Cost-cutting VW bets big to revamp loss-making luxury Phaeton

Wed Jan 28, 2015 11:14am EST
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By Andreas Cremer

BERLIN (Reuters) - With Volkswagen (VOWG_p.DE: Quote) having embarked on a big cost-cutting drive, industry experts are baffled why the "people's car" maker plans to spend millions of euros upgrading a money-losing luxury sedan.

The 76,000 euro ($86,192) Phaeton, a pet project of Chairman Ferdinand Piech, has never met VW's original sales target of 20,000 cars annually. Analysts say the executive saloon, which cost more than 1 billion euros ($1.13 billion) to develop and came out in 2002, should be axed.

But sources at VW told Reuters that the company is now planning a more advanced version of the Phaeton - described by Bernstein analyst Max Warburton as one of the three "most loss-making European cars of modern times."

The plans appear all the more perplexing to analysts as VW has pledged to make annual cost savings of 5 billion euros ($5.67 billion) at its passenger-car brand by 2017, as the world's second-biggest carmaker by sales seeks to narrow the gap with global leader Toyota (7203.T: Quote).

Announcing the "efficiency program" last July, Chief Executive Martin Winterkorn promised "painful action" to revive the core brand where profit margins have been languishing due to a proliferation of models and parts.

"It's no longer all about bigger, higher, further," the CEO told managers at a Dresden strategy conference in December. "Now it's about being leaner, faster, more efficient."

His comments echoed VW's plans to reduce the number of costly parts and drop some non-profitable variants from the German group's 310-model line-up as Europe's largest automaker shoulders costs of future growth and investments in lower-emissions technology.

Revamping the Phaeton will fly in the face of the CEO's cost-cutting drive, said Evercore ISI analyst Arndt Ellinghorst, adding that switching production of the model to VW's modular MLB platform could cost as much as 650 million euros ($737.17 million).   Continued...

Volkswagen Phaeton Exclusive is pictured during a media preview day at the Frankfurt Motor Show (IAA) September 10, 2013. REUTERS/Pawel Kopczynski