VW to Delay, Cancel Non-Essential Investments Due to Scandal

VW to Delay or Cancel All Non-Essential Investments
  • Labor leaders are pushing to cut R&D spending, protect jobs
  • Volkswagen spent as much as Apple and Google combined on R&D

Volkswagen AG Chief Executive Officer Matthias Mueller said the company will delay or cancel non-essential projects as pressure mounts to slash spending in the wake of the diesel-emissions scandal. 

“We will review all planned investments, and what isn’t absolutely vital will be canceled or delayed,” Mueller told some 20,000 employees at the German company’s headquarters Tuesday, according to an e-mailed statement of his remarks. “And that’s why we will re-adjust our efficiency program. I will be completely clear: this won’t be painless.”

Fixing about 11 million rigged diesel vehicles is a costly prospect. The 6.5 billion euros ($7.29 billion) Volkswagen already set aside for repairs won’t be enough to cover fines and potential legal damages as well, Mueller said. The company is exploring options from a simple software upgrade to outright replacing some cars. Fines may reach $7.4 billion in the U.S. alone, according to analysts from Sanford C. Bernstein Ltd.

Volkswagen could put a push to gain market share in the North America on hold as long as there’s no clarity on the extent of the costs of fixing the cars and potential fines, said Jose Asumendi, a London-based analyst at JPMorgan Chase & Co. The carmaker outlined plans in March for an investment of about $1 billion to expand its vehicle assembly plant in Mexico’s Puebla state. That work could face a delay, Asumendi said.

“It’s going to to be tough to find projects they could chop that will actually move the needle,” Asumendi said. “What they really need to do is get costs under control.”

Cutback Strategies

Labor leaders have been pushing Wolfsburg-based VW to reel in research and development spending to protect jobs, while management wants personnel expenses reduced as well, people familiar with the situation said before the carmaker published Mueller’s statement. Other options include lowering purchasing expenses and reducing sponsorship activities, with the extent of the measures dependent on the cost of the cleanup, said the people, who asked not to be named because the talks are private.

“We’ll pay extra attention to bonus payments to members of the management board,” Bernd Osterloh, a supervisory board member and head of the works council, told employees at the Tuesday meeting. All projects and investments will need to be examined, and “we’ll have to question everything that’s not economical,” he said.

The shares rose 1.1 percent to 94.50 euros at 2:20 p.m. in Frankfurt. The scandal has wiped 29 billion euros off Volkswagen’s market capitalization.

‘Incredibly Inefficient’

The German company may be forced to tighten an “incredibly inefficient” organization and lop funding out of a $17.4 billion research and development budget that was the world’s biggest last year, about equal to the combined figure at Apple Inc. and the former Google Inc., said Arndt Ellinghorst, a London-based analyst with Evercore ISI. Volkswagen’s R&D spending was higher than at Ford Motor Co. and General Motors Co. combined.

“Where’s the innovation? Obviously not in diesel engines,” Ellinghorst said. “There’s a culture of spending and a lack of focus on efficiency in favor of striving to be bigger.”

Volkswagen’s personnel costs at 16.7 percent of sales are the highest since 1997, while purchasing costs are also at a peak, Ellinghorst said. Half the company’s board is composed of labor representatives, and more than 60,000 people work for Volkswagen in Wolfsburg, where Mueller addressed employees until about midday.

Secure Jobs

The state of Lower Saxony, where VW is based, also has an unusually strong position of leadership in the company, owning about one-fifth of its voting shares. The government must “work with all its strength to secure these jobs,” Lower Saxony Prime Minister Stephan Weil wrote employees in an Oct. 5 letter.

Discussions over savings at Volkswagen are in early stages as the company focuses on repairs to satisfy regulators, the people familiar with the situation said. The company has until tomorrow to present a plan for fixing some 2.8 million diesel vehicles it sold in Germany. About 8 million of the Volkswagen cars that had software designed to cheat U.S. emissions tests were sold in Europe, the company told German lawmakers in an Oct. 2 letter.

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