph Rauwald in Frankfurt at crauwald@bloomberg.net.

To contact the editors responsible for this story: Chris Reiter at creiter2@bloomberg.net, Chad Thomas