VW Brazil to Invest US$1.2 bil. in New Models; Next-Generation Fox Also to be Built in Europe

VW to Invest US$1.2 bil. in Brazilian Unit

The president of Volkswagen's (VW) Brazilian unit, Hans-Christian Märgner, speaking at the São Paulo Auto Show, has announced that the parent company is to invest 2.5 billion reais (US$1.2 billion) in the unit over the next five years to develop and build new models. Märgner, who also announced his retirement, added that exports of the existing Fox to Europe will be reduced as the appreciating Brazilian real continues to harm profitability.

Further Cuts to Fox Exports

According to Märgner, VW Brazil expects to export 65,000 Fox models to Europe in 2006, down from 85,000 in 2005; the number is expected to fall further to 50,000 in 2007. Märgner added that VW Brazil has not yet decided whether to stop production of the model for the export market altogether: "No-one knows what is going to happen, but it is possible if the economic climate doesn't change", he said. VW Brazil is suffering, as is the rest of the industry in the country, due to the appreciating real; however, VW Brazil is being hurt more than its peers because of its larger dependency on exports. VW Brazil exports more than 40% of its production, whereas the industry average in the country is nearer 30%. VW intends to reduce this proportion in line with its competitors to less than 30% in 2007. "We want to maintain our exports, but not at margins that are not competitive", Märgner said. In 2005, VW Brazil exported 260,000 vehicles. The company expects that figure to decline to 202,000 in 2006, according to Märgner. For 2007, VW Brazil is targeting exports of 185,000 vehicles.

Märgner will retire as VW Brazil head at the end of 2006 and be replaced by Thomas Schmall, the current chairman of the company's management council in Slovakia. Märgner assumed control of VW's Brazilian operations in January 2004 and presided over the unit's recent controversial restructuring programme, which resulted in a strike at the São Bernardo do Campo "Anchieta" plant. The restructuring was necessary to reduce production aimed at export markets and trim labour costs in an effort to increase profitability. The company intends to cut up to 6,000 jobs by 2008.

Märgner's successor will report to Viktor Klima, current chairman of VW Argentina, and Alan Greenspan, who will be the chairman of the company's South American operations. The company also said that VW South Africa's head of finance, Carsten Isensee, will be in charge of finance and strategy at VW Brazil from next year.

Outlook and Implications

VW's investment confirms the Brazilian unit as the developer for its small-car programme, which will include the next-generation Fox subcompact. However, The successor to the Fox will only be produced in Brazil for the domestic market, as the new model will be produced in Europe for sale in that region. VW has not confirmed the location in Europe for Fox production, saying that it has not yet made a decision.

Speculation as to whereabouts in Europe the next-generation Fox will be made is centring on Slovakia, Spain and possibly a new plant in Russia. Russia is potentially a prime candidate as the plant there is being built and tooled at the same time as the model is being developed, so there would be no legacy machinery or production line, and the requirement of manufacturing small cars in a low-cost country to make them profitable would also be met.

However, the Czech Republic also figures in this as Skoda is planning to produce an entry model below the Fabia which will be based on the same platform. VW is forecasting that the Fox replacement will require a production capacity of 90,000 units per annum (upa). With the new model not due until 2009, VW will be in no hurry to assign production until a proper evaluation has been conducted of all the potential plants.