What important signals did Europe's largest automaker send out yesterday?

Written by | Hollow Knight

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Sell fewer cars and make more money.

Last year, volkswagen group's magical operation may not be able to be replicated as a set of templates in the next 2022.

On Tuesday (March 15), Europe's largest automaker held its annual earnings press conference at its headquarters in Wolfsburg to interpret the business performance of the previous fiscal year and make a new strategic deployment for the company's development this year.

Last year, the Volkswagen Group delivered 8.6 million new vehicles worldwide, down 600,000 units from 2020 and down 6.3% year-on-year.

Compared to 2019 before the outbreak of the new crown pneumonia epidemic, the Volkswagen Group's global sales last year decreased by 2.4 million units – in fact, this is the lowest point of the Volkswagen Group's annual sales in the past 10 years.

The continued decline in new car sales has also led to a widening gap between volkswagen groups and its biggest competitor, Toyota. In 2021, the Japanese automaker is the world's largest automaker with full-year sales of 10.5 million units and a 10% year-over-year increase.

The Volkswagen Group blamed the decline in new car deliveries worldwide on ongoing supply chain issues.

The group said its global sales in 2021 could have risen further, but a shortage of chip supplies hampered it.

Keynote 1: The group's earnings did not fall but rose

Despite the decline in product sales, the Volkswagen Group's operating profit in fiscal 2021 doubled to 19.28 billion euros (about 134.685 billion yuan) and net profit increased by 75% to 15.4 billion euros (about 106.557 billion yuan).

For reference, the Group's operating profit for 2020 was EUR 9.68 billion.

Rising prices for new cars and the group's launch of a more lucrative product portfolio are cited as the main reasons for boosting its profits.

Arno Antlitz, Chief Financial Officer of the Volkswagen Group, attributed this to "buyers buying models with better configurations and higher positioning.".

Arno Antlitz, Chief Financial Officer of the Volkswagen Group

Like "sibling" rivals BMW and Mercedes-Benz, these automakers have chosen to prioritize the production of expensive high-end models in the face of a shortage of semiconductor chips.

In addition, Antlitz said that Volkswagen, because of its strong brand power, offers customers less discounts at the point of sale than competing brands. At the same time, the group has sacrificed some low-profit markets to ensure that chips are well supplied in high-return markets such as China and Europe.

On the other hand, the automaker's advance cuts to management costs last year also offered a considerable degree of potential for high returns in the face of declining sales.

Antlitz confirmed that successful cost management initiatives have generated €4 billion (about RMB27.913 billion) for the Group compared to before the COVID-19 outbreak in 2019.

For 2022, the outlook given by the Volkswagen Group can still make people feel optimistic.

While supply chain issues remain, the group expects its global sales to increase by 5%-10% and revenue by 8%-13% in 2022.

In terms of profits, the Volkswagen Group is expected to be in line with last year. At the same time, the Group's sales operating margin in 2022 is expected to reach 7% to 8.5%.

The above targets are not much higher than in 2021, but they are significantly higher than in 2020, when the global epidemic is the worst. In 2021 and 2020, the Volkswagen Group's operating margin was 7.7% and 4.3%, respectively.

Volkswagen expects global passenger car sales to rise this year, but delivery will remain an industry-wide issue. At the same time, new car inventories will remain below pre-COVID-19 levels.

In addition to this, the shortage of semiconductor chips and commodities will ease somewhat and "become less serious".

But the company warned that its financial outlook could deteriorate because of the unpredictable nature of the Russian-Ukrainian conflict.

"It is not currently possible to make a final assessment of specific impacts." Herbert Diess, ceo of Volkswagen Group, said Tuesday.

Herbert Diess, CEO of the Volkswagen Group

In an interview with the Financial Times last week, he said the impact of the Russian-Ukrainian conflict on the global economy could be higher than the COVID-19 pandemic. Previously, the pandemic forced the group's factories around the world to close for weeks.

In this round of Russian-Ukrainian conflict, the risk exposure of volkswagen group is relatively high.

The German automaker has a production site in the Russian city of Kaluga, as well as a sales department and a financing company in Russia.

These commercial facilities are expected to be adversely affected by further Western sanctions against Moscow.

Volkswagen Group also said it did not set up a subsidiary in Ukraine or make any equity investments.

Keynote 2: Shift new car production to China

Although, from the perspective of commercial activities alone, the Volkswagen Group believes that its business in Russia and Ukraine is not very important, the chain reaction caused by the Russian-Ukrainian conflict in its European supply chain has to be taken seriously.

The group said Ukraine's current shortage of wiring harnesses has surpassed the chip shortage and has become the automaker's biggest supply chain conundrum. The latter affected the production of most of the Group's German plants.

