Volkswagen issued a warning on Thursday that its cost-cutting initiatives would extend beyond the second half of 2024, after reporting a decline in second-quarter operating profit due to elevated costs. Despite this, Volkswagen shares remained relatively stable in early trading, down only 0.5% from Wednesday’s close. The financial results largely met analysts’ expectations after the company had revised its outlook in mid-July, reducing its profit margin forecast from 7-7.5% to 6.5-7%.
The German automotive giant is currently engaged in a €10 billion ($10.83 billion) cost-saving initiative announced last December, with plans to cut up to €4 billion in 2024. This initiative is part of a broader strategy to enhance operational efficiency and profitability amidst challenging market conditions, driven by the need to streamline operations and bolster financial resilience.
In the second quarter, Volkswagen’s core brand operating return fell to 5%, impacted by restructuring costs. Audi’s performance was similarly affected by supply chain disruptions, while the Porsche brand faced reduced returns due to high costs associated with new model launches and declining sales in China. Overall, Volkswagen reported second-quarter earnings before interest and taxes (EBIT) of €5.46 billion, a slight decrease from €5.6 billion in the same period the previous year.
Volkswagen’s financial results were further strained by several factors, including costs related to the potential closure of an Audi plant in Brussels, decreased sales in China, and expenses associated with the deconsolidation of VW Bank Russia. Chief Financial Officer Arno Antlitz emphasized the need for continued and substantial cost-cutting efforts to achieve the company’s financial goals, stating, “A return of 6.3% after six months is too low. We will have to make significant cost-cutting efforts in the second half of the year and beyond in order to achieve our goals.”
Volkswagen is undergoing a global revamp of its product line, with a particular focus on bespoke electric vehicle (EV) models for the Chinese and U.S. markets. This strategy aims to defend Volkswagen’s market share in China, maintain its position in Europe, and expand its presence in the United States. The carmaker is among several legacy automotive firms seeking patience from investors as they enhance their EV offerings to remain competitive, even as European and U.S. regulators consider tariffs to limit the influx of new and cheaper Chinese EVs into their markets.
In addition to the cost-cutting measures, Volkswagen is focused on optimizing its supply chain and improving production efficiency. The company is implementing advanced manufacturing technologies and processes to reduce production costs and increase output. This includes the use of automation and digitalization to streamline operations and improve quality control.
Volkswagen’s strategic shift towards electric vehicles is also a key component of its long-term growth plan. The company is investing heavily in the development and production of EVs, with a target of producing 1 million EVs annually by 2025. This includes the launch of new models across various segments, from compact cars to SUVs, to cater to the growing demand for electric vehicles globally.
The company is also expanding its EV infrastructure, including charging networks and battery production facilities, to support the increasing adoption of electric vehicles. Volkswagen is collaborating with various stakeholders, including governments and private companies, to develop a robust EV ecosystem that can support the widespread use of electric vehicles.
In addition to its focus on electric vehicles, Volkswagen is also investing in other emerging technologies, such as autonomous driving and connected car solutions. The company is partnering with leading technology firms to develop and integrate advanced driver assistance systems (ADAS) and autonomous driving technologies into its vehicles. This includes the development of software and hardware solutions that can enable safe and reliable autonomous driving.
Volkswagen is also exploring new business models and revenue streams to enhance its profitability. This includes the development of mobility services, such as ride-hailing and car-sharing, to cater to the changing preferences of consumers who are increasingly looking for flexible and convenient transportation solutions. The company is also leveraging its extensive customer base and brand strength to offer value-added services, such as vehicle maintenance and insurance, to generate additional revenue.
Volkswagen’s efforts to enhance its financial performance and competitiveness are underpinned by a strong focus on sustainability and corporate responsibility. The company is committed to reducing its environmental footprint and promoting sustainable practices across its operations. This includes the adoption of green manufacturing processes, the use of renewable energy, and the development of sustainable mobility solutions. Volkswagen is also actively engaged in corporate social responsibility (CSR) initiatives, including community development programs and philanthropic activities, to contribute to the well-being of society.
The company’s ongoing efforts to improve its financial performance and competitiveness are reflected in its financial outlook. Volkswagen reiterated its 2024 outlook for other metrics and its guidance for 2026, which includes a return on tangible equity (ROTE) of over 10% this year, expected to rise to over 12% in 2026. Second-quarter ROTE was 11.1%, suggesting that the annual target is increasingly within reach. However, analysts at Citi caution that the metric might be lower in the second half of the year given revenue seasonality, a fourth-quarter bank levy, and a normalization in provisions from very low levels.
Analysts at JP Morgan Cazenove noted that one of the key investor concerns around Volkswagen’s medium-term targets is the reliance on topline growth. The strong performance in the second quarter, driven by the two main divisions—investment banking and Barclays UK—will be taken positively by investors. The company’s shares have continued their steady climb since the start of the year, hitting as high as 242 pence—their highest price in more than seven years—on Thursday morning. The stock has gained more than 50% year to date, and analysts expect it to continue its upward trajectory on the back of this update.
Volkswagen closed the quarter with a common equity Tier 1 ratio—a key measure of balance-sheet strength—of 13.6%, below consensus’s 13.8% but still in the upper half of management’s 13% to 14% guidance range. The company also announced a 750 million-pound ($964.2 million) share buyback program and declared an interim dividend of 2.9 pence a share, in line with expectations.
In conclusion, Volkswagen’s ongoing cost-cutting measures, strategic shift towards electric vehicles, and investments in emerging technologies and sustainability initiatives are key components of its efforts to enhance its financial performance and competitiveness. The company’s strong second-quarter performance and positive financial outlook underscore its commitment to achieving its long-term growth objectives and delivering value to shareholders. As Volkswagen continues to navigate the complex and competitive automotive landscape, its focus on innovation, efficiency, and sustainability will be critical to its success.