VW Revs Up $20 Billion Truck Push After Years in Neutral

VW Revs Up Heavy Truck Push After Seven Years in Neutral
Volkswagen has been seeking a heavy-truck alliance since buying a stake in MAN in 2006. Photographer: Guenter Schiffmann/Bloomberg

Volkswagen AG will look to jump-start a stalled seven-year effort to forge Europe’s biggest truckmaker tomorrow when it gains full control of struggling MAN SE.

So far, VW has little to show for the 15 billion euros ($20 billion) of shares it holds in MAN and Sweden’s Scania AB. A vote at MAN’s shareholder meeting tomorrow will hasten cooperation between the companies by eliminating the need for arm’s length negotiations between VW and the German truckmaker.

As part of VW’s push to leapfrog Daimler AG and Volvo AB to become Europe’s biggest truck producer, Chairman Ferdinand Piech is taking a more active role in MAN. The outcome of the vote in Munich is a formality since VW controls more than 75 percent of MAN’s stock.

Slumping demand for new trucks in Europe and ill-fated business decisions by the truck manufacturer have added urgency to VW’s efforts to more closely link MAN, Scania and its own commercial-vehicle operations.

“The truck cycle is much longer than the car cycle,” said Max Warburton, an analyst with Sanford C. Bernstein in Singapore. “Investments can take 20 years to pay off.”

The renewed push to cut combined annual costs by 200 million euros stands a better chance of gaining traction this time as Piech, who also chairs MAN’s supervisory board, takes a direct role in the process, according to four company officials familiar with the matter. VW declined to comment.

Union Clout

Piech is enforcing closer cooperation between MAN and Scania by using his clout with unions to overcome resistance, said the people, who asked not to be identified because the discussions are private. The effort is focusing on better utilizing MAN’s factories and lowering manufacturing spending, the people said.

“MAN’s production network in Europe is geared toward higher market volumes,” said Marc-Rene Tonn, a Warburg Research GmbH analyst in Hamburg. “They will have to look at that.”

Volkswagen has been seeking a heavy-truck alliance since buying a stake in MAN in 2006, a move that thwarted MAN’s own effort to take over Scania, which VW partially owned.

VW, based in Wolfsburg, Germany, gained a controlling stake in Scania in 2008. Because of different rules in Sweden, VW can’t push for similar control of Scania without further boosting its stake, so the two companies will still need arm’s length agreements. VW has no plans to invest the money needed to take full control of Scania, based in Soedertaelje, one of the people said.

Auto Success

Europe’s biggest automaker is seeking to replicate its car-making success in trucks. VW has cut costs by standardizing parts across brands such as Skoda, VW and Audi. That has helped it boost profitability to fund an effort to become the global leader by 2018.

The truck market is different -- prone to sharp swings in demand because of the underlying economy and requiring long-term planning to meet emissions regulations.

Daimler, the world’s biggest truckmaker, introduced a new generation of the Mercedes-Benz Actros long-haul truck in 2011 after spending 2 billion euros on development and upgrading factories. It was the first overhaul in 15 years, double the normal lifecycle of a car. That gives fewer opportunities for cost-saving joint development.

Bribery Scandals

MAN needs more immediate help. The company yesterday forecast its return on sales to fall “significantly” this year because of higher charges related to a power-plant deal, “substantial” tax risks and weaker after-sales business for its turbo and diesel unit. In the first quarter, MAN reported an operating loss of 82 million euros, while Scania posted a profit margin of 13.7 percent.

MAN has suffered bribery scandals in recent years. And last year it had to write down the value of its stake in a Chinese company, booked losses in a military-vehicle joint venture in Germany, and absorbed unexpected costs for unwinding an Indian partnership.

“MAN’s operating results reflect the difficult state of the European truck sector, but they also lagged behind competitors,” said Sascha Gommel, an analyst at Commerzbank AG in Frankfurt.

Demand for trucks over 3.5 tons in the European Union tumbled 14 percent in the first four months of 2013, according to industry association ACEA. More trouble is looming for freight haulers on MAN’s home turf as the German government considers expanding road charges.

European Potential

The market woes don’t detract from the potential. McKinsey forecasts average profit margins for truckmakers in Europe of about 7 percent in 2020, compared with 6 percent in the U.S. and 1.5 percent in China. The region will likely account for 35 percent of global truck-industry profit over the long run, even as demand in China and other emerging markets drive volume growth, according to the consultancy.

To push the cooperation, Piech last year promoted Leif Oestling, who had run Scania for more than two decades, to Volkswagen’s management board. He takes over truck integration from Jochem Heizmann, who struggled to boost cooperation between MAN and Scania in two years in the role.

Following the MAN shareholder meeting, VW will offer to buy the company’s remaining stock for 80.89 euros a share. Investors who don’t accept the cash offer, which is about 5 percent below the company’s current price, will receive a guaranteed annual dividend of 3.07 euros per share.

As VW seeks to become the world’s biggest automaker, it “also needs a strong commercial-vehicle business,” VW Chief Executive Officer Martin Winterkorn said at his company’s shareholder meeting in April. With the MAN and Scania alliance, “we’ve laid the groundwork for this.”

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