In western European markets, most suppliers, including Leoni, suspended production of wire harnesses in Ukraine, and the Volkswagen, Audi, Porsche and Skoda brands of the Volkswagen Group were forced to cut production.

Leoni Group has a production facility in Ukraine

The lack of these parts remains "a major constraint on production," Dies said.

Currently, a 150-member working group at Volkswagen Group's headquarters in Wolfsburg is working to find alternative suppliers with a view to increasing the supply of wiring harnesses for its European operations.

On the other hand, the outbreak of the Conflict between Russia and Ukraine has led to a surge in the price of nickel, palladium and other key materials for automobile production. In addition to this, Russia is also a major exporter of steel.

Volkswagen Group believes that commodity markets are likely to remain volatile until 2026.

Arno Antlitz said rising raw material costs will push up the price of electric and fuel vehicles at the same time. From batteries to catalytic converters, almost all components will become more expensive.

With high purchase spending, automakers have to pass on the extra costs to consumers.

However, analysts believe that the current car prices have experienced a sharp rise due to the previous strong market demand, insufficient supply and other factors. Therefore, in the short term, the ability of automakers to further pass on their costs will be significantly weakened.

At its annual earnings press conference, Diess said that if the group is unable to re-implement its production plan in 3-4 weeks, then it needs to adjust its outlook for this year.

The new production plan will depend on the Group's production facilities in the world's two largest automotive markets.

Diess said that out of concern about the situation in Russia and Ukraine and the supply of parts in Europe, volkswagen group plans to transfer production of up to 100,000 vehicles to North America and China.

This year, the group will give priority to the Chinese market. "Because of the situation in Europe, we will transfer more production power to China." He said.

Dies added that in view of the volatile trend in the European market, promoting the sales of new cars in the Chinese market will have a higher priority than before.

Volkswagen currently has a 16% market share in the Chinese market. The group also plans to double its sales of pure electric vehicles in China within this year.

However, the Chinese market seems to have been shut down in some production facilities due to a new round of the epidemic.

On March 15, the European Automotive News quoted FAW-Volkswagen as saying that the company's vehicle and parts plants had suspended production due to the epidemic from Monday to Wednesday this week. FAW Toyota also suspended some of its operations in Changchun.

Keynote 3: Porsche IPOs will happen with a high probability

Despite unfavorable market conditions and uncertainty, Europe's largest automaker expects to push Forward Porsche for an initial public offering. The latter will take place as early as the fourth quarter of 2022.

Wall Street previously estimated that Porsche could be valued at $102 billion (about 648.751 billion yuan) in the IPO, while the parent company Volkswagen Group was valued at $131 billion (about 833.199 billion yuan).

But sources say Porsche's complex ownership structure could slow the process.

Porsche's initial public offering also means that the balance of power in the Volkswagen Group may change.

In 2009, Porsche Holding failed to take over Volkswagen, and since then, the company has sold its stake in Porsche Cars to Volkswagen.

The deal makes Porsche and the Piëch family the most influential investors inside Volkswagen. Through Porsche Holdings, they hold a 31.4 percent stake in Volkswagen while controlling 53 percent of Volkswagen's voting rights.

The Porsche/Pierch family is the most influential investor within Volkswagen

Sources said the two families may choose to reduce their stake in Volkswagen in order to buy their shares after Porsche's successful IPO. The move would loosen the control of volkswagens from the two families and instead directly own the 89-year-old sports car brand.

Another source said volkswagen may issue the same number of common and preferred shares (without voting rights), each accounting for 25%, during the Porsche IPO process, and may pay special dividends to the Porsche and Piëchi families who control Volkswagen in exchange for the support of the two families for the deal.

The ultra-luxury sports car brand's stunning profit performance could be the catalyst for its IPO.

Of the Volkswagen Group's operating profit of 19.28 billion euros last year, the Porsche brand contributed 5.01 billion euros (about 34.946 billion yuan) and the Audi brand contributed 5.55 billion euros (about 38.713 billion yuan).

Last year, Porsche's operating margin improved to 16.5% from 15.4% in 2020. By comparison, the Group's core asset, the Volkswagen brand, had a profit margin of just 3.3 percent last year. However, the higher-margin joint ventures in China are not included in this earnings performance.

Part of the reason porsche's profitability continues to lead within the group is that the brand has achieved record sales in the Chinese market.

In 2021, Porsche's sales in China hit a record high, and the growth rate returned to the level before the outbreak of the epidemic in 2019

Analysts believe the Volkswagen Group expects to use some of the proceeds from porsche listing to accelerate the company's electrification strategy.

Keynote 4: Continue to accelerate the electrification process

"Over the past few years, the Volkswagen Group has proven itself to be resilient. Now, too, we will confront these crises head-on. In the meantime, we will continue to focus on the implementation of the 2030 NEW AUTO strategy, which will allow us to achieve an emission-free, autonomous future. At the annual meeting, when it entered the concluding statement stage, Dees said.

