VW Targets Profit Boost Amid Uncertainty on Europe’s Recovery

Volkswagen AG, Europe’s largest carmaker, plans to boost profitability at its mass-market brands even with the timing of a rebound in its home region uncertain.

The Wolfsburg, Germany-based company, which relies on luxury-cars for more than half its profits, expects loss-making Seat and the namesake VW badge to contribute more to the group’s goals of becoming the world’s largest automaker by 2018. Higher profits margins are tied to expanding beyond Europe and sharing more parts to cut costs.

The VW car brand, the manufacturer’s biggest unit by vehicle sales, 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 of profit margin of more than 5 percent. Skoda will have a margin of 6 percent to 8 percent, after posting 6.8 percent in 2012. The presentation didn’t set a date for when the targets would be achieved.

Improved margins for Volkswagen’s mass-market brands depend on “substantial cost reductions” through the rollout of parts-sharing technology, said Daniel Schwarz, a Frankfurt-based analyst at Commerzbank AG. “The targets seem realistic.”

Frankfurt Premieres

Profit from Audi and Porsche and a big presence in China have helped Volkswagen sidestep the brunt of a six-year slump in the European car market. While instability in its debt-strapped home region is keeping the German carmaker on its toes, the company isn’t backing off expansion.

At the International Auto Show in Frankfurt this week, the manufacturer introduced bread-and-butter models like the Seat Leon ST and Skoda Rapid Spaceback wagons and a van-like version of the Golf compact. The company also entered the electric-vehicle segment with the VW e-Golf compact and e-Up! city car and a plug-in hybrid version of the Audi A3 hatchback. The Porsche brand rolled out 918 Spyder hybrid supercar.

Seat, which is based in debt-strapped Spain, plans to further expand the Leon compact line with all-wheel drive and high-performance Cupra versions, brand chief Juergen Stackmann said in an interview in Frankfurt. A sport-utility vehicle is being considered. Entering new markets is also in the cards.

“We’re developing a new regional strategy to expand sales both in our core markets as well as markets like Turkey, Middle East or North Africa,” said Stackmann, who took charge of Seat in May after heading marketing for the VW group.

Bentley SUV

Volkswagen delivered 3.02 million cars and light commercial vehicles in western Europe in 2012, compared to 2.81 million in China, the company’s largest single market, and 1.01 million in South America.

At the top end of the auto industry, the Bentley ultra-luxury brand is making progress on plans to add an SUV in 2016 and may show the car as early as late 2015.

“The exterior and interior design is finalized,” Wolfgang Schreiber, Bentley’s chief, said in an interview. “Now, we’re preparing everything for production.”

Sales of the vehicle could exceed the brand’s target of selling 3,000 SUVs a year on average, he said. The Crewe, England-based brand sold around 9,000 cars in 2012.

To foster the group’s growth, the carmaker’s banking and financing unit plans to expand in countries such as the U.S., Russia and South Africa and may also enter Southeast Asia, Lars-Henner Santelmann, sales chief for Volkswagen Financial Services, said in an interview.

China Rentals

In China, where many car buyers still pay cash, VW’s financial services will roll out a car-rental program over the next three years in around 20 Chinese cities, Santelmann said. The program targets business customers and includes optional drivers for the rented vehicles.

Still, the expansion could be knocked off track if the European economy continues to struggle, Chief Executive Offer Martin Winterkorn said at the Frankfurt auto show.

“A lot depends on when Europe recovers,” Winterkorn said to reporters after a company presentation at a 5,000-seat stadium in Frankfurt this week. “We’re watching this very, very closely.”