DRESDEN, Germany -- Europe's largest carmaker Volkswagen AG warned on Tuesday its operating profit would fall this year if current weak demand and unfavorable exchange rates persist, rocking auto shares across Europe.
Volkswagen stock plunged as much as 12 percent to a seven-year low, wiping 1.2 billion euros ($1.3 billion) from its market capitalization after it gave a more negative outlook for this year than its European peers.
"Given present exchange rates ... and in the event that the market situation in western Europe and the United States does not improve, we will not be able to match the 2002 operating profit of 4.761 billion euros this year," VW Chief Executive Bernd Pischetsrieder told a news conference.
VW also said it expected weaker overall demand for cars on both sides of the Atlantic this year, but growth in China, VW's second-biggest market, would nudge global auto demand higher.
A drop in demand, an ageing product range and pricing pressure knocked VW's pre-tax profit down 10 percent last year and exchange rate developments also took their toll.
Finance chief Bruno Adelt said a less favorable exchange rate had trimmed last year's pretax profit by about 500 million euros, but added VW had lifted its currency hedging rate to cover 40 percent of its exposure to the U.S. dollar, Japanese yen and British pound.
North America last year accounted for about 20 percent of VW revenues.
With sales of its long-running Golf, the backbone of its success over the past three decades, and of its Passat family saloon under pressure before forthcoming replacements, analysts have long said VW would do well to keep profits flat this year.
"This is the long-awaited warning," said Trudbert Merkel, who manages four billion euros in German stocks, including a large Volkswagen holding, at Deka Group in Frankfurt.
FIRST QUARTER BODES ILL
Pischetsrieder said the result for the first quarter of 2003 would be significantly below the previous year, although cost cutting and new models would "reverse the picture" in 2004.
"It is clear that 2004 will be a year that will benefit from new products without the substantial ramp-up costs we have had this year," he said.
His comments on this year are more negative than French carmakers PSA Peugeot-Citroen, which aims to raise its profit margins this year, and Renault, which expects to keep them stable. Germany's DaimlerChrysler has also said it expects to raise its operating profit this year.
Some investors were concerned that VW's bearishness on the first quarter bodes ill for the rest of the year, and noted that unlike many other blue-chip companies, Pischetsrieder had not used the threat of war to cloud his forecast.
"VW did not say its profits would be lower because of the war, they said they would be down in any case," Lehman Brothers auto sector analyst Chris Will said.
"On a number of levels, the tone of what was announced was a more negative message than the one I had expected to hear."
NEW CAR EVERY 3 WEEKS
VW faces continued high development costs as it brings a raft of updated models to the market -- the company boasts that on average it will launch an updated model variant somewhere in the world every three weeks this year.
It is aiming to have products in 85 percent of all possible car market segments within five years, ranging from its smallest Lupo hatchback to its fastest Lamborghini supercars.
It nonetheless aims to cut investment spending by at least 10 percent this year, after investments at the core automotive division rose three percent to 6.73 billion euros last year.
Adelt said VW had also saved one billion euros thanks to cost cutting measures in 2002 and would aim to match those savings again this year. He gave no further details.
Board member for group strategy Jens Neumann said the group did not expect to see U.S. customers staying away from VW products as a result of Germany's stance against possible military action on Iraq.
"I would not say there is a risk of a boycott playing a big role. We have been in the United States since 1949. Americans are in a position to distinguish between German politics and German cars," Neumann said.
The group repeated it expects sales to inch up to over five million units in 2003 despite an anticipated fall in demand for cars in Europe overall, with most experts forecasting a decline in western European car sales of at least two percent.
It said it had delivered 732,000 cars in January and February, 4.5 percent more than by the same stage last year, although all of the growth came from China, where VW controls around 40 percent of the car market.