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The World’s Car Manufacturers 7th Edition
An operating and financial review
By Jonathan Storey
The World’s Car Manufacturers A strategic review of
finance and operations 2003 Edition
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THE AUTHOR
Jonathan Storey has worked in the motor industry for more than 15 years. Beginning as a financial analyst for Ford Motor Company, he later moved into the consultancy sector, providing research, analysis and forecasting services to vehicle manufacturers, suppliers and regulatory authorities. He is editor of Automotive World's Automotive Quarterly Review and co-author of the sister publication The World’s Truck Manufacturers 7th Edition.
Acknowledgements
The author would like to express his thanks to all vehicle manufacturers that provided information for this report.
Copyright © 2003 Synesis Media Ltd.
This work may not be photocopied or otherwise reproduced within the terms of any licence granted by the Copyright Licensing Agency Ltd or the Publishers Licensing Society Ltd.
This Management Report may not be reproduced in any form or for any purpose without the prior knowledge and consent of the publisher.
The views expressed in this report are not necessarily those of the publisher. While information, advice or comment is believed to be correct at the time of going to press, the publisher cannot accept any responsibility for its completeness or accuracy.
Printed and bound in Great Britain by IKON Office Solutions, London Document Services, 37–42 Compton Street, London EC1V 0AP.
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LIST OF CONTENTS List of contents ......................................................................................................................................................................................................................iii
Preface................................................................................................................................................................... ix
Chapter 1: Performance comparisons..............................................................................................................1 Introduction............................................................................................................................................................................................................................ 1 Global demand....................................................................................................................................................................................................................... 1 Aggregate sales & operating profit....................................................................................................................................................................................... 4 Aggregate revenue.................................................................................................................................................................................................................. 5 Average unit revenue by manufacturer 2002 ...................................................................................................................................................................... 6 Manufacturer operating margins .......................................................................................................................................................................................... 8 Cash holdings ......................................................................................................................................................................................................................... 9 Revenue per employee ........................................................................................................................................................................................................ 10 Production per employee West European carmakers ..................................................................................................................................................... 11 Industry structure................................................................................................................................................................................................................. 13
Chapter 2: BMW Group.................................................................................................................................. 14 Overview............................................................................................................................................................................................................................... 14 Recent performance............................................................................................................................................................................................................. 14 Business structure ................................................................................................................................................................................................................ 17 Markets & Models................................................................................................................................................................................................................ 20 Production ............................................................................................................................................................................................................................ 21 Notes on financial statistics ................................................................................................................................................................................................ 22
Chapter 3: DaimlerChrysler............................................................................................................................24 Overview............................................................................................................................................................................................................................... 24 Recent performance............................................................................................................................................................................................................. 26 Business structure ................................................................................................................................................................................................................ 27 Markets & Models................................................................................................................................................................................................................ 30 Production ............................................................................................................................................................................................................................ 31 Notes on financial statistics ................................................................................................................................................................................................ 34
Chapter 4: Fiat Auto........................................................................................................................................37 Overview............................................................................................................................................................................................................................... 37 Recent performance............................................................................................................................................................................................................. 39 Business structure ................................................................................................................................................................................................................ 42 Markets & Models................................................................................................................................................................................................................ 44 Production ............................................................................................................................................................................................................................ 45 Notes on financial statistics ................................................................................................................................................................................................ 47
Chapter 5: Ford................................................................................................................................................48 Overview............................................................................................................................................................................................................................... 48 Recent performance............................................................................................................................................................................................................. 51 Business structure ................................................................................................................................................................................................................ 52 Markets & Models................................................................................................................................................................................................................ 55 Production ............................................................................................................................................................................................................................ 56 Notes on financial statistics ................................................................................................................................................................................................ 60
Chapter 6: Fuji Heavy Industries (Subaru.....................................................................................................62 Overview............................................................................................................................................................................................................................... 62 Recent performance............................................................................................................................................................................................................. 63 Business structure ................................................................................................................................................................................................................ 64 Markets & Models................................................................................................................................................................................................................ 65 Production ............................................................................................................................................................................................................................ 67 Notes on financial statistics ................................................................................................................................................................................................ 68
Chapter 7: General Motors .............................................................................................................................69 Overview............................................................................................................................................................................................................................... 69 Recent performance............................................................................................................................................................................................................. 71 Business structure ................................................................................................................................................................................................................ 72 Markets & Models................................................................................................................................................................................................................ 75
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Production ............................................................................................................................................................................................................................ 76 Notes on financial statistics ................................................................................................................................................................................................ 79
Chapter 8: GM Daewoo Auto & Technology ................................................................................................80 Overview............................................................................................................................................................................................................................... 80 Recent performance............................................................................................................................................................................................................. 82 Business structure ................................................................................................................................................................................................................ 82 Markets & Models................................................................................................................................................................................................................ 83 Production ............................................................................................................................................................................................................................ 84 Notes on financial statistics ................................................................................................................................................................................................ 84
Chapter 9: Honda............................................................................................................................................85 Overview............................................................................................................................................................................................................................... 85 Recent performance............................................................................................................................................................................................................. 87 Business structure ................................................................................................................................................................................................................ 87 Markets & Models................................................................................................................................................................................................................ 89 Production ............................................................................................................................................................................................................................ 90 Notes on financial statistics ................................................................................................................................................................................................ 92
