Sept. 24 (Bloomberg) -- Volkswagen AG’s name translates as “People’s Car” and the company traces its roots to a push by the Nazis to mobilize the masses. Today, it’s counting on profit from cars for the world’s elite to gain an edge in its pursuit of General Motors Co. and Toyota Motor Corp.
With the completion of its purchase of Porsche in August, VW controls an unrivaled slate of high-margin luxury nameplates including Audi, Lamborghini, Bentley and Bugatti. If Porsche profit, which started flowing into VW’s books this quarter, had been included in the first half, luxury brands would have accounted for 54 percent of VW’s earnings, up from 39 percent in 2007, when Martin Winterkorn became chief executive officer.
“The financial results show that the strategy of producing exceptional cars was right,” Winterkorn said last week at an event in the north German city of Osnabrueck marking the first Porsche produced at a VW factory.
A goal of the luxury expansion is to generate cash to fuel investment of 62.4 billion euros ($81.2 billion) on vehicle development and factory upgrades over five years to overtake Toyota and GM in sales and profit by 2018. A key advantage for VW will be its luxury group, which sells about 1 million more high-end cars annually than either GM or Toyota.
“The big presence in the luxury segment is VW’s strength,” said Stefan Bratzel, director of the Center of Automotive Management in Bergisch Gladbach, Germany. “I don’t think you can compare GM’s Cadillac or Ford’s Lincoln to any of Volkswagen’s luxury brands.”
The luxury push should provide VW with a resilient profit machine. High-end nameplates typically endure economic swings better than mass-market brands because the wealthy are less prone to rein in spending in a slowdown.
“The high-end segment usually has a stabilizing effect on profits,” said Michael Punzet, an analyst at DZ Bank in Frankfurt.
With the addition of high-margin cars such as Porsche’s 911 and Cayenne sport-utility vehicle, the luxury group’s profit margins should rise to nearly 13 percent, from 11.4 percent in the first half. That compares with a margin of 4.2 percent for the mass-market VW, Skoda and Seat brands.
Adding Porsche’s earnings would have helped lift VW’s operating margin in the second quarter to about 7.6 percent, from the company’s reported 6.8 percent. Toyota’s operating margin for the quarter was 6.4 percent and GM’s was 4.8 percent, according to data compiled by Bloomberg.
VW, established after the Nazis commissioned Ferdinand Porsche to design a car for the masses in 1934, will present an expanded luxury lineup this week at the Paris Motor Show.
At Europe’s biggest auto fair this year, Porsche plans to unveil a four-wheel drive version of the 911 and a pre-production wagon variant of the Panamera four-door coupe. Audi will show five-door and high-performance derivatives of the new A3 compact.
The luxury expansion is forecast to boost VW’s premium sales 16 percent to 1.76 million vehicles by 2015, compared with Cadillac’s 68 percent surge to 326,100 vehicles and Lexus’s 33 percent jump to 605,600 vehicles, according to IHS Automotive.
VW’s current range of luxury cars runs from the 16,400-euro ($21,350) Audi A1 subcompact to super sportsters such as the 313,000-euro Lamborghini Aventador and the 1.69 million-euro Bugatti Veyron Vitesse. Cadillac’s line starts with the $33,095 ATS sedan and tops out with the hybrid Escalade SUV for $87,095. Lexus’s range includes the $35,065 IS sedan and the $375,000 LFA sports car.
Even in Europe, where the sovereign debt crisis is expected to drag demand for cars down to a 17-year low, Audi managed to increase deliveries by 5.9 percent through August. Bayerische Motoren Werke AG’s European sales were off by 2.4 percent for the period and Daimler AG’s Mercedes-Benz dipped 0.3 percent. Toyota’s Lexus has surged 13 percent from weak sales last year after many Japanese factories were shut down by the tsunami. The overall market dropped 6.6 percent.
Porsche’s 918 Spyder, an $845,000 limited-run hybrid supercar, will be the brand’s most expensive model ever when deliveries start next year. The Macan compact SUV is due to hit showrooms in 2014, and Porsche is also considering a $250,000 sports car and a smaller version of the Panamera.
To expand beyond its line of ultra-luxury coupes and sedans and double deliveries and margins in the coming years, Bentley is developing an SUV that will cost about 180,000 euros. Lamborghini is also considering an SUV to add to the Aventador and Gallardo sportsters.
“The VW group places a great deal of emphasis on the fact that its brands can compete successfully on their own,” Matthias Mueller, head of the Porsche brand, said in a June interview.
VW will face reinvigorated competition from key rivals. Toyota is adding nine new and refreshed Lexus cars and light trucks in 2012, including the GS and ES sedans and three “F-sport” performance models. Through August, Lexus sales grew 25 percent in the U.S., outpacing Audi’s 17 percent gain. GM says it intends to double Cadillac sales in the U.S. from its 2010 level and aims to compete for the title of the top-selling luxury brand in the nation again.
Even with the upscale growth, VW isn’t abandoning its roots in affordable cars for the masses. Following the rollout of the Up! city car late last year, VW introduced the seventh generation of the Golf hatchback in Berlin earlier this month.
The biggest challenge for VW may be its proliferation of brands. Its stable now encompasses a dozen nameplates including truck manufacturers Scania AB and MAN SE and exotic Italian motorcycle maker Ducati. GM, which once included more than 10 brands, closed Hummer, Pontiac and Saturn, and sold Saab as part of its 2009 bankruptcy reorganization.
“The high complexity of Volkswagen with all its brands and plants is a challenge for the management and can become a problem in the future,” said Juergen Pieper, analyst at Bankhaus Metzler in Frankfurt.
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