VW cuts costs but shareholders’ doubts remain

At its annual press conference last Thursday, Volkswagen announced plans to reduce manufacturing costs and the cessation of three-door Polo small cars models. CEO Martin Winterkorn (left) announced that about half of the targeted 5 billion euros cost cuts had already been determined. But worries still abound about the profitability of the company, especially for its China operation. Last year, the German marque’s profits dropped to 2.5% from 2.9% the year prior.

Critics have long said that the company serves its employees first before its shareholders, and that it employs too many people; VW has also been accused of relying on increasing sales while neglecting profit margins. Sales of the automotive group, which is the largest car maker in Europe, has increased by almost a third in five years but profits had plateaued. Comparisons have been drawn with Japan’s Toyota which achieved roughly the same sales number but manages a 10% profit margin while spending only about half as much on R&D as VW.

Critics also point out that VW produces many components that its competitors usually contract out, thus increasing headcount and manufacturing costs.

Investors are also worried about the company’s future leadership and its existing corporate structure, which hampers efficiency in making critical decisions: Ferdinand Piech, the supervisory board chairman, is now aged 77; Winterkorn is expected to step down as CEO next year and the question of his successor remains to be answered; and the state of Lower Saxony owns a fifth of the company’s voting shares while labour leaders have majority control over the supervisory board. Vital decisions, such as the setting up or shutting down of plants, require a two-third majority on the board.

But analysts had generally positive views after the press conference. Some were pleasantly surprised that the annual report finally offered some detailed information about VW’s joint ventures in China, which contribute some 35% to net income. Others are optimistic now that VW will be cutting out lower-tier models and simplifying its manufacturing operation.

Some think that the future is bright for VW. Adam Hull of Berenberg Bank thinks that investors underestimate VW’s quality and strong structural positioning. In an interview with Forbes, he said, “…VW has impressive technology, enviable scale and market positioning in all main markets except for the VW brand in the US.”

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