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Below are key drivers of Volkswagen's value that present opportunities for upside or downside to the current Trefis price estimate for Volkswagen AG:
Sales volume has increased from 2.9 million in 2015 to 9.2 million units in 2020. Trefis expects the figure to reach 11 million units by the end of the forecast period. In case the car sales touch 15 million units, we could see a good upside to our price estimates. On the other hand, if tighter regulations and unfavorable monetary policies result in sales touching 9.5 million units, there could be a downside to our price estimate.
Volkswagen AG, headquartered in Wolfsburg, Germany, is one of the largest global automotive companies in terms of the number of vehicles sold annually. In addition to producing Volkswagen branded passenger cars and light commercial vehicles, Volkswagen AG, along with its 340 subsidiary companies, also sells passenger cars under various automotive brands including Audi, Bentley, Skoda, Porsche, SEAT, and Lamborghini.
Commercial vehicles and engines and turbomachinery are sold under the Scania and MAN marquees. The company provides financial services, including leasing and fleet management. Following the purchase of Ducati, the Volkswagen Group has expanded its range to include motorcycles. China is Volkswagen's largest sales market and is a significant contributor to the company's profits. Volkswagen AG has also maintained the largest market share in Europe for over two decades.
China is Volkswagen's single largest market, constituting ~35% of the company's net deliveries for 2018. After an impressive growth last year, the company recorded a modest 1.5% year-over-year growth in deliveries to China. Passenger vehicle sales reached 24 million units in China last year, down by 3.9% year-over-year.
Although the Chinese passenger vehicle market has grown solidly over the last few years, this was mainly as the government halved the 10% purchase tax on cars equipped with 1.6-liter engines or smaller engines in October 2015, in response to a period of slow growth in the country's vehicle market. The year-over-over growth rate is expected to slow down in the new year in China, despite the government's extension of the tax breaks until 2017. The government had extended tax breaks into 2017 - increasing the purchase tax to 7.5%, up from 2016 but below the standard 10% purchase tax. The automaker is continuing to invest heavily in China, irrespective of its cost-cutting plans. The company had announced plans to invest over 15 billion euros ($18.3 billion) in the Chinese market by 2022, spending on its new SUVs and plug-in models in the country, coupled with its focus on e-mobility and autonomous vehicles. The Volkswagen brand aims to expand its SUV lineup to 10 models in China by the end of the decade. Volkswagen also plans to introduce 15 new-energy vehicles within five years in China.
Luxury brands are essential for Volkswagen, whose operating margin is much less than the 10-11% margin at which Toyota typically operates. Through the last year, while Audi, Porsche, and Bentley combined formed 14% of the vehicle deliveries for Volkswagen, the divisions formed 42% of the Automotive revenue and a much larger 64% of Automotive EBITDA. This is because the average unit pricing of a luxury car is somewhere close to $44,000, compared to just over $20,000 for the average price of vehicles overall. Given the high fixed cost of manufacturing and distributing a car, a higher purchase price is the biggest guarantor of profitability.
The operating margin of Volkswagen's Financial Services was around 8%, and that of Volkswagen's automotive business was about 2.5% in 2017. Volkswagen’s auto loans and lease portfolio went up to almost $150 billion following the integration of Porsche’s financial services in 2012. They stood at $255 billion at the end of FY 2018, earning an interest rate of approximately 13%. Over the period, Volkswagen charges an average interest & lease rate of roughly 15%. Volkswagen’s auto loans and lease portfolio was recorded at $277 billion at end of 2020.
The U.S. automotive market seems to have plateaued after six consecutive years of strong growth rates, following the recession. The re-filling of fleets took place aggressively over the last several years, and now the consumer demand has slowed down, as expected.
Volkswagen is already struggling in the country, where its namesake brand of passenger cars continues to lose sales. The aftermath of the Dieselgate scandal, which involves ~500,000 U.S. vehicles, is also weighing on Volkswagen's delivery numbers. However, the group's luxury troupe comprising Audi, Porsche, Bentley, and Lamborghini is still posting positive numbers in the country and growing by more than the overall light-duty vehicle market.
Germany, which has stringent labor laws, is Volkswagen’s home market. Since a significant portion of Volkswagen's labor force is unionized, attempts to reduce labor costs and layoffs are typically met with stiff resistance.
Continued consumer preference for lighter, more fuel-efficient cars, due to regulatory requirements and high fueling expenditure, might result in an unfavorable mix of sales that might drive down average car prices.