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Volkswagen Still Standing Strong

Date:10Minutes ago Source:autochina.comnews.cn Authour:He Lun

——Auto Market Hotspots Q&A (121)

Volkswagen Still Standing Strong

On the one hand, Volkswagen was caught up in the most serious crisis in its history – the emissions scandal. On the other hand it overcame its rival Toyota in world sales - with total sales of 10.30 million vehicles - and became the world’s largest auto maker. It also set a record-high operating profit of 14.6 billion Euro, two years ahead of its original plan. Volkswagen has surprised us all. On March 15th, Matthias Müller, CEO of Volkswagen AG, said at the 2016 Financial Report Conference in Wolfsburg made a categorical statement: “Volkswagen is now back on track.” So a company that had only just emerged from a major crisis immediately went on to become the biggest auto maker in the world. How was it able to do that?

Q: Are you surprised that Volkswagen has achieved this great result?

A: I’m not the only one who’s surprised - the senior management of Volkswagen AG feel exactly the same. Last June, Mr. Müller said to me in an interview, “2016 is a transitional year for Volkswagen AG” (see the articles CEO of the Volkswagen Group Matthias Müller: Don’t Let Problems Prevent Us from Moving Forwardand Has VW made it through?). He was telling the truth. At that time he had no expectation at all that Volkswagen would surpass Toyota and take the first place in car sales.

Last October at the Paris Motor Show, I put a question to Mr. Müller: “So far, the emissions scandal doesn’t seem to have affected the sales and profit of Volkswagen. Has it?” He said, “This crisis didn’t have a serious negative impact on our sales, but people certainly would like to ask – if there had been no such scandal, how much success could Volkswagen AG have achieved? This question is really worth further discussion.” (See the article “Volkswagen’s CEO Matthias Mueller: Volkswagen Is Not Hanging Back”)

It seemed that he had not yet figured the whole thing out for himself, and that was why he needed “further discussions”.

At this Geneva Auto Show, I asked if Mr. Müller was also surprised about their good performance, and what had come out of the “further discussions” he had previously referred to. He smiled and understandably avoided the “surprise” question, and simply talked about the conclusions: “First of all, the good performance we achieved last year was the result of hard work on the part of 600,000 staff in Volkswagen AG, who kept on working without being affected by the diesel emission crisis.” (See the article Müller: SAIC-Audi Cooperation to Continue and Volkswagen to Become a Chinese Company)

Volkswagen Still Standing Strong

Q: Was this answer too simple and vague?

A: Actually he has spoken a lot about this question recently on different occasions. I was most impressed with one particular statement - “All kinds of data show that Volkswagen AG is still standing strong.”

I also recollected the Geneva Auto Show last year, when Mr. Müller gave an interview with Chinese media for the first time. He stated firmly, “For the 12 brands under Volkswagen AG, we have no plan to integrate them or sell any of them.” At that time, all sorts of rumors were running around among the media that Volkswagen would sell some of its brands to deal with the financial crisis arising from the emissions scandal. Müller’s statement indicated that even in times of the most serious crisis, the senior management of Volkswagen was still very confident.

Now let’s take a look back. Due to the 16.2 billion Euro cost of the scandal, Volkswagen AG suffered an operating loss of 4.1 billion Euro in 2015; in 2016, Volkswagen spent another 6.4 billion Euro on the problem, but it had already turned the situation around and achieved a net profit of 5.4 billion Euro. So in less than two years it spent 22.6 billion Euro on the scandal, and yet it is still doing well. Volkswagen is a real tough nut. I don’t know what would have happened to any other car maker that had gone through all of this.  

Q: Last year, Volkswagen saw great sales growth. Does this mean the brand power and product competitiveness of Volkswagen are so strong that the emissions scandal has had only a limited impact on customers?

A: I don’t think we should attribute the sales growth to Volkswagen’s brand power and product competiveness alone. Public trust in “made in Germany” cars also played a big part. And besides, Volkswagen handled the crisis well, helping to get out of its difficulties. Of course, a crisis as serious as this has to have has some negative impact on sales. In the U.S. market in particular, they fell by 2.6%, because that is where the scandal happened; in Europe, sales increased by 4%, although the scandal also had a significant impact on this market; in China, there was hardly any impact at all.

Q: Some media think that though Volkswagen surpassed Toyota in sales, it was still overwhelmed by the latter in profits. What do you think?

A: This view has been repeated for a long time, and it was certainly supported by a lot of data. But if you take a close look at the main figures in Volkswagen’s and Toyota’s financial reports, you will see that Volkswagen’s profitability is now neck and neck with Toyota’s. For example, in 2016, Volkswagen’s gross operating profit was 14.6 billion Euros, with a profit margin of 6.7%, a little lower than Toyota’s 15 billion Euros and 6.98%; however, Volkswagen spent 13.6 billion Euros on R&D, 70% higher than that of Toyota (8 billion Euro). If we took this R&D gap (5.6 billion Euros) out of the equation, Volkswagen’s profitability would surpass Toyota’s. But then it would not be the real Volkswagen, because this car maker has always been willing to top the spend ranking on R&D. For many years, Volkswagen’s R&D spend has been No. 1 among all the carmakers in the world, and among traditional carmakers, its R&D-cost-sales ratio has also been the highest. That is one of the reasons that Volkswagen is so competitive.

