How South Korea Is Giving Volkswagen A Very Hard Time

by Trefis Team
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The backlash from the dieselgate scandal that broke out over a year ago has still not stopped. Volkswagen AG (OTCMKTS:VLKAY) has been hit with a fine of 37.3 billion won (~$32 million) by South Korean antitrust authorities for false advertising of its vehicle emissions. Volkswagen falsely claimed that its vehicles sold in South Korea met the European Union’s strict Euro 5 emissions standards, when, in fact, they were fitted with defeat devices that helped cheat on emission tests.

This fine adds to Volkswagen’s woes in South Korea, where it had already halted sales of most of its vehicles earlier this year in August. Even prior to the ban on sales of most of Volkswagen’s vehicles, the brand posted a 33% year-over-year drop in sales in the first half of the year in the country, while Audi posted a 10% decline. The ban meant that approximately 68% or more than 200,000 vehicles of the 310,000 vehicles Volkswagen had sold in the country in the last decade had been decertified. Last year after the news of the scandal broke out, the Korean government ordered the group to recall more than 125,000 of its diesel-powered vehicles and fined the company 14.1 billion won (~$12.2 million).

Volkswagen Q&A 32

Although South Korea is not a huge market for Volkswagen, this is cause for concern for the company. Taking the example of Audi– the brand is losing on the luxury automobile growth momentum in South Korea, enjoyed by both of its chief competitors and compatriots Mercedes-Benz and BMW, and Toyota’s Lexus. As can be seen from the figure above, Audi’s sales declined almost 88% last month. Furthermore, Audi’s South Korean sales have been down by 81-88% each month since August. Assuming that the ban hadn’t been enforced and if Audi’s sales in the country had even met the sales figures from last year in October, South Korean sales would have formed 2.5% of all Audi sales. Had sales grown by 40% (seeing the growth rates seen by all other luxury automakers), the sales would have formed 3.5% of Audi sales in October.

In broader terms, a dent in 3.5% of total sales of Audi — which is one of the 12 brands that Volkswagen’s owns, doesn’t seem very substantial. However, consider this: From 3.5% of all sales, South Korea’s vehicle sales have declined to 0.3% of all sales for Audi. This is a loss of around 3.2% of all unit sales. When multiplied by the average revenue per Audi for 2016 estimated at $36,919 by Trefis, the deficit in revenue is around $2.1 billion.

So, even if South Korea doesn’t form a huge market for Volkswagen, the ban on sales of vehicles in the country and the additional fines will have a considerable impact on the company’s profits. Audi is the company’s leading luxury unit, forming 12.6% of the group’s valuation according to Trefis estimates. The decline in the brand’s unit sales also doesn’t bode well for the overall group as the brand typically operates on higher price points and has broader margins. An increase in Audi sales is accretive to the margin of the overall company — which has low operating margins of 6-7%, much lower than the 10-11% operating margins of its chief competitor Toyota.

Have more questions on Volkswagen? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Volkswagen

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