VW Profit Slumps in 2003

Volkswagen AG said its profit fell by more than half last year because of a strengthening euro and a combination of rising marketing costs and dated products in North America.

Net profit fell 58 percent to 1.1 billion euros ($1.4 billion) from 2.6 billion euros in 2002 on sales that increased only 0.2 percent to 87.1 billion euros ($112.4 billion) in what the company described Wednesday as "difficult economic conditions." The profit performance topped forecasts of analysts surveyed by Dow Jones Newswires, who expected earnings of $1.26 billion. But the problems preview what could be another tough year for VW. Sales of the redesigned Golf are lagging expectations. Sales of Phaeton have been disappointing in Europe and launching into an even tougher North American market even more skeptical than Europe about a $75,000-plus VW-branded sedan.

Quality problems are still dogging VW vehicles and putting off customers who were attracted to VW in the late 1990s, costing VW big on warranty repairs and marketing costs to keep old customers and lure new ones. Last year, for example, VW began offering costly lease-pull-ahead deals to owners in order to keep them from defecting. In Europe, the company is offering deals like free air conditioning to move a large inventory of Golfs, and similar measures are anticipated in North America. VW stock initially rose 2.7 percent Wednesday, but then gave ground and closed at 39.33 euros ($50.49) or less than one percent in Frankfurt. Shares are down 11 percent since early January.

VW is offering discounted finance rates and leases in North America, but has stayed away from big rebates. Most models have rebates of just $500. And it is facing pressure from dealers to be more generous on discounts to move aging models like the New Beetle (five years old), Golf and Jetta (six years old), and Passat (five years old). VW's discounts are more in line with Japanese and European imports than with U.S. automakers. But it doesn't have the premium image of its European mates, nor the high-reliability image of its Asian rivals.

As expected, Volkswagen also said it was cutting its dividend to 1.05 euros ($1.35) per share from 1.30 euros a share in 2002.

Products in the pipeline

Meanwhile, the new products Volkswagen needs to compete more strongly in the U.S. will have to wait until next year to arrive. VW will spend the next two years rolling out an entirely new range of sedans and hatchbacks slotting in beneath the luxe Phaeton, execs said at the Arizona launch of the 240-hp, Golf R32. VW of America will finally get replacements for the Passat, Jetta, and Golf, and will launch the new models through May of 2006, front-loading the volume models.

The next VW to come this year after the R32 will be a 4Motion-equipped Passat 1.8T by springtime, followed by a Jetta GLI, the V-10 diesel Touareg and the Passat TDI in the summer. The Passat diesel, VW says, will be an interesting experiment, offering its customers something more upscale in a diesel. The TDI Passat will come in either sedan or wagon body with an automatic transmission. Some eight percent of Golf/Jetta sales now are diesels.

After those models come the new generations of the Jetta, due in March 2005; the Passat, in September 2005; the Golf GTI in October of 2005; the Passat Wagon, in Mach 2006; and the next-gen, non-GTI Golf in May of 2006.

VW is also studying the addition of more R-Series models like the 240-hp R32 to its lineup, but there's been no official decision to date.