VW Slashes Costs to Fund Its Pursuit of Tesla

(Bloomberg) -- Volkswagen AG is accelerating a push to lower costs and lift profits at its biggest car brand to add financial muscle as the world’s largest automaker pursues a $50 billion technology shift to counter Tesla Inc.

To improve profitability after lagging behind mass-market peers for years, the VW nameplate will trim management ranks, slash factory costs and eliminate a quarter of engine and gearbox variants in Europe.

“We must force the pace of our transformation and become more efficient and agile,” Ralf Brandstaetter, the VW brand’s chief operating officer, said Thursday at the company’s headquarters in Wolfsburg, Germany. “What we have achieved so far is still not enough.”

Overall, the division -- which accounts for about half of the 12-brand group’s global deliveries -- is seeking to slash expenses by 6 billion euros ($6.8 billion) as it aims to lift its profit margin to at least 6 percent by 2022, three years earlier than previously planned.

Traditional automakers are under increasing pressure as tighter emissions regulations force investment in electric cars. At the same time, they also have to head off inroads by mobility services like Google’s Waymo.

Over the next five years, the VW brand alone plans to spend 11 billion euros on next-generation technology, including 9 billion euros for electric cars as it increases the number of battery-powered models to 20 by 2025 from two now. The sense of urgency has intensified as Tesla prepares for the European rollout of the Model 3, which has become a best-seller in the U.S.

Opel Electrics

Volkswagen’s not alone in stepping up electric-car efforts. PSA Group’s Opel unit will add three pure-electric variants over the next two years to meet stricter emissions rules in Europe.

“We are putting maximum effort into the electrification of our portfolio,” Opel chief Michael Lohscheller told reporters late Wednesday in Mainz, Germany. The German brand will offer hybrid and fully-electric versions across its entire lineup by 2024.

For its part, Volkswagen is planning on the era of the combustion car fading away after it rolls out its next-generation gasoline and diesel cars beginning in 2026. From that point, VW will merely modify, rather than overhaul, its platforms for combustion engines.

The world’s largest automaker has started to introduce its first wave of electric cars, including next year’s Porsche Taycan. The rollout is forecast to comprise about 15 million vehicles.

Production of the VW brand’s I.D. Neo hatchback will start in 12 months in Germany, where three factories will assemble electric models. Other models from the battery-powered I.D. line will be built at two sites in China as of 2020. A decision on a production location in North America is expected soon, VW said Thursday.

VW’s biggest unit signed a deal with unions two years ago that includes shedding 30,000 jobs worldwide, mainly through natural attrition and early retirement. The labor pact will generate savings of more than 2.2 billion euros ($2.49 billion) by the end of 2018, VW said Thursday.

The company said it’s on track to achieve its target of trimming costs by 3 billion euros by 2020 from the pact, and plans to trim an additional 3 billion euros through other efficiency measures.

“We cannot let up in our efforts and must realize further substantial improvements,” Brandstaetter said. The executive said VW is discussing “ideas” to expand a planned cooperation on light commercial vehicles with Ford Motor Co. to include cars as well. VW intends to comment on the result of these talks early next year, a company spokesman added.

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

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, Chris Reiter, Tara Patel

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