Volkswagen will not match its 2003 profits in China this year, the company reportedly said on Wednesday, blaming a strong euro that has wreaked havoc on its results for the past two years.

According to Reuters, it also said its joint ventures with Chinese partners Shanghai Automotive and FAW would reduce costs by €410 million ($US503 million) by the end of next year to counteract potential price reductions in the market.

“We will not be able to meet and make the profit level we’ve seen last year for China for currency reasons, but we are confident that we can show a very impressive figure for 2004 and also for 2005,” chief financial officer Hans Dieter Poetsch told a London analyst conference.

In the first half of 2004, the German group posted a decline in pro-rata operating profit from its China ventures to €251 million ($US307.6 million) from €361 million a year ago. For all of 2003, it reported a contribution of €561 million, the news agency said.

“The short-term catalyst is missing,” HVB analyst Albrecht Denninghoff, who has a “neutral” recommendation for VW, told Reuters. “Due to factors like the erosion of prices in VW’s main markets, there are a lot of reasons that argue why investors should wait for the meantime.”

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Denninghoff added, though, that over the longer term the stock had potential as Volkswagen will have replaced nearly two-thirds of its fleet with new models by mid-2005.

For now, however, the strong euro reportedly will continue to plague VW, which posted a half billion euro first-half loss in North America in part due to exchange rates. The company has warned of a very high risk that the loss could be even higher in the second half.

Reuters noted that VW last month cut its 2004 guidance for group operating profit by €600 million, to €1.9 billion – excluding €400 million in one-off costs. It called this a worst-case scenario.

Chief executive Bernd Pischetsrieder reportedly wouldn’t exclude the possibility that VW’s vehicle sales in China might be flat on the year as Beijing puts the brakes on an overheated car market.

“This year I’m a little bit reluctant to make a forecast. Let me say we will be between 700 and 800 (thousand),” Pischetsrieder said.

Reuters noted that, last year, the company boosted car sales in China by 36% to about 698,000 units, and had said in early May it wanted to sell more than 800,000 in 2004. The company revised this in July to sales growth of 5 to 7%, or about 735,000 to 749,000 units. But rivals like General Motors caught VW off guard by slashing prices on models in an effort to chip away at Volkswagen’s leading market share of around 30% in China.

In the first half, VW posted a decline in Chinese car sales for the first time with a 4.2% drop to 310,657 vehicles, due entirely to a very weak June, the report said. After it responded with its own price cuts, sales rebounded in July to 50,430 units from 33,807 in June.

Pischetsrieder reportedly reaffirmed that VW would not seek to maintain its once-dominant market share if it meant sacrificing profits.

“We will not try at all to defend our market share … at any cost. We want to be profitable and we don’t want to defend (an) arbitrary high market share,” the CEO said.

The increasingly competitive atmosphere, combined with a notable decrease in growth rates, means that VW will have to remain lean to ensure profitability.

“We have to prepare for further price reductions in the market, and therefore – outside of (cost-cutting programme) ForMotion – there is another €410 million savings programme for our Chinese joint ventures by the end of 2005,” he said.

The carmaker intends to increase its production capacity to around 900,000 in 2006 from 700,000 currently. By 2008, it wants to bump that up to 1.6 million units in a step-by-step manner that would avoid overcapacity.

“We expect market growth to be substantially lower than it was the last few years,” Pischetsrieder reportedly said, adding sales in August were weaker than in July, as of last week.