VW: Are they getting their act together?

Posted By on May 17, 2005

The new Popemobile??? I hope this is not what VW is counting on.

VW Pope Mobile

Is there any question as to how Volkswagen has been managed in recent years? Their strategy to up scale their image and move from the “people’s car” mentality has surely made even the most loyal shareholders doubt. One writer sums up that the “miscalculations started when VW sunk billions of euros and much management time during 1998-2003.” It was during those years that VW moved into the luxury arena and bought Bentley, Bugatti and Lamborghini. Then they went on to build the $60,000 plus Phaeton and unveiled it as their flagship model. It was a costly move into the luxury market and was capped off with the upscale Touareg SUV. The Phaeton, from everything I have read although being a premium automobile, has bombed as a business move. It would have been far better introduced under the Audi luxury marque.

All in all the companies overall performance has not been stellar. Not surprisingly, the company share prices has reflected it in Frankfurt where ordinary shares of VW stock have dropped from a high of €62 in 2002 to about €34 now. This is just where they stood in 1996, when annual sales were a bit more than half today’s.

Adding insult to injury, sales have been hurt by growing competition from Japanese and Korean brands in the U.S. and Europe, and VW has also continued its poor reputation for quality. For more than a decade, Volkswagen has consistently finished near the bottom of J.D. Power’s initial-quality rankings — this year it was 36th among 37 brands sold in the U.S. Only the Hummer has a worse initial-quality rating.

Most analyst believe much as to do with ignoring their bread and butter models like the Golf, Jetta and Passat. Not only have sales fallen in the US and Europe, but VW continued to lose large chunks of China’s auto sales where they once dominated. Volkswagen once held 50% market share in China, which has unfortunately eroded to less than 20%. In the US, as friend that sells VWs puts it, sales have tumbled in part to being treated like the ‘redheaded stepchild.’ The US does not necessarily get the inventory and models needed to compete with offerings from Japan and Korea. Obviously the weak dollar has not helped sales in the U.S. and VWoA continues to show red ink.

VW by Brand and Country

Enough gloom … what is VW doing about this? Well believe it or not, there are signs of serious self- improvement in Wolfsburg. Over the past 12 months, the German state of Lower Saxony, which owns 18.2% of VW, the management and even the unions to some extent, realize the company must slash its costs. They are making some big changes and should eventually trim billions of euros in annual outlays and boost operating margins back toward the historic 4% to 5% rate. They have implemented the ‘ForMotion’ cost-reduction program … named after their all-wheel-drive system. It is beginning to yield results according to industry analysts.

To ease its dollar woes, Volkswagen has shifted Jetta production to Mexico, all Jettas/Boras will now come from one plant. For those of us wondering where our Jetta was born … now we can say “solamente en México.” Interestingly VW worldwide now has the most new offerings among volume car-producers, with some 20 models or variants being introduced this year …IMHO this should help reignite earnings growth. China, an extremely important market, is showing signs of stabilization after the reported first quarter.

On the quality front, VW is mounting a massive effort for improvement; Wolfgang Bernhard, the former DaimlerChrysler executive who recently became the VW brand’s head, is making this a priority. I have talked with local dealerships and they are already noticing a big difference with the quality of the new A5 Jetta. They have been informed that instead of making repairs on vehicles when they are delivered those models not up to quality standard will not be shipped out to dealers for repair as in the past.

All in all, most believe the damage has been done and that there is some upside potential. From the most rosy picture of a 20% rise in stock price to a ‘cooler’ look from an analyst at Credit Suisse First Boston analyst. “The market views VW as the most wasteful company in the sector, yet it then doesn’t grant that consequently savings are obviously possible.” Hmm?

Stay tuned.


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