Technology overhaul helps VW to surprise profit gain

BERLIN Tue Jul 30, 2013 3:07pm EDT

A Volkswagen logo is seen on the front of a Volkswagen vehicle at a dealership in Carlsbad, California, April 29, 2013. REUTERS/Mike Blake

A Volkswagen logo is seen on the front of a Volkswagen vehicle at a dealership in Carlsbad, California, April 29, 2013.

Credit: Reuters/Mike Blake

BERLIN (Reuters) - Volkswagen (VOWG_p.DE) posted a surprise gain in second-quarter earnings, reaping the benefits of new cost-cutting technology and growing sales of luxury cars.

Underlying earnings at Europe's largest automotive group rose 4.9 percent to 3.44 billion euros ($4.56 billion), VW said on Tuesday as it published key earnings figures a day ahead of schedule.

VW's results beat the 3.29 billion-euro high-end forecast in a Reuters survey of analysts, who had been bracing for a 5.5 percent decline to 3.1 billion euros.

"These are excellent numbers," said Frankfurt-based Bankhaus Metzler analyst Juergen Pieper. "The modular production drive is clearly starting to pay off. Strong sales by Audi and Porsche rounded off the rosy picture."

VW reaffirmed goals to match last year's record operating profit of 11.5 billion euros and to push sales and deliveries to new records as it counts on business improving over the course of the year.

A new production architecture, or platform, enables VW to design, engineer and build a wide variety of vehicle sizes and shapes - from a subcompact Polo hatchback to a full-size, seven-passenger crossover that's due in the United States in 2015.

The modular architecture, known internally as MQB, is being implemented over the next four years at a cost of nearly $70 billion, estimates Morgan Stanley.

While upfront costs burdened results in previous quarters, the potential pay-off looks compelling: projected annual gross savings by 2019 of $19 billion, according to the bank, with gross margins approaching 10 percent.

The overhaul "will have an increasingly positive effect" on future earnings, VW said.

The multi-brand group withstood most of last year's slump in core European markets and, thanks to its global presence, continues to outperform rivals. First-half group deliveries, including luxury nameplates Audi and sports-car maker Porsche, were up 5.5 percent to a record 4.7 million, powered by gains in North America and China.

VW is running extra weekend shifts at its main Wolfsburg-based factory during the third quarter to meet excess demand for a revamped Golf hatchback and the Tiguan compact SUV.

Still, signs are growing that VW is beginning to feel the pinch. Group sales have been falling in Europe, Russia and Latin America this year and deliveries edged up only 3.7 percent in June, the third-smallest gain in 17 months.

"We are not completely immune to the intense competition and the impact this has on business," VW said. "There will be increasingly stiff competition in a challenging market environment."

(Reporting by Andreas Cremer; editing by Maria Sheahan and Tom Pfeiffer)

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