VW chief tries to play model catch-up as sales slide

BY BRET OKESON BLOOMBERG NEWS

WOLFSBURG, Germany October 30, 2002; Volkswagen AG Chief Executive Officer Bernd Pischetsrieder introduced the carmaker's first sport-utility vehicle at this year's Paris auto salon, more than a decade after some rivals.

"It's not a showdown, it's a show-up," said Pischetsrieder as he presented the new Touareg. Europe's largest carmaker may be coming out with new models too late to win customers from competitors that already have similar vehicles, investors said.

Faced with falling sales, Pischetsrieder also will start selling a new minivan based on the Golf compact car later next year. Renault SA was first with a minivan in 1996, followed by General Motors Corp.'s Opel and PSA Peugeot Citroen.

"Volkswagen is late to the game," said Pia Hellbach, who helps manage 30 billion euros at Union Invest and has been selling Volkswagen shares. "You need to be first with niche models to make money and not bring out me-too models after everyone else."

Volkswagen today will report third-quarter net income fell 33 percent to 606 million euros ($597 million) from 903 million euros a year ago, according to the average forecast of eight analysts surveyed by Bloomberg News. Revenue is expected to be little changed at 20.8 billion euros, according to the average estimate.

The Western European market share of the maker of Volkswagen, Audi, Seat and Skoda brands fell to 18.3 percent from 18.9 percent in the first nine months of the year, while rival Peugeot gained almost a full percentage point to 15 percent.

The company's shares have lost 31 percent of their value this year and are the second-worst performing European car stock after Fiat SpA. The Bloomberg Europe Autos Index has fallen 16 percent and Peugeot has fallen 14 percent.

Pischetsrieder, who succeeded Ferdinand Piech as CEO in April, had to cut Volkswagen's forecast for pretax profit by 9 percent this year because of falling vehicle sales.

His strategy is to lower Volkswagen's dependence on its two best-selling cars, the Golf and mid-sized Passat. They've lost customers to newer models. Peugeot's year-old 307 car has taken sales from the 5-year-old Golf, while Ford Motor Co.'s 1 1/2-year-old Mondeo has won sales from the 6-year-old Passat.

"The possibility of another profit warning is very high," said Hellbach. "Maybe not this year, but early next year."

The Jeep Wagoner was introduced in 1962. Ford brought out the Explorer in 1990. Volkswagen's Touareg also faces competition from Bayerische Motoren Werke AG's X-5 as well as DaimlerChrysler AG's Mercedes-Benz M-Class and Jeep Grand Cherokee. General Motors Corp. has the Cadillac Escalade and Toyota Motor Co. the Lexus LX 470. Volkswagen is building the new vehicle together with Porsche AG.

Pischetsrieder also wants to reduce competition among Volkswagen's four main brands. The Volkswagen Lupo competes with the Skoda Fabia and the Seat Arosa. The Seat Toledo, the Golf and the Skoda Octavia fight for the same customers. The Audi A4 and Passat are rivals, while at the top of the range, Volkswagen's Phaeton may take orders from the Audi A8.

Pischetsrieder's predecessor Piech created the model overlap by building the different cars on the same platforms or underbodies. Investors say Pischetsrieder is right to widen the range, while reducing the so-called "cannibalization" effect, with the company's similar brands taking sales from each other.

"We'll see the impact of the new model strategy in two years," said Michael Rachor, who manages 220 million euros at Activest Investment GmbH and owns Volkswagen shares. "Everything that is happening now is still Piech's doing."

In Western Europe, the company's vehicle sales fell 6.4 percent in the first nine-months of the year, more than the industry-wide decline of 3.7 percent. In the U.S., sales are down 1.6 percent, even as overall sales in the U.S have risen 1.2 percent. The euro has appreciated 11 percent against the dollar, further reducing Volkswagen's U.S. profit.

Renault has overtaken Volkswagen as the best-selling brand in Europe, with 10.5 percent of the market compared with 10.3 percent. The only one of Volkswagen's four main brands to have increased sales this year is Audi, the luxury unit.

Volkswagen has tried to boost sales by offering loans of 0.9 percent on some models, including the Golf and Polo. Competitors have followed suit. General Motors Corp.'s German Opel unit began offering 0.9 percent loans on all models this month and Ford has 0.75 percent loans on the Fiesta.

Pischetsrieder, 54, became CEO following the retirement of Piech, who is now chairman of the company's supervisory board. Pischetsrieder was fired from the top job at BMW after failing to stem losses at the carmaker's U.K. Rover unit.

Under German law, Volkswagen doesn't have to reveal the individual salaries of management board members. The company paid its nine-member board a total of 17.6 million euros last year. At the time, Pischetsrieder was not yet chief executive.