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Abu Dhabi, UAEMonday 17 December 2018

VW warns over 2018 earnings as Germany mulls diesel ban

Car maker investing billions of euros into electric and self-driving cars while still paying out for the "Dieselgate" emissions scandal

Volkswagen cars at the storage facility auto tower at the company headquarters in Wolfsburg. Odd Andersen/AFP
Volkswagen cars at the storage facility auto tower at the company headquarters in Wolfsburg. Odd Andersen/AFP

Volkswagen said profitability could take a hit this year as the car maker invests billions of euros in electric vehicles (EVs) and launches a raft of new models.

Europe's largest automotive group, which reported record 2017 earnings on Friday, said it expected a return on sales for 2018 of between 6.5 and 7.5 per cent before special items, after reaching 7.4 per cent last year. It expects revenue to exceed the 2017 record of €231 billion (Dh1.04 trillion) by as much as 5 per cent.

Volkswagen (VW) is investing billions of euros into electric and self-driving cars while still paying out for the "Dieselgate" emissions scandal which has cost the company around $30bn in charges and fines.

The German group set aside another €600 millio in the fourth quarter in provisions for higher legal risks and vehicle buy-backs related to the emissions scandal, raising 2017 provisions to €3.2bn.

In total, VW has now put aside €25.8bn to cover fines, compensation and vehicle refits, of which nearly €20bn have so far been paid out.

The German government, which has steadfastly opposed bans on heavily-polluting diesel cars in cities, now plans legal changes that would allow driving bans on certain routes on an emergency basis, the Rheinische Post newspaper reported on Saturday.

Transportation State Secretary Norbert Barthle, a conservative, disclosed the change of approach in a reply to a parliamentary query by the pro-environment Greens party, the newspaper said.

News of the shift comes days before a German court rules on whether cities can implement driving bans that could lower the resale value of up to 15 million vehicles in Europe's largest car market, forcing car-makers to pay for modifications.

Germany's federal government is under pressure to help 70 cities whose emissions violate EU standards.

"A new legal basis is to be established in the road traffic act that would allow ... driving bans or restrictions on certain limited limited routes to protect human health against particulates or emissions [nitrogen oxide]," Mr Barthle said.

"That would make possible for the first time route-limited, emergency measures to protect against particulates," he said, adding that the changes would make it possible for cities to implement driving bans outside of air pollution plans.

He said the changes could be incorporated in revisions now being prepared to provide parking privileges to vehicles operated by car-sharing services, and the entire package of measures could be finalised by the end of the year.

Chancellor Angela Merkel said this month she wanted to avoid driving bans by focusing on switching fleets of taxis and buses to electric propulsion, as well as other measures. But she also underscored the need to find solutions quickly for the affected cities.

Greens policymaker Matthias Gastel said the federal government now appeared to view limited driving bans as unavoidable, but was still leaving the issue up to cities and communities.

"It's good to clear up the legal situation, but there's a danger of a patchwork of widely differing regulations," he said.

Germany's highest federal administrative court is due to rule on Tuesday on an appeal brought by German states against bans imposed by local courts in Stuttgart and Duesseldorf over poor air quality.

That may further impact VW. The Wolfsburg-based firm is known for taking a conservative stance when it comes to its outlook for profitability, but analysts were still disappointed.

"There is room for them to go higher," said Bankhaus Metzler analyst Juergen Pieper who has a "buy" recommendation on VW shares. "The market probably needs to scale back its expectations a bit."

VW shares fell after the results and closed 0.8 per cent lower at €162.60.

VW had been a laggard on electrification until it admitted in 2015 to cheating on US diesel emissions tests and had to deal with new Chinese quotas for EVs and tightening regulation in Europe. This prompted a strategic shift to zero-emission and self-driving technology, and VW has one of the most ambitious programmes in the industry.

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"We must not relax our efforts because huge challenges lie ahead," finance chief Frank Witter said. "Shaping the group's transformation will not only require a great deal of time and energy, it will also be very expensive."

Group operating profit after special items nearly doubled to a record €13.8bn from €7.1bn a year ago, VW said, helped by record sales of luxury Audis and Porsches but below the bottom-end forecast of €13.9bn in a Reuters poll.

VW said earnings were driven by a growing share of sales of higher-margin models such as the redesigned Tiguan 4x4 and the Arteon fastback and increasing savings from VW's modular platforms.

The car maker forecast 2018 group sales to exceed moderately last year's record of 10.7 million vehicles. Group sales jumped 10 per cent in January with demand up in all major world regions, showing that the emissions scandal has not dented VW's popularity among consumers.

The company faced a new diesel scandal last month when it emerged that VW and other German car makers had sponsored diesel fume tests involving monkeys and humans.

VW's supervisory board on Friday also discussed steps to prevent such research experiments from happening again, a source at the car maker said, as it is seeking to become more accountable after Dieselgate.

Separately, management and the supervisory board on Friday proposed to raise the dividend for 2017 to €3.90 per common share and to €3.96 per preference share, from €2 and €2.06, respectively, for the previous year.