Volkswagen’s plan to cut costs by 10 billion euros ($10.9 billion) and boost overall profitability of its namesake VW brand will come under scrutiny on Wednesday when the company hosts an investor day.
Investors will also want to know what VW thinks about reports that the threat of Chinese electric cars could lead to European Union (EU) tariff measures.
Auto investors in general have been concerned about the uncertain economic outlook. VW investors see a weakness in the profitability of its own brand and other mass-market cars Skoda and SEAT that needs to be addressed.
Experts expect production to exceed demand in Europe throughout 2023 as downward pressure on prices and profit margins intensifies. As Europe’s leading seller, VW will face calls for staff and capacity cuts. Due to the political nature of the management structure, this is always more difficult for VW than for its competitors.
Sales of VW electric vehicles have come under pressure as competition from other Europeans, Tesla and China increases. China has built a major lead in electric car and battery technology. It is currently posing a formidable challenge across Europe as customs alarm bells are ringing at EU headquarters in Brussels.
French government officials are reportedly seeking import restrictions to protect the electric car industry. German manufacturers are also suffering from China’s supposed 20 percent cost advantage, but are less interested in curbing imports, not least because this could jeopardize their enormously profitable sales there. France is significantly weaker in China.
Investors appeared positive about the possibility of an improvement in VW’s troubled outlook, as the share price rose to just over 160 euros last week from around 140 euros at the end of May. There could be some last-minute unrest as the price fell back below €160 on Monday.
VW’s overall financial performance is sending mixed signals to investors. Operating profit fell to 5.7 billion euros ($6.2 billion) in the 1st.St Compared to the year-ago period, the increase in the year-ago quarter was 8 billion euros ($8.7 billion), but after excluding the impact of commodity trading, it rose 35% to 7.1 billion euros, a margin of 9.3% . The annual target remains in the range of 7.5 to 8.5%.
As VW unveiled its mass-market cost-cutting plans, Bernstein Research said specific details were scant and hoped Wednesday’s meeting could fill some gaps.
“We assume the €10 billion includes revenue, cost avoidance and outright cost improvement, but the split is unclear,” said an Investment Research report.
“VW also intends to permanently reduce costs out of business by streamlining the product lineup, particularly by eliminating the VW Arteon and other low-volume models and most vehicle configuration options,” the report reads.
“Further synergies between volume brands (multi-brand assets and platforms) are expected to deliver further cost savings.” says the report.
Investment bank UBS pointed out that the VW brand recently cut its margin target for 2023 from about 6% to about 4%, down from 3.6% in 2022, worse than most of its mass-market peers in Europe. UBS spoke of VW’s structural inability to generate attractive margins with small, affordable cars.
“Before we pass judgment on VW’s strategic plan, we await the full announcements (on Wednesday). However, the VW brand plan does not appear to be a reason to change our structurally cautious stance on mass brands within the VW Group,” UBS said in a report.
According to a report last month by Allianz Trade, a subsidiary of German insurance company Allianz, the threat from China will intensify later in the decade, stealing a large chunk of electric car sales and profits from Europeans.
Allianz Trade said that unless the EU takes action, selling Chinese BEVs will cost European automakers 7 billion euros annually in lost profits through 2030. Measures should include tariffs. A 10% import duty is now levied on Chinese vehicle imports into Europe.
Investors will be concerned about Volkswagen’s governance, which has historically focused on employee satisfaction rather than investors. VW is controlled by a 20-member supervisory board, where the unions control half of the votes and two politicians from the state of Lower Saxony frequently vote with Labour. For decades, investors in VW shares have held off because the unwieldy management structure has blocked attempts to transform the company into a normal corporation in which for-profit shareholders rule.