Volkswagen Has To Wait Another Year To Top Toyota In Global Vehicle Sales

Volkswagen AG (OTCMKTS:VLKAY) has reached the record feat of 10.14 million vehicle deliveries in 2014, up 4.2% year-over-year. However, contrary to previous expectations, the German automaker did not surpass Toyota as the world’s largest automaker in terms of volumes, as the Japanese manufacturer sold 10.23 million units last year. Increasing volume sales is not the goal for Toyota, which plans to focus on profitability and improving service quality and workers’ skills, and has put off building new manufacturing plants till at least next year. Toyota forecasts its volumes to fall 1% to 10.15 million units this year, which means that Volkswagen could very well outsell Toyota next time around. ^[1]

However, higher volume sales don’t simply translate into higher cash flow. Volkswagen incurred $11.13 billion in research and development costs through the first three quarters, 14% more than its 2013 levels. In addition, the group has accelerated investment in cleaner and low emission technologies, in a bid to launch more environmentally viable cars in the future. Volkswagen’s aim of building more manufacturing facilities across the globe, especially near to the end customers and in low-cost countries, will require large investments that are expected to keep profitability in check in the near to mid term. High initial costs of localizing the Modular Transverse Toolkit (MQB) and Modular Production Toolkit (MPB), the company’s new and flexible vehicle assembly platforms, are also expected to dent margins in the near term. Volkswagen’s automotive margins stood at 6.37% through September, and although this is a 50 basis points improvement over 2013 levels, the automaker will look to further push-up profitability, in tandem with the push for higher volume-growth, in order to boost cash flow. What dragged down volume growth for Volkswagen in 2014, preventing the company from catapulting into the first spot in global volumes, were low U.S. sales for its namesake passenger vehicles brand, and a decline in commercial vehicle deliveries, owing to tepid demand in the European and South American markets.

Volkswagen’s U.S. Sales Decline Despite Overall Industry Growth

The U.S. automotive market crossed 16.5 million volume sales last year, up 6% from 2013 levels, and on account of lower energy prices and increasing disposable incomes, automotive demand is expected to remain strong in 2015. However, Volkswagen’s own-branded passenger vehicle sales declined 10% year-over-year in 2014, despite the strongest vehicle demand in the country since 2006. Part of the problem for the Volkswagen-branded vehicles in the U.S. has been a weak SUV/crossover lineup, a segment which grew by 11.8% to 5.38 million units last year, forming approximately one-third of the net light-duty vehicle sales in the country. Volkswagen Passenger Vehicles presently sells only two SUVs in the U.S., the compact Tiguan and the upscale Touareg, and the total light truck sales for the brand fell nearly 18% in the U.S. last year to 33,185 units. In comparison, volume sales for Toyota and GM’s light truck lineups in the country rose 11.1% and 7.6% respectively.

Last year, Volkswagen announced plans of investing $7 billion in North America between 2014-2018 for the purpose of adding capacity and accelerating growth in the country. ^[2] This is part of the company’s aggressive growth strategy aimed at becoming the highest-selling automaker in the world by 2018. In order to reach this feat, Volkswagen aims to sell around one million vehicles in the U.S. alone by that period. Contrary to the group’s growth estimates, U.S. deliveries dropped 2% to less than 600,000 units last year, reflecting how one million deliveries in the country by 2018, or an annual volume growth rate of 14% through 2018, might be unlikely.

Volkswagen will hope to reach as close as possible to its 2018 targets, and expanding its SUV lineup in the U.S. could boost the group’s chances to do so. The brand is planning to launch two SUVs in the country to augment its portfolio, including a mid-size SUV, and a longer version of the Tiguan, in the next couple of years.  In addition, without committing to the Cross Coupe GTE, a concept crossover model with a V6 plug-in hybrid engine introduced this month at the Detroit Auto Show, Volkswagen also plans to launch an SUV with plug-in hybrid technology in the near future. Demand for plug-ins has remained high in the U.S., with sales rising 23% last year, reflecting how a plug-in SUV could be an impact model for Volkswagen in the country.

Volkswagen witnessed a 12.4% sales-rise in its single largest market, China, last year, where the group crossed 3.68 million deliveries.  Continual strength in China will help the group narrow its volume sales gap with Toyota this year.  However, declining sales in the U.S., especially when automotive sales are expected to continue rising in the country in the near term, on lower oil prices, strengthening job conditions, and higher credit availability, will be an area of concern for Volkswagen. Augmenting its U.S. lineup, especially in SUVs, could boost the company’s volume sales in the country, and make their sales goals more likely to be realized.

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1. Toyota Fends Off VW to Stay Biggest Carmaker a Third Year, bloomberg.com [↩]
2. Volkswagen to invest $7 billion in North America, wsj.com [↩]