Volkswagen AG New Coverage: Trefis Price Estimate at $51.34


Volkswagen AG (OTCMKTS:VLKAY) is the second largest automaker in the world behind Toyota and slightly ahead of GM, selling 9.72 million vehicles globally in 2013. Established in 1937, Volkswagen AG, along with its 340 subsidiary companies, not only produces Volkswagen branded passenger cars and light commercial vehicles, but also sells passenger cars under various automotive brands including Audi, Bentley, Skoda, Porsche, SEAT and Lamborghini. Commercial vehicles, engines and turbo machinery are sold under the Scania and MAN marquees.

The company also provides financial services like leasing and fleet management. In 2013, over 90% of the group’s revenues came from the automobile division, of which, Volkswagen’s own brand constituted 55%. Following the purchase of Ducati in 2012, the Volkswagen Group expanded its range to include motorcycles.

We have a $51.34 price estimate for Volkswagen AG, which is roughly 5% above the current market price. We have broken down our analysis of Volkswagen AG brand-wise into the following divisions:

  1. Volkswagen China & Affiliates

  2. Passenger Cars, SEAT, LCVs

  3. Audi

  4. Porsche, Bentley

  5. Skoda

  6. Commercial Vehicles – MAN, Scania

  7. Volkswagen AG Financial Services

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See Our Complete Analysis For Volkswagen AG


Following are some of the trends that have a significant impact on Volkswagen’s valuation:

China Passenger Vehicle Market Provides Large Growth Potential

Volkswagen China & Affiliates is the most important division for the automaker, constituting around 45% of the company’s valuation, by our estimates. China is Volkswagen Group’s single largest market, with deliveries climbing to 3.26 million in 2013, up 16.25% year-over-year. The group competes with other major players such as General Motors, Toyota, Ford and Honda in the country. Volkswagen’s Chinese portfolio covers all segments from small cars to luxury sports cars, including the Lavida, Passat, Jetta, Sagitar, Audi A6, A5 and Q5, and Tiguan compact SUV. These vehicles enjoy strong popularity among the Chinese consumers, and led Volkswagen to topple GM as the highest selling foreign automaker in the country in 2013. The company already has a market share of 13.8% in China, and will look to improve on this figure owing to capacity additions and luxury market expansion, despite stiffening competition. Even if Volkswagen doesn’t see any increase in its market share in China going forward, growth in volumes due to higher vehicle demand in the country is expected to boost the company’s financials. Volkswagen aims to achieve its goal of producing 4 million vehicles in China by 2018.

  • Expanding Market Size in China

China surpassed the massive 20 million vehicle sales mark last year, outselling the second-placed U.S. by over 6 million unit sales. [1] Although China’s economic growth is expected to slowdown in comparison to the double-digit growth rates seen in 2010-2011, it is still the world’s fastest growing major economy and continues to attract large-scale investments in the automotive sector. China’s fast growing automotive market is expected to constitute nearly 30% of the global sales by the end of this decade, by our estimates. Increasing disposable incomes and a low vehicle ownership rate of 79 vehicles per 1,000 inhabitants are expected to drive growth in the Chinese auto industry. In comparison, the U.S. has a massive 791 vehicles per 1,000 inhabitants. [2]

  • Increased Investment and Capacity

Volkswagen is present in 17 locations across China, with five new facilities opening just last year. This included a new plant at Urumqi in western China, where disposable incomes are expected to rise sharply in the coming years, and a plant in Foshan, which started production of the new Golf, the first vehicle to be built on the Modular Transverse Toolkit (MQB) in China. In 2012, Volkswagen introduced the Modular Transverse Toolkit, which created an extremely flexible vehicle architecture, hence making it possible to produce different models of various brands in different quantities in the same production unit. This is expected to lower production costs for the automaker.

Going forward, Volkswagen, in partnership with the SAIC Motor Corporation and the First Automotive Works (FAW) Group, will invest a whopping 18.2 billion euros (nearly $25 billion) in China between 2014-2018, for the purpose of product development and capacity additions. Increased investment and local production will help Volkswagen evade import taxes, and also boost the automaker’s reach and availability, possibly improving market share.

  • Booming Luxury Market to Propel Sales Growth

China is the world’s largest passenger vehicle market but still trails the U.S. in terms of luxury vehicle volumes. The premium vehicle market in China is expected to grow at a CAGR of 12% till 2020, outpacing the 8% annual anticipated growth in the country’s overall passenger vehicle market. [3] This means that China will surpass the U.S. as early as 2016 in luxury vehicle volumes and cross the 3 million annual sales mark by 2020. Volkswagen’s Audi is the crowned leader in China, despite trailing BMW in terms of global sales. While Audi sold nearly 492,000 vehicles in the country last year, BMW and Mercedes-Benz managed 391,700 and 218,045 unit sales respectively. The automaker has gained from its acceptance as the official mode of transport for China’s top politicians. Audi, along with Bentley and Porsche, hold around 35% share in China, by our estimates.

