VW, its performance and precautions when analysing brand-based results
Weekly column by Bernard Jullien Director of Gerpisa.
This week's publication of Volkswagen Group results attests to the solidity of Europe's leading group and translates the relatively good health of the global automobile sector along with the ability of a highly internationalised group to take advantage of this situation.
It also lends credence to the group’s strategy for 2018, by which time VW intends to produce more than 2 million vehicles, vs.7,278 in 2010. Lastly, it reinforces the sense that it is possible for a company to succeed in the automobile sector even if it maintains deep roots in high-wage countries.
A detailed examination of these results and of some of the analyses that followed calls for a number of remarks, however.
1) Europe remains relatively important for the VW group and it is interesting that out of revenues of €126 billion, Europe accounts for two-thirds of the total with the rest more or less evenly split between North America, South America and Asia-Pacific. Even if sales by Chinese partner firms are not consolidated in VW’s group turnover (which only show profits), this observation indicates that the solidity of its European positions remains one of the group’s key characteristics.
2) There is also a very encouraging operating margin of more than €7 billion (or 5.6%) plus the fact that VW exceeded its 2007 totals and produced more than 2 million autos in Germany while employing 178,000 persons here. These results stem from a very favourable business mix enabling ongoing increases in its already high unit values, with turnover per vehicle sold rising from €16,670 in 2009 to €17,600 in 2010 (vs. €12,195 for Renault). Moreover, the mix improved for all of the group's leading brands, with Seat rising from €13,500 to €14,850, Skoda from €10,380 to €11,390, VW from €16,528 to €17,820 and Audi from €31,410 to €32,455.
3) Earnings do not reflect his hierarchy since in addition to losses by Bentley and Seat, operating margin rates were above 9% for Audi, 5% for Skoda, 15.85% for Scania and 2.7% for VW. It therefore appears that earnings generally suffered as a result of VW's own activities, given that this generalist European brand is affected by the same phenomena as all other groups positioned in the same way and must accept restrictions on its profitability. Indeed, some analysts were quick to highlight this fact and asserted that it is the basis for some key lessons.
This latter aspect is very important when analysing "the VW case" and drawing conclusions from the crisis (and from the crisis exit based on these factors). It is worth recalling during the Porsche affair, i.e. the pre-crisis battle when Porsche tried to increase its capital stake in VW, many favoured (in the name of "good governance") the idea that the Group return to the so-called "VW law" that supposedly prevented the golden rule of shareholder value management from being applied in this one instance. The idea was that the reservoirs of profitability hidden in its portfolio of brands and overall group activities were being under-exploited due to VW's outdated co-determination system that was said to block (or in any event, constrain) its decision-making processes. This was taken to mean that it was impossible to draw consequences normally from analysis of the group's business units (especially VW). Something forgotten that had occurred before the crisis and the problems with Porsche with its very "financial" management slowly returned to the front of the scene, namely this particular way of seeing things - a resurgence that destroyed any illusions about the value of brand-or activity-based analysis.
Yet to lend any credence to analyses of this kind, one would have to have a strong belief in the tools that were used to distribute profitability. With regards to the VW group, a person would have to seriously believe that brands such as Audi or Skoda deserve their reputation and/or that their engineering teams would have developed their current level of competency even without the help that they have historically received (and still get) from VW and its Wolfsburg platform in terms of building cars, factories and networks. Another inference is that Audi, Skoda or Seat applied a "cuckoo policy" towards VW, one where they are happy to simply camp out on the branches of a tree that already existed before they did while continuing to transmit its essential lifeblood to them. It seems clear that the "internal invoicing" of engineering costs and further clever ways of allocating to other divisions costs that VW itself assumed on behalf of the whole group is not a truly reliable way of accurately portraying the key role that it plays at the heart of this system.
This is the difference between a financial analysis logic and industrial or strategic analysis. The former can be viewed as a partial indicator that provides sight of a small chunk of a reality that is constructed across an infinitely longer timeframe and in an otherwise more complex organisation than the one whose understanding it purports to enhance. Hence the idea that it is not a good idea to take decisions or value or stigmatise teams based on these limited indicators alone. What is desirable is that the VW group continue to handle them with care to preserve its core identity. It would also be useful to apply the same logic and take a more distant view of the profitability ostensibly associated with the low cost strategies currently being pursued by Renault and/or that PSA achieves in China.
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