VOW Volkswagen AG

By William Boston 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 31, 2019).

BERLIN -- Volkswagen AG warned Wednesday that the downturn in the global car market was worsening, but maintained its outlook for profit and revenue as the world's biggest auto maker by sales continued to sell more higher-priced sport-utility vehicles.

Volkswagen's warning comes amid a spate of profit revisions and downbeat assessments of the industry by major players such as General Motors Co., Ford Motor Co. and Renault SA, citing trade conflicts, Brexit and economic uncertainty in China, the U.S. and Europe. Auto sales world-wide are expected to decline 4% this year, after a 0.5% decline in 2018.

Meanwhile, pressure is mounting on manufacturers to achieve scale, cut costs and generate more cash to finance investment in electric vehicles and new self-driving technology. Underscoring this, Fiat Chrysler Automobiles NV and PSA Group, maker of Peugeot and Citroën cars, have agreed on merging to create a trans-Atlantic heavyweight better able to absorb the rising costs of industry transformation, according to people familiar with the situation.

Volkswagen, whose automotive brands range from passenger cars and luxury sports cars to vans and long-haul tractor-trailer trucks, is reaping the rewards of an overhaul of its business that began in the wake of its 2015 diesel-emissions cheating scandal.

"The best days of the party are over, but I wouldn't want to drown in worries about recession," Volkswagen finance chief Frank Witter said of his industry's prospects.

Despite delivering fewer new vehicles, Volkswagen posted a 42% rise in third-quarter profit to EUR3.8 billion ($4.2 billion), while revenue rose 11% to EUR61.4 billion. It attributed the improvement to cost cuts and an increase in the share of higher-price SUVs in its product mix.

Overall, its new-car sales were down 1.7% for the first nine months of the year because of a fall-off in Europe and China.

Mr. Witter said the company's finances were improving, pointing to EUR8.6 billion in cash flow in the first nine months, up from EUR3.5 billion the year before, as the ratio of capital expenditure to revenue remained steady at around 5%.

Volkswagen shares rose 0.6% in Frankfurt, giving up earlier gains in the session.

As industry consolidation accelerates, global scale could decide the winners and losers in the race to dominate the sector. Big players such as Volkswagen, Toyota Motor Corp. and GM have long been seen as favorites, with the size and financial firepower to shoulder the costs of change. A merger of Peugeot and Fiat Chrysler would add to the mix in creating a $50 billion giant with solid footing in the U.S. and Europe and the potential to grow in China.

Smaller players, such as the German luxury brands Daimler AG and BMW AG, are struggling to maintain profits. Daimler reported higher overall earnings last week, but its flagship Mercedes-Benz luxury car division is struggling, with a 1% decline in sales to 1.74 million vehicles in the first nine months of this year and a sharp drop in its return on sales.

Renault, which is grappling with upheaval in its alliance with Japan's second-largest auto maker, Nissan Motor Co., reported last week that third-quarter revenue fell 1.6% to EUR11.3 billion and that vehicle unit sales dropped more than 4%. The French car maker also recently booted its chief executive.

GM and Ford face challenges as well. The former lowered its profit outlook this week, saying the 40-day United Auto Workers strike nearly wiped out its free cash flow for the year and cost it nearly $3 billion in lost earnings.

Ford, in the midst of a global reorganization, slashed its profit outlook for 2019 amid tougher competition in the U.S.

Write to William Boston at william.boston@wsj.com

(END) Dow Jones Newswires

October 31, 2019 02:47 ET (06:47 GMT)

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