Feb 6, 2013
According to a report of Bernstein Research, Volkswagen (VLKPY.pk) now has approximately 24% — up from 22.4% in 2011– of the Western European market and the company has also turned out to be the largest automobile seller in the largest market in the world, China. Its share of Western Europe is more than twice its closest rival, Peugeot-Citroen of France. Some analysts believe VW could push that share to 30% given the state of most of its rivals in Europe. VW is filing excellent profits with a final margin of an insane 23.1% over the first half of 2012 while its competitors GM Europe’s Opel-Vauxhall (NYSE:$GM), Ford Europe (NYSE:$F), Peugeot Citroen and Italy’s Fiat are all posting deep operational losses in their European divisions.
The simple reason behind Volkswagen outperforming the industry and its rivals is that its cars are cheaper to own over the life of the vehicle. When you factor in the slower depreciation of Volkswagen’s many brands it more than offsets the higher sticker price, driving total cost of ownership down making its cars nearly 5% cheaper to own on average than its American competitors. The only other carmaker which is consistently in the same class, economically, is South Korea’s Hyundai, itself simply a manufacturing and supply chain management powerhouse in the same way that Toyota (NYSE:$TM) was.
What also helps drive this cost competitiveness for VW is its ability to borrow as far lower rates than some of its continental rivals and pass those borrowing costs onto consumers where the financing rate differential was as high as 10% last summer for French consumers. In the European periphery that has been plagued by soaring government bond yields one can assume this financing arbitrage has been even worse. This has driven Peugeot to needing a $9.1 billion bailout.
Volkswagen has been able to outpace its rivals by reducing the number of common platforms or chassis that its cars are built on. Through this Volkswagen offers fabulous variety of brands and styles but keeps its manufacturing costs low. It doesn’t hurt to have a product like the New Beetle be so successful that it was in service on the MkIV Golf chassis from 1999 to last year. A Jetta is a Golf with a trunk. A Tiguan is a Golf on stilts, while a Skoda Yeti is a Tiguan with different interior and badge. It’s not a new concept but between that and having only a handful of engines that come with and without various turbo chargers it gives VW tremendous flexibility, especially if those engines and chassis are good, which invariably, they are.
The standardization that was evident in the Golf-derived cars of previous generations is nothing compared to where Volkswagen is moving with its new MQB approach to car design.
MQB Vehicle Architecture
MQB — Modularer Querbaukasten or “Modular Transversal Toolkit” – is a design approach to completely standardize the engine and transmission mounting for an entire line of cars which will allow Volkswagen to greatly streamline not only production but also design. Moreover, it will reduce the parts inventory and drive complexity out of one phase of its operation. According to some analysts by 2019, Volkswagen will use MQB to strengthen 4.6 million vehicles ranging from the next Polo sub compact to the future generation Passat. MQB will lead Volkswagen to save up to €14 billion by 2019. Production time could be reduced by as much as 30% and will allow Volkswagen to drive well past its competition in terms of technology and give them tremendous pricing leverage.
Winning despite Europe crisis
Volkswagen has become a dominant player in crisis hit Europe, where other rivals are far left behind. The German carmaker has been able to utilize a number of advantages to pressure its rivals like the MQB, a concept it began working towards with the Mark IV Golf back in 1999, the financing arbitrage and its willingness to compromise a bit of its premium quality branding to drive volume through aggressive pricing. The weak Euro helped around the world as well, especially in the U.S. and China. It was a gamble to cheapen the interiors of its cars, but so far, it has paid off handsomely as the right read on the European car market.
Flush with cash Volkswagen just announced €50 billion in spending over the next 3 years. While ford and GM are wondering how they are going to survive or even stay in the European market, VW is looking for new territory, much like the big Japanese brands that have targeted India and Southeast Asia. VW’s European rivals, like Peugeot and Renault simply do not have the funds at this point to compete if not outright on the verge of bankruptcy.
Into this void left by the U.S., French and Italian automakers, comes Hyundai which has made impressive gains in Europe since the 2008 financial crisis. Hyundai will be in Europe for the long game, there is no doubt, but in the near term Volkswagen will press its advantage and it should be difficult for many manufacturers to take much away from them there.
Hyundai’s current strategy is the opposite of VW’s as it has been holding volume constant and raising prices to drive its brand higher. The result has been an increase in net margins from 4.1% in 2006 to 11.4% in 2001. It’s now one of the top 100 brands in the world according to Interbrand. VW did this during the credit boom. When capital was cheap and people were flipping cars, VW stayed above the knife fighting and raised its brand image, which is can now use to drive massive share growth. The company’s growth drivers are its presence in faster growing markets outside Western Europe and a diversified product portfolio ranging from Bugatti high performance sports cars to Scania heavy duty trucks.
In the end, don’t take my word for it, take that of the industry’s executives who, according to KPMG’s latest survey, are most convinced that VW will take market share in 2013 – more than 81% of the 200 interviewed. In reality that is true. It is also true that Toyota managed a 24% increase in global market share as well and will likely give VW a good run in 2013. As an investor, though, I’m looking at VW trading at a P/E of 3.6 and a yield of 3% compared to Toyota’s 18.3 multiple and 1.4% yield and am more inclined to turn German than Japanese.