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VW Profit Juggernaut Rumbles On, As The Rest Stumble

But Predatory Pricing May Damage Residuals, Future Profits
Asians, French The Main Victims Of VW Success
German Sales To “Collapse” in 2010

Volkswagen managed to weather the economic storm in the second quarter, increasing market share and remaining in the black, just; but investors worry that sales in Germany will plunge next year when scrapping incentives expire, while profit forecasts vary widely.

Some investors reckon VW is using its market muscle to bring price pressure to bear on Asian and French manufacturers and Ford and Opel-Vauxhall, and that this could do VW more harm than good because of the implications for residuals and long-term profits.

VW’s net earnings fell more than 80 per cent to €283 million in the second quarter compared with the same period of 2008, while revenues fell almost 8 per cent to €27.2 billion. This looks much better if you compare it with huge losses made by the likes of Renault and Peugeot. VW expects to make a profit for all of 2009 too, but won’t say how much. Investors expect the company to remain profitable in 2010 as well, but estimates range from break-even to more than €3 billion.

Will global sales offset German collapse?
According to investment bank Nomura International, next year VW will have to cope with what it calls a “collapse” of highly profitable domestic sales, although global sales overall will mitigate this. Profits will be hard to come by, but losses should be averted.

“2010 looks to be more of a difficult year if German sales collapse 30 per cent as feared. VW will argue that its widespread geo footprint can help it offset the negative impact; however sales in China will in all likelihood be worse next year (minus 9 per cent) than in 2009 (minus 7 per cent). We also believe domestic sales contribute disproportionately higher to profit. Nevertheless, we expect VW will remain near operating breakeven in 2010,” said Nomura analyst Jeremie Papin.

Bernstein Research analyst Max Warburton believes VW is getting into predatory mode, using price to undermine the competition, although he acknowledges company denials.

Taking share from Asians, French
“We regard the market share surge of VW as probably the single biggest trend in Europe in the last four years. With structural and product costs lowered, VW has deliberately, gently adjusted its price points downwards and has been able to take share from Asian, French and U.S. producers (Ford and Opel-Vauxhall),” Warburton said.

(In the first half of 2009, VW raised its Western Europe market share to 21.3 per cent, from 19.3 per cent the previous year).

This is not all good news for VW, according to Warburton.

“However we worry that VW’s pricing strategy has recently become much more aggressive – competitors report VW selling brand new Golf Mark IVs for €9,990 in Germany….The evidence from Germany and the U.K. – and our discussions with dealers and fleet buyers – suggest VW has stepped up the pressure. This is bad for every other OEM and is also bad for VW’s residuals and potentially its long-term profitability,” Warburton said.

He said the Japanese are the big losers from VW’s gains, but BMW is also losing sales of its “1” series to the Golf, and both the Peugeot 207 and 308 are coming under pressure.

Solid profits in 2010 
Investment bank UniCredit thinks VW will report solid profits for the whole of 2009, and improve on that in 2010, although the return will be much worse than 2008’s operating profit of €6.3 billion. Despite the German “collapse” in 2010, VW global sales should inch ahead.

“We think VW is on track to achieve our full-year (2009) estimate of an operating profit of €2.6 billion – a 2.6 per cent margin. Since VW expects to outperform an overall flat market in 2010, we also feel comfortable with our 1.8 per cent sales growth assumption for next year, which should be accompanied by an improvement in operating profit to €3.2 billion for a 3.1 per cent margin,” said UniCredit analyst Christian Aust.

This is much worse than 2008, but with all other European mass car manufacturers struggling, it would be an impressive result.

Neil Winton – August 15, 2009

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