Carmakers look set for a tough year. The unwinding of subsidies in the US and France midway through last year mean new car volumes will be softer for the next three years, according to S&P Global.
This means around 90mn will be manufactured by 2028, and more worryingly for western carmakers the end of Chinese subsidies could mean even more exports from the country.
Although the European market remains in positive territory this year, further pressure from Chinese competitors means Europe’s biggest carmaker could soon hit an inauspicious milestone.
Chinese manufacturers claimed a 10 per cent share of the European market for the first time in April. Although the Volkswagen (DE:VOW) Group maintained its 25 per cent market share including Audi, Porsche and Skoda, the core Volkswagen brand is losing share and is down to 10.1 per cent after the first four months of the year, from 11.1 per cent a year earlier, according to Schmidt Automotive Research.
Volkswagen is the only European car brand with a double-digit share. The last time it ended in single-digit territory “was a decade before the fall of the Berlin Wall”, said Matias Schmidt from the research firm.
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Volkswagen’s battle is taking place both at home and in China, where for decades it was the biggest foreign player. It still enjoys a 23 per cent share of the combustion engine market, but only has a 1 per cent share of electric vehicles (EV). With EVs now comprising close to 60 per cent of China’s market “this is problematic”, said Michael Dean, a senior autos analyst at Bloomberg Intelligence.
These issues were reflected in first-quarter sales, which fell by 2.5 per cent to €75.7bn (£65.5bn). Although European revenues held up, vehicle sales in China dropped by a fifth and in North America they fell by 9 per cent.
The group’s operating margin fell to just 3.3 per cent, which was below guidance, largely due to a write-off after the company abandoned production of its ID4 EV in the US.
Volkswagen recently lowered its medium-term operating margin guidance to 8-10 per cent, from 9-11 per cent previously. It plans to achieve this by cutting capacity by 25 per cent to 9mn units and simplifying model ranges. The bulk of the cuts will come in Europe and China, and the company expects to shed 50,000 jobs globally.
In China, it plans more partnerships with local producers. It is developing vehicles jointly with Xpeng (HK:9868) and using driver assistance technology from Horizon Robotics (HK:9660) and battery cells from Gotion (CN:002074).
At an investor day held in Beijing last month, chief executive Oliver Blume said such tie-ups would allow it to bring a range of 50 models to market more quickly and cheaply than elsewhere in the world.
“China is like a fitness centre for the automotive industry,” Blume said.
VW thinks that this strategy will help it to nudge its China market share up to 12 per cent by 2030 from 11 per cent currently but acknowledges it will have to accept a lower return on sales of between 4-6 per cent, in line with the market average. Autonomous features will have to be offered as standard, for example.
It will also use its China base as an export hub to the rest of Asia but is not currently planning to sell Chinese-made cars in Europe, Volkswagen brand chief executive Thomas Schafer told an FT conference this month.
Blume also recently denied an FT report that Volkswagen is talking to Xpeng about a deal to allow the Chinese company to use its excess capacity in Europe. However, he told a workers’ assembly that overcapacity in European plants needs to be addressed, according to Reuters.
Bloomberg Intelligence’s Dean thinks mass exports from Chinese factories would be unpalatable both to the European Union and VW’s own workers but added that “if European governments don’t want further job losses and actual plant closures then some of these plants will need to be repurposed”.
Analysts are generally in agreement that Volkswagen’s €6bn restructuring plan is the right course of action. The only difference in views is whether it will deliver the margin improvement the group has outlined.
RBC Capital Markets analyst Tom Narayan said it would. He expects restructuring efforts will eventually lift VW’s margin by about 2 percentage points but job guarantees running until 2029 will mean most cuts come at the end of the period. He also expects margin recovery at both Audi and Porsche, with the latter shrinking its range to a more exclusive offering.
Yet others think Volkswagen has too much to do given its recent record on margins and the competitive pressures it faces.
“Attempting to almost double operating margins in four years is simply too ambitious,” said Michael Field, an equity analyst at Morningstar.
Despite this, Morningstar still rates Volkswagen shares as a buy. Its ordinary shares trade at around €95 per share (it also has preference shares listed) but based solely on a sum-of-the-parts valuation including stakes it holds in other listed entities they should be worth at least €115, Field said.
“Add to this the €40 we believe [unlisted] Lamborghini is worth and you get to a level much higher than today’s share price,” he said.