Volkswagen AG (OTCMKTS:VLKAY) has been struggling for more than a year now following the news of the emissions scandal. While the total P&L impact of the dieselgate scandal has reached €18.2 billion since last year, the group has been trying to recover from the scandal by drawing out a new Strategy 2025, emphasizing on cleaner vehicles and cost cuts. One of the key areas for cost cuts is at the namesake brand of passenger vehicles, which forms ~60% of the net unit sales for the group. The scandal has had a deep impact on Volkswagen’s business and brand image, with the namesake passenger vehicle brand recording a 12.5% year-over-year decline through the first three quarters in the U.S., and continually low operating margin due to added costs of discounts and incentives to attract buyers.
The group is looking to take a step back from its previous aggressive pursuit of expansion, and realign its strategy and targets, in a bid to realize more qualitative growth, and not just quantitative growth. The group announced previously that it is cutting investment by €1 billion ($1.08 billion) a year at its namesake brand, which is weighing down the group’s net profitability, as high capital spending and R&D investments have kept operating margins below 3% at the brand. The brand’s margin stood at 1.6% through Q3, down from 2.8% a year ago, due to added expenses, lower sales, and discounts and incentives offered in view of the dieselgate scandal, lowering the group’s overall operating margin to 7% in the first three quarters of the year (the figure excludes special items that comprise provisions for the emissions issue). In comparison, Toyota operates at a 9.5-11% margin. Volkswagen also employs ~2x and ~3x the workers employed by Toyota and GM, respectively, and spends a considerable amount on research and development, weighing on its profitability.
Volkswagen has now announced that it will cut 30,000 jobs at its namesake brand by 2020 to make it leaner and more efficient and save extra costs. The group is aiming to raise the brand’s operating margin to 4% by 2020, up from 2% last year. This move could see Volkswagen brand’s EBITDA margin by more than our current estimate for 2021. In this scenario, as can be seen from the chart, the group’s valuation rises by approximately 9%.
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