Volkswagen steps on the emergency brake following disastrous results: German car manufacturer pledges drastic cost-cutting programme and an end to the 'madness of variety' after pounds 515m first-quarter loss

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The Independent Online
VOLKSWAGEN chairman Ferdinand Piesch yesterday outlined a savage, short-term cost-cutting programme after the stricken German car maker announced that it had made a DM1.25bn ( pounds 515m) loss after tax in the first three months of 1993.

Planned investment is being halved, mainly in capacity expansion, to just under DM6bn. The group workforce is also being reduced by nearly 20,000 to 254,000 and short- time working is to be extended into the second quarter as VW 'steps on the emergency brake' to reduce unsold stocks.

Supplier prices are to be heavily squeezed, one of the key tasks of Jose Ignacio Lopez de Arriortua, the new hit man on the VW board. He was poached from General Motors where he was credited with slashing the US company's purchasing costs. 'We must get down to a level that enables both us and the suppliers to survive,' said Mr Piesch, adding that there would be sharper competition on high-value parts between in-house manufacturers and outside suppliers.

The 1992 results announced yesterday saw group pre-tax profit fall by 66 per cent, from DM1.785bn to DM602m. The 1992 dividend on ordinary shares was cut to DM2 from DM11. 'We hope to pay a dividend in 1993 but I cannot guarantee it,' Mr Piesch said.

He added that he hoped VW would make a smaller loss in the second quarter, moving to profit in the latter half of the year, on overall sales of 3.3 million vehicles.

The company also announced a substantial rationalisation in the production process, notably by focusing on modular parts. 'We have to get away from the madness of variety,' Mr Piesch commented, using the Golf range's 30 different axles as an example.

The extent of VW's problems is highlighted by the fact that its break- even point in 1992 was at over 100 per cent capacity utilisation. It is still over 90 per cent.

Mr Piesch conceded that VW's difficulties have 'only little to do with the recession and are really structural problems'. Citing the French as the benchmark for efficient European producers, he said VW's models are too expensive when compared with the competition.

Following through the revolutionary shake-up on the group's management board, Mr Piesch declared the goal to be having all main production processes operating in parallel teams. The nine management hierarchies are to be reduced to three. And by instituting a system of 'centres of excellence' VW is to put quality back at the centre of its strategy; recognition that standards have slipped considerably in recent years.

'One thing is absolutely clear: in just a few years we must already have overcome most of our cost disadvantages vis a vis the Japanese,' he said.