Volkswagen is out of its bad period. Corruption, shareholder shenanigans, poor quality cars are yesterday’s news. The company has been talking about making sustained improvements for ages. Yesterday (Wed) it had its (superb) half year results. VW can now be accepted as improving – and that the improvement is an embedded trend.
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Porsche has made a fine investment. VW was the only car company share price in Europe to be positive in the second quarter – only just it must be said, but given that Renault, Daimler, Fiat and Peugeot were all down by between 20% and 30%, that’s good.
Of course Porsche has been more than an investor. It started out as an activist investor, agitating for change; then it took a controlling shareholding. Now it’s progressing to consolidation and outright ownership.
Wendelin Wiedeking, the Porsche CEO, had inside information when he started buying VW shares. Not in the go-to-jail sense. But he knew that there was so much scruffy process planning in VW that it just needed someone to kick a few butts for money to fly out of every exhaust valve in Wolfsburg. He also had the inside information that he was going to do the kicking. That’s not go-to-jail inside information either. It’s rather clever. It’s what chief executives do when they join a company knowing which levers they have to pull to hit the jackpot. They load up with performance bonuses and executive share options. Same result. Different method.
In sales, VW outperformed every market it plays in. Asia Pacific was up 7%. VW was up 21%. US was down 8.5%. VW was up 3.8% and so on.
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By GlobalDataOperating profit for the year went from €2.8bn to €3.4bn. Half a billion gain came from volume, pricing and mix. Half another billion came from cost saving on the product. €0.4bn was lost on currency exchange. Euros is not the best denomination for your manufacturing and design costs right now.
It’s that cost saving which has been the vital factor. It was 15% of the profit, and the bottom line would look rather shabby without it. What Hans Dieter Pötsch – the VW CFO – had to say about this was that the new processes were delivering benefits that were sustainable. He must be convinced about that. He’s shoving capex ratios up from their present 4.3% to 6.0%. He said that his product cost savings arose through “toolkit systems, scale economies in purchasing, and productivity gains.”
That’s all pretty tired old stuff apart from the toolkit systems, which is the jargon they use to describe the increased commonality of designing, building and assembling the invisible bits of the cars. VW is genuinely getting to grips with efficient centralised processes whose benefits spread from Shanghai to Rio de Janeiro. Needs must. If you expect a German standard of living, you have to be extra smart to earn it.
Then there is the bold quote: “Our investments are under control. Our strategy is the right one. Our customers like our cars and power trains and the quality, and we expect better volumes and efficiencies. Two thousand and eight will be lifted above 2007’s operating profit.”
That is pretty staggering. Whatever the market throws at you? Whatever happens to exchange rates? Whatever happens to raw materials costs? Seems like it. And that also assumes Chinese growth rates dip from 20% in the first half to half that.
The big debate is pricing. VW thinks it can stick the consumer with higher prices for its cars to compensate for the raw material price increases. “We are watching our competitors. There seem to be some price rises.”
We all know what price rises are there for when you are buying a car. They’re to be negotiated away in the buying process. Dealers love that sort of thing. They are born to it.
Half an hour later, Sergio Marchionne was giving his results at Fiat and was saying the same thing about forced pricing in the market. No collusion here at all. Marchionne actually said as much.
It’s worth a try fellers. But I tell you what I reckon. If you stick €600 on a Grande Punto Sport 1.4, the punter just buys the Grande Punto Sport 1.2 instead. This is the point in the cycle when the punter gets mean; not the moment he spends money like a man with rag arms just to stop one of the car makers going out of business.
Rob Golding
See also:
GERMANY: VW, Fiat, beat expectations
GOLDING’S TAKE: Fiat spares no quarter and holds the forecasts
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