Volkswagen AG warned on Tuesday its operating profit would fall this year if current weak demand in Europe and unfavourable exchange rates, caused by a strong euro, persist.

Volkswagen stock plunged as much as 12 per cent to a seven-year low, wiping 1,2 billion euros (R10,6 billion) from its market capitalisation after it gave a more negative outlook for this year than most of its fellow European manufacturers.

The company reported that its net profit slipped 11 per cent, to R22,7 billion, last year. Revenue declined 1,8 per cent.

"Given present exchange rates ... and in the event that the market situation in western Europe and the United States does not improve, we will not be able to match the 2002 operating profit of 4,761 billion euros this year," VW chief executive Bernd Pischetsrieder said in Dresden.

VW said it expected weaker overall demand for cars in both the American and European markets, but growth in China, VW's second-biggest market, would nudge global demand higher.

A drop in demand, an ageing product range and pricing pressure knocked VW's pre-tax profit down 10 per cent last year and exchange rate developments also took their toll.

VW finance chief Bruno Adelt said a less favourable exchange rate had trimmed last year's pretax profit by about R4,4 billion.

With sales of its long-running Golf IV and of its Passat family saloon under pressure before forthcoming replacements, analysts have long said VW would do well to keep profits flat this year.

Pischetsrieder said the result for the first quarter of 2003 would be significantly below the previous year, although cost cutting and new models would "reverse the picture" in 2004.

"It is clear that 2004 will be a year that will benefit from new products without the substantial ramp-up costs we have had this year," he said.

Volkswagen further continued high development costs as it brings a raft of updated models to the market - the company says that on average it will launch an updated model variant somewhere in the world every three weeks this year.

It nonetheless aims to cut investment spending by at least 10 per cent this year, after investments at the core automotive division rose three per cent to R59,2 billion last year.

Adelt said VW had saved R8,8 billion thanks to cost cutting measures and would aim to match those savings again this year.

The group said it expected sales to inch up to over five million units in 2003 despite an anticipated fall in demand for cars in Europe overall, with most experts forecasting a decline in western European car sales of at least two per cent.

Original article from Car