VW bets on electric cars, services to recover from crisis

By Andreas Cremer

WOLFSBURG, Germany (Reuters) – Volkswagen <VOWG_p.DE> will invest billions of euros in electric cars, ride-hailing and automated driving to become a world leader in green transport by 2025, it said on Thursday, as it reshapes its business following its diesel emissions scandal.

Europe’s biggest carmaker said it would fund “the biggest change process in the company’s history” with an efficiency drive, including integrating components businesses that currently employ 67,000 people in 26 locations worldwide.

But a lack of detail in the programme, dubbed “TOGETHER – Strategy 2025”, left some analysts cold, and Volkswagen (VW) shares fell as much as 4.3 percent.

“The announcements by VW look great on paper but no one can say for sure how demand for electric mobility will develop,” said Commerzbank analyst Sascha Gommel.

“There are worthy elements among the plans but it’s probably also a marketing exercise by VW to tell the public that they have gotten the message” to change after its scandal, said Gommel, who has a “hold” recommendation on the stock.

VW is battling to recover from the biggest business crisis in its 79 year history after admitting in September to cheating U.S. diesel emissions tests. The German company has set aside $18 billion to cover the cost of vehicle refits and a settlement with U.S. authorities, and analysts expect more fines and costs.

The scandal has cast a shadow over the entire market for diesel cars, which account for about half of new vehicle sales in Europe, and has ramped up pressure on VW to cut costs at its namesake brand, which lags the profitability of rivals.

Spelling out a new strategy ahead of its annual shareholder meeting on Wednesday, the company said it planned to launch more than 30 electric vehicles over the next decade, forecasting they would account for about a quarter of group deliveries by 2025.

While VW sold almost 10 million vehicles last year ranging from upmarket Audis and Porsches to cheaper Skodas and Seats, it built just 67,000 fully or part-electric cars.

The company also said it would build a services business encompassing areas such as ride-hailing and car-sharing that it expects to generate billions of euros in sales by 2025, as well as hiring another 1,000 software engineers to help develop its own autonomous driving and battery technologies.

Chief Executive Matthias Mueller said the transformation would require a “double-digit billion” amount of investment, funded by an efficiency drive aimed at delivering around 8 billion euros in annual savings.

VW said it would tackle costly complexity in parts and slim down its bloated 340-model range as well as review its portfolio of assets and brands which industry observers said could lead to the sale of “non-core” businesses such as Ducati motorbikes or its diesel engines business for machinery.

But Mueller gave few details, saying they would be announced by the company’s brands in due course, though he added the VW brand was counting on a “pact for the future” with unions to be agreed by the autumn, aimed at both boosting competitiveness and preserving jobs.

Some analysts said VW’s move to embrace new technologies was merely catching up with rivals such as Daimler and BMW, while cost cutting would take time to boost profits.


Critics, including activist investor TCI, have urged VW to take more radical action to cut costs.

Some have also called for the company to tackle a complex ownership structure, in which the founding families, German state of Lower Saxony and unions all have strong voices.

Investors are braced too for the results of an investigation into who was responsible for, and who knew about, the emissions test cheating.

“For me, this is not an investible stock. That is really to do with the corporate governance issues, which they still haven’t addressed,” Kevin Lilley, European equities fund manager at Old Mutual Global Investors, said on Wednesday before the strategy announcement.

He said a “cosy relationship” between key shareholders meant “this company never reaches proper profitability.”

But Evercore ISI analyst Arndt Ellinghorst said the new strategy showed encouraging signs.

“Has VW changed? While only time will tell, there is certainly evidence that this is the case,” he said, retaining a “buy” rating on VW shares.

VW said its plan aimed to improve its operating return on sales before one-off items to 7-8 percent by 2025 from 6 percent in 2015. But DZ Bank analyst Michael Punzet was not impressed.

“Without any additional details on planned measures as well as on Dieselgate, we stick to our sceptical view on VW,” said Punzet, who recommends selling the stock.

Mueller reaffirmed VW’s expansion and investment plans for North America and China, adding he expected China would be the main market for its new electric cars.

He also said VW was in talks with potential partners to bolster its position in China’s growing economy-car market, a current weak spot for the business.

(Writing by Georgina Prodhan; Editing by Mark Potter)

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