Warning of tough times ahead, CEO of Volkswagen Passenger Cars, Thomas Schäfer, addressed top VW employees this week, telling them, “This is the final wake-up call.” Schäfer is calling for a short-term spending freeze to get costs under control.
“We are letting the costs run too high in many years,” VW’s leader proclaimed during an online management meeting this week.
Schäfer said he plans to cut spending for the rest of the year as part of a broader company-wide savings plan. Last month, VW announced a new “Accelerate Forward” program designed to drive long-term profitability and performance.
Part of the plans includes doubling VW passenger brand profit margins from around 3% currently to 6.5%.
The core brands leader said after announcing the initiative, “The program is the number one priority for the entire Board of Management.” Through its Accelerate Forward strategy, VW expects to improve earnings by roughly $11.2B (10 billion euros).
The company will focus on higher volume models to streamline production while reducing the number of variants to further optimize efficiency. VW gave an example of its new ID.7 having 99% fewer configuration options compared to a Golf 7 model.
Meanwhile, Volkswagen’s problems go beyond just simply profit margins. Despite all-electric vehicle sales increasing 48% YOY to 321,600 in the first half of the year, EV sales fell in one of its most critical markets, China.
Volkswagen CEO: “This is the final wake up call”
According to quotes by Manager Magazin, VW’s Schäfer said at the management meeting this week:
The roof structure is on fire. This is the final wake-up call.
VW’s final wake-up call comes as the automaker’s dominance over the Chinese auto market is slipping. The Volkswagen Group generates around 40% of its revenue from China, yet EV sales are down 1.5% from the first half of 2022.
More importantly, while new EV registrations are still climbing in other key markets, many of these are older orders from last year or even 2021, in some instances.
According to Handelsblatt, the reason for VWs demand problem is its so-called agency model the automaker implemented with dealers while introducing its ID series.
The move essentially helps save on sales costs but limits the dealer’s ability to raise or lower prices. A VW sales rep said, “The manufacturer cannot sell directly, that becomes clear in times like these,” adding the electric models are “simply too expensive.”
The report claims VW’s high order backlog is still masking the low demand. Earlier this year, CEO of VW Group and Porsche, said he had no plans of joining Tesla in a price war.
However, unlike Tesla, Volkswagen is not generating substantial margins on its electric models. Despite this, the automaker has already caved in China by introducing a limited-time offer on its ID.3 electric car.
Looking ahead, Volkswagen will likely look to introduce cheaper, more basic models with smaller batteries, like the ID2 all concept starting under $27,000 (€25,000) with up to 279 miles (450 km) of range.