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New VW CEO Matthias Müller has promised cuts; motorsport and Bugatti are likely to face scrutiny
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7 mins read
7 October 2015

The VW Group has set aside billions of euros to pay for its 'dieselgate' scandal but with financial analysts at JP Morgan predicting that the final bill in a worst-case scenario could be 40 billion euros, it’s little surprise that new CEO Matthias Müller has already predicted some cuts.

If that figure is proven correct, it would have the potential to blow a hole right through the VW Group’s investment plan through to 2020; it is, after all, enough to fund the design, engineering, development, launch and marketing of more than 20 new models.

Where, though, will the VW Group turn to make savings? Let’s assume that its core product line-ups will survive; the scandal is unlikely to delay the Mk8 Golf or Mk6 Polo, because if anything, VW needs to focus on the bread-and-butter everyday cars that made the brand so successful in the first place. Its commitment to the hideously expensive process of adapting factories to the efficient MQB platform technology has to remain firm.

It’s also hard to imagine VW pulling the plug on its American effort. Its days as a diesel pioneer there are long gone (its US website no longer features a single diesel model) but expect it to push ahead with local production and models aimed at American buyers, such as the CrossBlue large SUV.

Still, there are several areas where development and spending could be slowed, reduced, postponed, or even cut altogether. Here are some likely candidates:

Budget brand: Pet projects of key executives are always easy meat when it comes to cutbacks - and the VW Group’s much-discussed budget brand is a perfect example of this. It was born out of the belief of Martin Winterkorn, Ulrich Hackenberg and Heinz-Jakob Neusser that VW could do a better job of building a budget platform than Suzuki. However, every time the bean-counters ran the numbers on what the engineers were proposing as an alternative to the Maruti architecture that the Japanese company could offer, they said it couldn’t stack up.

That’s fundamentally still the case. Even if there’s still the appetite amongst VW’s Supervisory Board for yet another brand in the portfolio - and that’s a huge if - the Group may well decide that now is not the time to take a risk on a project with wafer-thin profit margins. Perhaps, they may reason, it makes more sense to focus on making money from the second generation of the Up, Mii and Citigo city cars - a project that is widely judged to have been a financial failure to date.

Next-generation Phaeton: Put aside for one moment the fact that the first Phaeton - the pet project of Ferdinand Piech - has been in red ink on the VW budget sheet for pretty much all of its 12 years (only saved in recent times by sales in China). And let’s not quibble over the fact that the next one would probably do the same, even though it’s due to be based on the more cost-effective MLB platform.

No, the real reason why Volkswagen won’t want to launch a new luxury saloon any time soon is that right now, it desperately needs to get back to its roots and appear humble again. The VW badge has always struggled to justify its place on a £60,000 saloon - and that awkwardness has been compounded by the dieselgate crisis. We’d expect this one to be postponed indefinitely - or even shelved altogether.

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Bugatti: The idea of having €1m-plus hypercar brand in your line-up when you’re desperate to appear humble in the eye of the wider public is an awkward one - and it’s no surprise, therefore, that the future of Bugatti has already been called into question in the German media. In a way, it’s a wonder that it’s taken so long; respected industry analysts at Bernstein Research once suggested that the VW Group lost around £4m on every Bugatti Veyron sold.

You’d like to think that the forthcoming Chiron may stand a better chance of bringing in some cash - if only because it’s essentially based on the same platform, and will presumably have cost a bit less to develop. But such are the small numbers involved at the Bugatti plant at Molsheim that the VW Group could easily postpone the new model for a year or 18 months, keep staff ticking over with maintenance on the existing Veyrons and save a bit of PR embarrassment. Some wilder speculation has even suggested that the Bugatti brand - complete with a near-ready Chiron - could be one of the easier elements to sell off if VW decides to break off chunks of its group.

