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VW Restructuring Plan Receives Lukewarm Reception, Wins Praise For Trying

VW Restructuring Plan Receives Lukewarm Reception, Wins Praise For Trying.

Volkswagen’s plan to cut costs and raise the profitability of its namesake brand didn’t impress investors and experts much, but was seen as the best that could be expected from a company dominated by unions and politicians.

VW has long been criticized for existing to protect jobs rather than please shareholders, and it has fallen way behind its global competitors in profitability because of this.

The VW union controls half the votes on the ruling supervisory board and has a veto over plant closures. The German state of Lower Saxony has two seats on the board too.

The latest plan was seen as making a little progress towards fixing this, but not much.

Comments after news of the plan came with automotive metaphors ranging from Reuters’ Breaking Views saying third gear had at last been engaged, to the Wall Street Journal’s Heard on the Street column believing VW’s investment case was still stuck in low gear. “Heard” was also “underwhelmed”, as was investment researcher Evercore ISI. 

Professor Ferdinand Dudenhoeffer from the Center for Automotive Research (CAR) at the University of Duisberg-Essen in Germany said the planned changes showed VW was setting the right course at last, after struggling for years to get anywhere near the profitability of fellow mass carmakers like Toyota.

Natural attrition
On Friday, VW said it had agreed to shed 30,000 jobs by 2025 by natural attrition, make cuts worth nearly $4 billion and raise its namesake brand’s profit margin to 4% by 2020, from an expected 2% this year. Before the dieselgate scandal broke last year, the target had been 6% by 2018. VW would also seek to embrace the electric revolution and concentrate on battery and hybrid powered vehicles. It has already announced plans that mean about 25% of it sales in 2025 will be electric ones.

Mass carmakers like Renault and Peugeot-Citroen of France have targeted profit margins of 6% by 2021.

CAR said in a recent report that Toyota, which makes roughly the same amount of cars a year as VW – close to 10 million – makes almost double digit margins while employing about half of VW’s 600,000 workforce.

“Volkswagen has set the right course, but has been pushed into it by the dieselgate scandal. Without this scandal the old management at VW would have remained in office and they would not have decided to build more electric cars,” Dudenhoeffer said in an interview.

“This development has been blocked for years. Up until now it was taboo at VW to think of workplace dismantling at all. Now you can do what was necessary 10 years ago. They are adapting the workforce, ensuring competiveness comparable to the world’s Toyotas, “ he said.

“In retrospect, the scandal appears as a crucial turning point for the company. Without the scandal, it would not have been able to change course fundamentally towards electromobility,” Dudenhoeffer said.

Significantly fewer
The move to electric cars also means you need significantly fewer employees to build the cars. It also raises the question of whether VW would take over battery manufacture or it leave it to specialists like Panasonic and LG-Chem, he said.

What risks does VW face to its future?

“VW still makes components such as interior fittings (which competitors contract out). The big profit-maker of recent years (premium brand) Audi is facing problems. Its profitability is declining. And the U.S. business remains a risk and the future there remains unclear,” he said.

“Added to this is (president-elect) Trump. VW has just set up a new factory in Mexico. If Trump terminates the free trade agreement with NAFTA and raise duties on imports from Mexico, that would be fatal for VW,” Dudenhoeffer said.

Reuters Breaking Views said the transition to electric and autonomous cars will be painful and radical for VW.

“The group will need fewer combustion engines, turbo chargers and gearboxes. Software and services will become more important,” said columnist Olaf Storbeck.

Storbeck wasn’t impressed by the VW brand profit margin target either.

“VW is trying to overcome its past, but could still try harder,” he said.

Citi Research said this might look like a slow start for VW, but it is preparing for big changes.

“The key point for us is direction of travel and in that regard the performance (on Friday) at least suggests change is coming,” said Citi Research analyst Michael Tyndall.

Commerzbank wasn’t overwhelmed.

“We remain neutral on VW (as a stock purchase) given the tail risk from the diesel scandal as well as uninspiring operating performance,” said Commerzbank analyst Sascha Gommel.

Neither was Heard on the Street.

“For investors it was at best lacking in detail, at worst lacking in ambition,” said “Heard” columnist Stephen Wilmot. 

And Dudenhoeffer thought VW was still likely to lag behind its compatriots Mercedes and BMW.

“They are better positioned. Both BMW and Mercedes do not have the fetters hurting VW with the works council. They are able to perform better and have made big structural adjustments. In addition they do not have dieselgate to cope with. But nevertheless, Volkswagen now has quite a good chance to go into the future,” Dudenhoeffer said. 

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