Volkswagen faces challenges amid cost-cutting and the transition to electric vehicles

Volkswagen's drive to cut costs and streamline its operations has been welcomed by investors, but the auto giant faces a number of challenges that could hamper its profitability. The European market is weakening and the Chinese market is becoming more and more difficult. In addition, sales of electric vehicles (EVs) are not as robust as expected, and the company is lagging behind in its preparation for stricter EU regulations against carbon dioxide that come into effect next year .

Those regulations, which force carmakers to sell a higher proportion of electric vehicles, could shave about 2 billion euros ($2.2 billion) off VW's profits by 2025 and reduce operating margin at 6.2%. This is due to weak demand for electric vehicles, which may force VW to subsidize its sales at the expense of profitable combustion sales.

Despite these challenges, VW is pushing ahead with its plans to launch 50 new models by 2024, half of which will be electric vehicles. This is part of a wider 10 billion euro ($11 billion) cost-cutting program, which is expected to save up to 4 billion euros this year.

However, VW's operating profit fell 2.4 percent to 5.46 billion euros ($6 billion) in the second quarter compared with the same period last year, and margins operatives fell from 7% to 6.6%. The company's core mass-market business, including its own VW, Skoda and SEAT brands, fell 5%. Audi has also been hit by supply chain issues.

In response to these challenges, VW has reduced the number of employees and closed plants in an effort to reduce costs to the level of its biggest competitor, Toyota. While these measures are expected to impact profitability this year, they are expected to create a more efficient and effective operation going forward.

Despite the difficulties, some analysts remain positive about VW's prospects. Berenberg Bank of Germany expects the current quarter to be challenging for VW, but expects an improvement in the fourth quarter. The bank is optimistic about VW's restructuring efforts, saying the building blocks for a successful turnaround appear to be in place.

However, other analysts, such as Bernstein, are more cautious, citing the impact of EU CO2 rules from 2025 and questioning VW's commitment to cost cutting. Despite this, VW continues to push forward with several ventures designed to address its weaknesses, including a $5 billion deal with Rivian and a deal with its battery subsidiary PowerCo to develop solid-state batteries.