Volkswagen Faces Financial Turmoil Amidst Fierce Competition and Rising Costs

Volkswagen is grappling with intensified competition and higher operational costs. With rivals, especially from China, looming large and aggressive pricing cuts backfiring, the carmaker's profit margins have severely squeezed. Added challenges include high energy and labor costs in Germany, further threatening the company's market position.

In May, Volkswagen's finance chief Arno Antlitz sounded the alarm, warning that Europe's leading automaker had about two or three years to brace for fierce competition, predominantly from China. Recently, Antlitz underscored the urgency by shortening this already tight timeline by a year, causing tremors in the global auto industry as he hinted at potential plant closures in the company's home country.

While Volkswagen has long been dealing with a slowing Chinese market and a slower-than-anticipated transition to electric vehicles, two recent developments have exacerbated its challenges. Firstly, fears have emerged that Asian competitors, including BYD, Chery, and Leapmotor, might accelerate their plans to establish production capabilities in Europe if Brussels imposes significant import tariffs on China-made EVs. Secondly, Volkswagen's decision to slash prices for VW brand vehicles, aimed at combating stiffer competition, has reportedly cost the company hundreds of millions of euros in profits, as stated by works council chief Daniela Cavallo.

The deep discounts, beyond initial expectations, have also prompted Volkswagen's management to realize that the high-cost base in Germany is compromising the company's ability to stay competitive against more nimble rivals. This has put the VW brand's efforts to cut costs by over 10 billion euros ($11 billion) by 2026 in jeopardy. Consequently, the brand's profit margin plummeted to 0.9% in Q2 from an already modest 4% in Q1, starkly lower compared to Renault's and Stellantis's margins of 8.1% and 10% respectively in H1 of this year.

With the squeezed margins and increased imports from Chinese competitors, there's growing concern about future local production competitiveness. Europe's car market, now 13% or two million vehicles smaller than pre-pandemic levels, adds further pressure. Given the mounting challenges, DZ Bank analyst Michael Punzet predicts that Volkswagen will likely revise its full-year group margin target downwards in the upcoming third-quarter results. The company had already adjusted its target to 6.5-7.0% in July due to potential closures at Audi's Brussels factory.

(With inputs from agencies.)