Mixed Signals From VW as Job Cuts Offset Profits

Bottom-line earnings at VW, Europe's biggest car maker, surged in the third quarter on 2005 on the back of rising sales and the positive effects of a massive cost-cutting program. The company said in a statement that it booked net profit of 282 million euros ($338 million) in the period from July to September; nearly four times the 76 million euros booked a year earlier.

At the same time, operating profit rose by 49.6 percent to 586 million euros, revenues were up 12.6 percent at 23.857 billion euros and unit sales climbed by 6.1 percent to 1.305 million cars worldwide, the statement said.

Taking the first nine months of the year as a whole, net profit climbed by 49 percent to 685 million euros and operating profit rose by 58 percent to 1.961 billion euros. Nine-month revenues were up 5.3 percent at 69.873 billion euros and unit sales rose by 3.1 percent to 3.864 million vehicles, the car maker said.

VW: Quarterly results justify painful restructuring

"Developments in the third quarter show that our steps to improve our performance have been successful," the statement read. "In a difficult environment, however, substantial efforts will still be needed in the coming years to achieve our targets."

VW said that in the first nine months, cost-savings made a positive contribution to earnings of 2.6 billion euros.

The car maker was therefore well on its way to achieving its target of boosting full-year earnings this year by 3.1 billion euros via cost-cutting, the statement added.

VW was also satisfied with the success of its new models, the Fox, Passat, Audis A4 and A3 and the Skoda Octavia, which helped boost European sales, it said.

Job cuts to hit Germany hardest in coming months

However, the prospect for the rest of the year looked bleaker. The company cautioned that fourth-quarter profits would be burdened by restructuring costs connected with the job cuts -- still be quantified -- announced in the autumn.

Press reports have suggested that about 14,000 jobs could be axed in Europe, with around 10,000 German jobs on the line. VW Chief Financial Officer Hans Dieter Pötsch confirmed on Thursday that the company would cut "thousands'' of German jobs as record raw material prices eat into earnings. "We have to reduce the workforce a considerable amount,'' said Pötsch during a conference call with analysts.

European carmakers have been struggling to cope with a strengthening euro, which makes vehicles more expensive in countries like the United States and China. The industry has also been hit by escalating prices for steel and oil, both of which reached records in the past year. On top of these factors, the demand for new cars has been stagnant in Europe for the past three years as unemployment hovered near record highs in Germany.

Problems with raw materials likely to continue

VW said it expected competitive pressures to intensify further, particularly in the key US and Chinese markets. "Nor do we expect any easing in the cost of raw materials in the foreseeable future. Moreover, we believe that the high oil price and the resulting record high fuel prices will further dampen automotive consumer confidence," the company statement said.

VW said its position in the US market had "stabilized" towards the end of the third quarter, thanks to the launch of the new Jetta and Passat models, as well as Audi A4 and Audi A6.

"We expect this to continue in the fourth quarter. However, due to the difficult market situation there, we will not match the previous year's delivery levels," the car maker said. In Western Europe, VW expected to increase its market share, particularly in Germany.