Volkswagen Positive For 2023 Profits, But Doubts Build

Volkswagen’s share price stormed ahead after it unveiled positive forecasts for profits in 2023 earlier this month but later stalled after it revealed ambitious spending plans for its electric vehicles, and bottom-line implications for the European auto market turned ugly.

Tesla’s price war is also shaking up the profitability outlook for competing electric cars, with VW in the eye of the storm.

Earlier this month Volkswagen said 2023 sales will rise by between 10-15%, and the operating profit margin will be between 7.5 and 8.5% compared with 7.9% in 2022. VW’s shares spurted ahead by about 13 points to just over €142, as investors’ automotive industry expectations turned positive. Last week, VW announced a €180 billion ($191 billion), 5-year spending plan including battery production plans and ambitious ideas for the U.S.

The mood soured on the stock market as the share price slid back to just over €120 on Friday. Analysts wondered if VW’s expectations for the year, which pointed to a positive 2^nd half, might be a tougher ask than expected.

According to LMC Automotive in a report entitled “A change in automotive fortunes is coming”, the surge in new vehicle prices in the U.S. and Europe and overall manufacturer profitability is about to end.

“At some point, possibly later this year, though unlikely sooner than that, rising supply should meet falling demand,” the report said.

Investment bank UBS wondered if VW’s reliance on pent-up demand later this year might be a hostage to fortune.

“We consider (pent-up demand) a risky bet to run the company based on such expectations because it bears risk of overproduction and overspending,” UBS said in a report.

VW’s efforts at cutting costs weren’t impressive compared with the competition.

“Unlike mass market peers like General Motors, Ford Motor, and Stellantis, VW hasn’t come up with additional cost-cutting efforts to prepare for a more competitive environment. While 2023 results are likely to be less bad than we initially feared thanks to backlog execution, we still expect a deteriorating pricing and margin trend, and we think VW’s volume brands are not well prepared,” UBS said.

Bernstein Research reckons prospects for VW look positive, with falling raw materials prices helping profits, although the big capital spending program presented a headwind.

“On face value, the margin guidance looks challenging, especially on a slightly diluted mix and higher BEV (battery electric vehicle sales). The company, however, signalled that the cost run-rate for 2023 would be substantially below the exit rate in Q4, and expects declining prices for aluminum and steel, as well as the operating leverage to help achieve flat margins in ’23,” Bernstein analyst Daniel Roeska said in a report.

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Professor Ferdinand Dudenhoeffer, director of Germany’s Center for Automotive Research said VW’s profit targets look doubtful. Big earnings from Porsche won’t be enough to make up for the usually profitable but challenged Audi, and problems at its own VW brand and other mass-market producers like SEAT. Audi’s new product pipeline has slowed.

“The greatest pressure on profits in the next few years is likely to come from BEVs. The reason is Tesla’s dumping competition,” Dudenhoeffer said.

No doubt Tesla would say it was taking advantage of its superior efficiencies to cut prices and put pressure on its competitors, rather than “dumping”.

“In my estimation, business for the VW brand will become more difficult in 2023. One part is the big competition with Tesla. Tesla has radically lowered its prices for Model 3 and Model Y. VW didn’t want to follow at first, but now the prices have been reduced by €4,000 ($4,300). In addition, the Stellantis Group is playing an increasingly important role in Europe and is also increasing price pressure for VW. Discounts and price drops do not bode well for profits. In my estimation, the market for VW will become tougher in 2023 and the profitability of the VW brand will decrease as a result,” Dudenhoeffer said in an email.

Jürgen Pieper, auto analyst at German investment bank Metzler, said he was pessimistic about VW’s profit prospects, but the company often squeezes out strong profits despite unlikely conditions. Pieper said most economists expect Germany’s economy to turnaround in the 2^nd half.

“The order intake should recover quickly as it has done in most cycles. Autos are early cyclicals. So the picture that VW has painted is not pure wishful thinking,” Pieper said.

As for electric cars, VW was still lagging.

“VW is still behind the leaders in e-mobility, no doubt that has been a disappointment so far. And one still misses spectacular ideas and products. The ID.Buzz could be the product that begins to change things,” Pieper said in an email.

UBS also had its doubts about VW’s electric car strategy, and worried that the increased spending (the new overall spending plan is €21 billion ($22 billion) was much higher than the previous 5-year plan ending in 2026).

“VW could be left with stranded assets that don’t allow for profitable mass-market BEV production, especially if VW’s competitors succeed to bring down cost in all areas much faster. Tesla has a 50% cost reduction target. The very evolutionary approach of VW, which is in stark contrast to rapid innovation “on the fly” by the EV leaders, doesn’t seem the winning formula to us,” UBS said.

Volkswagen was the 2^nd largest automaker in the world last year behind Toyota. VW sales dropped 7% to 8.3 million while Toyota’s were almost stable at 10.5 million, according to French consultancy Inovev.