Volkswagen Ended 2016 With Improved Operating Efficiency

Despite the direct dent to Volkswagen AG‘s  (OTCMKTS:VLKAY) kitty in the wake of fines, settlements, recalls, and fixes associated with the dieselgate scandal, which broke out in September 2015, the expected deeper dent to the group’s wallet due to a tainted customer perception didn’t actually materialize. Volkswagen set a new record for deliveries in 2016, delivering 10.3 million vehicles worldwide, up 3.8% year-over-year, and surpassing Toyota as the global leader in automotive volume sales in this process.

Interestingly, Volkswagen managed to record strong sales despite dealing with the emissions scandal backlash all year long. At the forefront of the growth in Volkswagen’s impressive volume growth in 2016 was the 12.2% year-over-year increase in deliveries to China, its single largest market and where the company didn’t sell as many diesel vehicles. Volkswagen will end up spending over $20 billion in the U.S. alone in relation to the emissions scandal to resolve claims from the federal and state regulators and owners of the affected vehicles, and for recalls and fixes, but the country is a relatively small contributor to the group’s overall volumes, forming just 6% of the net deliveries in 2016. European customers were fairly forgiving of the German automaker, which sold 4% more vehicles year-over-year in this region that formed ~41% of the group’s net deliveries last year.

Optimized product costs and positive mix helped Volkswagen improve its operating margin to 6.7% in 2016, up from 6% over a year ago. These figures do not include special items, which comprise the hefty costs related to the emissions scandal. The improvement in profitability is a big win for the group which aims to improve its margin to 7-8% by 2025, as part of its Strategy 2025 mission. 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 1.8% last year, down from 2% in 2015, due to added expenses, lower sales, and discounts and incentives offered in view of the dieselgate scandal, lowering the group’s overall operating margin.

Improving profitability is imperative for the group, which faces huge expenses in face of the emissions scandal. Luxury brands are important for Volkswagen, whose operating margin is much lesser than the 10-11% margin at which Toyota typically operates at. Through the last year, while Audi and Porsche combined formed 20% 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. Volkswagen expects operating return on sales to range between 6-7% this year as well.

The positives from the 2016 results are a plenty for Volkswagen, despite facing tens of billions in expenses related to the emissions scandal. The backlash of the scandal could have eroded the group’s sales due to negative customer perception. However, Volkswagen managed to reach record sales, boosted by strong sales in China and Europe. Going forward, the company plans to evolve with the newer trends in the automotive industry and is looking to build more environmentally-friendly vehicles and improve its mobility services.

Have more questions on Volkswagen? See the links below.

• Volkswagen Is The New Global Sales Leader: What It Means
• 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?

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