VW Budget Car Plan Stalls As Struggles To Meet Cost Targets

Volkswagen's plan to build a budget car for emerging markets, a key part of its drive to become the world's biggest automaker, has stalled because the German group is struggling to meet cost targets for the vehicle, a VW executive told Reuters.

Europe's largest carmaker has been trying for more than a year to hit internal cost requirements for the vehicle, which would likely sell for between 6,000 euros ($8,300) and 8,000 euros and be built in China, the biggest market for budget cars.

"It's becoming more and more difficult" to hit cost goals necessary to approve production of a budget car, VW brand development chief Heinz-Jakob Neusser told Reuters at the Geneva auto show Tuesday.

"It makes no sense to approve a vehicle that's not meeting our targets," he said, adding VW would keep working on fulfilling the requirements.

VW lacks a strong presence in markets such as India and southeast Asia which are dominated by no-frills models, and without a successful budget car, analysts have questioned whether the group will be able to meet its goal of becoming the world's biggest carmaker by 2018.

A 2009 partnership with Suzuki Motor Corp (7269.T), designed to benefit from the Japanese manufacturer's leading position in India, fell apart in 2011 in a public squabble.

In the meantime, low cost cars from rivals such as Hyundai <005380.KS> and Toyota <7203.T> have powered ahead in Asia. France's Renault <RENA.PA> has also been cushioned from a slump in European car sales by its expansion into entry-level cars, which surged to account for 41 percent of its global registrations from below 30 percent in just two years.

"News regarding cost problems related to VW's internal structures aren't new," said Arndt Ellinghorst, London-based analyst at ISI Group. "But the fact that these keep coming up, despite (the cost-cutting) MQB modular platform and in light of VW's light outlook, is somewhat alerting."

On February 21, VW toned down its guidance for 2014 operating profit even after publishing record earnings of 11.7 billion euros ($16.1 billion) for 2013 which beat company expectations.

If approved, a budget car would undercut VW's 9,850-euro Up! city car, the brand's smallest and cheapest model that is only sold in Europe and Japan. The two-door vehicle came to market in December 2011 and was launched as VW's first electric-powered car last year.

To keep down assembly costs, VW has said it would use pre-existing mechanics from models that have gone out of production or are nearing the end of production, rather than develop new costly underpinnings for the budget car from scratch.