LONDON (Dow Jones)--After several bleak years, markets could be justifiably pleased with Volkswagen's (VOW.XE) first-half performance.
But VW's recovery will be a long road. The latest results aren't enough to demonstrate that management can achieve the difficult task.
VW still has too many competing brands and too much capacity in Europe. U.S. losses have to be stemmed and the big Chinese investment has yet to pay off. The company is also inclined to let its business decisions be guided by historic loyalties to Germany.
Those problems may outweigh the refound knack of designing better cars and improving productivity.
Europe's largest automaker may not be able to continue the recent performance into the next quarter, never mind the long term. VW will have to show a couple more decent-looking quarters to prove it's on the mend.
But Chief Executive Bernd Pischetsrieder, much maligned for taking so long to show decent financial and operating improvements, is beginning to earn his stripes.
The company is cutting about 20,000 jobs but it still shows no sign of cutting production capacity. VW won't reveal the capacity use per plant, but it puts the global figure around 80%. That's close to the norm for a global producer like this, but it suggests the German capacity utilization rate is a lot lower.
Even if VW boosted sales by 20%, it would have plenty of capacity to cope. And the productivity improvements mean that it should be closing some of its factories.
The European car makers all have the same problem. In fact, so do GM, Ford and the Japanese manufacturers.
But Pischetsrieder has a complicated ownership structure and a restrictive labor agreement. He's got less room to maneuver than his counterparts. Investors have to hope that his productivity improvements give him the flexibility to cut capacity.