Volkswagen the German carmaker (VOWG p. DE) cut its operating profit and sales growth estimates on the 18th of November 2019. The company has to take such action due to the drop in passenger car demand while maintaining profit margin targets.
Volkswagen Cuts Profit
Volkswagen joins a host of car manufacturers and distributors including Ford (F.N) and Continental (CONG.DE) in warning of difficult times. That’s because at a time when a trade war between Washington and Beijing is curbing global growth, the industry faces higher investment in cleaner and self-driving technologies. Volkswagen now estimates operating profit to increase by at least 25 percent over 2016-2020 without special items. This is down from an earlier estimate of more than 30 percent, presentation slides shown.
The Wolfsburg-based company also reduced its sales growth forecast from over 25% to 20% over the period. The latest estimates brought Volkswagen shares down 4 percent to 176 euros. Next, it is compared to a fall of 0.6 percent in the DAX.GDAXI blue chip index in Germany. Besides that, Volkswagen, whose products range from budget Skodas and Seats, reiterated its expectations for an operating margin of 6.5% -7.5% in 2019-2020 and 7% -8% in 2025.
To counter the expense of rolling out electric vehicles, the company will increase sales of higher-margin sport utility vehicles. This is to seek lower the cost of manufacturing electric vehicles, Chief Executive Herbert Diess said. For example, Volkswagen’s new electric vehicle ID.3 will be 40% cheaper to build than its Golf model’s electric version, he told investors.
Because the battery pack in the new ID.3 and can be used to add structural rigidity, the vehicle body can make some savings. In addition, the battery’s modular structure allows versatile production and economies of scale. Volkswagen said it was going to start manufacturing the ID.3 in both Dresden and Zwickau, East Germany. From about 2025, the company said, electric cars would reach cost parity with gasoline and diesel types, helping to meet profit margin goals.
How the main business divisions of Volkswagen worked
VW Passenger Cars produced operating profit of € 866 million, up sharply from just € 200 million a year ago. This is when the brand’s profits are hit hard by diesel-related penalties and a shift in Europe’s new car testing protocol. LAter, the sales rose 5.6%, powered by the profit for the brand’s SUVs, including the U.S. made Atlas. According to an improved mix of products sold and cost reductions, Audi’s operating profit of EUR 939 million increased 3.2 percent from the year-ago period. Then, the brand sold about 440,000 cars, down 3.7 percent year-on-year, including Audis manufactured by VW’s joint venture with Chinese automaker FAW.
Besides that, Porsche’s global sales increased 3% to about 69,000 cars. But the higher costs associated with future products and adverse currency exchange rates forced its operating profit down 4.4% to EUR 1.08 billion. Next, VW Commercial Vehicles sold nearly 88,000 vehicles a year ago. Nonetheless, the cost of product development resulted in a loss of € 9 million compared to a profit of € 61 million over the course of the year-ago. Later, the captive lending unit of the company VW Financial Services, received € 754 million up 10.2 percent from a year earlier. Through the first three quarters of 2019, the penetration rate of the product was 34.5 percent, up from 34.2 percent in the year-ago period.
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