VW travels in 2 directions, both bad

Already employs twice as many workers per vehicle as Toyota, hires another 3,000 for China, Mexico, Poland

LONDO  (Reuters Breakingviews) — Volkswagen is driving in two directions, both of them bad. The stricken automotive group made fewer vehicles in the first quarter of 2016 than a year ago. Yet its bloated workforce actually grew.

Germany's biggest carmaker already employs almost twice as many workers per vehicle than Japanese rival Toyota. In the first three months of 2016, VW hired another 3,000 additional employees, mainly to man new plants in China, Mexico and Poland. Moreover, 120,000 workers covered by the group's collective wage agreement in Germany are getting a generous pay rise of 4.8 per cent over the coming two years.

This will put additional pressure on the group's already lackluster profit margins. While the core VW passenger-car brand returned to a small operating profit between January and March, its 0.3 per cent operating margin is woefully low. The still-unresolved emissions scandal is weighing on demand for VW-badged vehicles. While the marque has seemingly avoided heavy discounts so far, distribution costs are rising once again.

Chief executive Matthias Mueller is closing in on a settlement with U.S. regulators on VW's cheating in emissions tests. The group has provisioned 16.2 billion euros for fines, buybacks and recall costs. A huge and rising net cash pile of 26 billion euros means VW can shoulder the burden. The next big task will be to get VW's costs under control, and productivity up. It looks like little progress has been made so far.

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