VW's Pischetsrieder Plans New Models to Revive Sales

WOLFSBURG, Germany February 20, 2003;Bret Okeson writing for Bloomberg reports that Volkswagen AG Chief Executive Officer Bernd Pischetsrieder plans to invest 33.3 billion euros ($36 billion) over the next five years to broaden the range of new models and revive sales.

Volkswagen, Europe's biggest carmaker, this year will bring out the Touran minivan, a new version of the Audi A3 and an updated Golf model, its best-selling car. It aims to win back consumers turned off by aging models and reluctant to spend money because of unemployment and the threat of war in Iraq.

The German carmakers association expects industrywide 2003 sales to match last year's. PSA Peugeot Citroen Chief Executive Jean-Martin Folz has said car-industry sales in Western Europe may drop 13 percent in a "worst-case scenario." Volkswagen today said fourth-quarter net income rose 33 percent while sales fell 2 percent.

"Volkswagen will have a tough time increasing sales this year," said Joerg Schaefer, who helps manage 5 billion euros at AMB Generali and owns Volkswagen shares. "The whole auto market is going to be depressed this year, especially Germany with all the joblessness and the Iraq crisis."

Fourth-quarter net income rose to 755 million euros while revenue declined to 21.7 billion euros, Volkswagen said in a statement to the Frankfurt stock exchange. Full-year net income fell 11 percent to 2.6 billion euros. Analysts had expected fourth-quarter profit of 597 million euros and 2002 profit of 2.44 billion euros.

Volkswagen's Western European vehicle sales were little changed at 609,145 units in the last three months of 2002 after falling 6.4 percent in the first nine months of the year. The carmaker's 2002 sales in the region fell 5.1 percent to 2.63 million vehicles, according to the European Automobile Manufacturers Association.

The carmaker's full-year worldwide sales fell 2 percent to 4.98 million vehicles.

"Sooner or later there will be a need to replace a lot of cars," said Pischetsrieder in an interview at the Detroit car show last month. "The average age of cars on the road in Germany is above seven years. That's the highest in 15 years."

Pischetsrieder has been too optimistic before. He cut the outlook for 2002 profit after the market didn't improve in the second half as he had forecast. Weakness in Germany, Volkswagen's biggest market, helped push the company's stock down 34 percent last year.

The shares today fell as much as 90 cents, or 2.5 percent, to 35.50 euros and were down 1.7 percent at 35.80 euros as of 6:51 p.m. in Frankfurt. The stock is up 4 percent this year.

The carmaker will introduce a new version of the six-year-old Golf in September. The second-best selling model, the seven-year old Passat, won't be replaced until 2005, analysts have said. Revenue and earnings from both models will fall this year as buyers hold out for the new versions and Volkswagen offers discounts to sell remaining stock.

"The palette of models is worn out," said Juergen Lukasser, who manages 5.4 billion euros ($5.8 billion) as head of equities at Constantia Privatbank AG in Austria and doesn't own Volkswagen shares. "The management has a plan for new models, but we have to see how this looks concretely."

Pretax profit in 2002 fell 9.6 percent to 3.98 billion euros. The company was aiming for full-year pretax profit of 4 billion euros. Full-year sales fell 1.8 percent to 86.9 billion euros.

"Customers are waiting for the new models," said Guido Schickentanz, a fund manager at Julius Baer, who declined to say how much in assets he has under management. "The model changeover is holding demand down."

Unemployment in Germany is at a 4 1/2 year high. About 4.3 million people were out of work in the carmaker's home market in January, raising the unemployment rate to 10.3 percent from 10.1 percent in December.

Pischetsrieder expects to sell more than 5 million vehicles this year after a 2 percent slump last year to 4.98 million units.

Volkswagen's biggest growth is in China, which surpassed the U.S. in 2002 to become the company's No. 2 market. Volkswagen has the largest share of the country's market of any carmaker, selling 513,000 vehicles there last year, an increase of 43 percent. It aims to sell 1 million in the next three to four years.

The company operates in China in joint ventures with First Automotive Works and Shanghai Automotive Industry. Volkswagen includes any earnings from the ventures in its financial result rather than in operational accounts, making it difficult for analysts to see how profitable they are.

Peugeot, Europe's No. 2 carmaker, took sales from Volkswagen in Europe last year, increasing its market share in the region to 15 percent from 14.4 percent as Volkswagen's declined to 18.4 percent from 18.9 percent.

Two product recalls within the past four weeks have also hurt the company's image. Volkswagen earlier this month recalled 850,000 vehicles built between 2001 and 2003, including 530,000 in the U.S., due to defective ignition coils. Volkswagen also said Jan. 23 that it will cover the cost of repairing motors that were damaged by ice buildups.

To counter falling sales, the company has brought out new vehicles to fill niches. Volkswagen introduced the Touareg sport-utility vehicle last year. Last month, it displayed the Touran, based on the Golf, and a convertible version of the New Beetle. The company expects to sell 130,000 Tourans this year.

"We see an eventual turnaround in earnings coming," said Martin Hellmich, who helps manage 1 billion euros at Apo Asset Management in Dusseldorf, Germany. "We see Volkswagen in a more positive light."

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

"We're pretty clear on our positions being right, but the whole puzzle will only be visible in several years time," said Pischetsrieder.

Pischetsrieder, 55, became CEO last April following the retirement of Ferdinand Piech, who is now chairman of Volkswagen's supervisory board. Pischetsrieder was fired from the top job at Bayerische Motoren Werke AG in 1999 after failing to stem losses at BMW's U.K. Rover unit.