Volkswagen Group Faces Profit Decline
The Volkswagen Group’s profit has dropped by 20% on lower car sales in the first quarter of this year. In addition to that, Volkswagen say their costs have been going up.
They believe they have basically a turnaround plan that they think can, I wouldn’t say save the company, but to some degree, that would be accurate because Volkswagen does have nearly $190 billion in debt, and they plan on investing investing around $200 billion into new EV production facilities and in investing for, well, the biggest disruption we believe in the history of the car industry.
Profit Decline Amid Market Challenges
The Volkswagen Group reiterated its revenue and margin targets for 2024. They posted a 20% drop in first-quarter operating profit, primarily because of a decline decline in sales in China, a decline in profitability in China as well.
They’re trying to sell more EVs there. They’re not as profitable. And the truth is, the Volkswagen Group now having to contend with BYD, they’re having to contend with Chinese car manufacturers who are, well, they’re willing to sell at a loss to get market share.
The group’s results were hit by lower sales and higher costs as it gears up to launch more than 30 new models across all of its brands this year that include Porsche, Audi, and Bentley, along with the Volkswagen brand itself, Skoda and Seat Coupa volume marquise.
Earnings for four interest in taxes were $4.92 billion US dollars in the January to March quarter.
As expected, our first quarter results show a slow start to the year, said Chief Financial Officer Arnaud Antlitz.
A strong march, the solid order bank, and the improving order intake in the past months are encouraging and should already have a positive impact in the second quarter.
Now, Volkswagen has just committed to around 5 billion in cumulative investments in EV spending over the past couple of weeks, but all that is going in China.
Of course, they’re trying to slow down their disruption because historically, the Volkswagen Group, 40 % of their sales have been in China, 50 % of their profits have come from China.
So if you see a profit slide, it’s primarily mostly because of what’s going on in China.
EV Investment Strategy and Profit Margin
Porsche reported a 15 % operating margin decline for the quarter on higher model investments and lower demand for premium cars in China.
That was what Porsche actually quoted themselves. Group earnings were also hampered by delivery delays of Audis and Porsches held up at US ports due to customs problems to deal with the bridge that fell over.
Audi was also hit by delays in deliveries of six and eight-cylinder engines, said the company.
Group vehicles sales actually fell by 2% to 2.1 million in the quarter. Revenue dropped to 81 billion.
The automaker said its order book remained stable versus the end of 2023. And orders for fully electric vehicles, they say more than doubled in the quarter versus the same period last year.
But Volkswagen did say in this same period last year that it had enough EV demand pre-orders for years of deliveries.
Profit Margins and Revenue Targets for 2024
But a lot of that demand apparently dried up and was canceled. It’s yet to be seen if Volkswagen does have as much demand for its EVs as what it says it does.
Now, hopefully it does, because that would be great news for Europe, in particular.
Volkswagen said it still expects 2024 sales revenue to rise by 5%, and foresees a full year operating profit margin of around 7%, which would be a pretty low profit margin, historically.
The company expects additional momentum from the launch of more than 30 models over the year, just this year alone, as it continues to invest billions of dollars into refreshing its lineup, especially in the highly competitive Chinese market.
Volkswagen said last week, It aims to keep its Chinese market share roughly stable until the end of the decade, betting on heavy investment to support sales despite a raging price war with local EV rivals.
Production Challenges and Industry Disruption
To give you some context on that, Volkswagen sells the ID3. Basically, there’s a new version of the ID3 for around $17,000 US.
Now, in Europe, it sells the same vehicle for approximately $35,000-36,000 US. So it’s double the price in Europe versus what it costs in China.
You can imagine, Volkswagen Group are probably not making any profit at all. Neither are the competition, really, in China.
But they’re probably not making any profit at all on the EVs they sell in China. They’re just trying to hold their market share.
So Volkswagen Group’s strategy, they’re hoping they can hold on to their current market share in China over the next five years.
That’s extremely unlikely, considering a BYD’s rise and the rise of other automated companies in China as well that are China-based.
Demand in China from consumers is primarily driven now more towards Chinese car brands, and in particular, known EV brands.
Sales Trends and Market Share Concerns
I believe over the next five years, the Volkswagen Group sales worldwide will continue to go down.
I think we’re going to see probably an acceleration of a decline in sales from the group.
Last year, their sales were lower than what they were the previous year. But that will probably speed up because the Volkswagen Group’s EV production is just not that high.
When you think about it as a percentage of their car sales. Only around 5 or 6% of their car sales so far this year have been fully electric.
Realistically, they needed to be at a number of to 20 to 30 % in order to hit what is expected to happen.
Even the CEO of Audi believes that in 2026, massive disruption is coming. They’re saying that that’ll be the year that EV sales will blow up and that probably around 50 % of car sales in Europe in 2026 will be fully electric.
Predictions for Volkswagen’s Future in the Industry
Now, in China, already hit 50 %. Keep in mind, the majority of Volkswagen Group’s production, their factories, their production lines, they are set up for internal combustion production, not for EV production.
So it’s like manufacturing old Nokia 3310s or Blackberry phones, when ultimately people want iPhone, they want smartphones, they want Android phones.
Volkswagen will have to somehow magically change their production lines to EVs at a very, very fast pace in order to keep up with what will be enormous disruption over the next five years.