Cost Cuts Will Boost VW Against Mass Market Competition
“We estimate gross savings potential of between €6 and €8 billion”
While there is no shortage of doubters about Mercedes prospects, most analysts believe Volkswagen has got it made.
Investment banker Morgan Stanley said that despite the initial huge cost of switching to its latest modular production setup, MQB, profits will grow and easily beat VW’s target of an eight per cent pre-tax margin by 2018.
“(We are) convinced long-term earnings assumptions are too low. VW only sets targets it believes it can beat,” said Morgan Stanley analyst Stuart Pearson.
Despite the “massive” investment this year to implement MQB the payoff will be quickly available.
“We estimate gross savings potential of between €6 and €8 billion once four million units flow on to MQB by 2015/16. This allows plenty of room to share savings with customers while still enhancing auto margins. VW’s step towards MQB should leave VW leaps ahead of mass-market peers,” Pearson said.
Most analysts expect VW’s MQB production to reach four million vehicles by 2017, close to half of VW’s output then. The MQB platform, starting with the Audi A3 this year, will underpin more than 40 Audis, VWs, Skodas and SEATs. The MQB platform standardises the engine positioning and the length between the front axle and pedals. The width, length and wheelbase can be changed according to model. VW says the plan will slash production time by up to 30 per cent and costs by up to 20 per cent, and allow it to accelerate changes to market demands.
Doubters though say having such huge production runs could mean hugely expensive and massive recalls if anything goes wrong.
VW sold 8.3 million vehicles globally last year, and aims to be the world number one in 2018.
Pearson said there are three basic reasons for investors to believe in VW
- Best-in-class capacity use and tight inventory which drive robust pricing power.
- Modular construction lead over mass market peers may last the bulk of a product cycle.
- VW is well positioned for emerging market growth, with turnaround potential in the U.S. and breakeven by 2013 at the latest.
Although he does admit to some positive negatives
- VW’s large cash position could lead to value-destructive acquisitions in either automotive or trucks.
- A sharp decline in E.U. pricing could undermine margins in VW’s key domestic market, Germany.
- Managing VW’s huge size risks poor capital allocation.
VW brand vehicles hit record sales in the first quarter of 1.36 million, and industry consultancy IHS Automotive reckons sales for the year will rise 1.3 per cent to 5.27 million, with further momentum expected in following years.
The only big doubt on the horizon is China, as some analysts doubt that the momentum, which made it the biggest car market in the world may run out of steam.
Morgan Stanley’s Pearson believes VW will do well in China, although strong margins may come under pressure.
“What about China? VW still believes it can grow in China, despite its view that pricing will normalise towards global norms,” Pearson said.
Neil Winton – April 20, 2012
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