Volkswagen under pressure as China sales fall and Audi falters

Volkswagen shares slipped on Wednesday after an overnight profit warning triggered in part by the possible closure of an Audi plant and a 3.8% drop in second quarter sales dented by China.

Deliveries in China were down by nearly 20% amid a wider decline in sales of combustion engine cars which still make up the majority of Volkswagen's line-up in the country.

As China heads speedily to an all-electric market, Volkswagen has said it will be raising its battery-powered offerings in coming years and prioritising profitability even as rival local carmakers slash prices up by to 50%.

"We do not expect an easy year," a spokesperson told reporters.

The company lowered its 2024 operating return on sales forecast to 6.5-7% from 7-7.5% and said the Audi brand was considering closing its Brussels site, which employs about 3,000 people, due to low demand for its higher-end electric cars.

Volkswagen shares were down 1.13% at 105.4 euros at 1030 GMT, contributing to a 5.5% fall so far this year.

Finding an alternative use for the plant or closing it, as well as other expenses, would cost up to 2.6 billion euros ($2.8 billion) this financial year, Volkswagen announced.

A consultation process is now ongoing on finding alternative solutions for the site, it said.

Mexico Move

The future of Audi's Brussels plant was thrown into question earlier this year after the carmaker said the follow-on model to the Q8 e-tron would be built in Mexico.

Rising orders for newer models such as the Q6 e-tron coming to market this year had led to a sharp drop in interest in the older Q8 e-tron produced in Brussels, Audi said on Tuesday.

Audi has struggled to catch up with premium carmaker competitors BMW and Mercedes in the transition to electric vehicles.

"Products like the first generation Q8 e-tron were halfway solutions - not the full clean sheet like Audi has done with its new premium electric platform," said Stephen Reitman of Bernstein Research. "The potential of the Q6 is higher."

Audi has promised a refresh in 2024 and 2025 with over 20 new EV and combustion engine models, followed by EV-only models from 2026.

Addressing Costs

Volkswagen, which has strong union representation, has not closed a plant in four decades, but analysts said the carmaker was under pressure to reduce significant amounts of excess production capacity.

"Given the low margin on first quarter results, now is the time to negotiate with unions," said Daniel Schwarz of Stifel Research.

Some analysts welcomed the news of the possible plant closure as a sign the carmaker is addressing its costs and excess capacity.

"People worry because the headline figures play into the concern that VW is in trouble. but this is a business with too much cost and they're addressing that," Philippe Houchois of Jefferies said.