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Will Volkswagen be able to get out of a crisis through cost cuts? the car manufacturer plans to close several German plants and eliminate tens of thousands of jobs. At this point, however, the question is no longer whether VW needs to restructure, but whether the ax will be sharp enough to solve its problems.
The German group is facing a number of problems, as evidenced by a series of profit warnings and, more recently, a 64 Percent Drop in Third Quarter Profits exemplifies.
China is a key issue as domestic automakers produce better, cheaper vehicles. VW deliveries in the region fell 10 percent in the first nine months of the year. The contribution of its joint ventures in China this year will amount to around €1.6 billion of “proportionate operating income”, according to VW, about half the amount in 2022.
Competition from Chinese automakers – whether in China or abroad – is structural and will not be easy to reverse. EU tariffs in Chinese electric vehicles will slow, rather than stop, penetration.
That, plus a possibly cyclical slowdown in European vehicle sales – expected to be 14 million market-wide this year compared to 16 million before the pandemic – is forcing VW to grapple with its unsustainable cost base. high.
Much of the problem lies with the group’s main brand, VW. This struggles to make a big margin even in good times. In the third quarter, it fell to 1.8 percent of sales. That’s well below the group’s full-year target of 5.6 percent. Rival Renault expects full-year EBIT margins of around 8 percent, according to S&P Capital IQ.
Volkswagen wants to increase the VW brand’s margin to 6.5 percent by 2026. Last year it outlined 10 billion euros of performance improvements. Recently reported plant closures and job reductions could add another €4 billion, thinks Stifel’s Daniel Schwarz. Combined, these measures represent about 15 percent of the VW brand’s sales, far more than it needs to hit its margin target.
Investors can expect this excess to reflect VW’s huge potential to cut costs and cushion the worst of the slowdown in vehicle sales. However, the fear is that it reflects a deteriorating environment as Chinese automakers continue to gain share domestically and abroad, electric vehicle sales turn out to dilute margins and internal combustion engine prices decline. .
That, coupled with the fact that the mooted cuts and closures will face fierce opposition, explains why VW shares are trading at 3.3 times next year’s earnings. It’s clear that investors don’t believe the automaker is getting its show back on track.