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VW Steps Up The Pace For Change With Huge New Menu

VW Steps Up The Pace For Change With Huge New Menu.

Profit Targets, Job Shedding, SUV, Electric Focus.

“If there’s a shift to EV then VW seems well placed to take advantage of the trend, but the rewards are a long way off at this stage”

Another day, another Volkswagen restructuring plan. That’s how it must seem to investors as the company rolled out a series of targets, or maybe wish lists to its detractors.

Early in November, Volkswagen announced what was thought to be a comprehensive and definitive plan to cut costs and raise the profitability of its namesake brand. This was seen as lacking in ambition by investors, but all that could be expected from a company dominated by unions and politicians.

VW said in its initial plan it would shed 30,000 jobs by 2025 by natural attrition, make cuts worth €3.7 billion and raise its namesake brand’s profit margin to 4 per cent by 2020, from an expected 2 per cent this year. Before the dieselgate scandal broke last year, the target had been 6 per cent by 2018. VW would also seek to embrace the electric revolution and concentrate on battery and hybrid powered vehicles. It had already announced plans that meant about 25 per cent of it sales in 2025 will be electric ones.

But a couple of weeks later, VW hosted another event, this time aimed at the media, with some fresh and occasionally ambitious goals, the most impressive of which was a target of 6 per cent profit margin for VW brand by 2025, and more SUVs. CEO Herbert Diess turned his attention to the U.S. market, where it was still highly ambitious despite dieselgate, and would take a decade to become a significant volume player.

Diess said VW might make electric cars in America from 2021.

Not impressed
On balance, BMI Research wasn’t impressed.

“Volkswagen Group’s strategy to transform the company into a greener, leaner and more high tech organisation will increase operational risks for the company that is struggling to deal with already bloated cost overheads. Added to this, consumer trust in the Group’s key brand means that prospects for a meaningful rise in revenues are still weak,” BMI said in a report.

Citi Research was more impressed, saying it was VW’s plan to be the leader of the ‘brave new auto world’, by 2030.

“(we already know there will be more) SUV’s, less complexity, Future Pact and e-mobility, but it is good to see a cohesive plan after a lengthy period of review/negotiation. The targets and timeline seem lower and longer than hoped, but car companies take a long time to change and we assume there is a healthy degree of conservatism in the targets. The equity story remains compelling enough for us to remain Buyers (of the shares),” said Citi Research analyst Michael Tyndall.

“VW is very much committed to being a leader in e-mobility and the digital ecosystem for autos/mobility,” he said.

VW doesn’t see the need to expand internal combustion engine (ICE) capacity, and wants to be the first manufacturer to make 1 million electric vehicles.

“If the world does indeed shift to EV then VW seems well placed to take advantage of the trend, but the rewards are a long way off at this stage,” Tyndall said.

Right course at last
Professor Ferdinand Dudenhoeffer from the Center for Automotive Research (CAR) at the University of Duisberg-Essen in Germany said the planned initial 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.

   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.

“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.

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.

Neutral
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 the Wall Street Journal’s Heard on the Street column.

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

Investment researcher Evercore ISI was heartened because VW’s failures of the past are now, in a way, an advantage.

“It is also worth noting that VW has more room to improve efficiency than any other carmaker globally. After years of under-management all of VW’s costs ratios are at historic peak levels. Driving economies of scale and restoring profitability has far more to do with increased financial discipline and reduced complexity than labour costs. (The) announcement does not give the full picture of VW’s turnaround potential given this largely an agreement regarding the labour contribution,” Evercore ISI said in a report.   

And CAR’s 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.

Dieselgate worry
BMI Research was also worried about the dieselgate scandal costs.

“VW Group still faces a high degree of uncertainty over future costs of lawsuits and investigations related to its diesel emissions scandal. Having already set aside €18.5 billion to cover the legal costs and fines associated with the scandal, the company is still facing ongoing legal challenges. Other allegations have also come to light including fresh investigations by the E.U. and U.S. and a class action lawsuit all in relation to a supposed emissions cheat device in Audi gasoline cars,” BMI said. 

  

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