Volkswagen Profit Drop Shows Recovery Is Far Ahead

Operating profit at the biggest brand of the Volkswagen umbrella fell in 2016 showing there remain big challenges ahead for the largest automaker in the world 18 months after its scandal related to diesel engine emissions.

The company, based in Germany, said in February it made a record operating profit within its group during 2016, excluding items that were one-off, helped from strong performances by Porsche and a turnaround at the Scania trucks company.

However, releasing detailed data on its different brands Tuesday, the automaker said that is underlying operating profit for its namesake VW brand had fallen by 10% to just over €1.9 billion or $2 billion, while profit margin slipped from 2% to 1.8%.

The auto group said a drop in revenues as well as higher costs for marketing due to the admission in September of 2015 that it has cheated on emissions tests in the U.S. for its diesel engines were what factored into the drop.

Although the group overall has returned well from the scandal, as it overtook Toyota from Japan in 2016 to become the largest selling carmaker, analyst looked at the VW brand as the key to the overall prospects in the business.

The VW brand represented nearly half of the revenue at the group during 2016, but only 10% of its underlying operating profit.

The brand entered into a deal with its unions last November to eliminate jobs and to target annual savings of €3.7 billion by 2020 in its effort to raise its profit margin that year to 4%, which is still lower than many of its major rivals.

Nevertheless, problems with the implementation of those strategies have increased doubts amongst some auto analysts if the targets will ever be achieved.

VW COE Mathias Mueller announced that the group of 12 brands had been brought back on track following an agreement to spend as much as $25 billion in the U.S. to address the claims of vehicle owners, regulators, states as well as dealers regarding its scandal with emissions.

Mueller confirmed the forecasts for an increase to 4% in its sales revenues for 2017 and a profit margin for the group of between 6% and 7% versus a 2016 profit margin of 6.7%. He added that the group was also capable of handling its costs for the emissions scandal.

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