Volkswagen’s restart faces further roadblocks
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Neil Unmack
LONDON, Aug 1 (Reuters Breakingviews) -Volkswagen VOWG_p.DE is giving its tricky turnaround a shove. CEO Oliver Blume is shutting plants and laying off staff. Such expensive measures will hurt profitability this year, but hopefully lead to a less bloated machine. Still, Blume’s ability to hit his targets may depend more on what looks like a difficult road ahead.
Volkswagen’s first-half results are better than they might appear. A dismal 11.4% decline in operating profit is partly down to the cost of laying off staff in the bloated core business. Without those, the margin would have been 7.1%, rather than 6.3%. And despite a brutal price war in China revenues rose by 2% to 159 billion euros.
Those high restructuring costs, equivalent to over 800 million euros in the second quarter alone, may be repeated. In June last year Blume promised to get the company’s operating margin to between 8% and 10% over the mid-term, and its least profitable unit – the so-called core division that makes Volkswagen, Seat and Skoda cars – to 8%. Analysts only expect the unit to scrape a 5.2% return in 2027, according to Visible Alpha data.
Blume has other options to hike this margin. He has embarked on a series of bold deals with partners, such as a partnership with Rivian RIVN.O. That should allow him to reduce software investments, which gobbled up 1.2 billion euros in the first half.
Yet the backdrop is likely to get worse. Weak global consumer demand may soften further if rate cuts do not come quickly. Used car prices in Europe fell nearly 8% year-on-year according to the Auto1 index. They are still 16% higher than before the pandemic peak, suggesting room for more pain.
Then there’s China. Volkswagen’s deliveries there fell by nearly a fifth in the second quarter. And Chinese groups are grabbing market share in Europe, despite Brussels’ plan to impose tariffs on their electric vehicles.
Europe could be a problem too. As of next year, carmakers will need to start complying with rules to curb carbon emissions. That may force them to sell more electric vehicles cheaply to avoid fines. Yet sales of such cars are stalling as punters steer clear of costly cars with poor charging networks. Electric vehicles accounted for just 8% of VW’s global deliveries in the second quarter, and the number shipped in Europe actually fell year-on-year by 7.7%. UBS analysts reckon VW’s operating margin may shrink next year to 6.2%, partly due to the impact of these new EU rules.
Volkswagen is trading at a forward price earnings ratio of just 3.3 times, according to LSEG data, down from over 4 times when Blume announced his targets. That suggests investors are under no illusions about the challenge.
Follow @Unmack1 on X
CONTEXT NEWS
Volkswagen on Aug. 1 reported an 11.4% year-on-year decline in operating profit in the first half of 2024 to 10.1 billion euros, as high severance charges eroded its profitability. The result, equivalent to an operating margin of 6.3%, included over 800 million euros of costs relating to redundancy packages in Germany.
Volkswagen said it expects an operating margin of between 6.5% and 7% in 2024, having cut its guidance earlier in the year from 7% to 7.5%.
Volkswagen preference shares fell around 2% to 101.7 euros in morning trading.
Graphic: Volkswagen’s shrinking valuation https://reut.rs/3WsaOZV
Editing by George Hay and Oliver Taslic
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