Volkswagen AG (VWAGY), Europes largest carmaker, has warned that annual revenue may decline by as much as 3% as its worsening performance in China places further pressure on Chief Executive Officer Oliver Blumes turnaround strategy. The company had previously expected revenue to range from flat growth to an increase of 3%, making the revised outlook another setback for investors already concerned about declining profitability, elevated costs and intensifying electric-vehicle competition. Volkswagen shares fell as much as 3.2% in Frankfurt following the update, extending their decline this year to 31%. China remained the main weakness, with group deliveries falling 37% during the three months through June as domestic automakers gained further ground in electric vehicles.
Blume is attempting to make Volkswagen faster and more efficient after years of software delays, high expenses and weakening profitability. His proposal to eliminate as many as 100,000 jobs and close four factories faced resistance from the companys supervisory board earlier this month, suggesting the restructuring process may remain difficult. Chief Financial Officer Arno Antlitz said Volkswagen continues to operate underused factories, faces a 30% cost gap against competitors and needs to reduce overhead expenses by at least 10 billion, or $11.4 billion. Despite those pressures, management expects earnings to improve during the second half as productivity measures, cost reductions and new Audi models begin to contribute. Volkswagen also maintained its projection for an operating margin of between 4% and 5.5% and continues to expect its full-year result to exceed the 2025 level.
Demand for Volkswagens new compact electric cars may provide some support, with Blume reporting 70,000 orders within several weeks for models grouped around the ID. Polo. However, BYD Co. (BYDDF), a Chinese automaker competing in electric and hybrid vehicles, and Geely Automobile Holdings Ltd., a Chinese vehicle manufacturer, have expanded their lead in China while also increasing competitive pressure in Europe. BMW AG, Mercedes-Benz Group AG (MBGAF) and Porsche AG, German premium and luxury automakers, are facing similar concerns as weaker Chinese demand weighs on the regions auto sector. Volkswagen is seeking to rebuild momentum through local partnerships, including work with Xpeng Inc. NYSE:XPEV, a Chinese electric-vehicle manufacturer, on new electric models, while Audi, Volkswagens premium-car brand, is developing a China-specific electric-vehicle platform with SAIC Motor Corp., a Chinese automaker. These initiatives, together with lower costs and stronger second-half product activity, could help determine whether Volkswagen can stabilize earnings despite continued pressure in China.