VW Profit Lead Over Toyota Under Threat as Demand Wobbles

Volkswagen AG Chief Executive Officer Martin Winterkorn can check one thing off his to-do list: beat rivals in profit.

VW, which six years ago set out to become the world’s biggest carmaker and a leader in profitability by 2018, reported record operating income of 11.5 billion euros ($15 billion) for 2012. That surpassed General Motor Co.’s $7.9 billion and Toyota Motor Corp.’s 1.06 trillion yen ($11.1 billion) for the year.

When Winterkorn set the growth targets in 2007, VW didn’t look much like a world-beater. It had just gone through a disruptive round of job cuts, its namesake brand was barely breaking even, and Toyota earned about $10 billion more than VW.

Winterkorn vowed to raise pretax profit margins to 8 percent from just 1.7 percent in 2006. And he said VW would boost deliveries to more than 10 million vehicles from 6.2 million in 2007 -- in effect adding the sales of a carmaker almost as big as Hyundai Motor Co.

“It’s been a master class in execution,” said Max Warburton, an analyst with Sanford C. Bernstein in Singapore. “Of course there are always elements of luck with corporate plans like this, but mostly they’ve just gone out and done what they said they wanted to do with good products and increasingly competitive prices.”

This year’s race will be tighter and may come down to currency fluctuations. With Toyota bouncing back from product recalls and natural disasters, the Japanese manufacturer is set to report 1.7 trillion yen in operating profit this calendar year, according to estimates compiled by Bloomberg.

Tighter Competition

That could beat analysts’ forecasts of 13.2 billion euros for VW, depending on the strength of the yen. At current exchange rates, Toyota’s estimated 2013 profit would be $17.9 billion while Volkswagen’s would be $17.3 billion. The average forecast for GM’s operating profit is $7 billion.

In a sign of skepticism about VW’s prospects, Waddell & Reed Financial Inc. sold 5.8 million of the company’s preferred shares on March 15, a day after Volkswagen released full 2012 results. The investor was the third-largest holder of the widely traded stock, according to data compiled by Bloomberg. VW closed at 160.30 euros, down 2.6 percent.

VW’s price to earnings ratio is 2.45, the lowest among automakers with a market value above $5 billion and far behind Toyota at 20.7 and GM at 9.43.

VW is closing in on becoming the biggest automaker by sales. Deliveries surged 11 percent to 9.07 million passenger vehicles last year, boosted by growth in China and expansion in the U.S. Toyota had 9.75 million deliveries, while GM sold 9.29 million. VW also sold more than 200,000 heavy trucks and buses at its MAN SE and Scania AB brands.

Europe Woes

“I think we’ll reach our volume target earlier than planned,” Winterkorn, 65, said last week on the sidelines of the company’s annual press conference.

Volkswagen will have to work hard to hold on to its achievements. Its profit lead will be challenged this year as the effects of the sovereign-debt crisis spread from southern Europe to Germany, said Stefan Bratzel, director of the Center of Automotive Management at the University of Applied Sciences in Bergisch Gladbach, Germany.

“Volkswagen is extremely focused on growth,” Bratzel said, “and that makes it very dependent on the global economy expanding and other regions balancing out the weakness in Europe,” where sales are forecast to fall for the sixth straight year in 2013.

Expansion Spending

The risks facing VW, which makes about one in every four cars sold in Europe, have become evident as German demand wobbles. New vehicle registrations in Volkswagen’s home market dropped 9.6 percent in the first two months of 2013, with VW brand sales tumbling 14 percent, according to the country’s motor vehicle office, KBA. VW, based in the city of Wolfsburg, has cautioned that first-quarter earnings will be lower than a year ago as it ramps up production of a new version of the Golf.

To safeguard its expansion, Volkswagen plans to invest 50 billion euros in the next three years in developing vehicles and technologies and building new factories. Investment in the VW brand alone will increase by more than 700 million euros this year, to more than 5 billion euros.

Volkswagen can also lean on its expanded slate of upscale brands for profit after completing the takeover of Porsche AG last year. High-end cars helped VW generate an operating profit margin of 6 percent last year, beating Toyota’s 4.8 percent and GM’s 5.2 percent.

False Security

Audi, VW’s biggest profit generator and the world’s second-largest luxury brand, is projecting higher revenues and deliveries this year as it aims to surpass Bayerische Motoren Werke AG by the end of the decade. The VW luxury unit has an interim target of selling 1.5 million cars by 2015, a goal it says it will hit this year or next.

Audi beat BMW in profitability last year, posting an 11 percent operating margin, slightly ahead of the 10.9 percent margin at BMW’s car division.

Even after making more progress than expected half-way to 2018, VW is showing no signs of easing the pressure on rivals.

“Leading at half-time in no way means that victory is at hand,” Winterkorn told about 2,200 managers at an annual company gathering in Dresden in December. “We should never be lulled into a false sense of security.”

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