Volkswagen to trim down spending in North America

Volkswagen AG, Europe’s largest car maker, will reduce discounts and warranty claims, and concentrate on the sales of the most profitable models to make up for their loss in North America.

“We have a better financial result this year than last year, categorically,” said Adrian Hallmark, Volkswagen of America’s executive vice president. “We’ve cut costs, we’ve reduced incentives and we have hedged.”

Volkswagen sales have fallen in the U.S. this year as the company prepares new models for 2008. The company only sold 91,743 vehicles in the U.S. in the first five months, a 4.4 percent drop from a year earlier. Sales in 2007 will be flat, Hallmark reiterated.

Hallmark has a long-term goal of increasing U.S. sales to 400,000 to 600,000 vehicles a year. Last year, the car maker sold 235,140 cars and SUVs in the world’s largest market. Volkswagen’s U.S. sales record, set in 1970, was 569,696 cars and vans.

Volkswagen expects to increase U.S. sales next year with the introduction of a compact sport-utility vehicle, a new Passat coupe and a minivan built with DaimlerChrysler AG. The car company will also reintroduce a diesel Jetta in 2008. Volkswagen this year pulled the diesel, which accounted for 30 percent of U.S. Jetta sales last year, to switch to new technology.

Volkswagen’s North American loss in 2006 was 607 million euros, after a loss of 317 million euros in the first half. The company will no longer give profit figures by region when it reports first-half earnings on July 27.

Worldwide, the company reported a first-quarter profit after cutting labor costs. The Volkswagen brand had earnings before interest and tax of 386 million euros compared with an operating loss of 49 million euros a year earlier.

Volkswagen has lowered North American costs by decreasing spending on warranty claims by two-thirds over the last two years and focusing on sales of more profitable vehicles, Hallmark said.

“The car maker will double Rabbit sales this year to 20,000 vehicles while reducing Passat sales. The incentive costs for selling 2,600 Passats in the U.S. are eight times as high as selling the same number of Rabbits,” Hallmark said.
Hallmark plans to shorten delivery times from European and Mexican factories by one week by the end of the year. It now takes six weeks to get vehicles from Mexico and 14 weeks from Germany. Hallmark also said that it would cost $35 to $40 per week in transit for a Passat.

Hallmark, 44, replaced Executive Vice President Len Hunt as head of Volkswagen’s U.S. operations in late 2005. Volkswagen made changes in North America after sales plummeted and losses deepened. Hallmark had been running sales and marketing for the Bentley luxury-car division.

“Hallmark was moved from Bentley, where he was very successful, and has had one clear mission: Get Volkswagen’s U.S. operations into shape,” said Stephen Pope, head of equity research at Cantor Fitzgerald in London, who has a `buy’ rating on the stock. “The benefits of the hard work are being seen and when the new models come through it will auger well for the sales.”