Volkswagen Group’s strong first quarter financial results prove comparatively resilient amidst the difficult global macro-environment
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The major German automaker published first quarter results on May 4th that included healthy sales revenue and other stable vitals. VW Newsroom stated that, “The main drivers were an improved sales mix, better pricing, continued cost discipline and the flexibility provided by the Group’s global set-up.” The supply chain tie ups, particularly in China, and added instability in eastern Europe have resulted in many markets being squeezed. These positive numbers imply that the company will continue to accelerate expansion and prioritize key markets like North America.
EV Sales Importance
Global deliveries for the transitioning giant’s all-electric vehicles totalled a smooth 99,064. Considering the obvious hurdles in production, a 65% gain in EV deliveries from last year is quite impressive. Their share of BEVs relative to ICEs are also continuing to progress. Importantly, looking at their most pivotal market, VW’s averages indicated that BEV sales growth was strongest in China. Europe remains their strongest market with a total of 58,400 deliveries. To shield profitability, the company engaged in commodity hedging managing to achieve EUR 8.5 Bn in operating profit before special items. These figures demonstrated a robustness in their business practices relative to other firms in the market.
On May 4th, Volkswagen’s CEO, Herbert Diess, stated that the company is “basically sold out on electric vehicles in Europe and in the United States” for the year. This restricts their expansion in US markets despite high demand. Their backlog will continue to grow as competitors continue to try and scale up manufacturing to snatch away any share of the ripe US EV market from VW. Some buyers might not want to wait until 2023 if any other OEMs can manage to compete on price. Last month, the company had indicated that it had started to feel the impact of the Russo-Ukraine conflict. Specifically, a shortage of wire harnesses produced in Ukraine delayed the launch of their ID5 electric crossover on top of the rolling shutdowns of factories in China. Supply chain crunches and raw material inputs are putting many companies to the test in adapting to these unique market conditions.
While long term effects of the Russian “special military operation” are difficult to predict, the company has laid out a growth plan to reduce their supply chain vulnerabilities. By divesting more power to their regions and brands, the legacy OEM hopes to transform its fundamental structure into a vertically integrated mobility company. Allowing their local operations to adapt to unique market conditions as opposed to micromanaging from the top may bode well for them. These efforts are necessary to outlast what feels like a temporary but steep hurdle for many EV firms to climb.
Direction in China and beyond
China is a battlefield for all EV firms looking to become a global brand. For VW, China already accounts for around 40% of their automotive sales, however, they still lag behind competitors with EV sales performance. They have missed targets previously on the mainland relative to competitors and have lost ground that they'll need to improve on, and quickly too. Only 28,800 electric cars were sold in the first quarter due to pandemic-related lockdowns. While Diess remains confident that business in China is “really picking up,” it will be a challenge for the company to make up lost ground and reach their ambitious goal of 140,000 vehicles sold in the country.
The VW group had also recently announced that subsidiaries Audi and Porsche will be joining Formula One. VW continues to think big and boldly. Building their brand name and reputation is a pretty mask to compliment other foundational issues. Their leadership does continue to remain steadfast and dedicated to finding routes to success. Key points of focus for the company include accelerating investment in US manufacturing, competing more aggressively in China, improving and growing their software division, as well as reorganizing brand leadership.
At home in Europe, Volkswagen has confirmed a USD 2.2 Bn investment to erect a new manufacturing plant near its main Wolfsburg site. Another specific investment is laid out in a recent report that VW is flirting with the idea of opening a second US production facility, possibly in Chattanooga, TN, where its current footprint is. They are also considering adding a local battery cell plant near this crucial production zone for the continent. Competitors like Nissan, GM, and Ford, all manufacture EVs in the state of Tennessee as it is becoming a battleground for continental EV assembly.
Final take
While the company is taking all of the right steps and making plenty of tough decisions, it still trails global leader Tesla. This is better than others but for internally high standards set by VW’s leadership, there is plenty more ground to be gained. Their US EV market share sat at 7.5% in 2021 while they aim for 10% by 2030. According to the Financial Times, VW sold just under 100,000 electric cars in Q1 while Tesla’s latest earnings indicated sales of around 310,000 in the same time period. Tesla also is struggling to keep up with rapidly growing demand in China and beyond. To compete in China with local giants like BYD and new commersvw like Nio, they must come out of the current macroeconomic environment stronger and more nimble. VW must compete in manufacturing capabilities and cannot remain “sold out” for an extended time.
Not much has changed and there weren’t any big surprises coming from the most recently released data and guidance. They are basically in line with the current conditions with how they are structurally built. VW remains strong and at the head of the pack including their fundamentals. Volatility in the market and in worldly events will test them and shake things up further. They continue to adapt and haven’t shown signs of significant struggle. Investors should continue to monitor the EV market closely for any new disruptions and embrace patience and optimism. Hopefully conditions improve enough that all companies involved can accelerate the global EV transition. China will continue to be the most important region for this market.