Skills shortage makes it harder for VW to meet new rules of the road

WOLFSBURG, Germany (Reuters) - Volkswagen (VOWG_p.DE) warned that a shortage of engineers is hampering efforts to get its cars to meet new anti-pollution rules, clouding its sales outlook and overshadowing a forecast-beating 23 percent rise in underlying operating profit.

FILE PHOTO: A VW sign is seen outside a Volkswagen dealership in London, Britain November 5, 2015. REUTERS/Suzanne Plunkett/File Photo

VW has seen a raft of engine experts depart since admitting to systematic emissions cheating in Sept. 2015. That has left the carmaker short of engineers now needed to work on models complying with stricter emissions tests, Chief Executive Herbert Diess said on Wednesday.

“Engine development expertise has been lost,” said Diess, explaining that getting engines certified for road use has become a lot harder under a new Worldwide Harmonized Light Duty Vehicles Test Procedure, known as WLTP, that takes effect from September.

The carmaker last week poached BMW engine development expert Markus Duesmann to help overcome the problem, but warned that delays in getting road certification will result in bottlenecks for certain model variants between August and October.

“That impacts capacity utilization at our plants, so there will be closure days at our sites during this period,” Diess said. Although VW is sticking to its delivery targets, meeting them will be hard.

“One thing is clear, though: this will be a titanic task for the second half of the year, particularly on the margin side,” said Diess, who was promoted to the top job in April after running the VW brand.

In a press conference on Wednesday to discuss second-quarterresults, Diess said the changeover to the WLTP testprocedure poses, “The biggest volume and earnings risk forVolkswagen.”

Volkswagen shares were down 1.3 percent at 1145 GMT.

The introduction of WLTP rules was accelerated in the wake of Volkswagen’s diesel cheating. Regulators now take a much more granular look at vehicles and test car pollution levels much more comprehensively, Diess said.

“They look at what kind of tyres were fitted and whether the air conditioning is switched on,” Diess explained. In June, VW warned that production of up to 250,000 cars will be delayed because of WLTP and said last month it would

be renting parking spaces to stockpile vehicles that cannot be sold.

Rival carmaker Daimler (DAIGn.DE) and supplier Valeo (VLOF.PA) cut their outlooks citing the introduction of new stringent emissions standards and a slowdown in growth as a trade war and tariffs hamper global trade.

Automakers General Motors Co (GM.N), Ford Motor (F.N) and Fiat Chrysler Automobiles (FCHA.MI) lowered their full-year profit forecasts last week due to escalating tariffs.

Although its sales have held up, Volkswagen is still suffering the financial consequences of the “dieselgate” emissions scandal almost three years since it broke.

The scandal has cost the carmaker 27.4 billion euros so far and second-quarter earnings took a 1.6 billion euros hit to cover a fine and legal expenses, it said.

A 5.5 percent rise in vehicle sales helped lift second-quarter operating profit before special items to 5.58 billion euros from 4.55 billion a year-earlier, compared with analyst consensus for 4.98 billion in a Reuters poll.

After special items, group operating profit dropped by 13 percent to 3.95 billion euros.

“These are solid numbers despite the legal expenses,” NordLB analyst Frank Schwope, who has a “Buy” rating on VW, said on Wednesday.

Despite confirming its outlook for a full-year adjusted operating margin of between 6.5 percent and 7.5 percent, Volkswagen warned that sticking to its financial targets will be a challenge.

After special items, VW said it anticipates that its operating return on sales will fall “moderately short.”

In the wake of its emissions scandal, Volkswagen accelerated a push to expand its portfolio of electric cars. The Wolfsburg-based carmaker said it could start serial production of solid-state battery cells from 2024 or 2025. “We must not make ourselves dependent on a few Asian manufacturers in the long term,” Diess said, explaining that advances in ceramic separators had raised the viability of mass production. A solid state battery factory would likely be in Europe, or even in Germany under the right conditions, Diess said.

Reporting by Edward Taylor and Jan Schwartz; Writing by Edward Taylor and Maria Sheahan; Editing by Victoria Bryan/Keith Weir

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