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Volkswagen sees 'lousy' first quarter

German carmaker Volkswagen ERG said on Tuesday the first quarter of 2004 would be “lousy” and that it planned to slash 5,000 jobs as part of a cost-cutting drive after profits slumped in 2003.
/ Source: Reuters

German carmaker Volkswagen AG said on Tuesday the first quarter of 2004 would be “lousy” and that it planned to slash 5,000 jobs as part of a cost-cutting drive after profits slumped in 2003.

Despite hefty cost-cutting measures and the launch of its six-month old Golf V, VW also warned that a goal of beating last year’s operating profit before special items was ambitious.

Europe’s largest carmaker said it had gained market share in the first two months of 2004, but was downbeat on the first quarter’s performance compared with the same period in 2003, adding that there were no signs of an economic pick-up.

“Automobile markets have started the year very weak. That was especially true for January, while February has shown slight signs of improvement,” VW said in a statement.

Its shares were down 2.6 percent at 38.40 euros by 1132 GMT, consolidating its position as Germany’s worst performing blue-chip stock in 2004. VW is down 13 percent this year versus a three percent rise for the Frankfurt benchmark DAX index.

“Today’s news is a shock,” said Gerald Roessel, a fund manager at Invesco Asset Management in Frankfurt. “The shares are falling steeply because of the negative outlook which has disappointed the market again.”

VW, whose hopes for 2004 hinge on its new Golf hatchback which has been criticized for being over-priced, said growing pricing pressure, a weak economy and unfavorable exchange rates meant topping last year’s operating profit would be a stretch.

Volkswagen last month posted a 48 percent decline in 2003 operating profit to 2.49 billion euros, despite marginal rises in both car sales and revenues.

Cost cuts
VW also confirmed on Tuesday plans to slash costs by about 4.2 billion euros by the end of 2005 after last year’s profit fall was compounded by one-off charges of 711 million euros due to restructuring in Brazil and write-downs on investments in its luxury business.

Volkswagen said it aimed to cut product costs by 800 million euros, one-off expenditure by 250 million euros and reduce overheads by another 600 million.

An improved sales performance would contribute another 300 million euros while improvements at financial services, commercial vehicles and foreign sales subsidiaries would provide an additional 250 million, VW said.

That all comes on top of two billion euros already planned.

VW management has come under criticism -- including from supervisory board members -- after a venture upmarket that has so far failed to pay off and has eaten into VW’s cash reserves.

Investing in cars such as the 1,000 horsepower Bugatti Veyron, the Bentley Continental GT and VW’s own top-of-the-range Phaeton have distracted attention from traditional money spinners such as the more humble Golf hatchback, critics say.

Meanwhile, VW is already offering incentives such as free air conditioning to boost sales of its latest generation of Golfs, which was only launched in September last year.

Euro hurts
Adding to its woes, VW’s relatively low level of currency hedging to protect it against the impact of foreign exchange fluctuations also made a big dent in profits last year after the euro surged to a record high against the dollar and other major currencies.

“They (currency effects) reduced the profit before tax by 1.6 billion euros,” VW Chief Financial Officer Hans Dieter Poetsch told a news conference in Wolfsburg.

“The 1.6 billion euros does not include negative effects on the results of our Chinese joint ventures...totaling 320 million euros,” he added.