Chapter 10: Hyundai motor.............................................................................................................................93 Overview............................................................................................................................................................................................................................... 93 Recent performance............................................................................................................................................................................................................. 95 Business structure ................................................................................................................................................................................................................ 95 Markets & Models................................................................................................................................................................................................................ 96 Production ............................................................................................................................................................................................................................ 99 Notes on financial statistics .............................................................................................................................................................................................. 100
Chapter 11: Isuzu Motors .............................................................................................................................. 101 Overview............................................................................................................................................................................................................................. 101 Recent Performance .......................................................................................................................................................................................................... 101 Business structure .............................................................................................................................................................................................................. 103 Markets and models........................................................................................................................................................................................................... 105 Production .......................................................................................................................................................................................................................... 106 Notes on Financial Statistics............................................................................................................................................................................................. 107
Chapter 12: Mazda .......................................................................................................................................... 108 Overview............................................................................................................................................................................................................................. 108 Recent performance........................................................................................................................................................................................................... 109 Business structure .............................................................................................................................................................................................................. 110 Markets & Models.............................................................................................................................................................................................................. 111 Production .......................................................................................................................................................................................................................... 113 Notes on financial statistics .............................................................................................................................................................................................. 115
Chapter 13: MG Rover Group ....................................................................................................................... 116 Overview............................................................................................................................................................................................................................. 116 Recent performance........................................................................................................................................................................................................... 117 Business structure .............................................................................................................................................................................................................. 117 Markets & Models.............................................................................................................................................................................................................. 118 Production .......................................................................................................................................................................................................................... 118 Notes on financial statistics .............................................................................................................................................................................................. 119
Chapter 14: Mitsubishi Motors ...................................................................................................................... 120 Overview............................................................................................................................................................................................................................. 120 Recent performance........................................................................................................................................................................................................... 122 Business structure .............................................................................................................................................................................................................. 123 Markets & Models.............................................................................................................................................................................................................. 124 Production .......................................................................................................................................................................................................................... 126 Notes on financial statistics .............................................................................................................................................................................................. 128
Chapter 15: Nissan.......................................................................................................................................... 129 Overview............................................................................................................................................................................................................................. 129 Recent performance........................................................................................................................................................................................................... 131 Business structure .............................................................................................................................................................................................................. 132 Markets & Models.............................................................................................................................................................................................................. 133
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Production .......................................................................................................................................................................................................................... 134 Notes on financial statistics .............................................................................................................................................................................................. 136
Chapter 16: Porsche ....................................................................................................................................... 136 Overview............................................................................................................................................................................................................................. 137 Recent performance........................................................................................................................................................................................................... 138 Business structure .............................................................................................................................................................................................................. 139 Markets & Models.............................................................................................................................................................................................................. 140 Production .......................................................................................................................................................................................................................... 140 Notes on financial statistics .............................................................................................................................................................................................. 140
Chapter 17: Proton .......................................................................................................................................... 142 Overview............................................................................................................................................................................................................................. 142 Recent performance........................................................................................................................................................................................................... 143 Business structure .............................................................................................................................................................................................................. 144 Markets & Models.............................................................................................................................................................................................................. 145 Production .......................................................................................................................................................................................................................... 146 Notes on financial statistics .............................................................................................................................................................................................. 147
Chapter 18: PSA Peugeot Citroën .................................................................................................................. 148 Overview............................................................................................................................................................................................................................. 148 Recent performance........................................................................................................................................................................................................... 150 Business structure .............................................................................................................................................................................................................. 152 Markets & Models.............................................................................................................................................................................................................. 154 Production .......................................................................................................................................................................................................................... 156 Notes on financial statistics .............................................................................................................................................................................................. 157
Chapter 19: Renault Automobile.................................................................................................................... 157 Overview............................................................................................................................................................................................................................. 158 Recent performance........................................................................................................................................................................................................... 160 Business structure .............................................................................................................................................................................................................. 162 Markets & Models.............................................................................................................................................................................................................. 164 Production .......................................................................................................................................................................................................................... 165 Notes on financial statistics .............................................................................................................................................................................................. 167
