VW's Secret Additive

Posted by: Gail Edmondson on July 30, 2007

Volkswagen is riding more smoothly from quarter to quarter, now that management has rammed through some tough cost-reduction measures in Germany. Operating profit for the first half of 2007 (before exceptional items)soared 44.5% to $3.8 billion, despite heavy losses in the US market. That catapulted VW’s first half operating margin from 1.8% a year ago to respectable 5.1%.

The gains may look impressive, but they are not all powered by Golfs, Jettas and Passats. The real thrust behind VW’s earnings is Volkswagen’s premium unit Audi. It has only half the sales of VW brand unit, yet Audi brings home more bacon. It’s $1.38 billion operating profit in the first half of 2007 makes up more than 50% of total automotive earnings — and has done so for several years running.

In the past, Audi’s profit machine kept the VW group out of the red. Now with VW on the mend, it’s really revving group margins. Analysts forecast a stellar 7% operating margin at Audi this year, versus 2.5% for VW, and a group margin (includes financial services) to 5.2%.

The real intriguing question is whether fast-growing Audi is going to become the next BMW — a boutique luxury brand turned global primus. Morgan Stanley analyst Adam Jonas believes Audi will grow three times as fast as BMW over the next five years and could overtake BMW in profitability by 2010. Already Audi is the jewel in the crown of the VW group, accounting for 80% of group market cap. Now management needs to apply a bit of Audi magic to VW.

Reader Comments

coolnesh

August 1, 2007 12:14 AM

VW will bounce back... not because of a slew of products but whats going on behind the scenes...

1. Audi successful management is being promoted (or demoted whichever way you look at it) to manage VW as a whole... meaning the board is expecting the management to do what they did at Audi but now to VW brand.

2. Audi's success is only going to grow, which is evident in its slew of new product lines coming out every year... further more their diesel engines will do wonders ... just need that silly old state law lifted in some of the US states (expected to happen next year). This should push Audi sales and all other figures higher, in turn growing VW.

3. VW and Audi have a strategic partnership with Porsche. Plus Porsche seems very interested in gaining stake in VW. The combined R&D and sharing of technology will only make both companies stronger in sales and take the fight to BMW/Merc. Proof: Collboration in building the Porsche Cayenne, VW Toureg and Audi Q7. Other testing in different areas are also underway.

4. VWs closing on the plaging issue with its union will not only increase productivity but also settle other issues... helping management concentrate on actually growing the brand.

S4

August 1, 2007 6:02 PM

coolnesh - good points.

Re #2 - Audi has strong growth and hasn't even taken off in the US yet. I get the sense that they are waiting for the next gen, B8-based models to come in before making a marketing blitz in the US. The B8 A4 has to be a grand slam if they want to overtake BMW in the US.

Re #3 - The 3 companies have strong ties, and it's going to be great to see them leverage this more. I can't wait for the R4 version of the Boxster. I would also like to see Audi get a 6-cylinder from Porsche and do some of their twin-turbo magic to make a successor to the 2.7T. So many things these 3 companies combined can do.

Good times for VW/Audi/Porsche fans.

coolnesh

August 2, 2007 8:47 AM

S4 I couldn't agree with you more.

ref.#2 - The B7 A4 and the A3 have slowed down in sales. I guess in 2008 and 2009 their respective redesigns should change things around ... the A5 and S5 'look' spot on... it remains to be seen how their pricing pans out. Also, Audi needs to figure out a way to provide exciting lease deals ... I think they are losing ground on that.

ref.#3 - the R4 will another looker just like the beautiful R8. I believe Audi/VW have a big arsenal of engines they can use ... a 6 cylinder for the A6 can be the 3.6 VR6 used by VW group.

Definately some good times to look forward for Audi and VW fans.

Don Smith

August 6, 2007 12:45 AM

The picture of the restyled VW Van on this site is sweet. I wonder though, in the next few years how many car companys will be in business; since most people cannot afford the newer used cars & trucks or the brand new cars & trucks. We'll have to start a world-wide protest for lower prices on new cars and trucks since most parts are made by third world countries for pennies. All of the "Executive Management" positions could be out sourced to India so that a CEO could make $10-Gs a year.

Larry

December 4, 2007 5:04 PM

i'm currently doing a marketing project on audi, particularly focusing on their "bread and butter" model the A4 and coming in 2008 the all new improved Audi A4 in the Compact Executive group which includes main rival Mercedes C-Class and especially BMW 3-series.

I would be most grateful if anyone sent sent information on financials for this sector (to include Audi, BMW and Mercedes), what new model improvements to the A4 will mean to the company going forward plus expected growth.

Thanks,
Larry

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