Volkswagen reportedly has cut its 2004 profit forecast after taking a second-quarter beating in the key North American market even though its overall earnings beat stock market expectations.

According to the Associated Press (AP), VW’s net profit fell 9% to €357 million ($US443 million) during the second quarter from €394 million in the year-earlier quarter.

That was, however, still a sharp improvement over the first quarter’s profit of €26 million ($32 million) and beat the average estimate for a second-quarter profit of €163 million ($202 million) by nine analysts surveyed by Dow Jones Newswires.

Sales reportedly rose 8.4% to €23.99 billion ($29.74 billion) from €22.13 billion in the same quarter a year ago, but stiff price competition from General Motors, Ford and DaimlerChrysler helped push Volkswagen to an operating loss of €503 million ($623 million) in North America where sales dropped.

The Associated Press noted that VW has been reluctant to match competitors’ profit-draining incentives such as interest-free financing and rebates totalling several thousand dollars per vehicle, saying it undermines resale value for consumers – sales in the region fell to €6.56 billion ($8.13 billion) from €7.03 billion a year ago, in part because the stronger euro shrinks US earnings when translated from dollars to euros.

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Like Ford and GM, AP added, Volkswagen earned more from its auto financing arm than from making and selling cars, with operating profit of €279 million ($346 million) from financial services compared to €243 million ($301 million) from its automobile division.

In its profit warning, Volkswagen reportedly cited lagging demand in important markets, high oil prices and the stronger euro as reasons for cutting its 2004 forecast for operating profit before special items to €1.9 billion euros ($2.4 billion) from €2.5 billion ($3.1 billion).

“Despite these difficult conditions, we will continue to pursue our global model initiative in order to establish a leadership position in the key vehicle segments,” the company said, according to the report.

AP noted that operating earnings give an incomplete view of a company’s finances because they exclude financial items such as interest and taxes, but Volkswagen and many other companies use them as their yardstick.

The euro’s rise over the past two years has squeezed profit margins for European products by making them more expensive abroad, the report added.

The Associated Press said Volkswagen’s other woes include increasing competition from Japanese automakers in Europe and an aging product line in the United States, where the new version of its mainstay Golf hatchback [launched in Europe late in 2003] won’t go on sale until next year.

The company is pursuing a cost-cutting program, dubbed “ForMotion,” to eliminate some €4 billion ($5 billion) in costs, the news agency noted.

VW reportedly added that it expects “no letup in competitive pressure in key car markets, such as the USA, Europe, and China” – in addition to price wars in the United States, Volkswagen had to cut prices in China to match General Motors.

For the first half of the year, net profit fell 36% to €383 million ($475 million) from €596 million in the same period a year ago, while first-half sales rose 7.3% to €45.94 billion ($56.96 billion) from €42.83 billion a year ago, the Associated Press said.