Chapter 20: Suzuki ..................................................................................................................................... 168 Overview............................................................................................................................................................................................................................. 168 Recent performance........................................................................................................................................................................................................... 170 Business structure .............................................................................................................................................................................................................. 170 Markets & Models.............................................................................................................................................................................................................. 173 Production .......................................................................................................................................................................................................................... 173 Notes on financial statistics .............................................................................................................................................................................................. 175
Chapter 21: Toyota..................................................................................................................................... 176 Overview............................................................................................................................................................................................................................. 176 Recent performance........................................................................................................................................................................................................... 178 Business structure .............................................................................................................................................................................................................. 179 Markets & Models.............................................................................................................................................................................................................. 180 Production .......................................................................................................................................................................................................................... 183 Notes on financial statistics .............................................................................................................................................................................................. 185
Chapter 22: VW Group............................................................................................................................... 186 Overview............................................................................................................................................................................................................................. 186 Recent performance........................................................................................................................................................................................................... 188 Business structure .............................................................................................................................................................................................................. 189 Markets & Models.............................................................................................................................................................................................................. 191 Production .......................................................................................................................................................................................................................... 194 Notes on financial statistics .............................................................................................................................................................................................. 196
Chapter 23: Methodology & exchange rates ............................................................................................ 197 Spreadsheet structure......................................................................................................................................................................................................... 197 Glossary of financial statistics .......................................................................................................................................................................................... 198 Performance ratios............................................................................................................................................................................................................. 200 Exchange rates ................................................................................................................................................................................................................... 202
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List of figures
Figure 1 : World car demand 2 Figure 2 : Monthly new car registrations, worldwide(1) 2001-2003 2 Figure 3 : Aggregate unit sales & operating profit of the major carmakers 4 Figure 4 : Aggregate revenue - W. European, Japanese & US carmakers 5 Figure 5 : Average unit revenue by manufacturer, 2002 6 Figure 6 : Manufacturer operating margins - simple average, 1983-2002 7 Figure 7 : Manufacturer operating margins - simple average, 1998-2002 7 Figure 8 : Cash holdings as at September 2003 9 Figure 9 : Revenue per employee 1983 & 2002 (€) 10 Figure 10 : Production per employee, west European carmakers 11 Figure 11 : Industry structure - 2002 car & LCV sales by group* 12 Figure 12 : Industry structure - 1989 car & LCV sales by group 12 Figure 13 : Latest results - BMW 15 Figure 14 : BMW net profit trend 15 Figure 15 : BMW revenue & pre-tax profit trend 16 Figure 16 : BMW Group revenue by division (%) 16 Figure 17 : BMW Group PBT by division (€m) 16 Figure 18 : BMW customer deliveries by market 19 Figure 19 : BMW production by model & model plans 21 Figure 20 : Latest results - DaimlerChrysler 25 Figure 21 : DC car divisions) revenue and operating profit trend 25 Figure 22 : DC net profit trend 26 Figure 23 : DC revenue by division 28 Figure 24 : DC unit sales by market (000s) 30 Figure 25 : DC production by model & model plans 32 Figure 26 : Alfa Romeo & Lancia sales 38 Figure 27 : Latest results - Fiat Group 40 Figure 28 : Fiat Auto revenue & operating profit trend 40 Figure 29 : Fiat Auto net profit trend 41 Figure 30 : Fiat Group revenue by division (%) 42 Figure 31 : Fiat Auto unit sales (000s) 44 Figure 32 : Fiat Auto production by model & model plans 46 Figure 33 : Latest results - Ford 49 Figure 34 : Ford Auto revenue & operating profit trend 49 Figure 35 : Ford Automotive net profit 50 Figure 36 : Ford Europe net profit 50 Figure 37 : Ford revenue & net profit by division ($m) 52 Figure 38 : Ford Group, factory sales by market (000s) 55 Figure 39 : Ford Europe, unit sales by market 55 Figure 40 : Ford Europe production by model & model plans 59 Figure 41 : Latest results - FHI 62 Figure 42 : FHI revenue & operating profit trend 63 Figure 43 : FHI net profit trend 63 Figure 44 : FHI revenue by division (%) 64 Figure 45 : Subaru unit sales by market 66 Figure 46 : Subaru production by model & model plans 67 Figure 47 : Latest results - GM 70 Figure 48 : GM Europe revenue & net profit trend 70 Figure 49 : GM net profit trend 71 Figure 50 : GM net income by division ($m) 72 Figure 51 : GM unit sales by region (000s) 75 Figure 52 : New car registrations by market, GM brands, western Europe 75 Figure 53 : GM Europe production by model & model plans 77 Figure 54 : Latest results - Daewoo Motor 81 Figure 55 : DM revenue trend 81 Figure 56 : DM net profit trend 81 Figure 57 : Daewoo Motor unit sales 82 Figure 58 : Daewoo production by model and model plans 84 Figure 59 : Latest results - Honda 86 Figure 60 : Honda Automobile revenue & operating profit trend 86 Figure 61 : Honda net profit trend 86 Figure 62 : Honda revenue & operating profit by division (¥bn) 88 Figure 63 : Honda unit sales by market (000s) 88 Figure 64 : Honda production by model & model plan 91 Figure 65 : Latest results - Hyundai Motor 94 Figure 66 : Hyundai Motors revenue & operating profit trend 94 Figure 67 : Hyundai Motor net profit trend 94 Figure 68 : Hyundai & Kia unit sales by market 97 Figure 69 : Hyundai and Kia production by model & model plans 98 Figure 70 : Latest results - Isuzu 102 Figure 71 : Isuzu revenue & operating profit trend 102 Figure 72 : Isuzu net profit trend 102
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Figure 73 : Isuzu unit sales by region 105 Figure 74 : Isuzu production by model & model plans 106 Figure 75 : Latest results - Mazda 109 Figure 76 : Mazda revenue & operating profit trend 109 Figure 77 : Mazda net profit trend 109 Figure 78 : Mazda unit sales by market 112 Figure 79 : Mazda production by model & model plans 114 Figure 80 : Latest results - MG Rover 116 Figure 81 : MG Rover production & product plans 118 Figure 82 : Latest results - MMC 121 Figure 83 : MMC revenue & operating profit trend 121 Figure 84 : MMC net profit trend 122 Figure 85 : Mitsubishi unit sales by market (000s) 125 Figure 86 : Mitsubishi production by model & model plans 126 Figure 87 : Latest results - Nissan 130 Figure 88 : Nissan revenue & operating profit trend 130 Figure 89 : Nissan net profit trend 130 Figure 90 : Nissan unit sales by market 133 Figure 91 : Nissan production by model & model plans 135 Figure 92 : Latest results - Porsche 137 Figure 93 : Porsche revenue & operating profit trend 138 Figure 94 : Porsche net profit trend (€) 138 Figure 95 : Porsche Group revenue by division (%) 139 Figure 96 : Porsche unit sales by market 139 Figure 97 : Porsche production by model & model plans 140 Figure 98 : Latest results - Proton 143 Figure 99 : Proton revenue & pre-tax profit trend 143 Figure 100 : Proton unit sales by market (including Lotus) 145 Figure 101 : Unit sales in western Europe, Proton, Daewoo, Hyundai & Kia brands 145 Figure 102 : Latest results - PSA 149 Figure 103 : PSA revenue & operating profit trend 149 Figure 104 : PSA net profit trend (€) 150 Figure 105 : PSA revenue by division (%) 151 Figure 106 : PSA unit sales by market (000s) 154 Figure 107 : PSA production by model & model plans 155 Figure 108 : Latest results - Renault 159 Figure 109 : Renault Auto revenue & operating profit trend 159 Figure 110 : Renault Group net profit trend 160 Figure 111 : Renault Group revenue & operating profit by division (%) 161 Figure 112 : Renault Auto unit sales by market 164 Figure 113 : Renault Auto production by model & model plans 166 Figure 114 : Latest results - Suzuki 169 Figure 115 : Suzuki revenue & operating profit trend 169 Figure 116 : Suzuki net profit trend 169 Figure 117 : Suzuki revenue by division (%) 170 Figure 118 : Suzuki new car registrations by market 172 Figure 119 : Suzuki production by model & model plans 174 Figure 120 : Latest results - Toyota 177 Figure 121 : Toyota revenue & operating profit trend 177 Figure 122 : Toyota net profit trend 178 Figure 123 : Toyota unit sales by market 181 Figure 124 : Toyota production by model & model plans 182 Figure 125 : Latest results - VW 187 Figure 126 : VW revenue & operating profit trend 187 Figure 127 : VW net profit trend (€) 188 Figure 128 : VW Group revenue by division (%) 190 Figure 129 : VW unit sales by market 192 Figure 130 : VW production by model & model plans 193 Figure 131 : Spreadsheet structure 197 Figure 132 : Spreadsheet structure 198 Figure 133 : Exchange rates - units of currency per euro 202 Figure 134 : Value of export earnings in foreign currency 203
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Appendix 1 (on disk): Financial statistics and performance ratios by manufacturer (euro)
BMW Group
BMW – Rover Group
BMW AG
Daewoo Motor
DaimlerChrysler Group
DaimlerChrysler Auto
DC – Daimler-Benz (Passenger Cars)
DC – Daimler-Benz (Automotive)
DC – Daimler-Benz Group
DC – Chrysler Corporation
DC – Chrysler Automobile
DC – Chrysler (CFC on equity basis)
DC - M-Benz group
DC - M-Benz cars
Fiat Group
Fiat Auto
Ford Worldwide
Ford Automotive
Ford Europe
Ford UK
Ford Werke
Ford - Volvo Cars
Fuji Heavy Industries (consolidated)
Fuji Heavy Industries (non-consolidated)
General Motors
GM Automotive
GM (GMAC on equity basis)
GM Saab Automobile
GM Daewoo Auto & Technology
Honda
Honda Automobile
Hyundai consolidated
Hyundai non-consolidated
Hyundai – Kia Motors
Isuzu (non-consolidated)
Isuzu (consolidated)
Mazda (consolidated)
Mazda (non-consolidated)
MG Rover
Mitsubishi Motors
Mitsubishi Automobile
Nissan
Porsche
Proton
PSA Peugeot Citroën
PSA Automobile
Renault Group
Renault Automobile
Suzuki consolidated
Suzuki non-consolidated
Toyota
Toyota – Daihatsu
Volvo Group
Volvo Car
VW Group
VW Automotive
VW – Audi
VW – Seat
VW – Skoda
Appendix 2 (on disk): Financial statistics by manufacturer (native currency)
Companies/entities same as Appendix 1
Appendix 3 (on disk): World assembly plants
Appendix 4 (on disk): Exchange rates
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PREFACE Welcome to the seventh edition of The World’s Car Manufacturers. I would like to thank all subscribers to the first six editions, not only for subscribing but also for the positive feedback and helpful suggestions for future editions.
About this report The primary objective of the report is to provide comprehensive and consistent information on the financial and operating performances of the world’s major car producers. This information is complemented by analysis and commentary, which both highlights the pertinent aspects of the wealth of data included, and provides a guide to some of the pitfalls encountered when interpreting the data.
The backbone of the report is the appended database of financial statistics and performance ratios covering all the world’s major car manufacturers and their subsidiaries from 1983 onwards. This comprehensive database is designed to present information in a clear and consistent format, to enable users to analyse and compare the operating performances of a wide range of automotive companies over a statistically significant period.
Using these financial statistics, the first chapter of the report contains a series of comparisons between the major carmakers and some illustrations of activity of the industry at an aggregate level.
This is followed by individual profiles of all the manufacturers studied, including: • recent performance;
• business structure;
• new model plans;
• key markets;
• capacity expansion plans;
• production by model;
• revenue and profit forecasts;
• commentary and analysis.
I hope you will find the report meets my aims and your expectations.
Jonathan Storey
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CHAPTER 1: PERFORMANCE COMPARISONS
INTRODUCTION
This chapter provides a series of snapshots of the world’s automotive industry - its size, profitability, the numbers employed and other operational data.
The charts are mostly compiled from the database that accompanies this report and they not only provide some interesting perspectives on the way the industry and its key players are developing, but also illustrate some of the uses to which the database can be put.
GLOBAL DEMAND
2002 Global car demand increased marginally during 2002 to just over 49m units. Continuing weakness in western Europe, Nafta and South America was offset by growth in other regions, particularly a surge in demand in non-Japan Asia where car sales rose by over 20% to 4.3m units.
2003 The pattern of demand in 2003 is expected to have been very similar, with growth in Asia, Eastern Europe, the Middle East, Oceania, Africa and (marginally) Japan, being mostly offset by declines in western Europe, Nafta and South America.
Western Europe New car registrations fell by 1.3% in the first ten months of the year and are expected to end the year 2.4% down.
Among the major markets, France has been the worst performer with a drop of 6.7% over the first ten months and a similar drop expected over the full year. Demand in Germany has been on the brink of recovering for some months, but like the wider economy the market continues to stagnate. The launch of the new Golf in October should improve demand in the final months of the year, leaving the full year figure close to its 2002 level.
