The Month That Was: Automotive Stocks
In this article we will discuss the new developments associated with automotive companies Volkswagen AG (OTCMKTS:VLKAY) and Daimler AG, particularly related to their Russia operations. As the Russian economy continues to struggle amid geopolitical issues with Ukraine and collapsing oil prices, the ruble has lost approximately half its value against the U.S. dollar in the last 52 weeks. Negative consumer sentiment amid high prices and interest rates has also impacted the country’s automotive market, which was already in decline before the Crimean crisis. After declining nearly 5% in 2013, annual vehicle sales in Russia fell 15% last year, and continue to fall this year. [1]
Low demand and negative currency translations in Russia have also prompted automakers such as Volkswagen, Jaguar Land Rover, GM, and Ford to halt or slow down vehicle production in the country from time to time last year and this year. But a silver lining amid declining overall car sales in Russia has been the rise in luxury vehicle sales, especially for Daimler’s Mercedes, as customers in the country have looked to purchase vehicles, especially in the luxury segment, to turn their savings into something tangible, as the ruble continues to lose value.
Volkswagen
The German automaker has announced that it will scale-back vehicle production and layoff at least 150 workers at its Kaluga plant in Russia. Sales of passenger vehicles and light commercial vehicles declined 38% year-over-year in February in Russia, and the decline in unit sales for Volkswagen’s own-branded vehicles in the country was 40% in the month. Volkswagen Passenger Cars form approximately 60% of the group’s net deliveries. The company has looked to reduce costs and slowdown production in a market where there are no signs of immediate recovery.
What has also hurt Volkswagen, apart from the continual decline in sales for its namesake passenger vehicle brand, is the decline in sales for the Audi brand in Russia, as well, in February. Volkswagen and Skoda models were already built in Kaluga, Russia, since 2007, and Audi also started assembling its A6, A7, A8L, Q5, and Q7 models in a semi-knocked-down (SKD) facility at Kaluga in 2013. Even though customers were looking to buy luxury vehicles to convert their savings into value, Audi’s sales fell 28% year-over-year last month in the country. Volkswagen had halted production thrice last year, and laid-off hundreds of temporary workers at its Russia manufacturing plant, which has around 5,000 workers. Russia constitutes approximately 3% of Volkswagen’s net volume sales. Not only will the slowdown in vehicle deliveries hamper the group’s revenues, the continually depreciating ruble is expected to dent profits for the company in the near term. [2]
We have a $44 price estimate for Volkswagen AG, which is below the current market price. The stock rose 1.56% in the last month.
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Daimler
The biggest winner in Russia has been the luxury brand Mercedes, the leading premium vehicle brand in the country. Despite a 38% fall in overall light-duty vehicle sales in Russia in February as aforementioned, Mercedes-Benz witnessed a 16.5% unit sales growth in the country in the month, achieving a new sales record. The German luxury vehicle brand, which trails both BMW and Audi in terms of global vehicle volumes, imports all of its vehicles into Russia, unlike its compatriots who assemble their models in the country itself.
While Mercedes has grown volume sales in Russia, Audi’s sales have fallen in the country. However, a possible import ban on vehicles in Russia, following the ban on food import that the country imposed last year, could hurt Mercedes in the future. Russia is also pushing for higher localization levels of vehicles, and could impose an import ban on cars unless built locally in completely-knocked-down (CKD) units.
Last year, news that Mercedes is looking to start local assembly of its vehicles in Russia surfaced. Mercedes is the preferred vehicle for state agencies, and as Russia looks to ban state purchases of imported cars unless built locally in CKD units, with a localization level of 50% and above, the automaker’s volumes in the country could drastically decline. Although Russia represented only 3% of the net volumes for Mercedes in 2014, the luxury maker is looking to derive high growth from the BRIC nation in the longer term to compete better with BMW and Audi on a global front.
We have an $96 price estimate for Daimler AG, which is roughly in line with the current market price. The stock fell 0.46% in the last month.
See Our Complete Analysis For Daimler AG
Daimler already has joint ventures Mercedes-Benz Trucks Vostok OAO and Fuso Kamaz Trucks Rus Ltd., formed in partnership with the Russian truck manufacturer Kamaz OAO in Russia. These joint ventures produce and distribute Mercedes-Benz and FUSO trucks and distribute Mercedes-Benz and Setra buses in Russia, from the plant at Naberezhnye Chelny. Mercedes is now planning to assemble the large-sedan S-Class in Naberezhnye Chelny, extending its partnership with Kamaz. By leveraging its already established partnership with Kamaz, and through local assembling of vehicles, Mercedes could reduce the added costs of exporting, and also evade higher import tariffs.
Vehicle volume sales continue to decline in Russia, which is reeling under Western sanctions, high prices and interest rates, and negative customer sentiment. While this has impacted Volkswagen’s deliveries and production routine in the country, Daimler’s Mercedes seems to be faring well in terms of volume sales. However, this might all change if Russia decides to impose an import ban on vehicles, fueled by growing geopolitical tensions with Western countries.
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