Düsseldorf Herbert Diess certifies a bright future for the automotive industry. Because the electric drive makes vehicles cleaner and safer thanks to autonomous driving, interest in one’s own car is likely to increase significantly in the foreseeable future. “I am very optimistic about the future auto business,” said the Volkswagen CEO to the Handelsblatt. But there are still some major obstacles on the way there. Volkswagen seems to be slowly getting the first part of this long road under control, electrification. But the second half – digitization – will be more difficult and complicated. This is shown by the acute shortage of chips, which, like most car manufacturers, took Volkswagen completely unprepared. However, there is one point where Volkswagen differs significantly from many of its competitors: There is no great complaint from Wolfsburg in view of the many changes. Rather, the group sees the new era as an opportunity.
With a gap of more than five years, the VW Group can now consider itself lucky that the US authorities uncovered the diesel manipulation in late summer 2015. Because this forced Volkswagen faster and earlier than the competition to design a new drive concept for the future. The emissions scandal had finally discredited the internal combustion engine, that was already evident back then.
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Wolfsburg’s answer was an electric drive. Development work on a new generation of electric cars began more and less at the same time as the in-house investigations into diesel matters. Volkswagen has thus gained a lead over most of its traditional competitors, with the exception of the newcomer Tesla.
“Our lead should be two to three years,” estimates Thomas Schmall, Chief Technology Officer in the VW Group and thus primarily responsible for the new and rapidly growing battery business.
Volkswagen therefore no longer has any particular problems with the EU Commission adopting more stringent climate targets at regular intervals. In the future, even more electric cars will simply have to be produced, that is the consequence for the group. In Europe, for example, this means that the proportion of purely battery-powered models will have to be around 60 percent by 2030.
Up to CEO Diess, almost everyone in Wolfsburg signals that the EU is on the right track with its climate policy and the associated consequences for industry. Volkswagen is likely to have transformed itself into a pure electrical manufacturer in 20 years, there is no longer any doubt about that.
It looks a little different with digitization and autonomous driving. “Switching from a combustion engine to an electric drive in a car is not a particular challenge. We can do that, ”says CEO Diess. However, to want to be on a par with IT giants like Apple or Google in the next ten years – that is something completely different.
Volkswagen is pumping 2.5 billion euros into its new software subsidiary Cariad every year. The IT workforce is to be increased from the current 4,000 to 10,000 by 2025. In three to four years, an automotive operating system should be created that can compete with Android from Google and iOS from Apple.
But doubts remain. “Volkswagen has yet to prove that they can really do it,” says Stefan Bratzel, professor at the Center of Automotive Management (CAM) at the Bergisch Gladbach University of Applied Sciences.
Group boss Diess has the clear strategic goal in mind that Volkswagen will create the transition to a software provider and thus, for example, be able to catch up with Tesla. Right from the start, the US newcomer not only saw himself as an electrical manufacturer, but also worked on the automotive software at the same time.
After all, Volkswagen plans to offer wireless software updates for its new electric models for the first time this summer – as Tesla has been doing for years. The new Volkswagen way is rewarded on the stock exchange: Since the beginning of the year, the market capitalization has increased by around 50 percent.
Operational business: Corona shock subsides
The Volkswagen Group has come through the Corona period comparatively well so far. Despite the pandemic, the automaker made decent earnings last year. In 2020, the operating profit – excluding special charges from the diesel affair, for example – was 10.6 billion euros. This corresponds to almost halving the operating profit from 2019, when the group had reached a record value of 19.3 billion euros.
In 2020, sales fell by almost twelve percent to around 223 billion euros. Vehicle sales fell even more sharply worldwide by 15 percent to 9.3 million. As a result, Volkswagen also had to cede the title of the world’s largest automaker to its Japanese competitor Toyota.
Nevertheless: “Volkswagen did significantly better than many competitors in the Corona year 2020,” says NordLB analyst Frank Schwope about the annual result. In view of the special circumstances, the group presented a “strong operating result”.
The recovery after the corona shock will take a while: the VW Group will not reach the sales figures of 2019 again until 2022. After the first six months of 2021, the group just missed the five million mark, which means almost normal again.
Despite the corona pandemic and the global shortage of chips, business got off to a brilliant start at the beginning of the year. Because sales and earnings in the first quarter developed better than initially expected, the car company had also raised its outlook for the entire year. Accordingly, the operating return will improve again slightly.
At the beginning of July, Volkswagen published its consolidated operating profit for the first half of the year in advance. The Wolfsburg-based car manufacturer expects a profit of around eleven billion euros – that’s slightly more than 2020. For the rest of the year, however, two major factors of uncertainty remain: the chip supply and the further corona development.
Group subsidiaries: Porsche beats everything
The fact that Volkswagen has posted a double-digit operating profit of billions for 2020 is mainly due to the strong group subsidiaries. Above all, Porsche was able to transfer a billion-dollar profit to Wolfsburg again despite Corona.
