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Volkswagen Needs Mass Market Brands To Perform; Europcar Plan Questioned

The hosannas were ringing out for Volkswagen as it raised its profit outlook again and said it would try and buy French car rental company Europcar, but some investors soon turned sour on the business outlook which relied on premium brand success rather than the workaday mass market, while others wondered about the proposed acquisition.

China’s poor performance continued to irk investors.

VW raised its profit forecast again for 2021 – to an operating margin of 6.0 to 7.5% following an earlier guess of 5.5 to 7% – after previously announcing a record first half operating profit before special items hit of €11.4 billion ($13.6 billion). The previous record of €10 billion ($11.9 billion) was achieved in 2019, while 2020 was undermined by the coronavirus shutdown. VW said the strong profit performance was boosted by its Porsche and Audi premium giants.

VW shares jumped Thursday after the news but slipped back Friday by about 1% to close at €279.8.

Frank Schwope, analyst with Norddeutsche Landesbank Girozentrale (Nord LB), reckoned many aspects of VW’s long-range prospects looked positive but was worried by unforeseen interventions like the coronavirus disruption or the self-inflicted wound of dieselgate. Schwope also wondered about the new enthusiasm for electric vehicles and their profit-making possibilities.

“It amazes me that after years of complaining about narrow EV (electric vehicle) margins there are suddenly supposed to be dream returns just around the corner,” Schwope said.

VW has said it wants to overtake Tesla
TSLA
as the biggest electric car maker in the world. Schwope expects VW to overtake Tesla sales in 2023.

Bernstein Research analyst Arndt Ellinghorst, a long-term questioner of VW’s underlying financial performance, pointed to problems in China and a poor performance from its in-house mass market brand VW.

“VW’s premium brands are saving the group’s performance, China keeps deteriorating and the VW brand dramatically underperforms at times when pretty much all other major mass-market brands print money. On top, VW’s capital allocation (Europcar deal) is raising questions,” Ellinghorst said.

As well as the VW mass market brand, the company also sells similar vehicles badged as Skodas or SEATs. At the top end, there are British based-limousines from Bentley and Italian supercar maker Lamborghini.

Ellinghorst said in a report the profit forecast for the whole year could imply a disguised profit warning because in the first half the margin was 8.2%, or overly conservative guidance.  He also had questions about the performance in China generally and sales of electric cars.

“VW needs to deliver answers on why and when the performance of China and its ID. (electric cars) product in the region will step-up,” he said.

Reuters reported that VW’s sales target for ID electric vehicles in China this year is between 80,000 and 100,000, while in the first half deliveries stood at 18,285. 

Reuters Breaking Views column questioned the wisdom of what it called the timid take-over of Europcar, again, and the plans to keep it at arm’s length.

“The takeover is part of VW Chief Executive Herbert Diess’s plan to turn the $150 billion company into a tech-enabled provider of “mobility services”, a market he reckons will grow 10-fold to $100 billion globally by 2030. As younger drivers eschew car ownership, they are more likely to opt for alternatives like ride-sharing and monthly subscriptions. Further out, passengers will order driverless “robotaxis” whizzing around city centres with a swipe on a mobility app,” Breaking Views columnist Christopher Thompson said.

The idea that younger drivers somehow aren’t interested in car ownership is a hangover from the long years of economic recession when the young were priced out of the vehicle market. Meanwhile the idea that driverless taxis are about to swarm all over capital cities is also a bit of a stretch.     

Meanwhile GlobalData, a leading data and analytics company, had positive thoughts about the possible acquisition of Europcar.

“VW may feel that acquiring a vehicle hire company – and one which it used to own – at a very good price is too good an opportunity to overlook. One immediate benefit is that Europcar’s large vehicle fleet would provide a significant captive customer for VW Group cars and vans,” said GlobalData analyst David Leggett.

This would help VW’s mobility and autonomous car plans.

“Acquiring Europcar could turn out to be a smart move for VW Group,” Leggett said.

Nord LB’s Schwope also liked the Europcar move, although he pointed to the rerun nature of the move.

“We see the takeover of Europcar as a component of a multichannel strategy. However, the principle also applies here: trial and error!” he said in a report.

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