German carmaker Volkswagen has run itself aground. Speaking at the company's annual press conference at the Wolfsburg headquarters on Tuesday, chief executive Bernd Pischetsrieder announced, "the first quarter will be miserable in comparison to last year's."

Citing stagnating sales, the poor German economy and the fall of the dollar against the euro, the CEO outlined new cost-saving measures. Designed to squeeze some four billion euros ($4.96 billion) in costs by 2005, the reform program doubles a current savings plan for the same period, and is the largest cost-cutting initiative in VW's history.

Focus on cost efficiency

As part of the plan, the company will slash 5,000 of its 337,000 positions, 2,000 to 2,500 of which are in Germany. Pischetsrieder said the cuts were aimed at so-called "indirect personnel" and will not effect those employees on the assembly line. VW will also focus on reducing the workforce by not replacing workers who quit or retire.

Pischetsrieder also said the company will examine ways to reduce expenses in the manufacturing processes, by cutting the time for developing a new model, for example. Utilizing more interchangeable parts in the various series, should also lower the costs for developing individual unit pieces without sacrificing the "high quality standards," the CEO said.

A long road ahead

Pischetsrieder, who said the company had "entered a long valley" and would need some time before pulling itself out again, said the cost-cutting initiative was necessary to counteract what was already starting out to be a bad year. With a drop of 6 percent in unit sales from the same period a year ago, VW looks set to continue last year's downwards trend in 2004.

"The markets were very weak at the beginning of the year, particularly in January," the CEO said.

Volkswagen's earnings have been hit by intense price competition and a weak dollar in the key North American market, as well as a decline in consumer demand in Germany, where sales fell for the fourth straight year in 2003.

"We were not able to meet our goals last year. One main reason for this is that the economic upturn expected for last year did not take place," Pischetsrieder said. "We had to accept that -- against all forecasts -- up to this day the upturn on the most important auto markets hasn't begun."

Last year, the company's net profit fell to €1.1 billion from €2.6 billion in 2002, with sales rising just 0.2 percent to €87.2 billion.

Weak dollar, strong euro

The dollar-euro parity has been one of the carmaker's chief troubles this past year, trimming off profits from sales in the U.S. and outpricing the company's cars in the competitive North American market. According to the company, if it had not been for the sharp rise in the euro at the end of 2003, sales would have been about €3.5 billion higher.

VW said it would now start moving some production out of the euro zone to avoid the currency crunch. It aims to build the successor to its Lupo compact in Brazil and increase production at its Puebla, Mexico.

Light ahead?

The German carmaker plans on introducing new models aimed at the lower price segment. The brand Skoda, for instance, offers a competitive alternative to more inexpensive Asian manufacturers. Starting in 2005, VW will also roll out a new model for the European market with a price tag significantly under €10,000. By focusing on the lower end, the company hopes to widen its sales base.

In China, the concept is already reaping rewards. Despite steep competition, VW managed to hold on to its 30 percent share in the booming market by selling nearly 700,000 cars in 2003. But in its home market, the German company will have to work hard in the next few years to come close to such numbers, said Pischetsrieder.