Audi's Third-Quarter Profitability Drops as Recall Costs Loom

  • Profit margin squeezed by costs for new factory and A4 model
  • About 2.4 million Audi cars affected by emissions manipulation

Audi AG Headquarters

Photographer: Krisztian Bocsi/Bloomberg

Audi’s third-quarter profit margin scraped the bottom of its target corridor, increasing the pressure on the brand to boost earnings as a costly recall of rigged diesel engines looms.

Operating profit narrowed to 8 percent of sales from 9.2 percent in the second quarter, the Ingolstadt, Germany-based luxury unit of Volkswagen AG said Monday. That’s significantly less than Mercedes, which reaped a 10.5 percent profit margin in the third quarter, and marks the lower limit of Audi’s target of 8 percent to 10 percent.

The emissions scandal comes at a delicate time for Audi. The carmaker’s margins would be squeezed anyway by spending on new models and technology to compete with Daimler’s Mercedes and unseat BMW AG as the biggest luxury-car maker in the world. At the same time, the unit is the biggest source of profit for Volkswagen, which needs cash to pay for fines, recalls and court costs linked to cheating on diesel emissions tests.

Audi said it still expects to deliver more cars than ever before this year. Next year, it will start selling a revamped version of its best-selling model, the A4 sedan and station wagon, and open a factory in Mexico.

“We are continuing along our growth path,” Audi AG Chief Executive Officer Rupert Stadler said in a statement. "We are increasing our deliveries, expanding our international production network, safeguarding jobs and actually continuing to recruit more employees.”

Volkswagen set aside 6.7 billion euros ($7.4 billion) in the third quarter for anticipated recall costs, which pushed Europe’s largest automaker to its first quarterly deficit in at least 15 years. It’s too early to estimate potential legal costs as lawsuits pile up in the U.S. and Europe, Chief Financial Officer Frank Witter said on a conference call with analysts last week.

Audi accounts for about 2.4 million out of as many as 11 million cars that Volkswagen will need to recall to fix rigged emissions systems. The group’s namesake VW passenger-car brand is the worst hit, with 5.6 million affected vehicles, compared with 1.2 million for Skoda, 800,000 for VW light commercial vehicles and 700,000 for the Spanish Seat marque.

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