Volkswagen Group has announced that it will cut its dividends by 19%, after its profits fell 58% in 2003. The German vehicle manufacturer attributed its weak results to the strong euro and the struggling European economy. However, VW’s travails stem as much from strategic errors in new vehicle launches and it may well struggle in 2004 as well.
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The Volkswagen Group has reported a profit of €1.12 billion in 2003, which corresponds to a 58% drop on the previous year, even though it reported rising revenues. Despite launching a new generation of its top-selling Golf model in the middle of last year, Volkswagen group revenues rose just 0.2%. The German vehicle manufacturer attributed its weak results to the strong euro and also to the general slowdown in the economy, notably in the Eurozone, which is still struggling to record any significant economic growth.
One of the main reasons behind the group’s weak profitability is its expensive decision to develop the group’s luxury range. The luxury models have been slow sellers, with the Phaeton executive model in particular proving to be nothing more than a large burden on the company’s resources. Profits were also hit by the company’s slow response to changes in key markets and the adverse effect of the strong euro on its North American operations.
In Europe, Volkswagen has developed a strong position in the volume car market over its main competitors, thanks to the Golf model. However, the new version of the Golf, launched in late 2003, has not significantly contributed to revenue as yet. Again, the company was too slow to respond to changes in the market.
Firstly the model was launched when demand for new vehicles was at its weakest point in Europe’s largest markets. Secondly, the group opted for more high-technology equipment as a differentiation strategy, while competitors such as Renault and Vauxhall/Opel offered new designs with less ambitious specifications. Consequently, Volkswagen was forced to offer discounts a few months after its official launch.
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By GlobalDataThe group has declined to provide an outlook for 2004 and this indicates that it expects to carry most of its 2003 problems with it into this year. In January 2004, sales of Volkswagen brands were down by 10.5% in western Europe.
SOURCE: DATAMONITOR COMMENTWIRE (c) 2004 Datamonitor. All rights reserved. Republication or redistribution, including by framing or similar means, is expressly prohibited without prior written consent. Datamonitor shall not be liable for errors or delays in the content, or for any actions taken in reliance thereon.
