VW Seeks to Move Beyond Crisis as Reforms Slowly Lift Profit

(Bloomberg) -- Volkswagen AG sought to draw a line under the diesel scandal that has locked it in crisis mode for more than a year, with sweeping restructuring efforts starting to take hold and profitability improving at the namesake car brand.

While Chief Executive Officer Matthias Mueller acknowledged Tuesday that emissions lawsuits will continue to preoccupy the automaker for many years, he said the company is “back on track” and in a position to push ahead with tackling an “epochal shift” in the auto industry. Those initiatives could eventually include talks with Fiat Chrysler Automobiles NV, with the German company now more open to strategic partnerships, Mueller said.

“Volkswagen needs to transform, not because everything in the past was bad, but because our industry will see more fundamental changes in the coming 10 years than over the past 100,” Mueller said  at the annual press conference in Wolfsburg, Germany. “It was clear to me from day one that we need to seize this decisive turning point to realign Volkswagen for the future.”

In addition to working through the scandal, Mueller has been loosening up Volkswagen’s rigid decision-making structure and pushing the manufacturer to tackle challenges posed by a shift to self-driving, electric vehicles. Last year, he set up Moia, which will offer ride-sharing and other mobility services. The group also plans to roll out more than 30 battery-powered vehicles by 2025.

The strategy shift will cost the company more than 10 billion euros ($10.6 billion), Mueller said, adding that a list of internal company regulations will be reduced to just over 150 pages from nearly 800 and the number of corporate committees will be cut by one-third.

Not Ruled Out

Mueller has also opened Volkswagen to new tie-ups, including deals with Tata Motors Ltd. in India and Anhui Jianghuai Automobile Co. in China, to develop budget cars. Discussions could one day extend to Fiat Chrysler, which owns the lucrative Jeep brand and would offer a sizable presence in the U.S. market, where Volkswagen has struggled for years.

“I don’t rule out that we could talk about all kinds of things” with Fiat Chrysler in the future, said Mueller, while noting there are no plans and he hasn’t had contact with his counterpart at the Italian-American carmaker in months.

Fiat Chrysler CEO Sergio Marchionne said last week at the Geneva International Motor Show that he expected Volkswagen to call for a “chat” on consolidation as the German auto giant seeks to respond to the threat posed by Paris-based PSA Group’s move to purchase General Motors Co.’s Opel division. The combination will create Europe’s second-largest carmaker. 

FCA and Volkswagen are both multi-brand car producers, which seek to spread costs by sharing parts and technology across an array of nameplates. But both have issues. For Fiat, it’s debt, while Volkswagen is still weathering the worst crisis in its history.

VW Turnaround

To pay for fines, buybacks and a massive global recall, Volkswagen has set aside 22.6 billion euros since disclosing in September 2015 that a line of diesel engines was programmed to cheat on emissions tests. Recalls in Europe are set to take until this fall, as the company fixes 200,000 cars a week. The VW nameplate, which is bearing the brunt of the crisis fallout, has been trying to speed up its recovery by streamlining operations and scaling back jobs. The measures are only slowly feeding through due to repeated clashes between workers and managers.

“There’s no question that the consequences of the diesel crisis hurt us last year, not only in financial terms,” Mueller said at Volkswagen’s sprawling park-like customer center. “But we kept on course and put up one of our best operating performances in spite of it all.”

While cost cuts and record sales helped lift the profit margin to 2.2 percent in the fourth quarter from 1.6 percent earlier in the year, that’s still a far cry from the marque’s goal of 4 percent by 2020. Those gains were overshadowed as profits at Audi, the automaker’s biggest earnings contributor, dipped to 6.1 percent of sales in the final three months of 2016 from 7.5 percent a year earlier. 

Audi’s results last year were hampered by a 1.8 billion-euro charge for its role in developing tainted 3-liter diesel engines, and the luxury-car unit also faces increasing pressure from rival Mercedes-Benz’s edgier, redesigned lineup.

The shares, which have climbed 24 percent over the past 12 months, were down 1 percent at 142.77 euros as of 3:01 p.m. in Frankfurt.

Bloated Business

In a reflection of the changes sweeping Volkswagen, the group slashed compensation of senior executives by 37 percent last year amid the earnings slump from the diesel crisis and criticism of past generous pay packages. The company also moved to revise its compensation system last month to gear it more toward share performance than the carmaker’s results.

Volkswagen reaffirmed its forecast for 2017 of an operating profit margin of 6 percent to 7 percent at the group level, compared with 6.7 percent last year. The company expects deliveries to increase “moderately” amid challenges including economic volatility, intense competition and the diesel crisis. The margin target’s range for 2020 is 6.5 percent to 7.5 percent, Chief Financial Officer Frank Witter said.

“Even though much work lies ahead for us,” Mueller said, “2016 did not turn out to be the nightmare year that many predicted.”

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

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