Volkswagen Accelerates Profit Target For VW Brand.
Some Investors See This As Over-Ambitious, Others Say Easy.
Volkswagen brought forward the profit target for its VW brand and slashed the number of models and choices it offers to save money.
VW brand’s target of at least a 6 per cent profit margin has been shortened to 2022 from 2025. Last year VW brand margin was 4.1 per cent. The target for 2020 is between four and 5 per cent.
The Volkswagen Group includes its own VW nameplate, and brands like Skoda and SEAT which make their own versions of the same vehicles. Volkswagen also includes upmarket brands like Audi, Porsche and Lamborghini.
Investment bank Nord LB of Germany thinks this is a bit optimistic.
“The achievability of the newly issued targets of the VW brand of a margin of at least 6 per cent (brought forward) until the year 2022 stands in the stars,” said Nord LB analyst Frank Schwope.
“(There are) too many imponderables in the global situation such as punitive tariffs, (the need to invest huge sums in) electric mobility and market weakness,” Schwope said.
VW told a press conference it needed to raise profits to finance the development of future technologies. To improve efficiency it would also streamline the model portfolio and the number of variants produced. In Europe, VW brand will discontinue 25 per cent of the engine-transmission choices with low customer demand in the coming model year.
“We must force the pace of our transformation and become more efficient and agile. We cannot let up in our efforts and must realize further substantial improvements. What we have achieved so far is still not enough,” said Ralf Brandstaetter, VW brand’s Chief Operating Officer.
The Volkswagen brand will be investing over €11 billion in electric cars, digitalization, autonomous driving and mobility services from 2019 to 2023, of which over €9 billion will be spent on electrification. The VW brand currently has two fully-electric cars in its program. This number will increase to around 20 by 2025, with planned production set at over one million.
VW brand will increase efficiencies by increasing the use of its production engineering method, the so-called Modular Transverse Toolkit. Currently, approximately 60 per cent of the conventional models are based on the Modular Transverse Toolkit, and this is set to increase to around 80 per cent by 2020.
Investment researcher Evercore ISI has long believed that VW’s sprawling empire was hugely inefficient, and big rewards would be forthcoming if the problems were tackled.
“At times when most companies struggle to keep profitability stable, VW sticks to its ambition to drive margins higher. We don’t regard this as a heroic exercise. This is rather what we expect from VW’s management team given decades of unprecedented cost and FCF (free cash flow) mismanagement and the resulting opportunity VW has,” Evercore ISI analyst Arndt Ellinghorst said.
Ellinghorst said he expects VW brand to reach the 6 per cent target even earlier, in 2020, with 4 per cent in 2018.
“Given its global reach, brand equity and the largest R&D/capex pool of any (manufacturer), VW can start to dominate the industry if it executes well over the coming five years. If it doesn’t, it will struggle to deal with the transition away from traditional car manufacturing,” Ellinghorst said.
Despite its upbeat message, VW still has the “dieselgate” scandal clouding its outlook. The scandal has cost the VW group around €30 billion, and Nord LB’s Schwope expects liabilities of between €10 and €20 billion remain outstanding in the form of fines, investor and consumer actions.