Of course, after the deduction of special project costs, including those spent on the emissions scandal, the after-tax net profit of Volkswagen in 2016 was 5.4 billion Euros, far lower than Toyota’s 13.9 billion Euros.

 

Volkswagen Vs. Toyota 2016

2016

Volkswagen

Toyota

Global sales and year-on-year growth

10,312,400

+3.8%

10,175,000

+0.2%

China sales and year-on-year growth

3,982,200

+12.2%

1,214,000

+8.0%

U.S. sales and year-on-year growth

591,100

-2.6%

2,449,600

-2.0%

Europe sales and year-on-year growth

4,206,500

+4.0%

801,900

+5.4%

Global sales revenue

217.3 billion Euros

216.8 billion Euros (26.5 trillion yen)

Global operating profit

14.6 billion Euros

15.08 billion Euros (1.85 trillion yen)

Global profit margin

6.7%

6.98%

Special project costs

7.5 billion Euros

(16.9 billion Euros in 2015)

Including 6.4 billion Euros spent on the emissions scandal

(13.2 billion Euros in 2015)

?

Global net profit

5.4 billion Euros (after thededuction of special project costs and tax)

13.91 billion Euros (1.7 trillion yen)

R&D cost and its percentage in sales

13.612 billion Euros   6.2%

8.047 billion Euros     3.7%

Operating profit from JVs in China

5 billion Euros

?

 

Q: According to the 2016 annual financial report, in the equity method, Volkswagen gained an operating profit of nearly 5 billion Euro (5.2 billion Euro in 2015) from its joint ventures in China. But this part was not included in the Group’s operating profit, which amounted to 14.6 billion Euros. If it had been, the total net operating profit would exceed Toyota’s. Would the profit margin also be higher?

A: Not necessarily, because the sales of joint ventures were not included in the total sales, either. If the sales were announced, we can divide the sales by the operating profit, and if the result is higher than the group’s profit margin – 6.7%, then including this part will make the group’s profit margin higher.

Q: What are the main reasons for Volkswagen’s increased profitability?

A: First, I think it’s the company’s modular platform strategy. This strategy - targeting cost reduction - was once heavily criticized, but now it turns out to be working. No wonder competitors are all trying to copy it themselves. Second, Volkswagen began to implement its brand cost-cutting plan in July 2014, planning to save 5 billion Euros by 2017. After the emissions crisis broke out, it tightened its belt to an even greater extent.

I know very well that Volkswagen is always a big spender among German carmakers. So once it tightens its belt, it can save a lot of money. In 2005, Volkswagen China put forward an “Olympic Program” that planned to cut costs by 40%, which came under a lot of questioning from outsiders. Later, Winfried Vahland, then CEO of Volkswagen China, said to me that in order to deal with market competition, he had no choice but to put forward this program, and that he wanted to pass the pressure down through every level in the company. Ultimately Volkswagen did not succeed in cutting its costs by 40%, but it definitely made it to 30%.

Toyota owes much of its success to the Toyota Production System (also called “lean production”), and it is also famous for cost saving. Several years ago, Katsuaki Watanabe, then CEO of Toyota, said an interview that in order to save on the power consumption of air conditioning, the room temperature was maintained at 28℃, and that as a result, people all felt very hot. So Toyota gave a hand fan to each employee, which they took home and used for another two years. So we can see that Toyota really has little room for cost cutting any more (see the article “Who Is Stronger - Toyota or Volkswagen?”)

Volkswagen Still Standing Strong

Q: Some insiders think that its 12 brands have led Volkswagen to spend too much on marketing and communication, and that the positioning of these brands is very complicated, which can easily lead to internal competition. Meanwhile, Volkswagen has up to 620,000 staff around the world, while Toyota only has 350,000, so apparently the latter is more efficient. What do you think?

A: I don’t think Volkswagen would be this successful if without these 12 brands. Though they require huge marketing and communication costs, they also provide the market with a variety of choices, which is what keeps Volkswagen competitive. In the coming years Volkswagen AG will launch 60 new models, which is something its rivals cannot possibly do.

Judged by employee numbers, Toyota is indeed much more efficient than Volkswagen, but on the other hand, Volkswagen provides so many jobs and yet it still can make profit, which is something only a very strong company can achieve.  

Volkswagen is also learning from the Toyota Production System. So both these two have their own strengths, and the battle for World Number One still continues (see the article “Who Is Stronger - Toyota or Volkswagen?”). 

Volkswagen Still Standing Strong


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