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UPDATE 2-Volkswagen to cut capex by 10 pct - source

(Adds analyst comment, background on new CFO)

By Nick Tattersall

FRANKFURT, Nov 14 (Reuters) - Europe's biggest carmaker, Volkswagen AG , is set to announce a 10 percent cut in its five-year capital spending plan after a supervisory board meeting later on Friday, an industry source said.

"It will be about a 10 percent cut," the source told Reuters, adding that would mean spending of around 30 billion euros ($35 billion) over the next five years at the group's core automotive business.

The company is renowned for having one of the highest levels of expenditure in the industry, particularly under former chief executive Ferdinand Piech, who invested in luxury brands such as Bugatti, Bentley and Lamborghini at the expense of the group's core mass market business, industry analysts say.

VW, which has signalled a tighter rein on spending under its new finance chief Hans Dieter Poetsch, last reviewed its long-term spending plans a year ago, when it said it would invest 33.3 billion euros over five years.

"Any measures to get more financial control on this company can only be a good thing. It's a step in the right direction, but they've got other problems like are they ever going to earn any money," one London-based analyst said.

"The fact is that even with that kind of reduction, unless earnings pick up very fast in Europe, this company is going to be massively cash negative for the next couple of years."

VW shares were down 0.38 percent at 0857 GMT, lagging its peers slightly.

VW said last month its profits would more than halve this year due to weak demand for cars on both sides of the Atlantic, a strong euro and the cost of cutting jobs at its troubled Brazilian operation.

It earned more in the third quarter from financial services than it did from selling cars, and although it expects demand to improve next year it has said it will be 2005 before business is back at full throttle.

POETSCH PUTSCH

Poetsch has said he aims to cut capital expenditure as a proportion of revenues to seven percent in the medium term from recent levels of eight to nine percent.

VW also overhauled its executive pay earlier this year to make managers think more carefully about investment decisions. Up to 40 percent of this year's bonus for senior executives will be dependent on economic value added (EVA) -- a measure of profitability which charts returns above the cost of capital.

The state of Lower Saxony, where VW is based, holds a strategic stake in the firm which many in the industry say contributes to its willingness to spend rather than invest in low-wage countries at the cost of German jobs.

The company warned last month it would take a hit of several hundred million euros this year to write off some of its capitalised research and development costs, suggesting hundreds of millions of investment will never generate a return.

VW has declined to pin the charge on any specific model programme, but analysts believe it is related primarily to VW's ill-fated Phaeton luxury saloon, an expensive project which has generated disappointing sales, and the Bentley luxury brand.

Poetsch has said he is confident that capital expenditure this year will come in at about the same level as last year, when it invested 6.73 billion euros.

It is also aiming for a flat level of spending in 2004, a target which concerns some analysts who note that costs should have been particularly high this year because of the launch of the new Golf V, VW's most important model.