A VW badge sits on a Volkswagen I.D. Crozz electric vehicle, manufactured by Volkswagen AG, during the CeBIT 2018 tech fair in Hanover, German. (Photographer: Krisztian Bocsi/Bloomberg)

VW Needs `Titanic' Effort to Conquer Emissions, Trade Issues

(Bloomberg) -- Volkswagen AG warned that it will take a huge effort to meet delivery targets this year, as the world’s largest automaker battles trade tensions and stricter emissions rules while preparing to amp up its digital investments.

Tougher pollution-testing procedures, aimed at preventing a repeat of Volkswagen’s cheating scandal, will take effect next month and lead to production slowdowns, the German automaker said Wednesday. The German manufacturer is also bracing for higher tariffs around the globe, which could particularly hit Audi and Porsche, the group’s main profit earners.

VW Needs `Titanic' Effort to Conquer Emissions, Trade Issues

“Protectionist tendencies are escalating worldwide,” Chief Executive Officer Herbert Diess said in a speech on Wednesday.

Meeting delivery goals while avoiding deep discounts this year will be a “titanic task,” said Diess, who recently completed his first 100 days in office.

Looking ahead, Diess is trying to ready the automaker for coming challenges, from electrification to self-driving cars to new businesses like car-sharing. The company needs a “massive expansion” in software and in its digital investments, including partnerships and acquisitions, as it faces new competition from China and the U.S. West Coast, he said. “Those are the challenges,” Diess said in a Bloomberg TV interview.

Volkswagen shares fell after the company, based in Wolfsburg, Germany, said it wouldn’t be able to repeat the 23 percent surge in profit it reported for the second quarter. The challenges range from economic volatility, increasing competition and the costs of the ongoing diesel scandal, to new, time-consuming exhaust testing in the EU, Volkswagen said in a statement Wednesday.

The cost of implementing so-called WLTP tests may reach 1 billion euros ($1.17 billion), Chief Financial Officer Frank Witter said on a call. The carmaker churned out more vehicles ahead of the rules change, as production jumped 13.5 percent in the second quarter, twice the growth rate of deliveries. Volkswagen said earlier this year that the company may experience inventory build-up ahead of the Sept. 1 introduction of the Worldwide Harmonized Light-Duty Test Procedure.

Diess is grappling with political challenges alongside an internal overhaul in the aftermath of the three-year-old diesel crisis, which continues to burden the industrial giant. In the second quarter, the company took 1.64 billion euros ($1.92 billion) in charges, mainly for a fine from German authorities, raising the total damages to about 27.4 billion euros. Rupert Stadler, the now-suspended head of the Audi luxury unit, was arrested in June by Munich prosecutors and remains in custody.

Volkswagen shares fell as much as 4.5 percent, and were down 3.3 percent at 147.28 euros at 4:26 p.m. in Frankfurt trading, taking the decline for the year to 12 percent.

While Volkswagen is investing in technology, Diess said he doesn’t see a need for sweeping auto-industry consolidation. A recent joint venture with Ford in light commercial vehicles will allow the companies to pool development costs for electrification, he said, taking the edge off of one-time expenditures in areas like battery-powered and self-driving cars that are hitting at once.

“We cannot rest on our laurels because great challenges lie ahead of us in the coming quarters,” Diess said. “Growing protectionism also poses major challenges for the globally integrated automotive industry.”

Earnings Highlights

  • 2Q operating profit up 23% to EU5.58b vs estimate EU4.97b
  • German fine and other special items totaled EU1.64b
  • Revenue up 3.4% to EU 61.1b
  • 1H profit margin 8.2% before items. VW 4.9%; Audi 9%; Porsche 19%
  • Revenue outlook unchanged at 5% growth for 2018 
  • Profit margin forecast 6.5%-7.5% before special items for full year
  • Operating profit after items “moderately short” of expectations

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