Car crash

Volkswagen Skidding Towards Crisis

vw_dpa
Everything he touches no longer turns to gold.
  • Why it matters

    Why it matters

    Volkswagen has enjoyed years of rising sales and expansion in markets from Brazil to Russia. But while many of its subsidiaries continue to do well, the core VW brand is stalling and threatens to derail overall growth.

  • Facts

    Facts

    • Earnings at the VW brand shrank by a fifth in 2013 to €2.9 billion ($3.7 billion).
    • The austerity program aims to save €5 billion at VW, and more than €7 billion company-wide.
    • The company intends to increase the VW brand’s profit margin to 6 percent by 2018.
  • Audio

    Audio

  • Pdf

Volkswagen has achieved unparalleled success in recent years. Since 2010, the German carmaker has seen revenues from its 12 brands rise by about 50 percent. This year, Volkswagen will deliver more than 10 million new vehicles. Seldom has a car manufacturer grown so rapidly.

But there are problems with that growth, and the company – led by chairman Ferdinand Piech and CEO Martin Winterkorn – has developed fissures.

The cracks are showing most at the core, in the main VW car brand. This division, run personally by Mr. Winterkorn, accounts for more than half of yearly production. In terms of profitability, however, VW lags far behind the company’s other brands.

VW has been left in the dust by its subsidiaries – not only by the premium brands Porsche and Audi, but even by the non-premium Skoda. Only the perpetual underperformer SEAT is lagging behind it, mainly becasue of the crisis in its home country Spain. With demand stable in Germany, VW cannot claim the same excuse.

VW’s struggles were highlighted earlier this month at an investors’ conference in New York. The company’s head of finances, Dieter Pötsch, said that difficulties in emerging markets had created a financial burden of around €2 billion over the last two years, or about $2.55 billion. Earnings before taxes and interest for the VW brand shrank by a fifth in 2013 to €2.9 billion ($3.7 billion). All signs indicate that VW will scarcely be able to increase its profit margin above the current 2.1 percent this year.

VW has been left in the dust by its subsidiaries.

The reasons are complex, and not just down to lack of growth. Audi, for example, has not been able to keep up with growth in recent years. But at VW, problems are piling on top of each other. Mr. Winterkorn has acknowledged the key problems: Decisions take too long. Developments are too expensive. Processes are too complex.

Now the boss is hitting the brakes. “The Volkswagen brand has to be at the forefront in its processes, cost discipline and profits,” Mr. Winterkorn said in July when giving new marching orders to 20,000 employees.

The company intends to increase the VW brand’s profit margin to 6 percent by 2018. To achieve that goal, VW will have to be slimmed down. Instead of 310 models, there will be fewer in the future, so they can be developed more quickly and inexpensively. Additional offerings will be reduced to save money.

In all, the mix of austerity cuts and efficiency measures to boost profitability will lead to save €5 billion at VW, and more than €7 billion company-wide.

Mr. Winterkorn is unlikely to be able to reduce the number of employees. Bernd Osterloh, head of the workers’ council, has already made it clear that the workforce will not make sacrifices. Since almost all VW employees are unionized, nothing can be done against their will.

But Mr. Osterloh recognizes that disciplined cost management is required. The workers’ council prepared a 400-page report for management on how to stem the crisis. Observers might consider this unusual, but tutoring can’t hurt VW’s leadership at this point.

“The Volkswagen brand has to be at the forefront in its processes, cost discipline and profits.”

Martin Winterkorn, CEO, Volkswagen

VW is keeping quiet in public about details of its belt-tightening. But J.P. Morgan estimates that a quarter of the savings are supposed to come in marketing, a third in fixed costs and 27.5 percent from development costs. VW has called the J.P. Morgan estimates inaccurate.

Worries are growing that subsidiaries could be called on to provide money to shore up the core brand. One possibility would be to send more money to headquarters in Wolfsburg for “modular transverse matrix platforms,” a system by which Volkswagen shares basic chassis design across models. Several models of VW, Audi, SEAT and Skoda are based on the platform.

Sources say further redistribution of research expenses is also possible, but VW denies it. “That’s nonsense,” said a company spokesperson.

 

vw2
New models are not selling as well as VW hoped: Source: DPA

 

Last year, Audi and Porsche shouldered more than half of the company’s €10.2 billion development costs. So the subsidiaries are already helping to compensate for the weaknesses of the core brand. That way, regardless of billions of euros in losses, the company can keep to its forecast.

Volkswagen’s homegrown misery is exacerbated by weaknesses in several key global markets. Sales in Russia, Brazil and Argentina have declined dramatically, and no improvement is expected in 2015.

At the recent Paris Motor Show, Mr. Winterkorn said the company would have to change its strategy because of the crisis in Russia. He said he intends to hold on to two factories in the country, however.

Sales in Russia, Brazil and Argentina have declined dramatically, and no improvement is expected in 2015.

The situation in North and South America is of more concern. For months now, the company has seen dramatic falls in sales.

In the United States, cars produced by Porsche and Audi continue to sell well. But VW models remains on dealers’ lots, even though the company began a big new push in 2011 by opening a new factory in Chattanooga, Tennessee.

For too long in the U.S. market, VW bet on the Passat model, which is popular in Europe but was never honed to American tastes. And low-priced sport utility vehicles (SUVs) are missing in current U.S. product offerings. No improvement is seen before 2016, when the Chattanooga plant will begin turning out new SUVs.

But weaknesses in the South American market are even more worrying than those in the United States. Sales in this important region have dropped by a fifth in the past year, to 538,000 vehicles.

The decline is particularly acute in Brazil, where Volkswagen has production plants and traditionally enjoys high sales. The country’s struggling economy means many Brazilians have postponed buying cars or are choosing cheaper Asian models.

But Mr. Winterkorn has vowed not to abandon the continent. “The market will bounce back,” he said. Volkswagen is planning to introduce new models in South America, and Audi will also play an important role. The subsidiary plans to build the Audi A3 in Brazil starting in 2015.

 

Volkswagens low margin

 

The author is a Handelsblatt editor covering the car, steel and defense industries. To contact the author: Murphy@handelsblatt.com

Editor’s note: This story has been updated to correct several mistakes made in the original German article about the description of VW’s €2 billion financial “burdens” in emerging markets during 2012-14 and the composition of  a €5-billion mix of cost cuts and efficiency gains at the automaker. The article was also changed to make clear that J.P. Morgan, not VW, was the source of a proposed breakdown in cost cuts.

 

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!