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Volkswagen Reports 49 Percent Profit Drop

July 25, 2003

FRANKFURT, Germany (AP) _ The gloom over the global auto industry spread as Volkswagen on Friday became the latest major manufacturer to report that profits were slashed by weak consumer demand in Europe and the United States.

The automaker’s second quarter profits fell 49 percent to euro394 million ($453 million) from euro776 million in the same quarter a year ago. Global sales fell 2.9 percent to euro22.1 billion ($25.4 billion.)

The results follow announcements of slumping earnings over the past two weeks from DaimlerChrysler AG, Ford Motor Co., General Motors Corp. and PSA Peugeot Citroen, and an earnings warning from Mitsubishi Motors Corp.

In the key U.S. market, expensive incentives have been used to prop up demand, while the European car market shrank 2.8 percent in the first half.

Looking back at the first six months of the year, Volkswagen said it was hit ``by declining sales in important markets and by the continuing strength of the euro.″

The stronger euro saps earnings because revenues earned in foreign currencies shrink when translated back into euros, and because sales can fall as European goods become more expensive compared to those of foreign competitors.

Volkswagen also darkened its forecast for the next six months, saying earnings would be ``significantly″ lower than in the year before, instead of just lower. It cited the costs of shedding 4,000 jobs at its plants in Brazil for the new outlook.

But the German auto giant’s results roughly met analyst expectations and were seen as a modest positive by market watchers after a disappointing earnings report Thursday by Peugeot, one of its most important competitors.

Volkswagen shares traded up 1.4 percent to end the day at euro36.80 ($42.24) in Frankfurt.

Still, analysts pointed to weak sales and the lowered forecast.

Patrick Juchemich at Sal. Oppenheim in Frankfurt stayed with a neutral rating on the stock, points to a bare euro59 million ($67.9 million) operating profit in the first half in the United States. ``It’s on a break-even level,″ he said. Without their financing arm, he said, they probably would have lost money.

That issue wasn’t limited to Volkswagen; both GM and Ford made more money in the quarter loaning money through their finance arms than they did by selling cars.

``I would expect to see no major recovery in the United States in the second half of this year,″ Juchemich said.

Volkswagen, which also has brands such as Audi, Lamborghini, Bentley, cited increased costs associated with the launch of new models, but said that new versions would boost earnings as sales ramp up in the second half. The company said it plans to introduce a new version of its mainstay passenger car Golf in the fourth quarter, and to quickly increase production to 135,000 this year so the car can begin contributing to earnings.

For the first six months of the year, the company reported a euro596 million ($685 million) net profit, down from euro1.4 billion in the same period last year. Sales fell 2.8 percent to euro42.8 billion ($49.2 billion) from euro44.1 billion.

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