VW has added details of its plans to cut costs and boost the revenue of its core VW passenger car unit.
IHS Automotive perspective
VW is looking to boost the profitability of its core VW passenger car brand by reducing the number of components it uses, while it is also considering a separate listing for its heavy truck business which comprises the MAN and Scania brands.
CEO Martin Winterkorn announced last year that the company would embark on a major efficiency and cost-cutting drive in order to boot the profitability of it main passenger car brand which accounts for 60% of the group's overall sales on a global basis. The move to cut component costs and complexity is the first major announcement of the plan which is aimed at boosting the unit's operating profit margin from the 2.9% it recorded last year.
VW has just announced record combined sales of 10.14 million units, achieving one of the core goals of its Strategy 2018 corporate programme four years ahead of target, but the company is not resting on its laurels and the profitability of its core VW passenger car brand is a weakness that needs addressing. The plan to spin off the truck group separately will allow the unit to raise its own capital and give it the autonomy it needs to take on Daimler's leadership position in the global truck market.
The Volkswagen (VW) Group is looking to implement significant cost savings across the purchasing operations of its core VW passenger car brand by scaling back the range of components used by the unit. According to a presentation made by the firm's chief financial officer (CFO) Hans Dieter Pötsch, the company is looking to reduce the variety of components used in core models like the Golf and the Polo, which will offer significant savings potential. Other core cost-saving measures the brand is targeting include:
- Reducing complexity and speeding up management decision-making.
- Sharpening target-oriented investment.
- Increasing localisation in core markets.
- Enhancing R&D efficiency.
- Leveraging scale effects and group-wide synergy potential further.
In addition to these efforts which are focused on improving the cost base, VW also announced a number of measures aimed at boosting revenue, including adapting the model lifecycle strategy to meet regional competition (a strategy that is likely to focus heavily on the brand's operations in China) as well as "focusing on models that provide sustainable profitability". This latter element may mean the end of models in the VW passenger line-up for which there are marginal business cases. For example, models like the VW Eos, which is effectively duplicated in the VW line-up in Europe by the Golf cabriolet, will be killed off. The VW Phaeton also faces an uncertain future as it has never made a profit for the firm, although recent reports suggest VW is actually going ahead with preparing a second-generation version of the model.
VW is also said to be looking at planning a separate stock market listing for its heavy truck business in Frankfurt, according to a report by the German business publication Manager Magazin. The report cited company insiders who said the heavy truck business, which comprises the MAN and Scania brands, would potentially have its holding company structured so it could be listed on the stock exchange in the event that its parent wanted to raise cash.
Outlook and implications
The VW Group is looking to significantly improve the performance of its VW passenger car brand, following a pledge made last July by CEO Martin Winterkorn to cut costs and improve profit margins (see Germany: 16 July 2014: VW aims to initiate EUR5 bil. of savings by 2017 – report). The simplification of the component sets of its core models in Europe is one of the key measures that VW will implement in order to drag its core passenger car brand back to profit margin of 6% by 2018. This plan has been put into place after its operating margin fell to just 2.9% in 2013. With the two joint ventures in China with Shanghai Automotive (SAIC) and First Automotive Works (FAW) the VW passenger car brand sold 6.1 million units out of the company's combined sales total of 10.1 million units, so its financial performance obviously has a massive bearing on the Group's overall financial performance. However, its comparative lack of profitability in 2013 was highlighted by the fact that Porsche, which sold 155,000 cars during the year posted an operating profit of EUR2.6 billion during the year, almost matching the VW brand's figure of EUR2.9 billion, which itself fell by 21% during the year. Although VW is undoubtedly taking sensible and important steps to improve profitability, projects like the Phaeton send out the opposite signals. If the company has committed to manufacturing a second generation Phaeton, it will send out conflicting signals about the company's intent to tackle the VW brand's profitability crisis. Meanwhile, a move to spin off the truck division as a separately listed unit could make sense. VW is somewhat behind schedule in integrating its two heavy truck brands and establishing engineering and production synergies. A separate listing could make it more attractive to investors and allow more autonomy to make take the aggressive steps needed to ensure successful synergies. It will also it to raise capital in a fashion better suited to the longer product cycles of the heavy truck market.