Volkswagen Ag Group Economic Analysis

Introduction

This paper provides an economic analysis of Volkswagen AG Group (VW AG) beginning with an overview of the firm and its performance over the period 2006 until the end of FY 2017. The macro-economic context in which VW AG operates will then be considered including an analysis of the interface of the business and the market. The vulnerability of VW AG will then be assessed through an examination of its internal economics and costs as well as how these elements are affected by the external environment. Finally, the paper will then review the extent to which the company is able to manage any vulnerability and potential future macroeconomic shock and market exposure.

Overview of Volkswagen AG

VW AG, headquartered in Wolfsburg, Germany is one of the world’s leading automobile manufacturers and the largest in Europe. It has developed from a single company producing automobiles in the 1930s to a much larger global entity which now consists of some twelve brands including Volkswagen Passenger Cars, Bentley, Lamborghini, Porsche, Audi, Skoda, Bugatti, Ducati, Seat, Scania, Volkswagen Commercial Vehicles and MAN. VW AG’s spectrum of products includes commercial vehicles, motorcycles and passenger cars; ranging from small cars to luxury vehicles. The company also has dealer, leasing, financing, insurance and fleet management operations. VW AG has approximately 642,300 employees globally operates 120 production plants across 20 European countries with an additional 11 spread between the Americas, Asia and Africa and sells its vehicles in some 153 countries (VW AG Annual Report: 2017). Of note, in 2015 VW AG admitted to misleading global regulators regarding emission levels from their cars resulting in significant financial penalties, reduced consumer confidence, a loss of sales and the cost of correcting the fault (FT: 2018). The full impact of this is yet to be felt as further litigation is pursued.

Figure 1. VW AG Earnings before tax 2006-2017. (Statista: 2018).

Figure 1 details VW AG’s earnings before tax over the period 2006-2017 and provides an indicator of the company’s strong financial performance. In the fiscal year of 2017, Volkswagen AG produced earnings of around 13.9 billion euros. The fluctuations illustrated at figure 1 serve to highlight the correlation between global macroeconomic events (e.g. the ‘Great Recession’ of 2008-09) and the performance of VW AG. The notable loss in 2015 is as a result of the VW emissions scandal (FT: 2018).

Figure 2. Revenue of the leading automotive manufacturers worldwide in FY 2016 (in billion USD) (Statista: 2018).

Figure 2 places the performance of VW AG in the context of its competition in the top ten global automobile producers. In terms of revenue, in FY 16 VW AG was second to Toyota providing an indication of the size and global nature of the organisation.

Figure 3. Global market share of the world's largest automobile OEMs in 2016 (Statista: 2018).

In terms of percentage share of the global automobile market VW AG again sits second to Toyota as detailed at figure 3. VW AG’s has lost market share since 2014 owing to the emissions scandal.

Figure 4. Comparison of net profit margins of Toyota, Ford and VW AG: 2013-17 (Author’s own. Data from Marketline Reports: 2017).

Figure 4 illustrates the decline in VW AG’s net profit margin since 2013 when compared to its principal competition. Toyota has continued to grow since 2013 with Ford fluctuating from year to year. VW AG’s net profit has been dramatically affected as a result of the emissions scandal as the company set aside funds in preparation for legal claims against it. Whilst the full extent of the ramifications of the scandal have not yet been realised, figures in 2017 appear to indicate growth back towards historic norms.

Figure 5. VW AG's sales revenue from FY 2006 to FY 2017 (in million euros) (Statista: 2018).

Figure 6. Volkswagen's worldwide vehicle sales from 2006 to 2017 (in millions) (Statista 2018)

Figures 5 and 6 reinforce the strength of VW AG’s position in the market as, in spite of the damage incurred as a result of the emissions scandal, revenue from sales (figure 5) has shown year on year growth since the great recession in 2008-09 and worldwide sales have also grown.

Macroeconomic Exposure

Figure 7. Global GDP against VW AG EBITDA: 2007-17 (Authors own. Data from VW AG Annual Reports 2012 & 2017 and the IMF:2018).

Automobile producers, owing to the global nature of their operations, are particularly sensitive to the macroeconomic business cycle. Figure 7, which illustrates the impact on global GDP of the global recession in 2008-09, shows how VW AG is highly exposed to GDP elasticity. In times of recession consumers will choose to not purchase new automobiles retaining their current vehicle for longer which is in contrast to the food industry where purchases are non-discretionary. Figures 1, 4 and 7 demonstrate the impact of the financial crisis on VW AG with EBITDA, revenue and sales all falling over this period. VW AG’s ability to sustain operations through this period is testament to its strength noting that other companies such as Chrysler and General Motors were forced to file for bankruptcy (Clark: 2009). This strength is further evidenced by the speed of VW AG’s recovery and growth until 2014.

As a result of its significant volume of exports VW AG is exposed to fluctuations in currency exchange rates. VW AG’s exposure to foreign currency risk is mitigated through varying production capacity at their facilities around the world which are strategically located in the largest currency markets (e.g. the Eurozone, the US, China, India and Brazil) as well as producing components locally thereby reducing cost and exchange rate exposure. VW also maintains a diversified financial portfolio through investing in national and international markets (VW AG Annual Report: 2017). This affords them the ability to raise liquidity across the various financial markets and reduces exposure should there be a shock.

The great recession