Italy, Spain and the UK all showed an increase in new registrations over the first ten months of the year. The Italian market is expected to turn down in the final two months due to the non-recurrence of an incentive scheme which boosted the prior year results.
Among the manufacturers all of the European groups saw a decline in their new car registrations over the first ten months, with a few individual brands (Seat, Skoda, Citroën, Saab, Smart and Mini) showing an improvement.
Fiat Group remained the worst performer over the first ten months with a 10.7% drop in new car registrations and its market share dropped by 0.8pts to 7.4%. The Fiat brand was the worst affected with a drop in new registrations of 11.9% and a 0.6pts fall in market share to 5.6%.
Fiat Group’s share of the west European car market excluding Italy was just 4.0% in 2002 and is heading for 3.6% in 2003. This would be a lower share than Toyota.
Among the major groups, Ford's performance was the next weakest. New registrations of its vehicles dropped by 4.3% to 1.35m units as the Focus entered its runout phase and the Mondeo suffered from the increasing switch to premium brands.
VW Group also underperformed the West European market, with a 3.2% drop in new registrations as falling demand for VW and Audi branded models was partly offset by a small rise in demand for Seat and Skoda. Demand for the VW brand is of course expected to revive now the Golf has been launched. In a typical year the Golf accounts for about28% of the group's car sales in western Europe and about 47% of the VW brand's sales.
PSA and Renault both saw their sales decline over the first ten months but Renault's sales have been picking up in the latter part of the year as the rolling launch of the seven Mégane variants nears its end.
Collectively the Japanese carmakers outperformed the European market with a rise in new registrations of 9% over the first ten months, led by Mazda with a 32% rise. Mitsubishi was the only brand to see a decline and the drop of 0.8% still outperformed the market.
The increase was attributable to a combination of new models, wider availability of diesel engines and a more favourable exchange rate.
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CHAPTER 22: VW GROUP
OVERVIEW
The VW Group is the largest producer of vehicles in Europe in terms of unit sales, though both BMW and DaimlerChrysler are larger in terms of market capitalisation. Globally, VW is the fourth largest producer with an output of 5.0m cars and commercial vehicles in 2002.
The group has grown to its present size partly by acquisition, buying Auto-Union and NSU in the 1960s, Seat in 1986, Skoda in 1991 and three luxury marques: Bugatti, Lamborghini and Rolls Royce, in 1998. The non-VW brands accounted for 34% of VW's worldwide car production in 2002.
The acquisition of Seat and Skoda enabled the VW Group to establish a clear sales lead in the western European market during the late 1980s and early 1990s, a position reinforced by the surge in domestic sales due to the German reunification boom.
However, in profit terms the group was unable to capitalise on the booming demand in the way most of its competitors did. VW’s operating income declined in all but two years from 1985 to 1993 as it struggled to cope with excessive production costs, over-ambitious capacity expansion plans, and losses at Seat. The group made operating losses in 1992, 1993 and 1994. Some indication of the company’s problems can be taken from the fact that in 1992 its breakeven production volume was quoted as being in excess of 100% of capacity.
With this background, it is no surprise that much of VW’s activity during the 1990s was directed towards reducing costs, returning Seat and Skoda to profitable growth and developing an integrated group structure to enable its four principal marques to play to their strengths in the market, while maximising the scale economy benefits in areas such as development, purchasing and production. Central to this was VW's 'platform policy', the plan to produce all the core models on four platforms - not a new idea but a more intense application of an old one than had previously been tried.
With this plan successfully implemented, the expectation was that VW's lacklustre profits would improve strongly. In 1997 the company set itself a 'medium-term target of at least 6.5%' for its pre-tax return on sales which compared with a 15-year average of 2.3% and peak of 5.2%. This target looked achievable as pre-tax earnings grew, from a low base, by 95% and 63% in 1997 and 1998 respectively. But then VW seemed to run out of steam.
In 1999 profit dropped again before improving significantly in 2000 and 2001 but the company still remained substantially short of its own performance target. The results for 2002 showed a significant decline, with weak demand in Germany being one of the major problems.
This, since setting its target for a minimum pre-tax margin of 6.5% in 1997, the closest the company has got is 5.0% in 2001.
Although the platform policy achieved some substantial scale economies, VW is widely perceived to have suffered from a lack of clarity and flexibility in its approach to new model development. This has had two broad consequences. First, insufficient differentiation between the brands and between some models in particular, means there has been a cannibalisation effect, with models from one of the four core brands taking sales from the others, rather than competitor models.
Second, despite (or perhaps because of) this excess of models within some segments, VW has been notably slow in developing models for newly emerging market segments. For example, despite having a significant presence in North America, VW sells no light trucks there, so has missed out on the booming demand in that sector. In Europe it has only recently launched a Mégane Scénic competitor, nearly seven years after Renault launched the Scenic and several years after GM and PSA (among others) entered the sector with the Zafira and Xsara Picasso. This sector alone now accounts for about 1m units per annum.
The company has recognised these problems. Under its new chairman, Bernd Pischetsrieder, who formally took over from Ferdinand Piëch during 2002, the car business has been split in two, with Audi heading a new "sporty" division which includes Seat and Lamborghini. The remaining brands (VW, Skoda, Bentley and Bugatti) are in a division headed by VW. The "sporty" division is in some ways analogous to Ford's Premier Automotive Group but clearly VW is dividing along vehicle dynamic characteristics rather than simply on price.
One aim of the brand restructuring is to reduce product overlap. Another is to make the product policy more market-led than manufacturing-led. Mr Pischetsrieder believes that the emphasis given to the platform policy has led VW to miss out on emerging niches, such as those mentioned above.
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Figure 126: Latest results - VW
Figure 127: VW revenue & operating profit trend
We agree. He considers that the current model range only covers 65% of the market, whereas he believes a global manufacturer such as VW should cover around 85%.
It is encouraging to hear this sort of thinking at the company and the fresh approach to product planning should start to pay dividends in two to three years.
Last year's edition of this report observed that:
"VW faces the prospect of 2003 with the unhappy combination of: • demand in Germany still being weak;
• its best-selling model, the Golf in its runout year;
• the appreciation of the euro against the dollar lowering the value of export sales."
Sure enough VW's profit plummeted by 56% during the first nine months of the year.
While its performance should improve in 2004 as it benefits from the new Golf, launched in October, it will still face difficulties with the exchange rate and it is not clear that it has reduced its cost base sufficiently to outperform its principal European rivals.
VW GroupCurrency
/ Unit January - September Year to December2002 2003 (%) 2001 2002 (%)
Revenue €(m) 65,269 64,112 (1.8) 88,540 86,948 (1.8)Of which: - Automotive €(m) 58,327 56,348 (3.4) 80,072 77,503 (3.2)
- Finance €(m) 6,942 7,764 11.8 8,468 9,445 11.5
Operating profit €(m) 3,714 1,730 (53.4) 5,424 4,761 (12.2)Of which: - Automotive €(m) 3,127 980 (68.7) 4,872 4,040 (17.1)
- Finance €(m) 587 750 27.8 552 721 30.6Automotive op. margin percent 5.4 1.7 (3.6) pts 6.1 5.2 (0.9) pts
Net profit €(m) 1,842 813 (55.9) 2,926 2,597 (11.2)Net margin percent 2.8 1.3 (1.6) pts 3.3 3.0 (0.3) pts
Customer deliveries 000s 3,756.0 3,710.0 (1.2) 5,080.1 4,984.0 (1.9)Of which: - VW brand grp * 000s 2,634.0 2,588.0 (1.7) 3,566.2 3,501.5 (1.8)
- Audi brand grp* 000s 913.0 931.0 2.0 1,214.0 1,202.6 (0.9) - CVs 000s 209.0 191.0 (8.6) 299.8 279.9 (6.6)
* VW brand group comprises: VW, Skoda, Bugatt i and Bentley* Audi brand group comprises: Audi, Seat & Lamborghini
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Figure 128: VW net profit trend (€)
RECENT PERFORMANCE
2002 results Over the full year VW’s revenue dropped by 1.8% to €86.9bn as a 3.2% fall in the automotive division’s contribution was partly offset by an 11.5% rise in the financial services division. The decline in automotive revenue reflected a 2.2% drop in vehicle wholesales to 4,996,179 units. China, Great Britain and Mexico were the only significant markets where the group’s sales improved during the year.
