The head of the VW brand faces a big task in cutting costs and improving margins without upsetting the unions, while one of his counterparts claims China is gradually become less attractive as a manufacturing base.
IHS Automotive perspective | |
Significance | The VW brand's new head Herbert Diess takes over tomorrow (1 July) with a big job on his hands while the managing director of VW Group Fleet International Martin Jahn has claimed that some production is being moved back to Central Europe from China as a result of rising costs in the world's biggest market. |
Implications | Diess comes to VW from BMW with a reputation for aggressive cost management, and with very clear goals of saving EUR5 billion by 2017 and improving the operating margin of the brand from 2.5% in 2014 to an eventual 6%. Jahn's comments are interesting in light of the slowdown and increasing competition in the Chinese market. |
Outlook | Diess headed up some of the main cost-saving elements of BMW's successful Number One strategy as board member for purchasing between 2007 and 2012, although the elephant in the room for the VW brand remains the high percentage of overall output based in Germany. It is unlikely that as China's largest car brand VW will see a wholesale change in its production strategy but Jahn's comments reiterate that China is perhaps no longer the profit driver it once was. |
The new head of the main Volkswagen (VW) passenger car brand, former BMW executive Herbert Diess, starts work tomorrow on 1 July. He takes over the role from CEO Martin Winterkorn after the company decided that the main passenger car brand, which still contributes around 60% of the VW Group's overall sales volume, needs its own dedicated manager. Diess' main task is to raise the competiveness and profitability of the brand, which saw its operating margin drop further from 2.9% in 2013 to 2.5% in 2014. This falls far short of some of the company's rivals, especially the likes of Nissan with 5.2% in 2014 and Hyundai/Kia posting a margin of 8%. The longer-term target for the VW passenger car brand is to add EUR5 billion to the brand's bottom-line earnings by the end of 2018, and boosting the operating margin to 6% by 2018. He joins the brand as it posts slowing sales, with volumes falling by 5.9% in May to 499,500 units, with a year-to-date (YTD) decline of 3.0% to 2.5 million units. However, as a VW outsider Diess will have to walk a tightrope in terms of implementing cost cuts while keeping the all-powerful VW works councils and unions on side. He is therefore likely to concentrate initially on improving production efficiencies, where there is probably some scope for improvement given some of the issues seen with implementing production of the MQB-platform Mark-VII Golf at Wolfsburg and Emden.
Meanwhile on the subject of production costs and overall cost efficiencies, a Bloomberg report has quoted Martin Jahn, managing director of VW Group Fleet International as saying that many OEMs were looking to move some of their production footprint back from China, as a result of rising costs, to locations like Eastern and Central Europe. Instead of the steady flow of investment into China that has been a characteristic of the industry over the last decade Jahn said, "We are seeing a rather opposite process at present." He added, "Personnel costs in China are growing and that, in combination with long logistic routes and transport costs, means production of components in China isn't that advantageous anymore." Jahn mentioned the Czech Republic and Slovakia as destinations where there is an increasing amount of investment. Skoda, Hyundai-Kia and suppliers like Nexen plan to spend USD1.3 billion in the next five years, The Czech Republic and neighbouring Slovakia are among the world's biggest car producers per capita and both are investment-friendly environments with positive tax regimes for large foreign direct investments (FDI).
Outlook and implications
There is little doubt that Diess has a massive challenge on his hands in turning around the competiveness of the VW Group's mother brand, which still accounts for 60% of overall sales but only about 20% of the Group's overall profits. Porsche contributes a higher overall amount to the Group's overall net profit (EUR2.7 billion) to the EUR2.5 billion the VW passenger car brand posted in 2014 despite the VW passenger car brand building 30 times more cars than Porsche. Profit margins are being squeezed by the cost of implementing the company's new platform strategy which relies heavily on the MQB platform, which supports all the company's transverse-engined cars such as the best-selling Golf. There has been issues in terms of complexity of implementing production of the Mark-VII Golf at Emden and Wolfsburg and there have been costly line stoppages and inefficiencies as a result. In Europe the brand has also been hit by the heavy discounting and incentives environment, while the downturn in Brazil has also hit hard while the brand's performance continues to disappoint, and the latter area is likely to be a major focus for Diess, However, as an VW outsider he must avoid upsetting the powerful works council and union lobby, but there will only be so much he will be able to do to improve the cost base in terms of squeezing suppliers or reducing range complexity. The main issue with the VW passenger car brand's lack of cost-competiveness, the percentage of production based in high-cost Germany, is likely to remain unaddressed.