Volkswagen shifts more production to North America, China amid Europe instability

BERLIN -- Volkswagen Group is shifting more production to North America and China as a result of the war in Ukraine and will prioritize China this year, CEO Herbert Diess said in a press call on Tuesday.

"We will shift more into China because of the situation in Europe," Diess said. When asked about how the carmaker would respond in the event that China attacked Taiwan, he said that he did not believe the country would take such a step.

"China has a high interest to keep borders open," Diess said. "We think it is an asset for us to be strong in China... China is a stronghold for us."

The carmaker has suspended production in Russia following the country's invasion of Ukraine.

A lack of wire harnesses normally sourced from Ukraine was the most significant supply chain constraint at the moment, Diess said, affecting most German plants. If it could not relocate production in 3-4 weeks, its outlook would need to be revised, Diess said.

VW also warned that semiconductor shortages, supply bottlenecks, high commodity prices and the Russia-Ukraine conflict could hit growth in 2022, as the challenges facing the auto industry mount.

"The war in the Ukraine has put our existing outlook into question," CEO Herbert Diess said at the automaker's annual press conference on Tuesday.

Diess warned that commodity markets are likely to remain volatile until 2026.

He said VW had become more resilient through the coronavirus pandemic and under normal circumstances would have reason for optimism for 2022.

The automaker cut overhead costs ahead of schedule last year, leading to 4 billion euros ($4.4 billion) of benefits compared with 2019, said finance chief Arno Antlitz, and sports car brand Porsche's potential initial public offering will provide additional flexibility and value.

Antlitz said Porsche's IPO could still happen as soon as the fourth quarter of 2022, despite current market uncertainties.

VW Group sold 2 million fewer cars than planned last year due to the semiconductor shortage and said on Tuesday that, while the situation should improve steadily throughout this year, there could still be a drag on growth.

In western Europe, VW Group's VW, Audi, Porsche and Skoda brands have been forced to reduce output after suppliers including Leoni stopped production of wire harnesses made in Ukraine.

Diess said VW is building up additional capacities for wiring harnesses for Europe and shifting car production to regions such as China and the Americas in response.

Last year, global vehicle sales for the multibrand group, whose brands include VW, Porsche, Audi and Skoda, declined by 6.3 percent to a 10-year low of 8.6 million in 2021 because of microchip shortages.

Operating profit doubled to 19.3 billion euros ($21.1 billion) despite lower deliveries, helped by higher prices and a more favorable product mix.

VW expects to increase deliveries by 5 percent to 10 percent in 2021 and boost revenues by 8 percent to 13 percent, even with ongoing troubles in the supply chain.

The automaker warned that most commodity costs were likely to rise this year, exacerbated by Russia's invasion of Ukraine, which has caused prices of materials key to car production, such as nickel and palladium, to soar.

VW Group has a production site in Kaluga as well as sales units and financing companies in Russia, it said, which could be adversely affected by further sanctions on the country. It does not have subsidiaries or equity investments in Ukraine.

Still, business activities of the group in Russia and Ukraine were not significant, the automaker said.

VW said it achieved a 16 percent market share in China in 2021 and could have sold significantly more cars but was hindered by the ongoing semiconductor shortage

The VW brand returned to profit in North and South America, the company said.