Volkswagen’s Volume Decline To Weigh On The Mid-Term Results


Volkswagen AG (OTCMKTS:VLKAY) is scheduled to announce its Q2 and mid-term results on July 29, and while the automaker has sold more vehicles than any other company so far this year, all is not well at the Wolfsburg-based German group. Volkswagen has outpaced Toyota this year in terms of volume sales, selling 5.04 million units through June, as opposed to 5.02 million unit sales for the latter, but this was because deliveries declined faster at Toyota, rather than due to growth at Volkswagen. While Toyota’s unit sales decline of 1.5% has been impacted by the Japanese automaker’s decision to halt building more manufacturing facilities and remain committed to improving efficiency, Volkswagen’s 0.5% volume decline seems worrisome considering the company’s aggressive push for capacity.

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Volkswagen’s stock has declined over 10% in the last six months, hurt by lower than expected vehicle sales in China– which was previously one of the main growth avenues, and continually low sales in the U.S.  Improving sales in Europe this year has somewhat softened the blow of lower sales in China at Volkswagen, but the overall decline in vehicle deliveries in the last three months is expected to weigh on the financials.

Revenue split VLKAY

Operating profit split VLKAY

 

 

 

 

 

 

 

Volkswagen’s China Sales Down Through June

China’s economy has slowed down from the high growth levels seen in previous years, mainly due to industry overcapacity, a slowdown in infrastructure, and the real estate sectors. This slowdown has caught up to the automotive sector as well, with passenger vehicle sales rising only 4.8% year-over-year through the first half (the growth rate is down 6.3 percentage points from 2014 levels). [1] But Volkswagen recorded a 3.9% decline in vehicle deliveries in the country, thus losing market share, too.

There has been a shift in consumer preference from the well-known higher priced foreign-made vehicles to budget SUVs and sedans, which has cost Volkswagen. The company is losing share to both foreign automakers such as GM and Ford, and domestic automakers, which have seen their market share rise 3.5 percentage points in China through June. Volkswagen hasn’t been prompt in responding to the changing customer preferences in China. The group’s Chief Executive, Martin Winterkorn, has said that the group is lining up a family of budget cars in the country that will include an SUV and a hatchback in 2018, and the cars will be priced between €8,000-€11,000 ($9,000-$12,300). [2] Earlier in 2013, Volkswagen planned to launch the budget family for emerging markets by 2016. Not only has the time of launch been delayed, but the price range for the concept models is also higher than the previous target of €6,000-€8,000, making them more expensive for the entry-level segment.

U.S. Sales Still Low, But Could This Turnaround?

The group somewhat missed out on the automotive growth in the U.S. in the recent past, hurt by poor perception and a weak lineup of SUVs–the fastest growing segment in the country. However, the German conglomerate could be geared for growth in the country now, with deliveries rising in the last three months, and up 2.4% year-over-year through June. The major contributor to the turnaround in the U.S. is the Volkswagen Passenger Cars division (including cars, light commercial vehicles, and SEAT), which forms around 16% of the company’s valuation and was a massive 46% contributor to the net revenues last year. Although the division sold 2.6% fewer vehicles in the U.S. through the first half of the year, sales in June rose 5.6%.

Contribution to volkswagen's valuation

The namesake brand is looking to penetrate the high-growth SUV/crossover segment with strong growths for the compact Tiguan and the upscale Touareg. Volkswagen is now working on a lineup of five new SUVs, aimed directly at the U.S. market, in a bid to turn its fortunes around in the country– the biggest SUV market in the world.

What is also not working for Volkswagen presently is that its luxury car brand Audi’s stronghold in China has also somewhat weakened this year. The brand is the largest-selling premium vehicle brand in the country, but its volume growth has lagged both its compatriots BMW and Mercedes-Benz this year, selling only 1.9% more vehicles than the previous year levels in China through June.

Going forward, with the planned overhaul of Volkswagen’s internal structure, things might start to look up, at least in terms of profitability. The group, which employs roughly 600,000 people and has 119 factories around the world, comprises 12 separate brands ranging from mass market cars to luxury vehicles to commercial vehicles. Toyota, on the other hand, employs only around 330,000 people, but delivered more vehicles than Volkswagen last year to keep the global lead.

Citing the highly centralized management structure as one of the obstacles in the way of the Volkswagen group and its profitability targets, the company is now reportedly planning to split its twelve brands into four holding companies, based on their inter-sharing of platforms, parts, and engines, in a logical way to better align its brands and strategies. In addition, the group’s Chief Executive Martin Winterkorn wants to give more autonomy to Volkswagen, Audi, and Porsche, and also different regional units, including the America and China business units, which could allow the company to concentrate more on its U.S. and China businesses, and come out with products more in tune with the current demand trends. Till then, the more-than-expected volume decline will weigh on the company’s financials.

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Notes:
  1. China passenger vehicle sales []
  2. Volkswagen finds itself in a budget car bind, wsj.com []