VW Sees Net Profit Jump 50% in 2007, Raises Scania Stake to 69%

The Volkswagen (VW) Group has announced that its full-year net profit jumped 4.12 billion euro (US$6.25 billion) year-on-year (y/y) in 2007, over 2.75 billion euro in 2006, as cost-cutting and strong demand underpinned a solid set of results. VW Group's revenue rose 3.8% to 108.9 billion euro in 2007, from 104.9 billion euro in 2006, whilst pre-tax profit rose to a record 6.54 billion euro, up from 1.79 billion euro in 2006. Operating profit after special items rose to 6.15 billion euro from 2.01 billion euro in 2006.

The group's passenger-car sales, which include Audi, Skoda, SEAT and Bentley brands, rose 7.9% y/y to 6.19 million vehicles, as continued growth in emerging markets such as Brazil, Russia India and China (BRIC) drove the increases. VW also fared well in the stagnant Western European markets, which accounted for 58% of total sales. Asia-Pacific accounted for 17% of global volume, and North America accounted for 8.6%

Group CEO Martin Winterkorn gave encouraging guidance to VW's 2008 performance, saying in a statement: "The further optimization of our processes and our continued systematic cost discipline will also have a positive impact on earnings development. Overall, we expect the VW Group's 2008 operating profit to exceed the 2007 level."

VW also said that its capital expenditure (capex) spending rose 25% in 2007 to 4.6 billion euro, as the company invested in property, plant and equipment in its auto division. The ratio of capex grew to 4.6% from 3.8% in the prior year.

Separately, VW has raised its capital holding in Swedish truck-maker Scania to 37.73% and its voting rights to 68.60% following an accord with the firm's other major investors, Investor and the Wallenberg foundation, VW said today in a statement to the stock market. The company paid approximately a one-third premium over Friday's close for the stock, agreeing to pay 200 Swedish krona (21.4 euro, US$32.4) per share, the statement said.

Outlook and Implications

The VW Group's results are in part the work of Martin Winterkorn's predecessors, Bernd Pischetsrieder and Wolfgang Bernhard, as they spearheaded the cost-cutting and labour agreements, largely achieved in Germany, that have led to VW's record results this year. The group's short-term future looks healthy as the raft of new models, some of which will debut this week in Geneva (see Switzerland: 29 February 2008: Geneva Motor Show 2008: VW Unveils Official Scirocco Images; Three New Fuel-Saving Models) will maintain a high level of interest in the Group's brands.

Furthermore, the VW brand is back on track in China, holding solid its market share in the booming South American markets and making inroads into Eastern Europe and Russia. India is something of a weak spot for VW, and measures to address this are under way, although it has an advanced operation in the form of its Skoda brand in India to compensate somewhat. However, VW's biggest failing continues to be North America, where it is struggling to address its lack of penetration. While the lack of exposure to the tough market conditions may bode well for this set of results, the company's ambitions there are still out of line with the market reality. Furthermore, the company's decision to launch a minivan based on Chrysler's new Town & Country and Dodge Caravan platform, in order to address the lack of North American-focused products, is a mistake. Badge-engineering a vehicle for a diminishing segment, and one that will not help its image in the market one bit, is not where VW should be heading in the United States. Plans to announce another plant in the region are expected in the first half of this year, but having burnt a substantial amount of cash in acquiring Scania, we will have to wait and see how far VW wants to stretch in order to achieve its ambitions in North America.

VW's move to acquire Scania effectively ends the long-running and bitter attempted takeover by German rival MAN, which owns 17% of Scania. MAN's later attempts to find an amicable solution stalled as the Swedish majority shareholders (the Wallenberg family, who own Investor AB) and management of Scania continued to resist the move. VW had also sought an amicable solution that would enable it to create a merged company including its own South American truck operations.

With MAN already chaired by VW Group's own Ferdinand Piëch, it appears logical that the takeover of Scania will result in the company creating a truck manufacturer of global proportions. However, apart from VW's own South American operations, the instant synergies are not straightforward. MAN and Scania are largely focused on Europe and have many overlapping models. Their combined lack of presence in the North American market again leaves them with a significant disadvantage in the world's largest truck market. A move on independent Navistar may be the way forward to address this disadvantage, although the U.S.-based company remains fiercely opposed to moves to take it over and has been the subject of a number of rumours and speculation. In addition, the move to buy Scania will likely see management changes at Scania, many of whom will not work with their counterparts at MAN.