Audi’s third-quarter profitability drops as recall costs loom

FRANKFURT (Bloomberg) — Audi’s third-quarter profit margin scraped the bottom of its target corridor, increasing the pressure on the brand to boost earnings as a costly recall of rigged diesel engines looms.

Operating profit narrowed to 8 percent of sales from 9.2 percent in the second quarter, Audi said today in a statement. That’s significantly less than Mercedes, which reported a 10.5 percent profit margin in the third quarter, and marks the lower limit of Audi’s target of 8 percent to 10 percent.

Parent Volkswagen Group’s emissions scandal comes at a delicate time for Audi. The brand’s margins would be squeezed anyway by spending on new models and technology to compete with Daimler’s Mercedes and unseat BMW as the world’s No. 1 luxury-car maker.

At the same time, the unit is the biggest source of profit for Volkswagen, which needs cash to pay for fines, recalls and court costs linked to cheating on diesel emissions tests.

Audi said it still expects to deliver more cars than ever before this year. Next year, it will start selling a revamped version of its best-selling model, the A4 sedan and station wagon, and open a factory in Mexico.

“We are continuing along our growth path,” Audi CEO Rupert Stadler said in the statement. “We are increasing our deliveries, expanding our international production network, safeguarding jobs and actually continuing to recruit more employees.”

Audi accounts for about 2.4 million out of as many as 11 million cars that VW Group will need to recall to fix rigged emissions systems. The VW brand is the worst hit, with 5.6 million affected vehicles, compared with 1.2 million for Skoda, 800,000 for VW light commercial vehicles and 700,000 for Seat.

Audi said it “could experience changes affecting the organizational and economic business process” as a result of the emissions scandal. An Audi spokesman said orders and sales were stable, declining to elaborate.

Volkswagen set aside 6.7 billion euros ($7.4 billion) in the third quarter for anticipated recall costs, which pushed Europe’s largest automaker to its first quarterly deficit in at least 15 years. It’s too early to estimate potential legal costs as lawsuits pile up in the U.S. and Europe, Chief Financial Officer Frank Witter said on a conference call with analysts last week.

Reuters contributed to this report

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