The investment announcement is part of a regular update to shareholders and employees on the company's spending plans but it shows VW's commitment to remaining as a global technology leader and achieving its Strategy 2018 goals.
IHS Automotive perspective | |
Significance | VW has made its latest annual investment announcement with a plan for EUR85.6 billion on new models, new vehicle technologies and production facilities over the next five years. |
Implications | While the headline figure sounds impressive, it is in line with previous announcements of this nature with the company maintaining a capex ratio of 6–7%. VW will invest heavily in future powertrain technology, looking to hedge its bets in terms of what will be the dominant future technology paradigm with an increasing investment in plug-in-hybrid as bridging technology. |
Outlook | These investment plans will help VW ensure it maintains its growth targets, maintains and improves quality and continues investing in its enviable brand and model portfolio. VW's biggest advantage is scale and the fact it can leverage vehicle technology such as modular platforms and powertrains across all its volume brands. Projects like the MQB platform are key to the strategy and this latest investment announcement will ensure that VW maintains its position as one of the industry's technology leaders. |
The Volkswagen (VW) Group has announced its capex programme over the next five years with the company set to allocate EUR85.6 billion (USD106 billion) in new investment for a new models, environmentally friendly technologies, including conventional and future powertrains and new production investment, according to a company release. VW said that its latest five-year plan for its investment was the result of a supervisory board meeting on Friday (21 November) which agreed and signed off the plan. Commenting on the announcement VW Group CEO Martin Winterkorn said, "We will continue to invest in the future to become the leading automotive group in both ecological and economic terms – with the best and most sustainable products. Development costs will remain high in the future as a result of high innovation pressure and increasing demands on the automotive industry from CO2 legislation. As a Group, we have the expertise and financial strength to continue to extend our technology leadership and to reach our goals for 2018." More than three quarters of the total at EUR64.3 billion will be invested in property, plant and equipment, investment property and intangible assets, excluding capitalized development costs (capex) in the Automotive Division. Capex in the Automotive Division will remain at the same level over the entire planning period in line with previous investment announcements the firm has made. This means the group's capex ratio will be at a competitive level of 6–7% in the period between 2015 to 2019. In addition to spending on capex, the plans also include capitalised development costs of EUR21.9 billion and proceeds from asset disposals of EUR0.6 billion. More than 56% of total capex spending will take place in VW's home production locations in Germany.
A large chunk of total capex allocation of EUR41.3 billion (around 64% of the total), will be spent on new model developments across all its brands. VW said that a significant figure would be dedicated to expanding its sport utility vehicle (SUV) range – in particular in the A/A0 class. All the company's volume brands currently have a range of small. medium and large SUVs and crossovers in the pipeline with VW keen to leverage the global trend to move away from conventional passenger car body styles and more towards SUVs and crossovers, with much investment going on vehicles in particular in the A/A0 category, which will include sub-compact SUVs and crossovers such as the forthcoming Audi Q1. There will be further investment in the modular toolkit platform system with the MQB platform and second-generation version of the MLB longitudinal platform being launched next year with the new Audi A4. Considerable investment will also be allocated to expanding the Group's commercial vehicle range and new plant investments included in this plan include the brand new facility to build the new Crafter in Poland which is set to open in 2016 and the new plant in Mexico that Audi is building. The firm's China joint ventures (JVs) are not consolidated and are therefore not included in the above figures. They will invest a total of EUR22.0 billion in new production facilities and products in the period from 2015 to 2019, with this investment funded from the JVs' own cash.
Meanwhile in a separate article from German weekly business magazine Wirtschaftswoche, the publication claimed that the VW Group is on target to meet its 2018 pre-tax profit margin of 8%. The article cited sources that attended today's supervisory board meeting and who confirmed the target was still very much a goal of the company. The company has incurred some extra costs through the introduction of the modular MQB platform, which was launched in 2012, and now underpins about 40% of the total vehicles the firm makes. There will be also be an emphasis of improving the performance of the main VW passenger car brand over the next few years in order to meet this overall profit margin target.
Outlook and implications
The VW Group generally puts out a press release every year which compounds the five-year investment target so this announcement was not unexpected and its is line with previous announcements outlining topline investment figures for the company. The VW Group's capex ration has been pretty consistent for a number of years at the 6 to 7% level. However, as the company has grown, with turnover increases and record profit figures in recent years, so has the topline investment figure. The company has hit some turbulence this year with rolling out the MQB (Modularer Querbaukasten, or modular transversal toolkit) platform, production of the Golf at Wolfsburg and Emden was affected by the greater than anticipated complexity of manufacturing so many variants of the same model on the platform, while the company is in the process of developing the second generation MLB platform for the new A4's launch next year. These two basic platforms will eventually account for about 80% of the VW Group's passenger car production and are key to the firm's future technology strategy. Another traditional role of these kind of communications is to impress upon the rank and file at the firm's German production locations that VW remains committed to investing in production in its home country. In a perfect scenario it is highly likely that VW would look to move more production to lower-cost production locations, especially in Europe, but so ingrained is the company's works council into the management culture that it would take a huge change in the global business environment for this to be countenanced, even though high fixed costs are undoubtedly a drag on VW's profitability. In terms of the firm's overall investment and future technology strategy the Group is also taking steps to enhance collaboration between its two heavy truck entities, Scania and MAN. After years of resistance and attempts to find a way forward-for the two entities to work together on an aligned vehicle technology strategy it finally looks as though some real progress is being made, with an agreement for the two brands to share transmissions (see Germany - Sweden: 23 September 2014: Scania, MAN to share transmissions – report). This is likely to act as a precursor to a more comprehensive tie-up likely to involve cab design and powertrains.