BERLIN/FRANKFURT, Sept 9 (Askume) – In May, Volkswagen (VOWG_p.DE) Chief Financial Officer Arno Antlitz warned that Europe’s top carmaker has about two to three years to prepare for tough competition from abroad, mainly China.
He shocked the global auto industry last week when he cut an already tight timetable by a year and threatened to close the company’s factories in the domestic market for the first time .
While many of the challenges facing Volkswagen — from a weak Chinese market to a slower-than-expected shift to electric vehicles — have been plaguing the company for some time, two recent developments have made things even worse for the German group, according to interviews with seven company sources, investors and sources within Volkswagen AG.
First, there are growing concerns that BYDAsian rivals including (002594.SZ) , Chery (CHERY.UL) and Leap Motors (9863.HK) plan to build production capacity in Europe for electric vehicles made in China .
Second, according to works council president Daniela Cavallo, Volkswagen has recently reduced the prices of its Volkswagen-brand cars in response to tough competition, a move that has cost the company hundreds of millions of euros in profits.
Not only were the discounts deeper than initially expected, but management also became convinced that Germany’s high cost base was hurting Volkswagen’s ability to compete with more nimble rivals, a company source said, without giving details of the price cuts.
The sources declined to be named because of the sensitivity of the matter. Volkswagen declined to comment.
“It’s one of the world’s biggest car producers, but it doesn’t get a huge return on this scale,” said Cole Smead, CEO of Volkswagen shareholder Smead Capital Management. “I think they can do it in a country where demand is so low that it’s impossible to maintain this level of production?”
In addition to the restructuring charges, the waiver underpins the Volkswagen brand’s efforts to cut costs by more than 10 billion euros ($11 billion) by 2026.
As a result, the Volkswagen passenger car brand’s profit margin fell from 4% in the first quarter to 0.9% in the second quarter.
By comparison, two other big European carmakers, Renault (RENA.PA) and Stellantis (STLAM.MI), had profit margins of 8.1% and 10%, respectively, in the first half of this year.
Volkswagen’s profit margins are being squeezed as Chinese rivals increase imports from Europe, raising concerns about what could happen to local production in the future.
After all, automakers — including those in China — are competing for a smaller piece of the pie: CFO Antlitz said the European car market is 13%, or 2 million vehicles, smaller than it was before the outbreak.
Citing a number of challenges, DZ Bank analyst Michael Punzett said he expects Volkswagen to cut its full-year group profit target again when it releases third-quarter results.
The company had cut its target to 6.5-7.0% in July due to regulations related to the possible closure of luxury car subsidiary Audi’s Brussels plant.
The battle over costs
As demand continues to dwindle, selling mass-market cars has become a battle for who can make them at the lowest cost.
Jefferies analyst Philippe Houchois said: “The idea of finding solutions through growth has disappeared. Everyone is losing share and companies need to recalibrate.”
Antlitz said last week that the Volkswagen brand – which accounted for more than half of the group’s output last year – had been spending too much money for some time, adding that the company would not succeed if the trend continued.
Volkswagen’s automotive cash flow, a key measure of operational health, turned negative 100 million euros in the first half of 2024, compared with positive 2.5 billion euros a year earlier.
Intense competition is not just a domestic problem.
Profits in China, Volkswagen’s biggest single market, have almost halved over the past decade and will reach 2.6 billion euros in 2023.
Another big issue is Germany’s energy and labor costs, which are among the highest in Europe and have become a major headache for the country’s chemical and steel industries.
“New cheap competition, higher energy prices and higher labour costs lead to a very difficult scenario, especially for the European big brands,” Citi analysts said this week.
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