Volkswagen’s growth over profit worries investors



Easing of semiconductor shortage means VW is bullish about sales growth over margins.

Normality is back, at least as far as the Volkswagen Group is concerned. The German behemoth has advised that it aims to sell a million more cars in 2023 than in the year before but stick roughly to the same profit margin as 2022 at 7.9%. In other words, it will make less money per car sold as the semiconductor crisis eases, supply returns and the competition hots up.

But wait a minute, the financial analysts said to CEO Oliver Blume and finance chief Arno Antlitz on Tuesday’s earnings call: why the big need to go back to pre-Covid volumes of 9.5 million vehicles? Especially when car buyers are feeling the effects of inflation the world over.

“Your outlook sent quite a few shockwaves through the automotive industry,” Tim Rokossa at Deutsche Bank prefaced his question on the earnings call. “Can you explain why you feel a need to grow as much instead of clearly prioritising profit?” Given that the industry has shown it can be profitable at lower volumes, why not continue on that path, Rokossa asked.

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The question was repeated again by Harald Hendrikse, autos analyst at banking firm Morgan Stanley. “We unfortunately have a lot of experience of car companies guiding ambitiously on volumes. And as you well know, that hasn’t historically ended incredibly well,” he said. “Why guide to 9.5 [million]. Why not guide a little lower?” The problem with aiming high on volume targets is that you end up discounting to hit them, he added.

The answers from the VW Group’s two top executives showed that the profits reaped by the majority of the industry while supply was constrained might just be a unique moment in time and it was time for some realism.

Semiconductor supply was getting better for all companies, not just Volkswagen, allowing everyone to build more cars. That will tip the balance to a buyer’s market, likely in autumn: “In the third quarter, demand and supply will meet and that will be true for all of the companies. So there will be more competition,” Antlitz warned. But the VW Group is still seeing higher raw material prices. “It is more difficult to pass on these price increases to the customer. This is what we are preparing our teams for,” he said.

On top of that, VW will be returning to lower-margin segments and markets that in 2022 it was forced to bypass to ensure those precious semiconductors and other short-in-supply parts went to the biggest money spinners, as can be seen in record profits for its Bentley, Lamborghini and Porsche marques. “We didn’t ship all the cars and the semis to the less promising regions in terms of margin – for example, Brazil and others,” Antlitz said. “We didn’t offer the entry cars and also different channels.”

But even so, the VW Group is confident it can keep the margins stable and grow volume, despite the fears of the investment community. For one thing, it is sitting on an order bank of almost two million cars as a result of the group struggling to build cars in 2022. “Therefore, it’s very logical for us that we have a strong increase in deliveries in ’23,” Blume argued.

Despite the higher-volume targets and the stiffer competition as factories start ramping up, Blume promised to keep the faith on profit over volume. “It is my position that we drive the company more market-driven than production-driven,” he said.

VW is more bullish about the 2023 global vehicle market bouncing back after a stilted couple of years. Despite IHS Automotive predicting 3% growth from 2022’s total of 69.6 million vehicles, VW believes it can grow its sales by 12%, adding another million. Revenue, it believes, will increase by between 10-15%.

Car markets will grow the world over, VW predicts, despite a “weak” start to China, the company’s biggest market last year with 3.6 million sales. Excluding China, the company had a “decent” start in the first weeks of the year, Antlitz said.

For investors, it was worrying that the VW Group was willing to push for close on 10 million sales. “We consider it a risky bet to run the company based on such expectation because it bears risk of overproduction and overspending,” Patrick Hummel, analyst at UBS bank, wrote in a note to investors. “While 2023 results are likely to be less bad than we initially feared thanks to [order] backlog execution, we still expect a deteriorating pricing and margin trend, and we think VW’s volume brands are not well prepared.”

What VW was signalling, however, was the return to normal competition, and for the group overall conditions more aligned to pre-Covid than post-, albeit with lessons on costs and pricing learnt.

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