VW bets on electric cars, services to recover from crisis

June 16th, 2016  |  Source: Reuters

Volkswagen (VOWG_p.DE) will invest more than 10 billion euros ($11 billion) by 2025 in areas such as electric cars and ride-hailing as it seeks to reshape its business in the wake of its emissions-test cheating scandal, it said on Thursday.

Europe's biggest carmaker said it would fund what it dubbed "the biggest change process in the company's history" with an efficiency drive, including integrating components businesses that currently employ 67,000 people in 26 locations worldwide.

"The Volkswagen Group will be more focused, efficient, innovative, customer-driven and sustainable – and systematically geared to generating profitable growth," CEO Matthias Mueller said, launching a plan called "TOGETHER – Strategy 2025".

Volkswagen is battling to recover from the biggest business crisis in its 79 year history after admitting in September to cheating U.S. diesel emissions tests.

The German company has set aside $18 billion to cover the cost of vehicle refits and a settlement with U.S. authorities, and analysts expect more fines and legal costs.

The scandal has cast a shadow over the entire market for diesel cars, which account for about half of new vehicle sales in Europe, and has ramped up pressure on Volkswagen to cut costs at its namesake brand, which lags the profitability of rivals.

Spelling out a new strategy ahead of its annual shareholder meeting on Wednesday, the company said it planned to launch more than 30 electric vehicles over the next ten years, forecasting they would account for 2-3 million unit sales in 2025, compared with a tiny number currently.

It also said it would build a services business encompassing areas such as ride-hailing and car-sharing that it expects to generate sales in the billions of euros by 2025, as well as developing its own autonomous driving and battery technologies.

Mueller said the transformation would require a "double-digit billion" amount of investment, funded by an efficiency drive across the group aimed at delivering around 8 billion euros a year in savings.

He gave few further details, saying they would be announced by the company's individual brands in due course, but said the Volkswagen brand was counting on a "pact for the future" with unions to be agreed by the autumn, aimed at both boosting competitiveness and preserving jobs.


Critics of the company, including activist investor TCI, have urged it to take more radical action to cut costs despite union protests, particularly at the Volkswagen brand.

Some have also called for Volkswagen to tackle a complex ownership structure, in which the founding families, the German state of Lower Saxony and labor unions all have strong voices.

Investors are braced too for the results of an ongoing investigation into who was responsible for, and who knew about, the emissions test cheating.

"For me, this is not an investible stock. That is really to do with the corporate governance issues, which they still haven't addressed," Kevin Lilley, European equities fund manager at Old Mutual Global Investors, said on Wednesday before the strategy announcement.

He said a "cosy relationship" between key shareholders meant "this company never reaches proper profitability."

However, Evercore ISI analyst Arndt Ellinghorst said on Thursday the new strategy was an encouraging sign.

"Has VW changed? While only time will tell, there is certainly evidence that this is the case," he said, retaining a "buy" rating on Volkswagen shares.

At 1150 GMT (7.50 a.m. ET), the stock was down 1.2 percent at 118.65 euros, within a European blue-chip market .FTEU3 down 0.7 percent.

Volkswagen said its new plan aimed to improve its operating return on sales before one-off items to 7-8 percent by 2025 from 6 percent in 2015, and the return on capital employed in its automotive division to more than 15 percent from 13.8 percent.

Mueller reaffirmed the company's expansion and investment plans for North America and China, adding he expected China would be the main market for its new electric cars.

He also said Volkswagen was in talks with potential partners to bolster its position in China's growing economy-car market, a current weak spot for the business.

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