×

Volkswagen to slash investment by $1.1B per year

Embattled German carmaker Volkswagen announced Tuesday it would cut annual investment by 1 billion euros ($1.1 billion) after a special board meeting in the wake of the emissions scandal that has thrown the company into crisis.

In a press release Tuesday, the company's new Volkswagen Brand Board of Management said they planned to ramp up efficiency programs and overhaul select car models while cutting investments made by the VW Group's brand division by around 1 billion euros ($1.1 billion) per year.

The board also outlined plans for major developments towards plug-in hybrid vehicles and said new models of its flagship Phaeton car would be completely electric.

Volkswagen Phaeton automobiles pass along a conveyor on the assembly line at the Volkswagen AG factory in Dresden, Germany.
Kristian Bocsi | Bloomberg | Getty Images
Volkswagen Phaeton automobiles pass along a conveyor on the assembly line at the Volkswagen AG factory in Dresden, Germany.

Volkswagen's new diesel vehicles, meanwhile, would only be equipped with the "best environmental technology," the press release explained.

It comes after Volkswagen's diesel models built between 2008 and 2015 were found to have been equipped with software that reduced emissions during regulatory testing, but emitted 10 to 40 times the legal amount while on the road.

"Time and again, the Volkswagen team has proved it stands united and is fully focused on shaping the future, particularly when times are tough," CEO Herbert Diess said in the press release. "We have now laid the further foundations for that."

Volkswagen could be on the hook for as much as $18 billion in fines in the U.S.. However, with details emerging of similar software being used in Europe and Asia, alongside plans to recall and refit existing models, that figure could balloon.

"Time and again, the Volkswagen team has proved it stands united and is fully focused on shaping the future, particularly when times are tough," CEO Herbert Diess said in the press release. "We have now laid the further foundations for that."

Arndt Ellinghorst, head of global automotive research at investment banking advisory firm Evercore ISI Group, says these cuts only brings Volkswagen's spending more closely in line with its peers and that further cuts will be needed throughout the business.

"VW group is outspending every major OEM (original equipment manufacturer) in every area of the business," he said.

Underlying expenditure for investment and research and development at VW are almost 25 million euros ($28 million) for the group as a whole, Ellinghorst explained. The ratio to revenue stands at 14 percent, he added, which is "materially above" spending levels at fellow automakers like Toyota are around 8 percent.

"I would expect more cuts in area of $2 billion to $3 billion for the group overall. That would bring VW closer to more rational levels that we see at other car makers. It still would be at the higher end, but would be more reasonable," he said.