Huge savings program VW's ambitious plan to add €6 billion to the bottom line

The carmaker wants to increase the profitability of its core brand and raise funds to finance the transition to e-mobility.
Quelle: DPA
Can't we do this more cheaply?
(Source: DPA)

Long before Volkswagen grew into the world’s largest automaker with factories around the globe, it was a single, sprawling plant in a small town near the East German border. Instead of dozens of makes and models, it really had just the Beetle, which it churned out for decades at the Wolfsburg factory.

But that Beetle made money and now VW is launching an ambitious plan to turn its core brand into a moneymaker once again. Herbert Diess, the carmaker's boss, aims to improve the operating margin for VW vehicles to 6 percent from the current 4.1 percent – and not by 2025 as originally planned, but by 2023, Handelsblatt learned from company sources.

This will add €6 billion ($6.8 billion) to the group’s operating profit, plus another €500 million from operations in North and South America. Some €2.5 billion will come from price increases of 1 percent across the board. The group also aims to add revenue from the sale of software updates as digital innovation makes cars more like smartphones and enables them to add services and increase revenue.

The rest of the increase will come from spending cuts and savings. These will result more from streamlining the model range and reducing complexity across the board rather than massive layoffs. It will cut back on variations in engines and finishing. Configurations that aren’t making money will be dropped.

Big e-mobility bills

“Savings are possible even after the cutbacks of the past few years because our product line is still too wide-ranging and complex,” said one top VW manager.

There will still be workforce reductions, but not on the scale of the current cutbacks totaling 30,000 workers in the period 2016 to 2020. Beginning with front office staff, the cuts will be more targeted. When possible, the reductions will come through buyouts rather than layoffs. This measure alone should trim several hundred million euros from the cost structure, company insiders say.

VW needs the added profit to help finance its transition into electromobility and autonomous driving. Fines and added costs from the diesel emissions-cheating scandal have drained resources. The investment in all-new technologies and production facilities will be massive, reaching €44 billion over the next five years.

In addition, the German carmaker faces the possibility of punitive tariffs from the US if talks to bring current tariffs into better alignment don’t succeed.

Increasing profit is no longer a luxury for the company that still bears the marks of a state-owned enterprise, but a matter of survival in the Darwinian competition of the world car market. “We missed a lot of chances to save in the past,” said one manager, “and we will use them now.”

Stefan Menzel covers the auto industry for Handelsblatt with a focus on VW. Martin Murphy covers companies. Darrell Delamaide adapted this article into English for Handelsblatt Today. To contact the authors: [email protected]