* May cease models, cut procurement costs
* VW brand trails 6 pct profit margin goal
* Analyst sees risk of brand margins slipping further
* VW declines comment on rumours of CEO contract extension
* Management must cut out its own mistakes -VW labour chief
(Adds comment from VW works council chief)
By Jan Schwartz and Andreas Cremer
HAMBURG/BERLIN, Germany, July 15 Volkswagen
plans to cut costs at its core passenger-car brand
by about 5 billion euros ($6.8 billion) per year from 2017 as it
struggles to match the earnings power of global rival Toyota.
VW's namesake brand, the carmaker's biggest division by
sales and deliveries, is lagging a profit margin target of at
least 6 percent because of fixed costs that it said are high
relative to Japan's Toyota.
The brand's 2013 profit margin was 2.9 percent, compared
with auto division margins of 8.8 percent at Toyota and 9
percent at Hyundai Motor Co of Korea. Much of VW's
production is in its home market of Germany, where workers
secured a significant pay increase last year.
Analysts have said VW's profitability gains are
disappointing given its steady expansion. The company looks set
to hit a sales goal of 10 million autos a year in 2014, four
years ahead of target.
"Let's be honest: We have a lot of catching up to do with
our core competitors," Chief Executive Martin Winterkorn wrote
in a letter to VW managers obtained by Reuters on Tuesday.
"That is why we must now take action that is clear,
effective and sometimes painful," the CEO said, pointing out
that research and development costs had surged 80 percent across
the multi-brand group since 2010.
To boost efficiency across its 310-model empire, Europe's
biggest automotive group is reviewing its strategy. A post-2018
plan dubbed "future tracks" will set out priorities on
technology and model policy and may be outlined later this year.
"VW's and Audi's product momentum remains tough for 2015,"
said Arndt Ellinghorst, London-based analyst at investment
researchers ISI Group. "We see a real chance that margins keep
Winterkorn said VW may decide to cease making non-profitable
models, citing convertible cars at the namesake brand which
accounted for over a third of the group's 47.8 billion euros in
first-quarter revenue but only about 15 percent of operating
Other steps may include reducing procurement costs and
improving sales channels, according to VW.
VW shares ended 0.03 percent lower on Tuesday.
The CEO's call for greater cost discipline follows a similar
plea in February, when Winterkorn urged senior managers to keep
costs down to weather tough market conditions.
VW toned down its 2014 profit guidance in February, saying
core earnings may only improve if economic conditions improve
more than expected, especially in Europe where VW sells about 40
percent of its vehicles.
Staff representatives urged VW's management to pay heed to
workers amid the efficiency drive.
"Management must cut out its own mistakes," Bernd Osterloh,
head of VW's works council wrote in a newsletter to be published
on Thursday. "The focus needs to be shifted to whatever earns
money," Osterloh, who sits on VW's supervisory board, said.
Separately, VW declined comment on a report by Germany's
Manager Magazin published on Tuesday saying that Winterkorn had
agreed with leaders of the supervisory board to extend his
contract by two years until 2018.
($1 = 0.7331 Euros)
(Reporting by Jan Schwartz. Additional reporting by Andreas
Cremer; editing by Tom Pfeiffer and Jane Merriman)