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VW to Ease Europe Woes With China Growth, Porsche Profit

Volkswagen AG (VOW) expects profit to grow in China this year as Europe’s biggest automaker looks to remain resilient to a recession in its home region.

VW plans to grow faster than total auto demand in China, which is set to increase 6 percent to 8 percent this year, the Wolfsburg, Germany-based carmaker said today.

“Revenue and operating profit will grow this year” in China, Chief Financial Officer Hans Dieter Poetsch said today during a conference call with analysts. After the group’s operating profit dropped in the first three months, the pace of earnings should pick up in the course of the year and the second quarter should “beat first-quarter numbers.”

VW’s position in China, where it plans to build seven factories, has helped the German manufacturer sidestep slumping demand in Europe. The addition of Porsche, which was fully integrated in August, also helped offset a drop at the namesake brand after the maker of the 911 sports car contributed 573 million euros ($750 million), or 24 percent of Volkswagen’s first-quarter earnings.

“The resilience of VW’s premium business was once more evident during the quarter,” David Arnold, a London-based autos specialist at Credit Suisse said in a note to clients. Profit from China took “another step up,” after VW’s earnings from its Chinese joint ventures surged 36 percent to 1.16 billion euros in the quarter.

Shares Rise

VW’s presence in China and profit from Porsche, Audi and Bentley have helped the company avoid the full effects of slumping demand for mass-market cars in Europe. Chief Executive Officer Martin Winterkorn last week pledged to extend that advantage by expanding in China and further boosting the company’s presence in luxury autos, where profit margins tend to be higher.

VW rose 2.6 percent to 152.00 euros in Frankfurt trading. The stock has declined 12 percent this year, valuing the automaker at 69 billion euros.

The Audi division retained its position as VW’s largest earnings contributor with 1.31 billion euros in first-quarter earnings, or 56 percent of the group total versus 45 percent a year earlier. VW-brand profit tumbled 46 percent to 590 million euros because of lower sales, especially of higher-end models.

As part of Volkswagen’s upscale push, Porsche will add the 918 Spyder hybrid supercar this year and the Macan compact sport-utility vehicle at the beginning of next year. Audi, which aims to take the global luxury-car sales lead from Munich-based Bayerische Motoren Werke AG by 2020, is planning to double its SUV lineup. The development of a new Bentley SUV is progressing, Winterkorn said last week.

‘Tough Environment’

The European car market’s sixth straight annual contraction is hampering growth at the German manufacturer, which plans to overtake world industry leaders Toyota Motor Corp. (7203) and General Motors Co. (GM) by 2018. VW is working to counter the decline by rolling out 60 new and updated models this year, including fresh versions of the Golf hatchback, Audi A3 compact and Skoda Octavia small car, and tapping into emerging markets.

“We made a healthy start to the year, but the coming months will be anything but easy,” Winterkorn said in a statement. “The current environment is definitely a tough challenge for the entire industry.”

Group first-quarter operating profit, which doesn’t include earnings from the Chinese joint ventures, fell 26 percent to 2.34 billion euros as revenue declined 1.6 percent to 46.6 billion euros, VW said last week.

Seat Losses

The operating loss at the Seat division in Spain, VW’s only unprofitable brand, widened to 46 million euros from 29 million euros a year earlier. Earnings fell 46 percent to 112 million euros at the Czech brand Skoda.

The company’s sales of cars, SUVs and delivery vans all but stalled last month with a 0.2 percent increase, restraining the first-quarter advance to 5.2 percent, as deliveries in Volkswagen’s home German market tanked 17 percent.

Still, the manufacturer stuck to its target of higher auto sales and revenue in 2013 even as Europe auto demand heads to a 20-year low. VW also affirmed today a forecast to “match” 2012’s operating profit of 11.5 billion euros this year.

VW has been able to steer through the European slump better than mass-market competitors such as French manufacturers Renault SA (RNO) and PSA Peugeot Citroen (UG), the region’s second-largest carmaker. Both of those companies are eliminating 17 percent of their domestic workforces to scale back costs, while Peugeot is closing a factory near Paris.

VW is countering with plans to invest $19 billion in production outside Europe, including new factories in China.

The expansion isn’t always smooth. The manufacturer set aside a “low three-digit million euro” sum for a transmission recall in China after a state television featured complaints about vibrations, loss of power and sudden acceleration in Golfs and other cars.

To contact the reporters on this story: Christoph Rauwald in Frankfurt at crauwald@bloomberg.net; Dorothee Tschampa in Frankfurt at dtschampa@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net

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