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VW to Spend $114 Billion in Pursuit of Global Sales Lead

Volkswagen AG (VOW), Europe’s largest automaker, will maintain a high level of spending on developing new vehicles and upgrading factories over the coming five years to underpin its bid to become the world’s largest automaker.

VW plans to invest 84.2 billion euros ($114 billion) through 2018, the Wolfsburg, Germany-based company said today in a statement. The plan calls for a reduction in average annual spending on property, plants and equipment of about 500 million euros a year, compared with its previous budget.

“We will continue to invest strongly in our innovation and technology leadership,” Chief Executive Officer Martin Winterkorn said in the statement. “This will give us extra power on our way to the top.”

VW has been on an expansion binge in recent years as it seeks to sell more than 10 million vehicles and overtake Toyota Motor Corp. (7203) and General Motors Co. (GM) Since Winterkorn took the helm in 2007, the company added the Porsche, Scania, MAN and Ducati brands. It also more than doubled the number of factories around the world to 105. The spending pace may now slow as VW, which forecasts sales of 9.5 million autos this year, focuses on raising profitability.

“VW invested a lot in recent years,” said Daniel Schwarz, a Frankfurt-based analyst at Commerzbank AG. “They almost reached their sales volume target already, but profit margins aren’t quite there yet.”

Photographer: Jason Alden/Bloomberg

A VW logo sits on the alloy wheel of a Volkswagen automobile. Close

A VW logo sits on the alloy wheel of a Volkswagen automobile.

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Photographer: Jason Alden/Bloomberg

A VW logo sits on the alloy wheel of a Volkswagen automobile.

Belt Tightening

The shares fell as much as 1.5 percent to 192.70 euros and were down 1 percent at 1:21 p.m. in Frankfurt trading. The stock has climbed 13 percent this year, valuing the company at 87.9 billion euros.

VW’s Chinese joint ventures, which aren’t consolidated and therefore not included in the group figure, will invest 18.2 billion euros through 2018 to expand in the world’s largest auto market.

The carmaker is cutting capital expenditures by postponing construction projects and improving the use of existing capacity, it said today. Investment levels will be equivalent of 6 percent to 7 percent of annual sales in the period.

VW has become more cost conscious in recent months, saying Sept. 24 that “further belt-tightening” was needed. The same month the company outlined plans to boost profitability for brands including the VW nameplate and the loss-making Seat unit.

Profit Goals

The VW car brand is forecast to lift its operating profit margin to more than 6 percent of sales from 3.5 percent last year, according to a Sept. 9 presentation by Chief Financial Officer Hans Dieter Poetsch. Seat, which posted an operating loss of 156 million euros last year, has a target profit margin of more than 5 percent.

VW has sidestepped a slump in European car sales to a two-decade low by expanding in China, the U.S. and Russia. The company has also invested in technology to share parts to lower production costs. Spending on developing new vehicles and upgrading existing lines will total 41.2 billion euros in the five-year period.

Third-quarter operating profit rose 20 percent to 2.78 billion euros. The company expects full-year operating profit to match 2012’s 11.5 billion euros as spending offsets sales gains by the luxury Audi and Porsche brands. VW targets higher profit in 2014.

“Volkswagen’s focus on future viability and sustainability also extends to its investments,” Bernd Osterloh, head of VW’s works council and a supervisory board member, said in the statement. “It is a positive signal, particularly in light of the difficult market environment.”

To contact the reporter on this story: Christoph Rauwald in Frankfurt at crauwald@bloomberg.net

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

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