The Volkswagen Group announced the "2030 NEW AUTO" strategy in 2020, which aims to accelerate the transformation into a software-driven mobility service provider.

By 2030, the Volkswagen Group will increase the share of pure electric models to 50% in line with its commitments under the Paris Agreement and reduce the carbon footprint of each vehicle over its entire life cycle by 30% compared to 2018.

However, in the context of the pandemic and severe chip shortages, the automaker's start in the electric vehicle sector has not been smooth.

The group's executives have said that the layout of the electrification upstream may be too costly for the automaker to finance itself.

Therefore, while Diess reaffirms the commitment to electrification behind the "2030 NEW AUTO" strategy, it is particularly important that Porsche can successfully IPO.

According to the 2030 NEW AUTO strategy, the Volkswagen Group will generate significantly more revenue in the field of electric vehicles and software than fuel vehicles

According to the plan, the Volkswagen Group will establish six super battery plants in Europe.

The group also confirmed on Tuesday that a "final discussion" is underway to build a battery plant in Spain, in addition to the battery factories to be built in Sweden and Germany.

"At the same time, we have started to site our fourth plant in Eastern Europe." Dees said.

Northvolt, a Swedish power battery manufacturer invested by Volkswagen and Goldman Sachs, also said it will establish its third European battery factory in schleswig-Holstein, Germany, hoping to put into production by the end of 2025. The plant is expected to have capacity of 60 GWh per year, with the capacity to supply batteries to about 1 million electric vehicles per year, the company said.

As of the end of last year, the Volkswagen Group held about 20 percent of Northvolt' shares.

In addition, Volkswagen Group announced this month that it would spend 2 billion euros on a new plant near its Headquarters in Wolfsburg. The group plans to start production of a pure electric sedan code-named Trinity at a new plant based on a next-generation electric vehicle platform from 2026.

The new plant is believed to adopt advanced production methods and will serve as a blueprint to guide Volkswagen's plants around the world to help them gradually transition to electric vehicle production.

On the same day, U.S. electric car maker Tesla received long-awaited approval to open its first European factory near Berlin.

Last week, Volkswagen also released an ID. Buzz, the latter is an electric minibus with the classic brand of volkswagen T1.

The large investment in the field of electrification stems from the Volkswagen Group's optimism about the profitability of electric vehicles.

Despite soaring prices of raw materials such as nickel, cobalt and lithium for electric vehicle production, the group's chief financial officer, Arno Antlitz, expects the profit margins of pure electric vehicles to remain flat with fuel vehicles "sooner than expected."

Part of the reason for this, he said, is that the cost of raw materials used in traditional cars will also increase.

The group said tuesday that several pure electric vehicles, including the Porsche Taycan, have been sold out this year. Strong consumer demand is helping its electric vehicle business to become profitable faster than expected.

Although the Electrification Strategy of the Volkswagen Group is not expected to be fully effective until around 2050, it has now borne some fruit.

In Europe, the Volkswagen Group is currently a major manufacturer of electric vehicles, with a market share of around 25%. In the U.S., the group's market share reached about 7.5 percent last year, second only to Tesla.

The group's share of China's ev market is still relatively small, but it is growing rapidly.

Last year, Volkswagen's EV deliveries in China increased fourfold to 92,700 units. Volkswagen expects this number to double again in 2022.

In China, Volkswagen has built a relatively complete lineup of pure electric products

"We're seeing bigger production and sales, we're seeing better margins, we're seeing higher demand," Arno Antlitz said Tuesday, "Initially, we thought it would take 2-3 years to see the profits of electric vehicles on par with fuel vehicles." ”

What Antlitz calls "bigger" will come in part from its U.S. rival, Ford Motor Company.

Ford and Volkswagen jointly announced on Monday (March 14) that they will launch two Ford-branded electric vehicles based on Volkswagen's MEB electric vehicle architecture for the European market. Production of the new vehicles will begin in 2023 and production is expected to reach about 1.2 million units within six years – nearly double the original plan.

Since 2019, Volkswagen and Ford have been collaborating on electric vehicles, autonomous driving and other areas.

In addition, Volkswagen plans to expand its global charging network. The company said it has a total of about 10,000 high-speed charging stations in the United States, China and Europe, and plans to increase the total number of charging stations in these three markets to about 45,000 by 2025.

Write at the end:

Tilting towards the Chinese market, promoting Porsche IPOs, accelerating the electrification process... In essence, these major decisions made by the Volkswagen Group point to a goal: to help the Group effectively avoid risks and obtain greater benefits in the shortest possible time.

But judging from the group's forecast of 5%-10% sales growth in 2022 and a profit margin of 7%-8.5%, the situation of "selling fewer cars and making more money" in the past year may be difficult to repeat.

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