Volkswagen Cuts Spending to Cope with the Emissions Scandal

By John

Volkswagen headquarters in Wolfsburg, Germany. Image source: Volkswagen

As expected, on Friday Volkswagen released a summary of its plan to reduce spending as it grapples with the potential costs of a giant emissions scandal.

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It's an incremental reduction, not a drastic cutback. Perhaps in relief, VW shares were up about 2% in European trading after the announcement.

What's the plan?VW said in a statement that it will cap its capital expenditures at about 12 billion euros ($12.8 billion) next year. That's down about 1 billion euros ($1.1 billion), or 8%, from its average over the past few years.

It appears that VW plans to get most of those cuts from delaying or slowing down programs that are already in the plan, not from drastic cuts to major programs. A new design center planned for VW headquarters is on hold, a paint shop upgrade in Mexico may be delayed, and an upcoming all-electric version of the VW Phaeton luxury sedan may be postponed or cancelled, it said.

VW said explicitly that there will be no cuts to planned investments in China.

In the same statement, VW said that it will boost spending on "alternative drive technologies" by about 100 million euros ($110 million) next year. That investment will be focused on rapidly developing electric drive systems for the VW, Audi, and Porsche brands, including the "modular electric toolkit" ("MEB" in German) that will serve as the basis of several new battery-electric models.

"We are not going to make the mistake of economizing on our future. For this reason we are planning to further increase spending on the development of e-mobility and digitalization," CEO Matthias Mueller said.

What does it mean for VW? First and foremost, the cuts only save a billion euros. VW is likely to need more money to deal with the costs of the scandal than it has so far set aside. Right now, it's not clear where that money will come from.

It is, however, clear that VW won't mess with its highly profitable operation in China. It's also clear that VW is following through on Mueller's stated plan to boost efforts related to electric cars. That's smart for a number of reasons, not least of which is that it could help VW restore its green credentials in time.

The relative modesty of the cuts isn't surprising. Cutting anything at VW is very difficult. German labor leaders have an outsized voice in VW's affairs, and resistance to cutting any programs -- or any workers -- is said to be very stiff.

What else could VW cut without sacrificing future product programs?Theoretically, it could probably cut a whole lot of employees. VW has nearly 600,000 employees worldwide, far more than the roughly 340,000 at Toyota -- and nearly three times the approximately 212,000 employed by General Motors . All three delivered roughly 10 million cars last year.

But again, the power of labor unions in Germany and inside VW in particular mean that major personnel cuts probably won't be happening any time soon.

The upshot: Not a bad plan, but probably not close to enoughSimply put, VW is likely to need more than a billion euros to cover the costs of the scandal in 2016. With this plan, we now know that -- at least in the near term -- major VW future-product plans aren't at risk. But we still don't know how much this scandal is ultimately going to cost VW, or how those bills will get paid.

For value-minded Fools considering an investment, I still think we need more information.

The article Volkswagen Cuts Spending to Cope with the Emissions Scandal originally appeared on

John Rosevear owns shares of General Motors. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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