Volkswagen Focuses On Costs, Bottom Line, As Europe Weakens, China … – Forbes

Posted: Saturday, August 16, 2014

It seems only a couple of months since Volkswagen was constantly beating its breast and saying it would soon be the world’s biggest selling auto company.

Suddenly VW, Europe’s biggest auto company, has changed its tune, and some of the foundations for success are looking less than solid. China has been a source of big profits, but recent actions from the Chinese government questioning luxury car makers’ monopoly pricing suggest that this gravy chain might be hitting the buffers. VW sold almost 2.4 million vehicles in China last year out of a global total of 9.7 million.

Improving the VW brand profitability depended on the long moribund European market waking up, but recent E.U. economic growth data in general and German in particular shows that this might go into reverse. VW’s plans to make money in the U.S. are still on hold. And VW’s big investment in technology know by its acronym in German, “MQB”, which will allow it in theory, to build a huge range of vehicles on one standard basic engineering module, is hiccupping, and VW production chief Michael Macht has left the company.

VW hopes its new Passat sedan, not on sale in America, will make bigger profits because of its new engineering methods

VW hopes its new Passat sedan, not on sale in America, will make bigger profits because of its new engineering methods

Now the message is all about cutting costs and increasing threadbare profits at its massively important VW brand. Last month CEO Martin Winterkorn announced a plan to cut costs by five billion euros ($6.7 billion) a year from 2017. Then came reports that VW unions had vetoed a secret report from management consultants McKinsey which had been hired to find ways to implement the cuts. If you’re wondering how a union can veto a management decision, remember that in Germany unions have an elevated status in companies, and they have a majority on the VW supervisory board with 12 out of 20 votes when combined with the State of Lower Saxony. Lower Saxony owns just over 20 per cent of VW and has the power to kill big decisions and stop takeovers.

Late last month VW’s latest financial results allowed investors to get a check on how the big picture was developing. The plan was to be number one in the world by 2018, with pre-tax profits of more than eight per cent, and six per cent for its own troubled VW mass market brand.

In the first half of 2014, VW profits for all the brands – including upmarket luxury Bentley, Lamborghini supercars, Ducati motorbikes and MAN MAN trucks, VW brand cars, Audi Audi, Porsche Porsche, Skoda and SEAT – fell to 3.3 billion euros ($4.4 billion) from 3.44 billion euros ($4.6 billion) in the same period of 2013.  The crucial VW brand operating profit fell to 2.1 per cent from three per cent. The share price tanked after the results and is now off more than 13 per cent.

Bernstein Research analyst Max Warburton said in a report VW’s profitability has stalled, particularly at the VW brand. Warburton said far from spurring profits MQB is hurting them.

“So far there’s little sign of the growing earnings – emerging markets get most of the blame, but in our view MQB is a big issue too. We disputed VW’s claimed scale-driven cost savings for MQB from the start. But we didn’t expect it to be a negative for profits. Now we’re increasingly concerned that every MQB-based car makes less money than its predecessor,” Warburton said.

Warburton hasn’t run out of hope yet though.

“Is this stock now at the stage where it’ll only work with management change and a new strategic approach? Perhaps. But let’s hope Audi, Porsche and China can keep delivering the goods and the new Passat has better economics than the Golf (same MQB platform, higher price). That should be enough to drive higher earnings in 2015,” he said.

Investors wondering about management changes are starting to get nervous about the prospect of VW without the magic, not to say abrasive, touch of visionary chairman Ferdinand Piech, now a robust 77, but at an age when realists will be wondering who comes next. The Piech family has a voting majority at VW. German media lately has been full of rumors that Piech’s wife, fellow-board member Ursula, may succeed him.

If and when Piech goes, some fear a power vacuum and turmoil, while others reckon the management team at VW is strong and deep enough to provide an adequate succession.

Meanwhile Volkswagen is trying to push its VW brand upmarket and is trapped in a squeeze from above by real premium cars like Mercedes, BMW and its own Audi, and from below by in-house competition from Skoda, and Korean upstarts Hyundai and Kia.

VW’s competition for global leadership is the current leader Toyota, and General Motors.

Professor Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Duisburg-Essen doesn’t think VW will be the world’s number one in 2018, favoring Toyota or the Renault-Nissan alliance, with maybe a threat from Hyundai-Kia of Korea or GM.



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