VW swamped by demand

AMID collapsing markets and universal gloom, it emerged last week that Volkswagen was facing a severe production crisis and struggling to meet demand for the Golf, Europe's best-selling car.

Coupled with record German car production in August, this helps to explain why Hans Tietmeyer, head of the Bundesbank, swiftly rebutted President Clinton's demand for lower interest rates. The car industry accounts directly or indirectly for 30 per cent of the German economy. August saw a 40 per cent increase in production, and orders continue to grow strongly.

Profits at Daimler-Benz, BMW and Volkswagen are running at record levels, thanks to strong export demand for new models. Analysts are admittedly cautious about the boom in the German car industry, which has fuelled growth in the wider German economy. John Lawson at Salomon Smith Barney said: "The German car industry is enjoying its best phase ever. Nevertheless, there are clouds on the horizon, notably from lower growth and a weaker dollar."

At the moment, Volkswagen is struggling to cope with its own success. It built a record 4.3 million cars last year and has been overwhelmed by demand.

In the US, its sales rose by 50 per cent in the first half of 1998. In 1997, it reported profits of DM3.9bn (pounds 1.37bn) and is expected by Salomon Smith Barney to make profits of DM6.2bn this year.

Volkswagen's production problems centre on its main Wolfsburg works, which - with 47,000 employees - is the largest car plant in the world.

Klaus Volkert, union representative on Volkswagen's supervisory board, indicated last week that Wolfsburg was beset by problems and running at three-quarters of its theoretical capacity of 3,000 vehicles a day.

With waiting lists extending for six months and beyond, the costs to Volkswagen of the lost production are phenomenal. Assuming one fifth of potential production is lost, that could knock DM1.5bn off profits a year.

Modelled on the Ford plant at River Rouge, Detroit, and built during the 1930s and 1940s, Wolfsburg was not conceived with modern production methods in mind and its architecture is visibly a product of Nazi monumentalism.

Despite heavy investment in the latest technology, production flow is often slowed by the unnecessary complexity and size of the site.