The automotive division’s gross profit dropped by 1.5% to €12,760m, a gross margin of 14.7% (based on the group revenue figure) compared with 14.6% a year earlier. The margin increase reflected efficiency improvements (about €1bn was taken out of the cost base) and a rise in the operating lease business. The improvement came despite an 8.7% increase in R&D expense to €2.89bn or 3.7% of automotive revenue compared with 3.3% in 2001. The financial services division gross profit fell by 6.8% to €1.24bn.
Group operating profit dropped by 12.2% to €4.76bn, a margin of 5.47% compared with 6.1% a year ago. The decline was more marked than that of gross profit because distribution costs of €7.56bn (2001: €7.55bn) and administrative costs of €2.15bn (€2.15bn) were virtually unchanged in absolute terms but increased as a proportion of revenue as VW was forced to increase sales incentives in the US and Europe.
On a geographical basis, the €663m decrease in operating profit reflected falls of: • €377m to €1,287m in Nafta;
• €314m to a loss of €359m in South America;
• €33m to €3,365m.
These falls were partly offset by an increase of €62m to €469m in Asia-Pacific. This latter figure does not include the contribution from VW’s Chinese operations which are not consolidated in the group results.
Pre-tax profit was €3,986m, a decline of 9.6% from the 2001 result of €4,409m. The company’s pre-tax margin of 4.6% was 0.3pts below the 2001 figure. The profit decline was limited by a 24% drop in finance costs to €775m from €1,015m. That reduction was almost entirely due to the €245m increase in the contribution from subsidiaries and joint ventures to €534m, most of which was presumably attributable to VW’s Chinese ventures.
VW is keen to point out that this represents its second highest pre-tax result, but as they have published only three years’ worth of results according to International Accounting Standards, the claim does not amount to much. However, given the subdued conditions in many of VW’s core markets and the fact that VW was at a weak point in its model cycle, with the Golf and Passat in their final and penultimate years respectively, this was not a bad performance.
The divisional results were as follows:
! The Volkswagen brand group reported a 5.4% drop in revenue to €46.7bn and an 18% drop in operating profit to €2.46bn. The operating margin dropped by 0.8pts to 5.3%.
! The Audi brand group reported a 1.6% rise in revenue to €25.4bn and a 6.7% drop in operating profit to €1.36bn. The operating margin dropped by 0.5pts to 5.3%.
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! The CV division reported a 2.9% drop in revenue to €4.9bn and a 54% drop in operating profit to €156m. The operating margin dropped by 3.6pts to 3.2%.
January - September 2003 Revenue fell by 1.8% to €64.1bn during the first nine months. The decline was almost wholly attributable to the VW brand group which saw a 7% fall due to lower sales and exchange rate effects. The other main divisions contributed higher revenues than a year ago.
In the region which VW classes as ‘Europe / Rest of the world’ the adverse effect of lower sales and (in non-eurozone markets) the stronger euro, was more than offset by a richer model mix helping revenue to grow by 1.4% to €45.77bn.
In North America the adverse exchange rate movement combined with a 6.3% fall in customer deliveries led to an 18.4%drop in revenue to €10.8bn.
In the rest of the world, gains in Asia-Pacific more than offset a decline in South America, leaving revenue 9% higher at €7.5bn.
Please note the figures for Asia-Pacific do not include China. VW’s joint ventures in that country are included on an equity basis therefore do not affect the group revenue figures other than through the sale of components to the ventures.
Group operating profit plummeted by 53.4% to €1.73bn.
Adverse exchange rate movements were the biggest factor in the decline, reducing profit by €1.2bn. Start-up costs, principally for the Golf, reduced profit by a further €0.9bn. Lower sales and a weaker mix caused a drop of €0.6bn. The result was also affected by restructuring measures in Brazil which incurred a non-recurring charge of €120m.
These negative factors were partly offset by cost reductions and other improvements.
In response to its exchange rate problems the company has said it will use financial instruments to hedge two-thirds of its currency exposure in future, compared with 40% previously. In the longer term it may look to achieve a more naturally hedged profile by increasing its production in North America.
It seems extremely poor management not to have made better hedging arrangements previously. The weak euro gave a boost to many of Europe's exporters but most observers agreed it would not last.
Furthermore, it is worrying to think that VW's profits in the past two years have been substantially boosted by the weak euro but even with this significant following wind the company has been unable to meet its profit objectives during those years.
Results by brand group were as follows:
! The Volkswagen brand group was the worst performer, reporting an 7% drop in revenue to €33.1bn and an 81% drop in operating profit to €388m. Most of the new model launches this year are VW brand models, most notably of course the new Golf.
! The Audi brand group reported a 2.4% rise in revenue to €19.4bn and a 5.3% drop in operating profit to €814m.
! The CV division reported a 3.6% rise in revenue to €3.56bn and an operating loss of €152m compared with a year-ago profit of €142m, reflecting launch costs for the new generation Multivan and Transporter.
! The financial services division reported an 11.8% rise in revenue to €7.76bn and a 27.8% increase in operating profit to €750m.
Full year outlook VW should gain some benefit from the new Golf in the final quarter of the year but the company nevertheless expects its full year operating profit to be only half the 2002 level.
BUSINESS STRUCTURE
At a consolidated level, in 2002 sales of vehicles accounted for 75.7% of group revenue and parts sales for a further 6.2%.
The bulk of other revenue came from the leasing and rental business.
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Figure 129: VW Group revenue by division (%)
Financial services division The division was responsible for financing or leasing 35.7% of VW’s customer deliveries during 2002, up from 30.7% a year earlier. Also during 2002 VW's financial services division started to sell personal and property insurance. It is co-operating with four German insurers: Cosmos Direkt, HDI, Neue Leben Lebensversicherung and Allianz; in order to offer insurance in sectors such as accident, home, legal, life and sickness.
It is also planning to expand into business credits outside its existing financing of automotive dealers. It is hoping to target up to 50,000 existing customers of its leasing services.
Product strategy committee Following the adoption of its new brand strategy (see opening comments) VW formed a new product strategy committee (PSC). As its name indicates, the PSC will review product development from a strategic perspective, considering whether new proposals are consistent with the newly defined objective of greater differentiation between the brands.
VW's much-vaunted platform policy has frequently been criticised for the resulting lack of brand differentiation and the amount of overlap between various models. However, we would argue that such problems are not an inevitable consequence of the platform policy, the flaws of which have been more to do with execution than with concept. The PSC should help to address this concern.
The 'VW Law' The European Commission has been examining the so-called ‘VW law’ to see if it infringes EU competition regulations. The VW law limits voting rights at 20%, regardless of the amount of shares an investor owns. The regional government of Lower Saxony holds around 21% of the voting rights in Volkswagen, giving it a special right to block major company decisions. The 43-year-old law could breach of EU rules because it gives the government of Lower Saxony a veto on any takeover of the company.
