Confident VW Sales Pitch Turned Around By Real-World Events
|   Wednesday, September 03, 2014
Even as Volkswagen was confidently predicting that it would become the world's number one automaker as recently as a month ago, events were unfolding that have knocked that prediction out of the game.

VW has had an enviable record as its sales climbed up to 9.7 million vehicles a year for 2013. Much of the increase in its sales success has come from its strong performance in China where as much as 34 percent of its growth could be traced. Volkswagen sold 2.
million vehicles in China.

Evidently, VW had been banking on the relationship with China to continue, but that has not been the case as Chinese authorities were unhappy, according to Forbes.com, the online arm of Forbes Magazine, a leading business magazine, with VW's "monopolistic pricing" policies. China disliked VW's habit of charging customers full price for its wares, unlike other markets where customers could bargain or negotiate with the automaker on the final price. This was not an unfair expectation.

And, as it was running into rough seas with China, VW turned its view to Europe, to what it had expected to be a resurging market. However, the market in Europe has been softer than VW would have liked and even its home market, Germany, has been disappointing, as its economy seems to have turned south when VW needed it.

This effectively crimped VW's march to number one in sales by 2018, a figure that was confidently predicted VW management, on the basis of its performance in 2013. (This is not the safest of business practices. It is a variant of "feel-good" marketing where the practitioner actually acts as if only its own views were true. It hurts when the real world comes crashing into the pretty pictures.)

Because it could no longer depend on China or Europe, the automaker revised its planning, deciding that the only way to profitability was deep cuts in expenses. It had planned a round of cuts that were as deep as $6.7 billion a year through 2018 to keep its profitability up.

The company had hired a consultant to implement its plan to restore profitability. The consultant had drawn up a report that was circulated and VW's supervisory board almost immediately killed the plans. The 20-member board, made up of 12 union directors and eight other directors, working with the State of Lower Saxony, effectively killed the consultant's plan. Unions were able to do this because they hold a higher place in Germany's manufacturing sector than in other countries. At VW, they were awarded a high number of seats on the board. The State of Lower Saxony, where VW is located, also owns 20 percent of the automaker directly and can effectively halt takeovers or other economic plans.

With that plan out of play, VW has had to revise its cost-cutting plans and their implementation. They do have an economic game plan mapped through 2018. The cost-cutting plan was caused by these events, plus falling net profits. Last year, the automaker earned 34.4 billion euros or $4.6 billion, while this year sales dipped to 33 billion or $4.4 billion. Almost immediately VW's stock price dropped into the bucket, dipping by 13 percent immediately.

Bernstein Research's Max Warburton has tracked VW's fortunes. Warburton noted VW has a case of stalled profitability across all its lines, including its key line Volkswagen. He also noted VW had placed a lot of faith in the advanced development program, called MQB. The MQB plan called for VW to use one platform for its entire range of vehicles. That it hasn't worked out as planned is easy to see as Michael Macht, head of production left recently.

Warburton noted that he firmly believes, as does Bernstein Research, that the MQB program is a mistake. He also believes that it is not profitable for VW, though it is forging ahead with the idea as a key part of its recovery package, and hopes that it won't pull VW down. "We've disputed VW's claimed scale-driven cost savings. We didn't expect it to be a negative for profits. Now we are increasingly concerned that ever MQB car loses more money than its predecessor."
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