Volkswagen to halt production of the Phaeton Luxury Saloon, ready for a new Electric model in 2019.

Volkswagen will suspend production at its small showcase factory in the German city of Dresden next year as the carmaker alters its model strategy to cut costs in the wake of the emissions test scandal.

VW said in October it would discontinue production of the Phaeton sedan, which is built at the glass-walled plant in the eastern state of Saxony. The model -- a pet project of former Chairman Ferdinand Piech which cost more than 1 billion euros ($1.1 billion) to develop -- has never met sales targets since coming to market in 2002.

Production of the Phaeton, assembled by 300 of the Dresden plant's 500 workers, will end in late March. The site, the smallest of VW's 10 German factories, will then be reconfigured for about a year to prepare for producing an all-electric Phaeton by about 2019.

"Production in Dresden will be suspended during the restructuring phase," Jens Rothe, head of the works council of VW's operations in Saxony, said on Wednesday, adding that the plant would be awarded a new product for when it reopens, ensuring "employment will in future be secured on today's level".

VW has pledged to expand its offerings of hybrid and all-electric cars as its rigging of U.S. diesel emissions tests is seen by analysts as casting a shadow over the entire diesel vehicle industry.

VW said on Wednesday that, as planned, it would start modifying millions of diesel cars at the end of January to ensure they met emissions regulations. The plan involves recalling 8.5 million cars across European Union nations, including 2.4 million in Germany.

Analysts have long expected cutbacks in Dresden where output of the most expensive VW-badged model has fallen to about eight cars per day due to weak demand. Manufacturing areas of the plant have all-parquet floors with workers wearing white uniforms, and sometimes even white gloves as they assemble cars by hand.

The planned production shutdown, announced at a staff gathering, ties in with plans by Europe's largest automaker to cut about 600 temporary jobs next year at another Saxon plant in Zwickau.

Rothe said production staff in Dresden affected by the shutdown will need to commute to Zwickau, about 120 km (75 miles) west of Dresden, where VW builds the Golf hatchback and the Passat sedan.

Labor representatives at VW's Porsche arm are in talks with the sports-car manufacturer on offering at least some of the temporary workers from Zwickau the chance of employment at Porsche's two German sites.

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BREAKING NEWS - VW Chairman Ferdinand Piech resigns with immediate effect.

Volkswagen Group Supervisory Board Chairman Ferdinand Piech unexpectedly resigned on Saturday after losing a showdown he provoked with CEO Martin Winterkorn.

Piech, a dominant figure at VW for more than two decades and the grandson of the inventor of the VW Beetle, also resigned as a member of the supervisory board and any other mandates within the Volkswagen Group with immediate effect, VW said.

A panel of senior supervisory board members at Volkswagen said a loss of trust was to blame for the sudden departure of Piech.

"The members of the steering committee came to a consensus that in light of the past weeks the mutual trust necessary for successful cooperation was no longer there," the six-member panel said in a statement.

The leadership crisis at VW burst into the open this month when German weekly magazine Der Spiegel quoted Piech, the 78-year-old patriarch of the family that owns 51 percent of voting rights in VW, as saying he had "distanced" himself from Winterkorn.

The comment came at a time when VW is slashing costs and revamping operations to boost profitability. It has struggled in the U.S. and posted lower profits at its core autos division.

Tensions between Piech and Winterkorn appeared to have eased a week ago when senior supervisory board members backed the CEO, leaving Piech isolated in a five-to-one vote and forcing him to to agree to a joint statement supporting Winterkorn.

But sources said at the time he would have faced calls for his own resignation had he not backed the CEO.

Deputy Chairman Berthold Huber will temporarily assume leadership of the board until the election of a new chairman, Volkswagen said, adding that Piech's wife, Ursula, had also resigned from her posts at the group.

Huber said VW needed to end the uncertainty among employees caused by the leadership crisis.

Weil, the premier of Lower Saxony, which owns 20 percent of VW, said Piech's resignation was necessary to create clarity about the carmaker's leadership.

Said Weil: "I regret the resignation of Ferdinand Piech, but it was unavoidable in the end."

Piech's cousin, Porsche Automobil Chairman Wolfgang Porsche, who owns 50.7 percent of voting rights in VW Group, in a statement Saturday thanked Piech "for his decades of extraordinary and highly successful service to the Volkswagen Group."

Also in the statement Porsche said: “We deeply regret the developments of the last few days ... Our great loyalty to the Volkswagen Group and its 600,000 employees remains unchanged and we assume our responsibility as a principal shareholder."

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VW to build next gen Phaeton, even though it losses money & VW is slashings overall costs.

With Volkswagen having embarked on a big cost-cutting drive, industry experts are baffled why the "people's car" maker plans to spend millions of euros upgrading a money-losing luxury sedan.

The 76,000 euro ($86,000) Phaeton, a pet project of Chairman Ferdinand Piech, has never met VW's original sales target of 20,000 cars annually. Analysts say the upper-premium car, which cost more than 1 billion euros to develop and came out in 2002, should be axed.

But sources at VW told Reuters that the company is now planning a more advanced version of the Phaeton -- even though the first-generation car was ranked by Bernstein analyst Max Warburton as one of the three "most loss-making European cars of modern times."

