Sept. 12 (Bloomberg) -- Volkswagen AG, whose earnings have fallen for three years in a row, plans to introduce five new models at the Frankfurt International Motor Show this week, adding to global overcapacity that's eroding carmakers' profits.

The Wolfsburg, Germany-based company, Europe's largest automaker, will be one of 1,000 exhibitors at the show. Organizers expect to attract 1 million visitors to view 122 new models. Geely Automobile Holdings Ltd., China's largest privately held carmaker, will be there for the first time, displaying five cars.

Carmaker profits are falling as the companies resort to discounts to sell all the vehicles churned out by their factories. Volkswagen has assembly lines for about 6 million cars compared with the 5 million it sells. Worldwide, the industry sells about 62.5 million vehicles while factories can build about 80 million, according to Waltham, Massachusetts-based Global Insight Inc.

``Overcapacity is leading to price pressure and lower margins,'' said Stefan Bauknecht, a fund manager at DWS Investment GmbH in Frankfurt who manages about $1.2 billion, including shares of Volkswagen and DaimlerChrysler AG. ``Carmakers have to get better use out of their factories.''

Carmakers' shares have declined over the part three years. The MSCI World/Automobiles and Components index, which includes General Motors, Volkswagen and DaimlerChrysler, is little changed at 102.38 on Sept. 9 from 97.27 five years ago. General Motor Corp.'s and Ford Motor Co.'s debt rating has been slashed to junk by Standard & Poor's and Moody's Investors Service.

Growing Capacity

Capacity is growing as new factories are built in lower wage countries in eastern Europe and Asia, while carmakers have been slow to shut older factories or cut jobs. As a result, the top 10 automakers last year had median net income of 2.78 percent of sales, down from 3.3 percent in 2003, according to data compiled by Bloomberg. Output will expand by another 8 million vehicles in three years, according to PriceWaterhouseCoopers.

``It's a classic overcompetition situation that doesn't correct itself because of the barriers to exit,'' said Paul McCarthy, lead analyst in Europe for PriceWaterhouseCoopers Autofacts division.

He cited political difficulties companies may encounter when trying to close factories. Add to that nationalism: China in its 2004 automotive policy said it wanted some carmakers to become global brands. Geely is one of three Chinese companies displaying cars in Frankfurt for the first time.

Volkswagen is trying to cut jobs in western Germany with early retirements and buyouts. It can't fire workers because last November it agreed to guarantee 103,000 workers employment through 2011 in exchange for a wage freeze that eventually will save the company 2 billion euros ($2.5 billion) annually.

Volkswagen Woes

``The international automobile industry suffers from serious overcapacity,'' Volkswagen Chief Executive Officer Bernd Pischetsrieder said on Sept. 5 after announcing the company needed to cut thousands of jobs to improve earnings. ``As a result, the competitive pressures will intensify.''

Volkswagen is operating its Western European factories at 73 percent of capacity, according to Jochen Gehrke, an analyst at Kepler Equities in Frankfurt. DaimlerChrysler's Mercedes plants in the region, including Smart, are operating at 84 percent.

General Motors Corp. and Ford Motor Co. this year have reduced or announced plans to cut North American production in each of the first three quarters. The cutbacks contributed to a $1.39 billion first-half loss at Detroit-based GM and a 31 percent decline in net income at Dearborn, Michigan-based Ford. The companies said on Sept. 1 that they would both raise output in the fourth quarter.

DaimlerChrysler, based in Stuttgart, Germany, began cutting capacity in the U.S. in 2001 when the Chrysler division's woes ate into group earnings. Since then, the company has closed six Chrysler factories and fired 40,000 workers.

Ford, GM

Ford was producing at 86 percent of its plant capacity in North America while GM was last at 85 percent, according to Harbour Consulting's 2005 report, released in June. Toyota Motor Corp. stood at 107 percent. To step up production when demand is strong for models, such as Toyota's Avalon sedan, factories add night or weekend shifts and move past the 100 percent mark. The baseline for the report is two eight-hour shifts, 235 days a year.

Overcapacity at GM and Ford has led to lower prices and incentives as well as higher sales, said Global Insight analyst Nigel Griffiths. Overall, the industry should have a utilization rate of about 90 percent to be healthy, he said.

GM, the world's largest carmaker, has used employee discounts to clear bloated inventories of 2005 models and halt market share losses to competitors such as Toyota. DaimlerChrysler's Chrysler and Ford followed suit to attract customers. Volkswagen in July estimated its U.S. incentives were about half the industry average, which according to CNW Marketing Research was about $4,427 per vehicle.

Job Cuts

In Europe, GM is cutting 12,000 jobs, mainly in Germany, while Ford ended Jaguar production at the Browns Lane factory in the U.K. In contrast with U.S. and European volume manufacturers, Toyota on Sept. 7 announced that it would spend 110 million euros expanding output at its Valenciennes, France, plant to meet demand for the new version of its Yaris subcompact and this year opened a joint- venture plant with PSA Peugeot Citroen in the Czech Republic. Hyundai Motor Co. is building a plant in Slovakia.

Worldwide, the automotive industry needs about 8 percent to 10 percent overcapacity to meet changes in demand as growth accelerates in regions like China and South America and stagnates in Europe and the U.S., said Global Insight's Griffiths.

``The problem of overcapacity is that the industry needs to constantly adjust the cost structure downward and this puts pressure on profits,'' he said.

To contact the reporter on this story: Jeremy Van Loon in Berlin at jvanloon@bloomberg.net Alan Katz in Paris at akatz5@bloomberg.net.

Last Updated: September 12, 2005 00:06 EDT