Executive pay As part of a drive to improve investment efficiency VW is restructuring executive pay. The company is to base up to 40% of 2003's bonus on the achievement of returns above the cost of capital. The introduction of earnings value added (EVA) measures by Mr Pischetsrieder and his new finance director, Mr Pötsch, is designed to encourage managers to think more like investors. In addition to the EVA component, the new bonus structure will add group performance measures to the individual and brand measures already in place. This makes a clear statement to all concerned that the group’s brands need to work with each other, rather than competing. In 2002 VW made a return on invested capital of 7.4%, less than its 7.7% cost of capital - equivalent to destroying €134m ($146m) of value.
Scania, MAN & VW Trucks In March 2000 VW finally realised its ambition to develop its heavy truck operations when it bought a stake in Scania, following the European Commission's blocking of Volvo's takeover. VW bought 37.4m Scania A shares, representing 18.7% of the company's capital and 34% of the voting rights. The price of SKr370 per share (SKr13.8bn in total) was higher than the SKr280 that VW offered to buy Scania in 1999 and higher than the average SKr266 per share paid by Volvo which holds 30.6% of the voting rights and 45.5% of the capital.
Division 1996 1997 1998 1999 2000 2001 2002
VW Cars 45.6 43.6 46.0 44.9 44.0 42.6 40.0
VW CV's 7.9 8.3 7.1 6.1 5.9 5.2 4.9
Audi 18.0 18.9 18.8 18.9 18.2 19.7 20.2
Seat 4.9 5.4 5.2 6.0 5.9 5.3 5.5
Skoda 2.6 3.5 3.8 3.8 4.3 4.9 5.1
Spares 7.0 6.6 5.8 5.9 5.9 6.2 6.7Fin. Services & Other 14.0 13.7 13.3 14.5 15.8 16.1 17.6
Total 100 100 100 100 100 100 100
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The move goes someway to satisfying VW's oft-stated desire to develop a presence in the truck industry although this publication questions the wisdom of the move for at least two reasons.
First, VW paid top dollar for its stake at a time of peak demand in the world's major truck markets. Scania's share price is currently trading around Skr200.
Second, the strategic rationale for the move is far from clear. The performance of VW's car operations remains below its publicly stated targets and while this remains the case the company would surely do better to concentrate its managerial and financial resources on its core business rather than be distracted by a business about which it knows relatively little.
While there is often much to be said for refusing to follow the latest management fashion, we believe VW would do well to follow the examples of Ford, GM, Renault, Saab-Scania and Volvo. These companies have recognised that there are few synergy benefits in maintaining a presence in both car and truck sectors and unless both operations are of sufficient size to compete successfully on a global basis, then better to concentrate on one or the other.
VW has said in the past that it wanted a presence in the truck sector to offer a cyclical counter-balance to its car business. This is a weak argument, as the demand for cars and trucks has followed fairly similar patterns in North America and Europe over the past ten years or so, which we find unsurprising. The only noticeable difference is that the demand for trucks shows more volatility, again unsurprising.
Looked at another way, over the last decade in which Volvo cars and trucks were part of the same company, the profits of the two division were nearly always been heading in the same direction, albeit at different speeds.
Bernd Pischetsrieder, VW's new chairman, has not appeared keen on keeping the stake in Scania, acquired by his predecessor, Ferdinand Piëch. A sale to Hino is suggested as a one way of achieving a quick exit. If there is any substance to these rumours then we would welcome it, having always been critical of the investment in Scania.
During 2003 rumours of a possible tie-up between VW and MAN continued to circulate. Previous editions of this report have pointed out the disadvantages and illogicality of such a move and we continue to hope that the rumours will prove to be ill-founded. A focus on EVA should certainly steer the company away from this idea.
VW / DC
During 2003 VW and DC have signed an agreement for VW to supply turbo diesel engines to DC for use in Chrysler’s and Mitsubishi’s European models. First deliveries are scheduled for 2005 and the agreement runs until 2013. Annual deliveries are expected to be around 120,000 units.
Audi / Maserati In September 2003 Audi and Maserati signed a letter of intent for several technical and commercial co-operation projects. The two firms plan joint development and manufacturing of modules from Volkswagen, Audi and Maserati models.
VW / Siemens In March 2003 VW and Siemens’ automotive division, Siemens VDO, announced a joint venture to develop diesel injection technology. The two companies will invest a total of €270m in the 50-50 venture, which will be known as Volkswagen Mechatronic. The venture will be located in Stollberg in the German state of Saxony. Construction of a new factory for the venture will begin in May, with first production targeted for Q4-2004. The project will employ about 380 people in the first phase. This will rise to 690 in a second phase, planned for 2007.
MARKETS & MODELS
2002 VW’s wholesales dropped by 2.2% in 2002 to 4,996,179 units. The Volkswagen brand group (VW cars, Skoda, Bentley and Bugatti) accounted for 3.54m of these or 70.8% (2001: 70.6%). The Audi brand group (Audi, Seat and Lamborghini) accounted for 1.19m or 23.8%. Sales by the CV division fell by 9.8% to 267,000 units.
Customer deliveries in western Europe fell by 5.1% to 2.827m units, reflecting falls of: • 4.7% to 940,129 units in Germany;
• 9.8% to 314,522 units in Spain;
• 2.9% to 303,117 units in Italy;
• 8.6% to 256,827 units in France.
Deliveries in Great Britain rose by 7.9% to 332,274 units.
In Eastern Europe deliveries fell by 1.8% to 322,266 vehicles, led by a 9.6% drop to 89,061 units in the Czech Republic.
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Figure 130: VW unit sales by market
Nafta deliveries were 0.9% lower at 663,278 units as a 3.5% fall to 424,531 units in the US was mostly offset by rises of 4.6% to 188,523 units in Mexico and 1.5% to 50,224 units in Canada.
In South America VW’s deliveries fell by 14% to 477,473 units, with deliveries in Brazil dropping by 12.5% to 382,071 units.
Asia-Pacific was the main bright spot, with a 34.6% increase in deliveries to 620,624 vehicles, most of which were sold in the Chinese market where deliveries increased by 42.8% to 512,548 vehicles.
2003 YTD In the first nine months of 2003 VW delivered 3,710,000 vehicles to its customers, down 1.2%. This reflected falls of 3.5% in Europe, 6.3% in Nafta and 14.1% in South America / South Africa, partly offset by a 26.8% rise in Asia Pacific.
Over the first ten months of the year new registrations of VW cars in western Europe fell 3.2% to 2,197,628 units and the group's market share slipped from 18.4% to 18.0%.
In the US VW's sales over the first ten months fell by 9.5% to 326,300 units.
Distribution changes The company has recently said it is planning to merge the distribution of its different brands at the wholesale level in a move expected to save several hundred million euros. Distribution will be co-ordinated by the two marketing groups but the company has stressed the changes will not be apparent at the retail level and do not presage a widespread move to multi-branded dealerships.
It seems astonishing that the company has not introduced such 'backroom' changes before. The availability of such scale economies were the main reason VW acquired Audi, Seat and Skoda in the first place.
Sales expansion VW is aiming to lift its sales by more than 20% over the next 3-4 years, with upwards of half the increase coming from China, where the company expects its sales to double from the 2002 level of just over 0.5m units, by 2007. Five new models have been launched in China during 2003 as part of a €6bn investment programme.
