Volkswagen has three years of earnings decline behind it. And if this year is to be turnaround year, it won’t be by much.
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That’s the message that came out of the German company’s Press conference this morning when the chief executive, Bernd Pischetsrieder reviewed the full story of last year and poked tentatively at the portents for 2005.
Initially, the stockholders didn’t like what they heard. The share price dropped but then recovered some of the fall. Although the stock is only worth a third of what it was at its peak six years ago, it is now at a level very similar to what it was a year ago. Shareholders are used to the idea that things are not going to get better in a hurry.
It was the Chinese and the Americans who made it all go horribly wrong for VW in 2004.
The Chinese market has become extremely important because VW was first in as a volume assembler and has built a powerful presence in the rapidly growing market.
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By GlobalDataBut, said Pischetsrieder when the Chinese decided during the year to apply the brakes to the economy, VW was forced to decide “not to defend market share at any price.” He did however manage to defend market leadership in a falling market with 648,000 vehicles sold – now second only to Germany in importance. Market share is now 25% compared with the overwhelmingly dominant 50% in the year that the share price was peaking.
The American problem was the weak dollar which decimated the profit (to a loss of more than a million Euros) once the revenue was converted to Euros. Adding that to the massive discounting by competitors made the US a horrid market. With Germany – where VW has to defend a 30% share – also still weak, VW’s Big Three markets have all been unkind. “Our world markets have been persistently unfavourable,” was the understated way that he put it.
There has been quite an interesting shift of emphasis within the two main brands. The head of finance, Dieter Poetsch showed figures that had operating profit from Audi up by more than 10% while VW was down four.
The two men conceded it’s not good enough. The operating margin was only 1.6% on sales of €89 billion. Return on investment as a percentage was even lower. The only cheerful news on the financial side is that the balance sheet remains sound with provisions that happily take care of pension liabilities. VW boosted cash by just under €2bn during the year but Pischetsrieder was quick to say that achieving that every year is not likely.
It is probable that volume will go up this year because new Passat and new Audi A6 Avant show up in the second half of the year. But new product and better volume alone aren’t going to fix the problem of flat profit growth. That can only now come from cost saving and from building more vehicles in, and sourcing more components from, the dollar economies.
Trust us on the cost saving, says Pischetsrieder; we are right on track, we are speeding up implementation, and the momentum is driving is forward.
But he is nevertheless well aware that close up behind him are weak markets, rising material and fuel prices, and those “persistently unfavourable” markets. It’s not pretty.
Rob Golding
