Volkswagen trims spending in wake of diesel scandal

Volkswagen responded to the mounting costs from the emissions scandal by halting work on a design center in Germany and a paint shop in Mexico, leaving much of biggest investment budget in the auto industry untouched.

The carmaker will trim spending on factories and equipment to 12 billion euros ($12.8 billion) next year, down from 12.9 billion euros under its previous budget. The cuts target marginal projects, including the next generation of the slow- selling Phaeton sedan, now delayed after previously being cut to only an electric version.

“This is clearly just the beginning as you can’t halt everything at once,” said Frank Schwope, a Hanover-based analyst at NordLB. “It’s urgently needed. The company needs to save, save, save.”

The investment plan was only for 2016, rather than the traditional five years provided in the past. That gives Chief Executive Officer Matthias Mueller time to negotiate with labor leaders on more painful measures to prune a group that spans 12 brands and more than 300 models.

Prior to the Friday announcement, Volkswagen had more than doubled its annual investment spending since 2008, as it focused on growth. The company didn’t announce plans for development spending, which totaled about 4.4 billion euros a year under its previous budget.

Investment for the group’s two Chinese joint ventures, which are self-funded, would be steady at 4.4 billion euros annually.

“What we definitely won’t do is make cuts at the expense of our future,” Mueller said in a press conference at the company’s Wolfsburg, Germany headquarters. What’s not immediately necessary will be canceled or postponed, the CEO said.

The roughly 1 billion-euro cut in investment is in line with plans announced last month by Volkswagen’s namesake brand. The lack of steeper cuts suggests how complex it will be to find a clear way out of the crisis stemming from circumventing emissions regulations. The company estimates the scandal will cost it at least 8.7 billion euros. Volkswagen has said it will recall as many as 8.5 million diesel cars in Europe. In the third quarter, it set aside 6.7 billion euros to pay for repairs, noting that the full cost will probably be higher.

In addition, about 800,000 vehicles also had irregular readings for carbon dioxide. Volkswagen won’t have to recall those vehicles but will have to compensate for higher tax payments and worse-than-promised fuel consumption.

The company has estimated the economic risk of the irregularities at another 2 billion euros.

The carmaker is facing a Friday deadline to present U.S. and California regulators with a plan to fix diesel vehicles that had software to turn on full emissions-control systems only during pollution tests. The 482,000 affected cars in the United States were emitting as much as 40 times the permitted levels of smog- forming nitrogen oxides.