Market 1996 1997 1998 1999 2000 2001 2002 2003 (e)
Germany 969,361 1,006,675 1,102,349 1,155,140 1,025,857 986,813 940,129 937,200Share of VW total (%) 24.3 23.7 23.2 23.5 19.9 19.4 18.9 18.9
N America 300,849 309,803 419,057 554,821 657,394 669,494 663,278 621,400Share of VW total (%) 7.5 7.3 8.8 11.3 12.7 13.2 13.3 12.5
S. America (2) 752,237 738,530 587,280 490,281 534,557 555,266 477,473 410,600Share of VW total (%) 18.8 17.4 12.4 10.0 10.4 10.9 9.6 8.3
Spain 202,713 232,706 277,808 330,650 338,252 348,744 314,522 329,000Share of VW total (%) 5.1 5.5 5.9 6.7 6.6 6.9 6.3 6.6
Italy 232,762 249,877 296,862 300,123 306,965 312,036 303,117 282,400Share of VW total (%) 5.8 5.9 6.3 6.1 5.9 6.1 6.1 5.7
France 228,051 210,572 237,908 264,371 271,208 280,434 256,287 238,400Share of VW total (%) 5.7 5.0 5.0 5.4 5.3 5.5 5.1 4.8
Great Britain 183,427 207,595 228,605 252,473 264,569 307,944 332,274 324,100Share of VW total (%) 4.6 4.9 4.8 5.1 5.1 6.1 6.7 6.5
Other W. Europe 540,139 580,890 685,093 750,956 792,946 742,187 681,143 645,800Share of VW total (%) 13.5 13.7 14.4 15.3 15.4 14.6 13.7 13.0
Other 584,773 713,766 912,856 824,181 969,440 877,169 1,015,807 1,176,100Share of VW total (%) 14.6 16.8 19.2 16.7 18.8 17.3 20.4 23.7
Total 3,994,312 4,250,414 4,747,818 4,922,996 5,161,188 5,080,087 4,984,030 4,965,000
(1) Includes sales by non-consolidated subsidiaries: 165,000 in 95, 232,000 in 96, 280,000 in 97 & 309,000 in 98, 317,194 in 99 & 333,340 in 2000(2) Also includes Africa from 1994
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Figure 131: VW production by model & model plans
Model Debut Change 2001 2002 2003 (e)(2004-07) Units (%) Units (%) Units (%)
Lupo 1998 2005 Term. 82,238 1.6 70,377 1.4 54,232 1.1Polo 2001 - 391,219 7.7 548,214 10.9 537,724 10.8Beetle - - 38,851 0.8 24,407 0.5 11,267 0.2Beetle II 1998 2005 115,851 2.3 101,500 2.0 121,862 2.4Golf 2003 - 1,201,422 23.5 1,049,839 20.9 1,107,598 22.3Bora 1999 2004 117,419 2.3 349,799 7.0 144,911 2.9Jetta - - 319,082 6.2 106,226 2.1 95,116 1.9Vento 1998 0 0.0 0.0 0.0Passat / Santana 1996 2004 737,449 14.4 709,897 14.1 637,640 12.8Sharan 2000 Term. 2006 56,337 1.1 58,387 1.2 48,222 1.0Touareg 2002 - 0 0.0 6,343 0.1 38,120 0.8Touran 2002 - 0 0.0 519 0.0 201,600 4.1Phaeton 2001 - 371 0.0 3,403 0.1 7,979 0.2Caddy 1996 2004 41,821 0.8 33,756 0.7 19,224 0.4
A0 2002 0 0.0 0 0.0 0 0.0A2 2000 Term. 2006 49,369 1.0 37,578 0.7 31,535 0.6A3 2003 - 144,756 2.8 125,538 2.5 126,594 2.5A4 2000 2006 309,151 6.1 339,562 6.8 319,398 6.4A6 1997 2004 182,309 3.6 178,773 3.6 198,108 4.0A8 2002 - 11,708 0.2 10,942 0.2 15,980 0.3Cabriolet 2002 - 184 0.0 20,705 0.4 26,876 0.5TT/TTS 1998 2005 39,349 0.8 34,711 0.7 33,000 0.7
Marbella 1982 Term 98 0 0.0 0 0.0 0 0.0Arosa 1997 2005 Term. 22,980 0.4 19,627 0.4 14,441 0.3Ibiza 2002 - 188,427 3.7 197,311 3.9 213,765 4.3Tango 2005 - 0 0.0 0 0.0 0 0.0Cordoba 2003 - 78,770 1.5 58,646 1.2 72,423 1.5Leon 1999 2004 91,939 1.8 93,606 1.9 77,613 1.6Toledo 1998 2004 47,645 0.9 39,503 0.8 38,949 0.8Alhambra 2000 Term. 2006 26,524 0.5 26,308 0.5 23,006 0.5
Felicia 1995 Term. 2001 25,928 0.5 0 0.0 0 0.0Fabia 1999 2006 284,437 5.6 254,966 5.1 269,625 5.4Octavia 1996 2004 175,613 3.4 163,198 3.2 174,070 3.5Superb 2001 - 581 0.0 24,305 0.5 30,000 0.6Pickup 1996 Term. 2001 3,981 0.1 0 0.0 0 0.0
Bentley / RR 1,781 0.0 1,210 0.0 3,144 0.1Lamborghini 280 0.0 442 0.0 919 0.0Other 320,173 6.3 333,666 6.6 281,759 5.7
Total VW Group 5,107,945 100.0 5,023,264 100.0 4,976,700 100.0
(1) Production of predecessor and current models is combined e.g. Vento & Jet ta.Includes production by non-consolidated subsidiaries: AutoEuropa, Shanghai-Volkswagen,FAW-Volkswagen and Chinchun Motor.
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The company is aiming to lift sales in Nafta by more than 50% by 2005 with a new product offensive. Chairman Bernd Pischetsrieder said the group could achieve unit sales of 750,000 a year in the US in the medium term. Much of the growth is expected to come from the new Touareg SUV, with projected sales of 65,000 units in the US by the end of 2004. It will also launch the all-new Microbus in the region in 2004.
Product plans In 2002 Volkswagen’s board of management approved a five-year capital spending plan that called for spending of $30bn on new model development and better production. 67% of the budget will be devoted to its operations in Germany, as opposed to the 60% earmarked for the company’s domestic market in its previous plan. Most of the spending will be used for expanding and renewing VW’s model range.
However, the decline in performance during 2003 has led to a revision. The company is now aiming to cut €3bn from its plan by cutting spending, improving investment efficiency and making its production more flexible. As part of this plan the company is to increase its use of modules to cover 50% of its production from a current 10%.
It will also space out new model launches to avoid having key products age at the same time. One of the reasons its sales and profits are currently suffering is that the Golf and Passat, respectively its first and second best-selling models, are both nearing the end of their lives simultaneously.
Much like our response to the lack of currency hedging and merging of distribution for the different brands, our response is one of astonishment that the company is only just getting to grips with such elementary issues.
The major product changes over the next few years are shown in Figure 131.
PRODUCTION
VW group’s production fell by 1.6% in 2002 to 5.02m units. This figure includes production by non-consolidated subsidiaries in China.
Modular production As mentioned, VW is currently moving on from its platform-based manufacturing strategy toward an all new system based on modules. Over the next four years the company plans to replace its four platforms with a core set of eleven modules, including engines, transmissions, brakes, axles, fuel systems and door locks. Savings of up to 5% of total production costs are expected. VW also believes the modular system will lead to greater brand differentiation.