The plans appear all the more perplexing to analysts as VW has pledged to make annual cost savings of 5 billion euros at its passenger-car brand by 2017, as the world's second-biggest carmaker by sales seeks to narrow the gap with global leader Toyota.

'Painful action'

Announcing the "efficiency program" last July, CEO Martin Winterkorn promised "painful action" to revive the core brand where profit margins have been languishing due to a proliferation of models and parts.

"It's no longer all about bigger, higher, further," the CEO told managers at a Dresden strategy conference in December. "Now it's about being leaner, faster, more efficient."

His comments echoed VW's plans to reduce the number of costly parts and drop some non-profitable variants from the German group's 310-model lineup as Europe's largest automaker shoulders costs of future growth and investments in lower-emissions technology.

Revamping the Phaeton will seems to contradict the CEO's cost-cutting drive, said Evercore ISI analyst Arndt Ellinghorst, adding that switching production of the model to VW's MLB modular platform could cost as much as 650 million euros.

"Economically speaking, it's the most irrational project," London-based Ellinghorst said. "Piech and Winterkorn simply cannot let go of their fondness for luxury products."

A new glass-walled factory, R&D outlays and low sales volume led VW to lose 28,000 euros on each Phaeton sold between 2002 and 2012, Warburton wrote in a September 2013 note.

Unfazed by the losses, VW aims to pit the next-generation model against the Mercedes' 80,920 euro S-class flagship, sources said, adding the car may hit dealerships in 2017-2018. A plug-in hybrid version is also planned.

VW confirmed it was planning a successor to the Phaeton but declined to comment on the details or costs. It also declined to comment on analysts' loss, cost and sales estimates for the existing version, but said the sedan helped to show off its technical prowess.

The company does not disclose sales data for individual brands, only production numbers, which show it produced 5,812 Phaetons in 2013 -- the most recent annual figures published.

High-end battle

Stefan Bratzel, head of the Center of Automotive Management think tank near Cologne, said another high-end luxury sedan may overstretch the VW brand, traditionally a mass-market division which in November released a more upmarket Passat.

A new Phaeton could also affect sales of VW's other premium offerings, especially the Audi's flagship A8 sedan, which may share MLB underpinnings with the VW-badged model, he said.

"It doesn't make much sense strategically," Bratzel said. "The business case is equally questionable."

A new Phaeton would struggle against its premium rivals, analysts say. Sales of the model will average no more than 11,900 cars a year in 2017-2020, up from 6,300 this year, according to estimates from research firm IHS Automotive.

That compares with annual averages of 85,000 units for the Mercedes S class, 64,000 for BMW's 7 series and 41,000 for Audi's A8 in the four-year period, according to IHS data.

Buyers will never warm up to the notion of an upper-premium sedan made by the "people's car" brand unless they get a huge discount, a former VW Group executive told Reuters.

"This is the inherent problem, which puts the car's price positioning and profitability at risk," he said.

The Phaeton is the brainchild of Piech, the mastermind of VW's global expansion and its former CEO, who is well known for outmaneuvering both rivals and allies.

Sacred project

A former Audi North American chief, Axel Mees, was forced to leave the company in 2004 after criticizing the Phaeton project and Piech in public, a source at Audi said.

Meanwhile, Michael Horn, VW's new U.S. boss is chasing a lofty sales target of 800,000 VW brand cars by 2018, more than double last year's tally.

Horn will be tasked with relaunching the next Phaeton in the U.S. after VW pulled the model from the world's biggest premium-car market in 2006 because of poor sales.

Horn struggled with the answer when asked by Reuters at the Detroit auto show what potential he sees for the model in the country.

"That's a dangerous question," he said. "It's an image bearer with no relevance for volume."

VW and Suzuki explore options to resolve legal battle, report says.

Volkswagen and Suzuki are exploring options to either revive cooperation efforts or enter a settlement to end a two-year legal battle, people familiar with the matter said.

VW Chairman Ferdinand Piech and Suzuki President Osamu Suzuki are involved in the effort to reach an agreement, said the people, who asked not to be identified because the talks are private.

VW and Suzuki continue to view the industrial logic for the cooperation as compelling, one person said.

The effort may still fall apart and legal proceedings at a London-based arbitration court over the future of the disputed alliance will go ahead if the talks fail, the people said.

Eric Felber, a VW spokesman, and Ei Mochizuki, a Suzuki spokesman, declined to comment on any possible discussions between the two companies.

"Both companies stand to benefit if they can overcome the disagreements over leadership claims," said Frank Biller, a Stuttgart-based analyst at LBBW. "VW and Suzuki would still complement each other very well."

VW became Suzuki's largest shareholder when it acquired a 19.9 percent stake for 1.7 billion euros in 2009. Suzuki in return bought VW stock worth about 770 million euros as part of the deal, which was brokered by Suzuki and Piech.

The plan to join forces to cooperate on small cars for emerging markets collapsed two years later, with both carmakers accusing each other of breaching the agreement.

Suzuki demanded VW return its stakeholding and filed a lawsuit at a London arbitration court.

VW said in its 2012 annual report the court case "is not expected to reach a decision until mid-2013 at the earliest."

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