U.S. escapes unscathed in this round of VW cuts

FRANKFURT -- Scandal-plagued Volkswagen Group has cut its global spending plan next year by more than $1 billion, but it spared the ax at its U.S. operations.

The biggest investment cut in North America affects only Mexico. Sources familiar with the plans say the renovation of a paint shop in VW's massive Puebla plant, one of the group's largest factories worldwide, will be shelved, even though the company says the decision is still under review.

The much-anticipated groupwide investment budget disappointed analysts, who had expected deeper cuts as VW braces for a multibillion-euro hit from its emissions cheating scandal.

Company officials were put on the defensive.

"Entire departments had precisely calculated their budgets, and it's simply impossible to put a stop to all of their projects," one insider said. "We can't just slash them, for example, by a third from one day to the next."

VW's spending next year in property, plants and equipment is expected to drop back to the 12 billion euro ($12.7 billion) level last seen in 2014 vs. the roughly 13 billion euro ($13.8 billion) estimated for this year, a cut of about 7 percent.

While the Puebla paint facility is about 20 years old, delaying its modernization can save Volkswagen $100 million or more. Paint shops tend to be among the most capital-intensive investments in car manufacturing and typically have to be run on a permanent three-shift basis to recoup their costs.

More investments could fall under the knife when the board meets with management early next year, VW's labor leader Bernd Osterloh warned staff on Friday, Nov. 20.

But sources say there are no indications any larger project is threatened in the U.S., where VW is investing $600 million in its Chattanooga plant to build a midsize SUV starting in late 2016.

In the days leading up to Friday's regularly scheduled board meeting to approve the upcoming budget, speculation centered on everything from possible plant closures to questioning the very existence of major brands such as Seat, VW's Spanish marque.

"I expected more," said auto analyst Frank Schwope of German bank NordLB. "The cuts throughout the group appear to be relatively modest ... but this is most likely just the start, and I expect it will increase to 1.5 or possibly 2 billion euros across the entire group in the coming years."

In light of the tens of billions of dollars in damages expected from fines, lawsuits and customer compensation resulting from its enormous emissions scandal, new CEO Matthias Mueller said, VW would "strictly prioritize all investments and expenditures," and "anything that is not absolutely necessary will be canceled or postponed."

While officials at the group say savings will likely run deeper than the 1 billion euros as the year progresses -- arguing there is nothing stopping VW from coming in under budget -- they defended last week's relatively minor drop by saying the company's future could not be secured through cost cuts.

The most prominent victim of the investment delays is instead the oft-maligned VW Phaeton luxury sedan. A flop, the Phaeton retails for more than the price of a Mercedes-Benz S class and was pulled from the U.S. market about a decade ago. VW had previously announced that the second generation of the nearly 14-year-old model would be offered only as an electric car and confirmed on Friday that the launch would be delayed without being more specific.

Phaeton production already sank 30 percent last year to a paltry 4,000 units, prompting VW to deny media reports recently that it was planning to close the prestige plant dubbed the "Transparent Factory" in the heart of Germany's baroque city of Dresden, where the 90,000-euro car is built.

The VW brand already had announced annual cost cuts of 1 billion euros on top of the existing 5 billion euro efficiency plan introduced last year under then-CEO Martin Winterkorn. But analysts felt VW should have gone further.

"It reads as if management sees these cuts more as a necessity related to the current extreme challenges the company has navigated itself into," Arndt Ellinghorst, Evercore ISI's head of global automotive research, wrote.

Instead Ellinghorst believes the company needs to address its constant overspending in good times and bad; he said the modest cuts implied that no other part of the sprawling group other than the VW brand appeared to be reducing investments.

Another source at Volkswagen, however, said further, deeper measures may still come, since the company cannot yet quantify the scale of the financial risks it faces.

Nevertheless, the company source argued that the current cuts were prudent for the moment: "We are not going to take the lawn mower approach."