The locally manufactured A3 Sportback started selling in China in March, for which the assembly plant at Foshan was built last year. The sedan version of the A3 will also be launched in the next few months. Audi’s production of both the A3 and A4 models in China itself will help evade the 25% import taxes, in addition to the value added tax and consumption tax, prompting a decline in model prices. [4] The automaker also aims to increase the number of dealerships to 500 by 2017, up from 341 in 2013. While Audi remains the highest seller of luxury vehicles in China, its sales growth in the country lagged the growth rates of both BMW and Mercedes-Benz in the first quarter. But with the A3 models adding incremental sales from March onward, we expect the automaker to retain its lead in China and possibly sell around 540,000 vehicles this year in the country.

European Markets Impact Commercial Vehicle Volumes

Stabilizing economic conditions in some of the European markets are expected to boost sales-growth for Volkswagen’s commercial vehicles, including Scania and MAN, in the coming years. The global commercial vehicle market comprising medium and heavy trucks, and buses grew by 5% in each of the last couple of years, reaching 22.75 million units in 2013. As infrastructure and construction activity picked up in Europe, truck registrations grew 7% in the first four months of this year. The bright spot for Volkswagen was that Scania’s sales grew by 11.3% during this period, thereby improving market share in the region to 15.4%. With the Euro 6 emission standard going into effect at the beginning of 2014, large-scale pre-buys of Euro 5 vehicles increased truck sales by 38% in the latter half of 2013. [5] Following the panic purchases at the tail-end of 2013, year-over-year volume growth is expected to slightly fall in the second half of 2014.

However, another trend that could boost truck sales going forward is the need for replacing older vehicles. Demand for trucks was high during pre-recession years, but has lowered in the last few years. This also means that these vehicles call for replacement as they are now late in their service life. The average age rose from 4.1 years in 2001 to 5.3 years in 2013. Replacement of older trucks could fuel growth for Volkswagen’s commercial vehicle division in the next few years.

Volkswagen also increased its stake in Scania in May, now controlling 98.19% shares of the Swedish truck maker, up from around 62.6% before the announcement.((Volkswagen controls 98.19 percent of the shares in Scania)) According to Volkswagen, this move will enable the company to integrate its three truck businesses- Scania, MAN and Volkswagen trucks, and put them on a common manufacturing platform, resulting in cost benefits of up to 650 million euros ($890 million) annually. This could improve margins for the commercial vehicle division, going forward.

Fuel Efficient Vehicles Could Drive Growth Going Forward

Consumers are moving towards more environmental friendly and fuel efficient electric and hybrid electric vehicles (EV/HEVs), due to increasing concern regarding global warming, rising oil prices, and lower running costs of electric vehicles, as compared to gasoline-powered engines. In addition, governments around the world provide various incentives to boost electric vehicle sales. EV/HEVs also have lower battery prices, adding to their appeal. Due to these reasons, the combined EV/HEV market is expected to more than triple from current levels to 6.6 million units by 2020, representing 7% of the global light-duty vehicle market by then. [6]

Volkswagen group’s environmental friendly programs include initiatives such as Volkswagen Passenger Cars’ “Think Blue Factory”, and Skoda’s “Green Future” seek to improve fuel economy and resource efficiency and promote more extensive use of renewable energies. The fuel efficiency of Volkswagen’s vehicles is generally higher as compared to cars from other automakers. Volkswagen is the first carmaker to commit to the extremely ambitious European CO2 target of 95g/km by 2020. Innovation in engines is likely to improve fuel efficiency and reduce transmissions by 90% in passenger cars and by 25% in commercial vehicles. In line with this trend, Volkswagen plans to spend a staggering 84 billion euros (~$115 billion) over the next five years to develop new and greener technologies and build environmentally friendly production in an effort to become the largest automobile company by 2018.

The Volkswagen e-Up!, the company’s first pure-play electric vehicle, was launched in Europe last year. But the company doesn’t plan to launch the e-Up! in the much larger U.S. plug-in electric vehicle market. Instead, Volkswagen will launch the all-electric version of the hatchback Golf in the country in November. The U.S. will be crucial to Volkswagen’s ambitions in the electric vehicle segment, as the country contributes around 40% to the global EV sales. [7] In the first half 2014, EV volumes have grown by around 40% year-over-year in the U.S. The e-Golf will be priced at around $35,000 and have an electric range of 115 miles, second only to the Tesla Model S. The car will compete on a pricing front with the Nissan Leaf, which presently leads the U.S. electric vehicle market with nearly 10,400 unit sales through May. Seeing as how the e-Golf will have more torque, more horsepower and more range compared to the Leaf, along with the established brand name of Volkswagen, the model could nab some market share from the Leaf, following its launch.

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Notes:
  1. Global vehicle sales []
  2. Global vehicles in use []
  3. Upward mobility: the future of China’s premium car market“, mckinsey.com []
  4. Audi press release“ []
  5. Europe will rebound, scania.com []
  6. Electric vehicles speeding toward 7% of all global sales by 2020“, cleantechnica.com []
  7. electric vehicle sales in the U.S., insideevs []