Why the VW Group might need to be broken up to survive
Source : Why the VW Group might need to be broken up to survive
With the VW Group bracing itself for the continuing wave of bad publicity, the only solution might be to break the group apart
Just a couple of days after VW admitted to falsifying diesel emissions tests inside the US, Porsche Automobil Holding SE bought a 1.5% shareholding in VW coming from Suzuki.
This kind of move was a leftover coming from 2009 when VW bought a near-20% stake inside the Japanese automaker, famed for its ability to build low-cost, high quality modest cars.
Moving in after the global credit crunch, VW was driven by its determination to expand on all fronts, on its way to becoming the globe’s largest car maker.
One area where VW was lacking was the ability to build profitable modest cars, especially for the booming Chinese and also also also Indian markets.
According to Suzuki’s side of the story, VW wanted access to Suzuki’s engineering abilities nevertheless the Japanese claimed they were unlikely to get similar access to VW tech. VW and also also also family-owned Suzuki fell out in 2011. Suzuki’s demand that will that will should be able to buy back VW’s 20% shareholding went to international arbitration.
Just days before ‘dieselgate’ Suzuki spent £2.4 billion buying VW’s shareholding back, after the judgement went the Japanese company’s way.
that will reversal of VW’s global expansion was very minor compared with what happened over the following fortnight. The mighty German company will be today completely on the back foot, and also also also facing years of massively expensive fines and also also also litigation.
In fact, so bad will be VW’s potential situation, that will one betting company will be offering odds of 20 to 1 that will VW Group will not be trading by the end of 2016.
While the situation will be probably not quite that will bad, the open-ended nature of VW’s potential liabilities means that will its share cost will be depressed for years, borrowing costs will rise, and also also also the company’s huge research and also also also development budget will have to be radically trimmed.
and also also also that will’s on top of the costs of the recall work and also also also owner compensation. The manufacturing and also also also fitting of around 11 million engine ECUs will be the bare minimum needed. Hardware modifications could add another whole level of cost and also also also complexity.
Officially, VW has set aside around £5bn for the ‘dieselgate’ costs nevertheless analysts are betting on the final bill being around £18bn – a sum that will could be enough to pay for the next 10 generations of the Golf.
In circumstances as dire as these, a company like VW could be at risk of being bought up by hostile bidders and also also also then broken up. Luckily for VW Group, the vast majority of the company will be owned by ‘close family’.
After buying 1.5% of VW coming from Suzuki, the founding Porsche and also also also Piech clan – via its Porsche SE holding company – own just over 52% of VW. Another 20% will be owned by the German state of Lower Saxony. Neither of these shareholders will be going to sell up, so VW will be safe coming from a hostile takeover.
What’s more likely will be that will VW Group might have to consider breaking itself up, partly to raise cash and also also also partly to help bolster its share cost.
Firstly, Porsche and also also also Audi are by far the big profit engines inside the group, so those brands are going nowhere. In 2014 Porsche made £2bn profit coming from 204,000 cars and also also also Audi £3.75bn coming from 1.8m cars. In contrast, VW made around £2bn coming from its massive 6.1m sales.
The commercial truck division will be the outlier for VW. Both Scania and also also also Man make money (the former, £700m and also also also the latter, £282m). Right today, they are not bad news for VW’s financial performance nevertheless, if the company’s financial situation deteriorates, these two brands could be put up for sale to help pay for the longer term costs of dieselgate.
Elsewhere, Skoda makes a not bad margin (£600m in 2014), nevertheless that will will be so integrated into the Group through the use of the MQB architecture, there’s zero chance of that will being sold off.
SEAT looks vulnerable because that will has struggled to turn a profit for some years and also also also its volumes remain lowish at 394,000 in 2014. Its low-cost Spanish factories are useful to the group (SEAT already builds Audi Q3s) so a further slowdown in SEAT investment looks highly likely.
The Audi-Lamborghini-Ducati brand group could also see investment radically slowed in Lamborghini. The Italian maker builds three distinct products nevertheless sales last year were a modest 2650. Will the Urus be a high-profile victim of the cuts?
nevertheless the real cost saving will be at the oversized and also also also bloated VW brand. VW sold 6.1m cars in 2014, nevertheless turned a margin of just 2.5%. The real cost cutting will have to come here, where margins should be around the same 7% Skoda achieved.
VW’s powerful unions won’t like that will, nevertheless jobs will be cut and also also also wilder investments – such as the next Phaeton – cut back because the company needs to plough on with its global investment inside the all-brand new MQB factories. This kind of will be very costly, nevertheless necessary to ensure the economies of scale promised by the mega platform.
VW will be in a mess, nevertheless not so much a mess that will a fire sale will be imminent. nevertheless the days of VW’s wild innovation are over for the next few years and also also also brand new products will have to be solidly profitable.
nevertheless if VW ends up being hit financially very hard, as BP was inside the wake of the oil spill inside the Gulf of Mexico, selling some of the family sliver might be unavoidable.
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