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VW plans to spend $106B chasing Toyota for sales lead

Christoph Rauwald
Bloomberg News

Volkswagen AG will keep pouring money into new vehicles, technology and factories as it chases Toyota Motor Corp. for the lead as world’s largest automaker.

VW will invest 85.6 billion euros ($106 billion) over the next five years, Europe’s biggest manufacturer of cars, vans and heavy trucks said Friday in a statement. The plan calls for an increase in average annual spending on auto operations to about 17.1 billion euros a year, compared with 16.8 billion euros under its previous rolling five-year budget.

“We will continue to invest in the future to become the leading automotive group in both ecological and economic terms,” Chief Executive Officer Martin Winterkorn said in the statement. “Development costs will remain high in the future as a result of high innovation pressure and increasing demands on the automotive industry.”

Winterkorn has pushed VW to expand in recent years and expects to sell more than 10 million vehicles this year for the first time, four years earlier than initially planned. The German carmaker narrowed Toyota’s global sales lead to 72,000 vehicles in the first nine months of 2014 from 227,000 a year earlier, as General Motors Co. fell further back into third place.

VW’s Chinese joint ventures, which aren’t consolidated and therefore not included in the company’s figure, will boost their investments in the world’s largest auto market to 22 billion euros through 2019. Including this spending, the group’s five- year budget will increase to 107.6 billion euros from 102.4 billion euros under the previous plan.

“We did not expect VW to cut its very high capex spending, but this raises some concerns that VW fixed costs momentum could indeed become a bigger issue,” Arndt Ellinghorst, a London-based analyst at Evercore ISI, said in an email.

VW expects to offset the increased spending with higher sales. The company said that even with the increased investment, capital expenditures will remain at between 6 percent to 7 percent of revenue, Volkswagen said.

The shares rose 2 percent to 177.95 euros in Frankfurt trading. The stock has declined 13 percent this year, valuing the company at 84.1 billion euros.

Since Winterkorn became CEO in 2007, the Wolfsburg, Germany-based manufacturer has added the Porsche, Scania, MAN and Ducati brands. VW also more than doubled its number of factories around the world to 107.

Volkswagen will probably spend more than any other public company on research and development for the third consecutive year in 2014, ahead of Samsung Electronics Co. and Intel Corp., according to a study by consultancy Strategy&.

The company must now balance that spending with a new focus on improving its profitability, including a program announced in July to boost earnings at its namesake passenger-car brand by 5 billion euros by 2017. Winterkorn plans to roll out savings programs across the entire group, which comprises 7 car brands, three commercial-vehicle units and Ducati motorbikes.

Audi, VW’s largest earnings contributor, plans to rein in costs by about 2 billion euros a year to offset surging spending on new technology, people familiar with the matter told Bloomberg News last month.