Executive admits it will take time to crack US market after diesel scandal

Volkswagen on Tuesday unveiled an overhaul of its underperforming VW brand aimed at tripling its profit margin and eventually cracking the US market.

Still reeling from the consequences of last year’s diesel emissions scandal, the VW brand is seeking to achieve a 6 per cent return on sales by 2025, compared with just 2 per cent in 2015.

The strategy will involve the German carmaker producing 17 new sport utility vehicles by 2020 to capitalise on strong consumer demand, and phasing out models that are not popular. It will also seek to sell 1m electric cars globally by 2025.

Herbert Diess, head of the VW brand, is seeking to conquer the US market, but admitted it could take a decade. The company has a weak position in the US, and its reputation was badly damaged by the revelations in the emissions scandal.

VW will devolve decision-making on many of its products to a local level, in a move aimed at increasing market share in key regions such as North and South America and China. Finally, there will be a push to eliminate some of the cost and complexity that has weighed on the brand’s profitability.

“This will be the biggest process of change in the history of our brand,” said Mr Diess. “We are faced with tremendous challenges. We must not lose any further time.”

Analysts said the new strategy left many questions. “Thus far, the detail provided is far from sufficient to improve confidence in the operational turnaround story at VW brand, and hence the group,” said Stuart Pearson, analyst at Exane BNP Paribas.

Arndt Ellinghorst, analyst at Evercore ISI, said the VW strategy was “short on near-term financial targets”, and the company needed to outline a “clear road map” for investors, something that was hampered by ongoing investigations into the emissions affair in the US.

Mr Diess said he wanted to push the VW brand margin up to 4 per cent by 2020, and 6 per cent by 2025, with an aim of being above 6 per cent after 2025.

This compares with how, before the emissions affair, the brand’s margin was meant to reach 6 per cent by 2018.

VW shares closed up 0.4 per cent on Tuesday at €120.60.

The performance of the VW brand has lagged behind competitors as well as other marques within the German group, such as Audi and Porsche, where margins are far higher.

Efforts to improve the brand’s profitability took a big step forward last week when VW reached an agreement with the company’s works council to cut 30,000 jobs by 2020 in order to save €3.7bn a year.

This deal will help prioritise investments in electric vehicles, as well as new digital car services: the brand wants to generate €1bn in sales from this area by 2025.

VW is seeking to increase its sales in developing countries, but Mr Diess acknowledged it would take many years to improve the brand’s position in the US, where it has a 2 per cent market share.

US regulators revealed last year how VW had fitted cars with cheating software that served to understate emissions of harmful nitrogen oxides in official tests. Up to 11m VW group cars worldwide were affected.

“In the next three years we will not be able to compete with the largest players”, said Mr Diess. “It will take 10 years to be really a significant volume player in the US.”

VW will build electric cars in North America from 2021, potentially at its Chattanooga plant in Tennessee, under the motto “electrify America”, added Mr Diess.

The US strategy also involves a bigger push into SUVs, which have proved particularly popular in the country and generate a higher margin compared with smaller cars.

By 2020 VW will sell 19 SUVs globally, against just two today, said Mr Diess, adding the company had “missed the bandwagon” by launching models later than competitors.

Source: The Financial Times