European operations
Germany Production of the new Touran officially began in Wolfsburg in January 2003. VW expects to produce 180,000 units during 2003 year, rising to 200,000 units in 2004.
Audi invested more than €500m at Ingolstadt to prepare for production of the new A3 and plans an initial daily production capacity of around 630 units.
Portugal In February 2003 VW announced it would invest €500m at the AutoEuropa plant at Palmela in Portugal. The former joint venture with Ford, which currently produces the Ford Galaxy, VW Sharan and Seat Alhambra is to stop producing those models by 2005. There was concern about the plant's future thereafter but it is now planned to produce a golf-based SUV there and possibly other Golf derivatives, beginning in 2005.
Spain Seat will make the new Altea sports people carrier one of its three main models, along with the Ibiza and the Leon. It will start manufacturing the Altea at Martorell at the start of 2004. Some €160m has been invested in the development of the vehicle, which will use the same platform as the new Audi 3 and the fifth generation of the VW Golf. Andreas Schleef, chairman of The Altea is the first vehicle totally designed and developed within the framework of the new synergies between Seat and Audi.
Slovakia W’s plant at Bratislava in Slovakia may be used to produce the Audi Pikes Peak crossover SUV. The plant currently produces the Polo, Golf, Bora, Touareg and the body-in-white Cayenne. Production at Bratislava (which is also a major gearbox plant) has climbed steadily since its opening in 1994/95, reaching 238,400 units in 2002.
Hungary In Hungary VW’s Gyor plant may cease car production when production of its only remaining model, the Audi TT, ends in 2005. The plant used to produce the A3 as well but this ended in April this year when the new generation A3, built at Ingolstadt, was launched. Gyor will remain a key plant for engine production, having produced 1.3m in 2002.
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Other regions
Brazil As indicated in the results discussion, the company has recently restructured its Brazilian operations cutting 3,933 jobs at its Anchieta and Taubate plants. In its press release the company describes the move as “a redimensioning programme” which is presumably an alternative euphemism for ‘down-sizing’. VW has said it will transfer to a newly-created "training and study centre" the workers that do not opt for the voluntary redundancy scheme. It will take care of these workers until their contracts expire - November 2006 for the Anchieta workers and February 2004 in the case of the Taubate workers.
A new VW model for Europe will be built in Brazil from 2005. The Anchieta plant beat competition from VW’s plants in Spain, Portugal and Slovakia to manufacture the Project 249 or ‘Tupi Europa’ model. Up to 180,000upa will be made, all for export, while a domestic version of the model will be made at the VW/Audi Curitiba plant.
Mexico VW aims to increase production by 30% in 2005, when it begins producing the new Bora at its Puebla plant. The new model requires investment of $180m at the plant which will have the capacity for 100,000 Boras per year in addition to the existing 400,000upa capacity for New Beetles and Jettas.
India VW wants to expand in India and is in exploratory talks with various potential local partners for assembly there. Local media report that VW has been talking with Hindustan Motors on an alliance to produce VW models. VW is also considering taking over a Hindustan Motors plant near Madras.
Skoda has brought forward the launch of CKD assembly of the Octavia at Aurangabad, where it currently assembles the model from SKD units. The shift is due to changes in customs duties. Originally Skoda had planned to change from SKD to CKD operations in 2007. Because of the change there will be a production slowdown at the plant resulting in sales of around 4,500 vehicles this year instead of the hoped for 8,500 units.
China The company has recently outlined its planned actions in China over the next five years during which time it expects to invest (or rather expects its joint ventures to invest) some €6bn. It is to double its annual capacity in the country from 800,000upa to 1.6m upa over the next five years. This means expanding its two joint ventures: FAW-Volkswagen in Changchun and Shanghai Volkswagen.
In September 2003 the foundation stone for the new FAW-Volkswagen factory in Changchun was laid. With a capacity of 330,000upa the new factory is scheduled to be handed over in late 2004 or early 2005. FAW-Volkswagen is investing some €1bn in the project.
Also in September the Golf was officially launched in China. It will be built in Changchun and the company is aiming to sell 50,000 units in 2004.
The two joint ventures are planning to each launch one new Chinese-built model a year onto the market.
Russia VW has made several unsuccessful attempts to establish production facilities in Russia. In October 2003 it announced it was in discussions with the Russian government about a new plant. Few details were available at the time of writing but it sounds as though the plan under discussion is for a fairly small operation, assembling VW models from kits and requiring investment of less than €100m. The company does not want to commit to a bigger project until it has gained some experience.
Ukraine During 2003, Ukraine's ZAO Eurocar, began assembling the Audi A4 and A6 alongside the Skoda models it already produced. Ukrainian Audis are 4-5% cheaper than those made in Germany and potentially can be exported to nearby Hungary, Slovakia and Russia. The ZAO plant currently has capacity to produce 8,000 Skoda models and extra capacity to produce 45,000 Audi models a year is being constructed.
In future ZAO Eurocar will also assemble VW brand models including the Passat, Bora, Golf and Polo.
Commercial vehicles VW is to go ahead with a modern remake of its Microbus, first seen 50 years ago. The project will cost €600m and create 1,500 jobs at VW's Hanover plant in northern Germany when production starts in 2005. Some €400m will be spent on vehicle development, with the remainder going on new plant and equipment. VW is projecting annual demand of 80,000 units with two-thirds to be sold in North America. If these expectations were met, Hanover's output would be raised by 50% from the current level. The plant currently produces the VW Transporter and LT light commercial vehicles.
VW's truck operations are mainly based in Brazil at Resende where it now produces trucks in the GVW range 7t-40t. Production in 2002 was 18,580 trucks and 5,020 buses, from 8,765 trucks and 3,780 buses in 2000. The trucks are built at VW's Resende plant, near Rio de Janeiro. Output in 2003 is planned at 27,000 vehicles.
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The company plans to invest €400m over the next four to five years at Resende. Capacity at the plant will be doubled to around 200 trucks per day with exports to Africa, Asia and the Near East accounting for about 25% of output.
In October 2003 VW announced it is to establish a truck assembly plant in Mexico. Capacity is planned at 2,000upa to support the company's objective of a market share of 15% in Mexico by 2006. The location of the new assembly plant has not yet been announced but it will be supplied with kits from Resende. However, the engines will be supplied by the Mexican subsidiary of Cummins.
The van division is to invest €600m in Poland for a fourfold increase of production from 40,000 vehicles in 2002 to 150,000 in 2005. VW will manufacture new T5 microbuses and delivery vans. At the Poznan plant the company plans to reach a production capacity of 200 transporters daily by the end of 2003 and by 2004 it hopes to have increased this to 600 vehicles a day. In total, VW will invest €178m in 2003. Employment will increase from 3,400 to 5,000 during that time.
NOTES ON FINANCIAL STATISTICS
The VW Group financial year runs to 31 December. The results of Seat are reflected in the group’s consolidated accounts from 1986, those of Skoda from 1992.
Statistics are presented in the appendix for the VW Group, Audi AG, Seat SA and Skoda Automobilova AS. The results of Seat are reflected in the group’s consolidated accounts from 1986, those of Skoda from 1992.
The results of the consolidated finance companies are included in the interest results, therefore do not affect the operating income figures. The results of the leasing companies are included within the revenue and operating expense data. Capital investment excludes additions to rental and leasing assets. Cash flow in the data sheets reflects ‘inflow from current operations’.
In 2001 the company adopted International Accounting Standards for the first time. The figures for 2000 have been restated. The pre-tax profit for 2000 under the German accounting standards was €3,469m. Under the IAS system this figure increased to €3,719m.
