FRANKFURT -- The strong euro, a sluggish German car market and a bloated cost base are just a few reasons why analysts widely expect Volkswagen to lower its profit target for 2004 when it reports second quarter results on Friday.
Europe's biggest car maker has already said its goal of improving earnings this year is ambitious.
It could instead face another year of declining earnings following a 48 percent drop in 2003 operating profit before one-offs to 2.5 billion euros ($3 billion).
According to the average in a Reuters poll of 24 analysts, second quarter operating profits are likely to be down 20 percent on a year earlier at 493 million euros.
For the rest of the year, much will depend on costs and the strength of the euro, particularly against the dollar, after currency effects wiped away more than 1.6 billion euros in pre-tax profits last year.
Chief Executive Officer Hans Dieter Poetsch warned in late April that its 2004 guidance would be "very difficult" to reach if the euro were to sustain a climb above $1.25. The single currency, trading above $1.24 on Monday, resumed its upwards climb recently and marked a four-month high on Friday.
Advantageous exchange rates have allowed Asian firms to muscle into VW's European turf -- where its popular VW Golf has long been the best-selling car of its class and a name virtually synonymous with the compact segment itself.
GM's Opel launched a re-energized Astra compact in March that won rave reviews from industry experts and could rob VW of Golf sales. Even BMW has decided it's open season on the VW model by launching its brand new 1-series hatchback.
In the first five months of 2004, VW has only managed to sell just over a third of the 600,000 new Golfs targeted for this year, despite enticing customers with offers such as free air-conditioning.
VW executives have tried to put on a brave face. "We're not unsatisfied, but we're not as satisfied when compared with what we had originally planned," production boss Folker Weissgerber said recently, when asked to describe the Golf's sales performance.
"If VW reaches its target, then it will only be because of measures taken to its cost base," said M.M. Warburg analyst Robert Pottmann, who rates VW a "hold".
PREPARE FOR WORST-CASE
Pischetsrieder wants to save an additional 2.2 billion euros by the end of next year on top of the two billion originally targeted, and aims to use VW shares to acquire half of Europe's largest fleet management business to hedge VW's exposure to soft group car sales.
He is also in talks to bring Gulf emirate Abu Dhabi on board as the company's second largest shareholder.
This is supposed to prepare the group for a worst-case scenario, including a long term euro-dollar rate above 1.30 and long-term stagnation in auto markets, but lingering burdens left over from former times under previous CEO Ferdinand Piech have left VW vulnerable.
But although 2004 looks set to disappoint, analysts say VW's strong near-term product flow leaves hope for next year. By mid-2005, nearly two-thirds of the group's vehicles will have been replaced by new models since 2003.