Volkswagen warns on jobs as margins slip, electric plans accelerate

WOLFSBURG, Germany (Reuters) - Volkswagen will cut jobs as it speeds up the rollout of less labor-intensive electric cars and will review its sprawling portfolio of brands as it battles to reverse a slide in profit margins, the German carmaker said on Tuesday.

The company said it planned to launch almost 70 new electric models by 2028, aiming to put itself at the forefront of the industry’s shift to zero-emissions driving following the 2015 scandal over its cheating of U.S. diesel emissions tests.

However, it said investments to retool factories, as well as adverse currency moves and a sales slowdown triggered by new emissions certification tests, led to a fall in operating margins at its VW, Skoda, Audi and Porsche marques last year.

The margin at its top-selling VW brand slipped to 3.8 percent in 2018 from 4.2 percent in 2017.

“Despite all the rhetoric, the opportunity to reduce an historically high fixed cost base, 2018 actually saw a new high,” Evercore ISI analysts said. “This is unacceptable.”

At 1550 GMT, Volkswagen shares were down 2.1 percent at 143.54 euros.

The group said it would respond by aligning management pay and bonuses more closely with profitability, cutting manufacturing complexity and reducing headcount by an unspecified amount.

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Chief Executive Herbert Diess also said it is reviewing its portfolio of brands, which also include Lamborghini, Ducati and Bentley, and whether to divest some non-core businesses.

He said there might be an update in the second half of this year, but added he was not thinking about selling Skoda or Porsche, as they used vehicle platforms of the wider group.

Diess said it had not been possible to strike a deal with unions to raise profitability at the VW brand in 2018. The group is now focusing on cost cuts at the VW brand and Audi, it said.

“Labor cost is a big concern for us. It’s part of the dispute we are having currently with the union. Our plan was to improve productivity and decrease costs which didn’t work out in 2018,” Diess told analysts after the company’s annual results.

Volkswagen is preparing to roll out a new compact electric car, known as the ID, in 2020 as part of a drive that it expects will see it building 22 million electric cars by 2028 - despite uncertainty about the level of demand for such vehicles.

“The reality is that building an electric car involves some 30 percent less effort than one powered by an internal combustion engine,” Diess said. “That means we need to make job cuts.”

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The VW brand has brought forward its target of achieving a return on sales of 6 percent to 2022, but this will also involve cutting jobs, the company said.

The brand has ruled out compulsory redundancies until 2025 and is counting on natural attrition and voluntary retirements.

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In addition, the group is raising efficiency in production. The VW brand has reduced the number of its model variants by 25 percent. At Audi, the drop is 30 percent.

Volkswagen said it was also ramping up investments in China, the world’s’ largest autos market, where it has joint ventures with local companies JAC and FAW. It will increase the number of SUVs it offers in China to 14 from six.

Along with its local partners, Volkswagen plans to invest 4 billion euros in 2019, China Chief Stephan Woellenstein told analysts. The group, which has 4,200 research and development engineers in China, wants to develop connectivity, autonomous driving and smart infrastructure expertise in China, he added.

Volkswagen also announced a push to hire software engineers as a way to better compete with newer technology focused rivals like Tesla, which have gained an edge with over-the-air software updates for cars.

“Today our 20,000 developers are 90 percent hardware-oriented. That will change radically by 2030. Software will account for half of our development costs,” Diess said.

Volkswagen’s scale would be an important asset in the race to succeed in electric cars, he added. “I take start ups seriously like Tesla ... But this is a scale game I think we have a good chance to succeed.”

Volkswagen released detailed 2018 results after announcing some figures last month, when it said group operating profit rose 0.7 percent to 13.92 billion euros ($15.8 billion), below the 14.53 billion euros forecast in a poll.

Audi and Porsche made up the lion’s share of group operating profit - 4.7 billion euros and 4.1 billion euros respectively, before one-off items. The VW brand contributed 3.2 billion.

But Audi’s profitability slipped, due to a 1.2 billion euros diesel-related charge and delays getting its vehicles to conform to a stricter emissions testing standard known as WLTP.

“Audi was hit particularly hard. It will probably be the end of the first quarter before all variants are available again,” Diess said.

The luxury Bentley brand plunged to an operating loss of 288 million euros last year, from a profit of 55 million a year earlier, hit by delays ramping up production of the new Continental GT and exchange rate effects.

Volkswagen stuck to its forecast for revenue to grow up to 5 percent this year, and for a group operating return on sales of 6.5-7.5 percent.

Reporting by Edward Taylor; Editing by Keith Weir and Mark Potter