"Black sheep" Seat holds back VW in Toyota pursuit

BERLIN, August 9 Thu Aug 9, 2012 6:57pm IST

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BERLIN, August 9 (Reuters) - One thing Volkswagen does not need as it strives to become the world's most profitable automotive group is a perpetually loss-making subsidiary like its Spanish car division Seat.

Unlike struggling competitors PSA Peugeot Citroen, Ford and Fiat, VW has weathered Europe's deepening debt crisis, reporting higher profits and record deliveries while adding production capacity in expanding Chinese and Russian markets.

Seat meanwhile has amassed about 1 billion euros ($1.24 billion) of losses since 2008 and has made a profit in only one of the last 10 years, a dismal performance that VW nonetheless seems committed to fix despite some suggestions it should close the Spanish unit.

Battered by the slump in austerity-strapped Spain where car registrations have been in uninterrupted decline for more than two years, Seat is the only brand among VW's five main car nameplates to be stuck in the red, VW's quarterly results published on July 26 showed.

"Seat is the undisputed black sheep in the VW family," said Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Duisburg-Essen. "It would be economically more sensible to close it down and use its facilities for other group brands."

"Skoda covers the same (compact to midsize) segments and is a thoroughly reliable mass market brand. Why bother keeping Seat," asked Dudenhoeffer, a former Peugeot official.

VW, which bought Seat in 1986 to increase its exposure to the then fast-growing Spanish market, has been trying for years to overcome losses caused by underutilised capacity at Seat's main factory in Martorell which can make 500,000 vehicles a year. Output at the plant near Barcelona had slumped by almost a third to 345,000 cars in 2010 from 2000.

Two years ago, VW carried out a wave of cost cuts in management and manufacturing and moved production of luxury division Audi's new Q3 compact SUV to Martorell from June 2011 to boost utilisation. The plant has a target to build 100,000 Audi Q3 SUVs per year and assembles four Seat model lines.

VW's problems with Seat began in the early 1990s when a global recession wiped out the brand's car sales, shattering ambitious targets after the German parent had spent heavily on the new Martorell factory and development of new models such as the Ibiza compact and the Toledo sedan.

"THREE OPTIONS"

"We had only three options: Wipe out the Seat brand, shut half its facilities or halve the workforce," for VW chief Ferdinand Piech wrote in his memoirs, "Auto.Biographie", published in 2002.

The Wolfsburg-based manufacturer decided against closing the brand and slashed Seat's labour force by a third to about 15,000 by the end of 1994. The division now employs about 14,000.

About two decades later, there are still no signs that VW's patience with Seat is exhausted, though the German company has said profits should return next year.

The loss-making brand is pushing its broadest model rollout to date, including the revamped Ibiza subcompact, which accounts for about 55 percent of brand sales, and expanded offerings of the Leon compact, to be unveiled at the Paris car show in September.

"The new Leon plays a decisive role in Seat's growth strategy," Manfred Kantner, head of the brand's German operations, told Reuters.

He said the car would be based on VW's new cost-saving architecture that allows for greater use of standardized components in small and midsize vehicles across the VW brand, Audi, Skoda and Seat.

Unlike General Motors, which keeps its ailing European unit Opel from penetrating lucrative overseas markets, VW wants Seat to become less reliant on crisis-ridden Spain and instead seize potential in China and Russia, both of which the VW division entered this year.

Seat plans to open 15 showrooms in major Chinese cities including Chengdu, Nanjing and Shenzen by the end of the year, exploiting growing demand from young buyers for sporty compacts. The average Seat buyer is 34 years old, giving the brand the youngest customer profile in the VW family.

"VW is reinforcing its commitment to Seat by tying them firmly into their modular production system and by throwing them the overseas lifeline," said Albrecht Denninghoff, Frankfurt-based analyst at Silvia Quandt Research.

"There's definitely an element at VW of never say die," he said, adding that fixing Spain's biggest carmaker is part of VW's agenda to surpass Toyota Motor Corp as the world's top carmaker by 2018.

Opening up Seat to non-European markets may be the best way to boost volumes. Global deliveries of Seat models may surge 75.1 percent to 506,331 vehicles by 2018, outpacing increases of 32.4 percent at Ford and 27.7 percent at Opel, according to research firm IHS Automotive.

Meanwhile, VW won't rest on its laurels and seems prepared to fix trouble-spots such as Seat.

"We mustn't think that we've made the grade or that VW is now rich and invincible," VW personnel chief Horst Neumann said. "Instead, we need a clear look at strengths and risks. Then, we're able to fix the weak spots."

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