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VW Faces Some Rare Negative News

Weak German Sales, Worries About China Ruffle Investors
Management Cull Raises Some Eyebrows

Possible Solution To Porsche Deal Tax Conundrum Might Oil Deal

It’s only fair that even mighty Volkswagen has to face some negative news sometimes as the German market tanked and VW’s reshuffle at the top raised some eyebrows.

More plaudits for VW’s modular production system, MQB, though helped restore some optimism, as did reports that VW had found a way of integrating Porsche without incurring a crippling tax bill.

Investment bank UBS declared that VW should be added to what it called its “least preferred” list of stocks to buy, as markets immune to the current economic crisis succumbed, a little.

“Negative Auto news has now reached the safe haven markets. The U.S. had a weaker than expected May as inventories rose while German demand declined five per cent,” said UBS in a daily bulletin.

“We are adding Volkswagen to our least preferred list because it has the highest exposure to E.U. weakness amongst the German manufacturers. It has high operating leverage to the weakness if it comes,” said UBS.

UBS said reports that VW is discounting cars heavily in Europe, and its China exposure were worrying.

“Writing a €3.6 billion cheque for MAN or €3 billion for Scania is not helpful. We think most investors are sceptical on VW’s truck strategy,” the bulletin said.

According to the Financial Times Deutschland, VW is looking at the possibility of buying a stake in U.S. truck maker Navistar.

VW group CEO Martin Winterkorn’s dramatic shakeup of personnel at the top table was reassuring for truck operations, but raised questions on China and Audi, according to UBS.

VW China chief Karl-Thomas Neumann, Audi development chief Michael Dick, and Audi sales chief Peter Schwarzenbauer lost their jobs. The main winners were Jochem Heizmann, who won the board post overseeing VW China, Luca de Meo was appointed head of sales and marketing at Audi, while Wolfgang Duerheimer moved from Bentley CEO to Audi’s head of technical development. Scania CEO Leif Ostling is joining the VW board responsible for commercial vehicles. Anders Nielsen leaves Scania to become CEO of MAN.

30 per cent cost cuts?
Meanwhile Deutsche Bank said the launch of the new Audi A3 using MQB should help reduce costs by up to 30 per cent, above VW’s target of 20 per cent. VW aims to produce two million vehicles on this platform by 2014 and four million by 2016 and eventually should have around three quarters of its volume on the new system.

“The annual savings should be highest in the period 2014-2016, exceeding €2 billion a year on a gross basis, before fading down towards the end of the decade. Beside cost savings, VW should materially improve its flexibility and time to market with the system. Ultimately, we believe that between 60 and 70 per cent of the value of a car will be put on the same system,” Deutsche Bank said.

According to press reports in Germany, VW has found a tax neutral way of integrating Porsche.

“We therefore see our view of early option exercise confirmed and continue to see the full consolidation of Porsche AG in 2013, which we expect to be highly earnings/cash flow accretive – €1.2 billion of annual free cash flow.”

“With around 50 per cent of future VW group earnings coming from premium cars we see this development as very positive for VW shares and indirectly for Porsche,” Deutsche Bank said.


Neil Winton – June 15, 2012

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