With 15.4 percent, the Stuttgart sports car manufacturer even achieved the minimum return target of 15 percent again. Basically, the following applies: For the premium brands, the consequences of the corona were less noticeable than for the mass business.
In addition to Porsche, Audi and Skoda also achieved comparatively good results. The main brand Volkswagen Passenger Cars was hit hardest by the pandemic, with sales figures falling by around 15 percent in the past year, as in the entire Group. There were also bigger problems in 2020 with the Spanish subsidiary Seat and with the light commercial vehicles (VW Transporter).
Business in China is an important earnings driver for the group; Volkswagen is the market leader in the People’s Republic with a share of around 20 percent. In China, the car market recovered very quickly after the early Corona-related slump in sales at the beginning of last year.
The group had sold around 3.85 million vehicles in China in 2020, a decrease of around nine percent compared to the previous year. The decline there was significantly smaller than in the rest of the world. However, Volkswagen is currently having problems in China and is losing market share there.
The group also benefited from the positive development of its premium brands in the first quarter. Here, too, a key driver of earnings is Porsche, which achieved a return of 16.7 percent in the first quarter. The leasing subsidiary VW Financial Services is also developing very well, earning almost one billion euros in the first three months of the year.
Cash flow and financial strength: full pockets
Compared to 2019, VW was able to increase its cash flow from ongoing business from just under 18 to almost 25 billion euros last year. In order to reduce the effects of the corona-related production stoppages, many car manufacturers had reduced their investments, including VW. Instead of 20 billion euros, 18.3 billion euros were invested last year. The investment ratio therefore fell from 6.6 to just under six percent despite lower sales.
In the end, VW had a free cash flow of more than six billion euros. This result should have been entirely in the spirit of VW boss Herbert Diess. On the one hand, because the free cash flow in 2019 was over two billion euros in the red.
On the other hand, because he sees a key value in this parameter, as he made clear in a fire speech at a VW management meeting in early 2020. “In the future, we will focus even more on sales, returns and cash as the core reporting parameters,” said Diess at the time.
VW can fall back on liquid funds amounting to 26.8 billion euros. In 2019, the net liquidity was just over 21 billion euros. In order to strengthen its own financial position, VW placed bonds with a volume of four billion dollars each in the USA in May and November 2020.
The total equity amounts to 128.8 billion euros, which corresponds to an increase of more than four percent compared to 2019. The equity ratio increased from 25.3 to 25.9 percent.
According to the risk report, financial risks could arise from a decline in demand for vehicles with combustion engines. In the area of diesel vehicles in particular, the problems “could be exacerbated by media reports or inadequate communication”, the report says. This results in the risk of higher working capital, which in turn has a direct negative impact on cash flow.
Competitive comparison: Generous with staff
Europe’s largest car manufacturer continues to suffer from high personnel costs. The comparison with the competition shows how big the differences are. While the personnel cost ratio at VW is around 18.2 percent, Toyota’s sales here are only burdened with around twelve percent. The staff costs at BMW are also lower. Even Daimler – which had been noticed negatively for years with very high personnel costs – is doing much better with a rate of 14.1 percent.
In terms of the EBIT margin, too, Diess is likely to look jealous of Toyota. The world’s largest auto company achieved an EBIT margin of more than eight percent in the past fiscal year. Like Daimler, VW had to be content with 4.3 percent. BMW came up with a rate of return of 5.3 percent last year.
Despite the high personnel expenses, VW was able to increase its free cash flow – which was negative last year – to 6.5 billion euros. This means that the Wolfsburg-based company has almost twice as much financial resources at its disposal as BMW. At the top here is Daimler with more than eight billion euros.
In terms of sales, VW can certainly keep up with Daimler. The cash flow rate for both automakers is around eleven percent. BMW lags behind with around eight percent. The cash flow rate indicates what percentage of sales are available for investments, debt repayment and dividends.
Particularly in the area of investments, manufacturers are facing major burdens in the course of the digitization of the automotive industry. VW wants to invest more than 70 billion euros in its future business by 2025.
The lack of chips has not yet made itself felt in terms of sales. Similar to Daimler, VW was able to sell almost 28 percent more vehicles in the first six months of this year. In this comparison, BMW stands out with a sales increase of 40 percent.
At VW, on the other hand, the weakness in China is noticeable. In June in particular, the group suffered a setback there compared to the previous year. In the most important market for VW, sales fell by more than 21 percent. For the premium manufacturers Daimler and BMW, however, things went much better in China.
Outlook: chips as an uncertainty factor
The first half of 2021 went significantly better for the VW Group than originally expected. The consequences of the pandemic have more or less been overcome. Actually, every market watcher would have expected that Volkswagen would have given up in the first six months because of the acute shortage of chips. But nothing happened.
Volkswagen itself has now pointed out that consequences could be expected in the third quarter due to a lack of semiconductors. Because of the factory holidays, there shouldn’t be too much of it in August. September will be the exciting month: then all plants should be running normally again.
More: Billions for electric cars and software: That is Volkswagen’s plan for the future