Solid figures, meager prospects: How VW wants to sell less but earn more

Volkswagen is facing difficult times, but the bosses are trying to do business as usual.

Solid figures, meager prospects: How VW wants to sell less but earn more

Volkswagen is facing difficult times, but the bosses are trying to do business as usual. When CEO Oliver Blume and his CFO Arno Antlitz presented the business figures for the first half of the year on Thursday, their message was: everything under control. Although demand for the group's cars has slumped in some areas, as reflected in orders for the second half of the year, managers stuck to their financial targets for the full year. The Board of Management intends to meet these goals, according to which the Group should above all become significantly more profitable. And this despite the fact that the sales target was lowered somewhat at the same time: VW wanted to sell at least 9.5 million cars a year so far – it should now be at least 9 million.

How to do that, sell less but earn more? The group is building on two things: On the one hand, on the savings programs that have been started, especially for the core brand with the VW logo: "We must and will bring in the first results of these programs in the second half of the year," said Antlitz. That probably doesn't bode well for workers at the VW plants. Because in the future, VW wants to shut down production in the factories more quickly if demand falls. One is currently negotiating the "plant occupancy", reported Blume. "What we don't do is produce more stockpiled cars." At the plants in Zwickau and Emden, where Volkswagen produces e-cars such as the ID.3, ID.4, ID.5 and the brand new ID.7, the group has already cut shifts and is letting fixed-term contracts or those with temporary workers expire.

In the future, this could also affect the main plant in Wolfsburg, where electric cars from the ID series should actually also be produced from autumn. Basically, the rather expensive operation in Wolfsburg no longer makes much sense, at least in the short term, if the ID production in Zwickau is not fully utilized. On the other hand, however, it would probably be a provocation for the state government in Lower Saxony as VW's major shareholder and the powerful workforce if Blume were to announce cutbacks in Wolfsburg. How the plans continue could be an indicator of how great the need actually is.

As a second reason why he believes he can still achieve the goals, Oliver Blume is spreading the expectation that the slump in demand will not be quite as bad: "In the last few weeks we have seen a slightly positive development in our incoming orders," he said. The group had previously heard that orders for electric cars in Germany, for example, had fallen by 50 percent. The European car markets in particular are generally weak, and there is also the poorly performing business in China. China is the most important market for the company.

VW now wants to address the problems in China by getting emergency help from outside: On Wednesday, the German group announced a cooperation with the Chinese electric car manufacturer Xpeng. Xpeng is intended to play a key role in developing two new VW electric cars. The ID models on the VW Group's MEB platform are not well received in the Chinese market. They are sometimes perceived as backward compared to Chinese cars and are also comparatively expensive to produce. As a result, long-standing China market leader VW is struggling in the face of fierce competition with domestic manufacturers and with e-car pioneer Tesla.

By making a strategic U-turn so quickly, the Germans are showing that they don't want to give up the Chinese market without a fight. At the same time, this turnaround is an admission of failure with the MEB and solidifies the new conditions in technology transfer: Chinese used to benefit from Western technology in car construction, now VW has to use Chinese know-how to still have a chance in the market. And that's expensive. The German group is spending around 700 million US dollars for a nearly five percent stake in Xpeng.

With all this, the figures from the first half of the year do not appear to be that bad at first glance: Sales rose by 18.2 percent compared to the same period last year to a good 80 billion euros (although growth between April and the end of June has already slowed down considerably has), as well as the sales figures (except in China). The operating result, however, fell by 14 percent to 11.35 billion euros, but the company blames unfavorable raw material hedging transactions, these “valuation effects” would have cost 2.6 billion euros in profits.

The still reasonably solid figures are put into perspective, however, when you consider that VW still benefited from two circumstances in the first half of the year that will hardly have an effect in the second half of the year: There was a backlog of orders because many customers stayed away for a long time due to the shortage of parts, especially for chips were waiting for their orders from 2022, which have now been processed. And the group also benefited once again from the fact that it was able to charge particularly high prices due to the scarcity, or that it focused on producing particularly profitable versions and models. According to market forecasts and also according to Blume's earlier assessments, all of this will no longer have such a strong impact in the second half of the year. On the contrary: Especially in the e-car segment, price wars are beginning - led by Tesla, among others - that VW can hardly escape.

And so, despite the still positive circumstances, the impression remains that VW is relatively unprofitable. The carmaker reports an operating return on sales of 7.3 percent for the half-year. The pure automotive business is even just under 7 percent. On the other hand, the target for the group return that Blume und Antlitz set is between 7.5 and 8.5 percent. VW puts the meager group return into perspective by pointing to the negative effect of the commodity hedging contracts. But when comparing the competition, profitability remains the biggest shortcoming at VW.

The day before, competitor Stellantis, the conglomerate that owns brands like Peugeot, Citroen, Fiat, Opel, Jeep and Chrysler, had presented its figures. And its group return is almost twice as high as that of Volkswagen. And in the generally sluggish European business, Stellantis managed to increase its profitability to 10.7 percent. "Stellantis is far from what you create," said Deutsche Bank auto analyst Tim Rokossa to VW management. "They lack a competitive cost structure." If the VW bosses were to follow Stellantis as a guide, it would also mean that they would have to reduce the capacity utilization of plants like this much more clearly. With the corresponding negative consequences for those who work there.

Editor's note: This text first appeared on "Capital".