VW's forecast profit gain seen masking margin troubles

Fri Apr 25, 2014 9:02am EDT
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By Andreas Cremer

BERLIN (Reuters) - The record quarterly earnings which Volkswagen AG (VOWG_p.DE: Quote) is set to report next week may mask more fundamental problems for the German auto maker.

While a 5.8 percent increase in first-quarter deliveries, which VW revealed earlier this month, will help Europe's biggest carmaking group meet its 10 million vehicle sales goal four years early, profitability gains are not keeping pace with the group's rapid expansion.

Behind the scenes there is evidence of faltering competitiveness at the core VW brand, some analysts say, and the group faces a struggle to both raise output and margins.

The group's 2013 figures, released in March, showed revenue surging by a quarter over three years to reach almost 200 billion euros ($276.6 billion) - for comparison, about the size of Israel's GDP.

But yearly operating profit rose just 3.5 percent to 11.7 billion, held back by increasing investment and labor costs. VW'S global workforce swelled to 573,000 in 2013, up over 40 percent from 2010, and it splashed out on a generous 5.6 pct two-step pay rise last year for workers in high-wage Germany.

First-quarter 2014 results, due on April 29, may underline the need for further action, said London-based analyst Arndt Ellinghorst at brokerage ISI Group, who expects the core VW division's operating margin to fall to 2.3 percent from 3.3 percent.

The quarterly figures are forecast to show group operating profit up 17 percent to 2.74 billion euros, a Reuters poll of 11 banks and brokerages showed.

But that is only part of the picture.   Continued...

A general view of the Volkswagen plant in Chattanooga,Tennessee February 14, 2014. REUTERS/Christopher Aluka Berry