Bugatti may not be a lost cause, though. It may prove significant that the brand has been brought in under the wing of Porsche in the VW Group’s newly created ‘sport’ division. And of course, Bugatti’s biggest ally of all - Dr Ferdinand Piech - waited only one day after the departure of his arch-rival Martin Winkerkorn before popping back into VW HQ in Wolfsburg. His influence over the future of the VW Group’s pinnacle luxury brand could prove pivotal in the weeks ahead.

Motorsport: The VW Group’s three major motorsport programmes are two World Endurance Championship campaigns for Audi and Porsche, and the World Rally Championship with Volkswagen. Porsche remains largely untainted by the diesel gate crisis, so its WEC effort should be safe enough. Audi, meanwhile, contributes 40% of the VW Group’s revenues - so the much-rumoured switch to F1 - funded by a mix of Middle Eastern investors and Red Bull - could still occur (it’s not expected to happen until 2018 anyway).

The WRC is probably under the greatest threat: VW has already won three world titles in a row with Sebastien Ogier, and while the WRC itself has listened to manufacturers and included a new round in all-important China for 2016, it has also extended the calendar to accommodate the new event instead of replacing one of the less attractive rounds. More rounds mean more costs in logistics - and it’s also worth remembering that VW has to spend huge amounts of cash just reminding the public that it’s in the WRC at all, because the series still struggles to get proper television coverage.

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If VW is to start cutting R&D jobs and shutting a factory or two, it’s hard to see how it can get that past the unions when it is spending millions on three Polo WRCs. VW recently started testing a Polo WRC based on world rallying’s revised rules, due to come into force in 2017. Those early miles in Finland may well prove to be the limit of that car’s activities.

Niche models: With the Volkswagen brand’s environmental credentials under closer scrutiny than ever, is the world ready for a hardcore version of the VW Golf with 395bhp, a 0-62mph time of less than four seconds and a price tag north of £35,000? It’s unlikely. Prototypes of the Golf R400 spent much of this year thrashing around the Nordschleife, but we’d expect this most extreme of VW hot hatchbacks to be put firmly on the back burner - perhaps until it can be an end-of-life edition of the Mk7 Golf in around 2018.

Bentley’s baby V8 sports car project - previewed by the EXP 10 Speed 6 concept at the Geneva motor show - could also be delayed. The British firm has been asking customers for expressions of interest in the car, but it may have to focus on fulfilling a bulging order book for its Bentayga SUV and wait for the cash to modify Crewe to accommodate yet another model.

Jobs: With more than half a million staff on his payroll, Matthias Müller probably gets phone calls from a dozen unions the moment he mentions the word ‘Cuts’. But there’s no doubt that a realignment of the Group’s activities - an adjustment to its US-market ambitions, for starters, and a probable tidy-up of the Chinese operation - could result in some reductions in shift patterns at best, or factory closures at worst.

One of the bigger hits could come in the R&D department, though. Audi’s development boss Dr Ulrich Hackenberg revealed last year that he had 10,000 engineers under his charge at that brand alone and that he could tap into the collective brains of 40,000 development staff across the group. It is inconceivable that this sort of scale can survive any Group-wide cuts, especially as the Group rationalises its activities and focuses on making doubly sure that existing products are profitable and accepted by consumers.

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Mikey C 13 October 2015

The only logical divisions to sell

Would be self contained and with no effect on overall economies of scale
So selling Seat or Skoda would make no sense, who would want to but Seat when you'd have to replace every model without the shared VW parts and platform?

Bugatti is a vanity project, that makes losses, but also needs access to VW group technology, so again would be worth little.

That leaves the Ducatti and MAN/Scania truck divisions...

jer 12 October 2015

Wow 10k at Audi

40k in the Group those are serious numbers of "development engineers"
reckless fox 9 October 2015

Offload brands

I don't think an of the mainstream brands can be offloaded as they are all so linked to the group platforms. In reality, Skoda, Seat, VW and Audi are just skins on the same architecture, and they can't sell the underlying platform. Even if you could, selling them just reduces the benefits to scale and worsens the profitability of their business.

Slimming back the ranges - yes I agree that would make more sense

Selling Bugatti and Ducati seem like the best options. Even Lamborghini shares a platform with Audi.