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Volkswagen now expects profit margin of around 5.6%

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Outlook cut comes amid tough pay talks with unions

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BMW, Mercedes-Benz also slashed outlooks in September

(Adds details, context from paragraph 7)

By Christoph Steitz and Christina Amann

FRANKFURT/BERLIN, Sept 27 (Reuters) - Volkswagen

cut its annual outlook for the second time in less

than three months on Friday, citing a weaker-than-expected

performance at its passenger car division as pressure on

Europe's top automaker continues to rise.

The lowered outlook is the latest from Germany's car giants,

with Mercedes-Benz and BMW both downgrading

their annual forecasts earlier this month as a result of

weakening demand in China, the world's biggest car market.

It also comes two days after Volkswagen kicked off crucial

talks with IG Metall, Germany's most powerful union, over pay

and job protection, a historic conflict that could lead to the

first German factory closures in the carmaker's history.

Volkswagen now expects a profit margin of around 5.6% in

2024, down from 6.5-7% previously and below the 6.5% LSEG

estimate, while sales are expected to fall by 0.7% to 320

billion euros ($356.7 billion) after the company had initially

expected an increase of up to 5%.

Volkswagen said it was cutting its outlook "in light of a

challenging market environment and developments that have fallen

short of original expectations, particularly at the brands

Volkswagen Passenger Cars, Volkswagen Commercial Vehicles and

Tech. Components".

The German carmaker, which owns majority stakes in Porsche

AG and truck giant Traton, also cut its

outlook for global deliveries to around 9 million, down from a

prior forecast of a rise of up to 3% from 9.24 million vehicles

in 2023.

Porsche SE, the holding company of the Porsche

and Piech families that holds most of the voting rights in

Volkswagen and is the carmaker's single biggest shareholder,

also cut its own outlook in the wake of Volkswagen's downgrade.

FALLING DEMAND

Frankfurt-listed shares in Volkswagen and Porsche

SE were trading 0.7% and 1.6% lower, respectively.

A softening global economy has hit Germany's export-oriented

economy at a time when a painful shortage of skilled labour and

high energy prices and cheaper Asian rivals have already cranked

up the pressure on local industrial heavyweights, including

Thyssenkrupp and BASF.

The problems have also

challenged

Germany's tested model for consensual relations with

powerful unions

, seen as a strength in times of growing demand but turning

into a liability of sorts when cost increases outpace salary

expectations.

The fate of the auto industry and pressure from China

are global issues, hitting Europe's car elite that has

struggled

with keeping plants running at full capacity.

In the U.S. presidential election, Republican nominee

Donald Trump has suggested that China could dominate future auto

production, while the Democratic Biden administration has

accused China of flooding global markets with auto exports

because of overcapacity and is proposing rules that would

effectively bar nearly all Chinese cars from entering the U.S.

market.

Volkswagen, which is scheduled to report third-quarter

results on Oct. 30, said it now expects net cash flow of its

automotive division of around 2 billion euros, down from 2.5

billion to 4.5 billion previously.

($1 = 0.8971 euros)