Volkswagen Faces Increased Pressure in Competitive Auto Market

By Victoria Waldersee, Christina Amann and Christoph Steitz

BERLIN/FRANKFURT (Reuters) – In May, Volkswagen’s finance chief, Arno Antlitz, warned that Europe’s biggest carmaker had about two or three years to prepare for fierce competition, primarily from Asia, notably China.

This week, he reduced that timeline by a year, alarming the global auto sector with threats to close plants in Germany for the first time.

Volkswagen’s ongoing challenges, including a waning Chinese market and slow electric vehicle transitions, have been exacerbated by two recent developments, based on insights from company sources, investors, and analysts.

Recent Challenges

1. Asian Competitors: Growing concerns that rivals like BYD, Chery, and Leapmotor could accelerate plans for production capacity in Europe if the EU implements hefty import tariffs on Chinese-made EVs.
2. Price Cuts: Volkswagen’s recent decision to lower prices on VW brand cars to compete resulted in significant profit losses, with the company reportedly losing hundreds of millions of euros, according to works council boss Daniela Cavallo.

Management recognized that these unanticipated discounts, coupled with high costs in Germany, jeopardized Volkswagen’s competitiveness against more agile rivals.

“Volkswagen is one of the largest car producers globally, yet it struggles to generate large returns from its scale,” said Cole Smead, CEO of Smead Capital Management. “Sustaining that production level in a country where demand is decreasing is impossible.”

These price reductions, alongside restructuring expenses, have undermined Volkswagen’s goal to cut costs by over €10 billion ($11 billion) by 2026. Consequently, the VW passenger car brand’s profit margin fell to 0.9% in Q2, down from 4% in Q1.

Comparison with Rivals

In contrast, Renault and Stellantis reported first-half margins of 8.1% and 10%, respectively. The declining margins at VW, especially as Chinese rivals increase imports to Europe, raise concerns about future competition when they establish local production.

The automotive market is shrinking, with Europe’s car market now 13% smaller than pre-pandemic levels, resulting in increased rivalry for limited sales. CFO Antlitz noted this shift.

Analysts, including DZ Bank’s Michael Punzet, predict Volkswagen may further reduce its full-year margin target when third-quarter results are released. The target had already been cut to 6.5-7% in July due to potential closures in Audi’s Brussels factory.

Cost Competition

As demand wanes, the ongoing battle for mass-market vehicles centers on minimizing production costs. “The idea of growth as a solution is gone; companies must refocus,” stated Jefferies analyst Philippe Houchois.

Antlitz remarked that the VW brand had been outspending its earnings, indicating that the trend should not persist for the company to succeed.

Volkswagen’s automotive cash flow turned negative in the first half of 2024, reflecting a stark drop from a positive €2.5 billion during the same time last year.

Competition imposes challenges not only in Germany. Profits from China, VW’s largest market, have nearly halved over the past decade to €2.6 billion in 2023. Predictions show only minor recoveries over the next few years.

Energy and labor costs in Germany remain among Europe’s highest, complicating matters for VW as well as the chemicals and steel industries.

“New, cheaper competition combined with high energy and labor costs creates a challenging outlook for European mass brands,” stated analysts from Citi.

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