By William Boston
BERLIN-- Volkswagen AG, the German car maker embroiled in a
crisis over its emissions tests cheating, said Wednesday it swung
to a EUR1.73 billion ($1.9 billion) third-quarter net loss and
issued a full-year profit warning, as the cost of repairing tainted
diesel-powered cars began to slam earnings.
With the company reeling from the scandal, Volkswagen Chief
Executive Matthias Müller told investors Wednesday that the German
auto maker would no longer chase growth at all costs in a bid to be
the biggest car maker in the world. He said he would present a new
strategy by the end of the year that balanced sales growth with
good governance and profitability.
"In this industry, size is important," he said, "but the point
is not whether Volkswagen sells 100,000 cars more or less than our
competitors. Important is qualitative growth."
One of the central themes to have emerged, in the wake of
Volkswagen's admitting last month that it cheated on emissions
tests, is how the company's naked ambition to overtake rivals
Toyota Motor Corp. and General Motors Co. created a pressure cooker
that encouraged its top engineers to deceive customers and
environmental regulators.
For the past eight years, Volkswagen has been on an aggressive
campaign to overtake its rivals, spending billions to build
factories from China to Chattanooga in what Mr. Müller's
predecessor called "Strategy 2018."
From the beginning, that strategy was about more than just
bulking up. For the first time in its history, Volkswagen set
profit targets and other financial metrics to improve performance
and the quality of its earnings, for example. But meeting targets
was most often identified with unit sales growth, catching up
rivals one car sale at a time, and each of the company's big
divisions developed its own growth plan.
At the VW brand, the company's biggest business, the slogan was
"Mach 18", a play on words in German that could mean both achieving
the 2018 targets and moving at 18 times the speed of sound.
Meanwhile at Audi, the company's luxury car brand and a big
contributor to profits, executives set out to overtake rivals BMW
AG and Daimler AG with their "Audi 2020" growth plan. Porsche AG,
the tiny maker of sports cars, added mass-market sport-utility
vehicles as part of its "Porsche 2020" program to build volume.
Porsche has more than doubled in size, but its profit margin has
slipped as less profitable SUVs become its biggest business.
Now, Mr. Müller wants to rebalance the company's growth strategy
in the wake of the emissions crisis to put a greater emphasis on
repairing Volkswagen's dysfunctional corporate culture and
improving profitability. He has created a board post for an
integrity officer and hired a respected compliance official from
Daimler AG for the job.
After Volkswagen admitted to the U.S. Environmental Protection
Agency that it had cheated on emissions tests last month, several
of the company's key directors learned about it in the news rather
than hearing it straight from then-CEO Martin Winterkorn.
Mr. Winterkorn resigned under pressure last month and was
replaced by his one-time protégé.
Mr. Müller, who only briefly attended the conference call
Wednesday before darting off for a flight to China with German
Chancellor Angela Merkel, told investors that Strategy 2018
delivered "impressive results" but that he would launch "a new
strategy headed toward 2025" that will "add substantial new
elements."
Yet, beyond the vague proclamations about coming up with a new
playbook less focused on the "size matters" mantra, Volkswagen's
new A-Team said little about the one thing everyone on the call
wanted to hear about: How did the crisis happen and how was
Volkswagen going to dig itself out?
Max Warburton, an automotive analyst with Bernstein Research,
published a scathing note to clients after the call, describing it
as "largely pointless."
"VW STILL doesn't seem to understand the magnitude of its
problems, still doesn't have a clear idea how to fix them and is
slightly 'in denial' about it all," he wrote. "One can sense that
VW hopes this will all just go away soon. It won't."
The quarterly loss, Volkswagen's first in more than a decade,
compares with a net profit of EUR2.9 billion a year earlier. The
loss was caused by a EUR6.7 billion charge against earnings that
the company has taken to pay for a global recall of up to 11
million cars containing software that allows them to dupe emissions
tests.
Were it not for the crisis, Volkswagen's earnings report would
have painted a picture of a company struggling with the gyrations
of currency markets and emerging economies in turmoil, but one
still on fairly solid footing.
Operating profit before taking the hit to pay for the global
recall was EUR3.2 billion, about the same as a year ago. Sales
revenues was robust, up 5.3% at EUR51.5 billion. Growth at the
company's leading car brands VW, Audi, Porsche and Skoda wasn't
stellar, but with the exception of SEAT, all of its car brands were
profitable in the quarter.
The charge taken against earnings ripped a gaping hole in
Volkswagen's balance sheet and left the company guessing about the
future.
Volkswagen warned that full-year operating profit for both the
group and the passenger cars business will be "down significantly
year-on-year." But the company was unable to provide much detail as
the final cost of the recall, potential fines from regulators, and
lawsuits remain unknown.
The company's management said little to give investors a clearer
sense of what to expect as the company heads down its uncertain
path. They pointed out that Volkswagen is still generating a lot of
cash and it has a number of assets that it can turn into cash. Some
analysts have suggested Volkswagen could sell minority stakes in
its profit engines, Audi and Porsche, for example.
Volkswagen recently sold its stake in Japanese auto maker Suzuki
Motor Corp., which led to a capital gain of EUR1.5 billion that
helped boost the company's net liquidity to EUR27.8 billion at the
end of September. Liquidity, which is cash and securities after
liabilities, was EUR21.5 billion at the end of June.
"The financial burden from the diesel issue is enormous, but
manageable, " insisted Chief Financial Officer Frank Witter.
Write to William Boston at william.boston@wsj.com
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(END) Dow Jones Newswires
October 28, 2015 13:52 ET (17:52 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
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