Exchange Rates, Pricing Pressures Squeezing VW Profits

So far, 2014 has been a mixed bag for the auto industry, and Volkswagen Group expects the rest of the year to remain so, as pricing pressures in emerging markets and aggressive new-model investment costs offset some of the gains being made in more established regions.

The German automaker posted solid, but not spectacular, results for first-quarter 2014, with revenues inching up 2.7% from year-ago to €47.8 billion ($66.1 billion), operating profits jumping 10.4% to €2.9 billion ($4.0 billion) and vehicle sales volumes gaining 7.9% to 2.6 million units.

“So the first quarter came in reasonably OK, (but) definitely not fantastic,” Hans Dieter Pötsch, management board member-Finance and Controlling, notes in a conference call to discuss results with analysts and media.

The second quarter should show some improvement, because sales volumes usually pick up in April-June and the upward trend in the still-recovering European market is expected to continue, Pötsch says. The outlook for the remainder of the year calls for a “moderate” increase in unit sales from 2013, a modest 3% growth in revenue and an operating profit margin of 5.5%-6.5%.

“Trends we saw in the first quarter won’t go away,” he says, pointing to political instability in Russia, the Ukraine and other Eastern European markets, plus exchange-rate and pricing squeezes – extreme in some cases – in such markets as South America, China and Turkey.

Christian Klingler, management board member-Group Sales and Marketing, says the steep, double-digit decline in the value of the Argentine peso that occurred in January is just one example of the currency swings that are shaping VW’s strategy and pressuring its profits this year.

“We try to understand what is the right way (to counter unfavorable exchange rates) and find the right balance of increasing prices but not (resulting in) too big a risk in market share,” he says, adding that in the case of Argentina, VW matched the peso depreciation with a point-for-point hike in retail prices. “Of course, we lost market share, but that’s something we have to accept sometimes.

“We will see what happens in Russia, Southeast Asia, Brazil and Turkey in terms of exchange rates, and then we’ll try to get the best out of it we can. But there will be impacts.”

The U.S. also could be a source of pricing pressure, Klingler says, with both incentives and dealer inventories on the rise industry-wide.

“U.S. pricing is getting more complicated,” he notes. “There’s some overheating in the market, so we will see some pressure in terms of pricing.”

Some of that will be offset by growth in Europe, where Klingler says gains are being made in the top markets of Germany, the U.K., Spain and France, and the outlook is improving for Italy.

“In general, are we more confident in Europe? Yes we are,” he says. “The only negative impact is coming from the countries in the East, and that is coming from political crisis.

“In Europe, clearly the highly competitive situation is continuing, but (we don’t) expect further negative impact on pricing.”

The VW brand is feeling the most acute pressure from the currency swings, Pötsch says, because it competes in volume segments around the world.

“But in principle, VW is not in a bad position to tackle the issues in emerging markets, because we have local content,” he says. “We have to improve our business model with more local content, but the elements are there; it’s only a matter of time.”

VW also is spending heavily on new product, the executives say, as it rolls out more models on its flexible MQB platform and enters new segments in some markets. This year, the automaker expects to build 1.6 million vehicles based on its MQB architecture, nearly 2 million if production at its China joint ventures is included.

[email protected]