The Year That Was For Volkswagen’s Audi
Volkswagen AG (OTCMKTS:VLKAY) might be going through a tough time viz-a-viz the dieselgate scandal, and the continual poor operational performance of its namesake brand of passenger vehicles, but despite being embroiled in the scandal, the group’s largest luxury brand, Audi, finished 2016 holding its lead in China and Europe, and managed to grow in the U.S. Audi’s image has also been marred in the U.S., where Volkswagen is likely to pay over $20 billion in relation to the fines and penalties, settlements, and recall and fixes. However, the brand has managed to grow in a market which remained relatively flat through 2016, as demand weakened following the years after the recession where re-fueling of fleet took place at an aggressive rate. 
Audi forms almost 13% of the company’s value as per our estimates, and this doesn’t include its Chinese business, which is accounted for using the equity method of accounting. The biggest fuel to Audi’s growth has been its biggest market, China, which accounted for approximately 32% of all Audi vehicle deliveries in 2016. Demand for the compact premium sedan A3 and the SUV Q3 have remained high, allowing Audi to report solid results in China. However, the brand is facing stiff competition from Mercedes and BMW in the country, as both these brands are catching up to Audi. Although the Chinese passenger vehicle market grew solidly last year, 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.
Luxury brands are important for Volkswagen, whose operating margin of 5-6% is almost half of that reported by Toyota, its chief competitor in the global vehicle market. Through the first three quarters, while Audi and Porsche combined formed 21% of the vehicle deliveries for Volkswagen, the divisions formed 38% of the net revenue and a much larger 60% of the operating profit. 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.
- Up 17% YTD, What To Expect From eBay Q1 Results?
- Rising 21% This Year, What Lies Ahead For Exxon Stock Following Q1 Earnings?
- Should You Pick General Electric Stock At $165?
- What’s Next For JetBlue Stock After A Sharp 19% Fall Post Q1 Results?
- Is Kimberly-Clark Stock Fairly Valued At $135 After A Solid Q1?
- How Will AMD’s AI Business Fare In Q1?
Although the Volkswagen brand of passenger cars forms a majority of profits for the company, rising volumes for the luxury units means that their proportion in profits, and subsequently, overall profits, get a boost. This means that continual growth in Audi volumes could spur Volkswagen’s profitability going forward.
Have more questions on Volkswagen? See the links below.
- Settlements In The U.S. Continue To Drain Volkswagen’s Bank Accounts
- Volkswagen Tries To Appease Customers In Canada As Emissions Row Continues
- How South Korea Is Giving Volkswagen A Very Hard Time
- What Will Be The Impact On Volkswagen’s Stock If The Namesake Brand’s Margin Rises Strongly?
- Volkswagen Is Losing Share In Europe Thick And Fast
- The U.S. Automotive Slowdown Is Here And Now
- Where Will Volkswagen’s Revenue And EBITDA Growth Come From Over The Next Three Years?
- By What Percentage Have Volkswagen’s Revenues And EBITDA Grown Over The Last Five Years?
- What Is Volkswagen’s Fundamental Value Based On Expected 2016 Results?
- How Much Have Big Auto Companies Been Investing In Growth Opportunities?
- Has The Emissions Scandal Impacted Volkswagen’s Volume Sales This Year?
- Rundown Of How Volkswagen’s 2015 Results Were Impacted By The Dieselgate Issue
- How Significant Will China Be For Volkswagen By 2020?
- How Is Audi Holding Up Compared To Its Compatriots In Crucial Markets?
- How Has Volkswagen’s Revenue And EBITDA Composition Changed Over 2012-2016E?
- What Is Volkswagen’s Revenue And EBITDA Breakdown?
- Why Premium Brands Are 3x As Valuable As Non-Premium Brands For Volkswagen
- How Much Will Premium Brands Contribute To Volkswagen’s Top Line By 2018?
- How Much Does Volkswagen Make On The Sale Of One Porsche, Audi, Skoda And Volkswagen Vehicle?
Notes:
See More at Trefis | View Interactive Institutional Research (Powered by Trefis)