If you had invested in Volkswagen a day before the diesel scandal was exposed in September 2015, your stock would not only be up 10 per cent by now, it would have outperformed BMW and Daimler — rival carmakers that have both posted seven straight years of record sales.
In the chaotic days after the scandal was revealed by US regulators — when the share price nearly halved and some analysts estimated it could cost the company as much as $80bn — such a turnround would have seemed impossible. Some questioned whether VW would be forced to break up after admitting it installed software to cheat emissions tests in up to 11m cars worldwide. Martin Winterkorn, chief executive, resigned that month as the company plunged into crisis, at first denying its luxury unit Audi was also involved — then conceding it was.
The German carmaker is not just outselling Toyota and General Motors by volume, it is also raising profitability and pushing further into new technologies than any of its rivals, with group chief executive Matthias Müller saying it will spend €20bn on electrification and €14bn on shared mobility and self-driving technology by 2025.
Rather than destroying the company, some, including Mr Müller, go as far as to suggest that the scandal forced long overdue changes that might have saved it.
“The crisis, of course, was a huge problem and it was also rather costly,” Mr Müller says at his Wolfsburg office. “But it actually worked as a kind of accelerator to address issues that, before, were unable to be addressed.”
Figures released on Wednesday show sales at the group, whose 12 brands include Audi and Porsche, climbed 4.3 per cent in 2017 to 10.7m vehicles. Even in the US, where Reputation Management Consultants said last April that Volkswagen had “destroyed brand trust”, the mass-market VW brand stole market share with a 5.2 per cent rise. It has been helped by an upswing in the market, with car sales at peak levels in every major region.
Damages from the scandal so far amount to $25bn although other legal action is possible. But instead of raiding its cash reserves, Volkswagen has paid off close to two-thirds of the compensation and fines from improved cash flow and profitability. Comparing the group’s most recent annual balance sheet with one before the scandal shows no discernible evidence that the company experienced difficulty in between, let alone the biggest calamity in its eight-decade history.
“It’s astonishing,” says José Asumendi, analyst at JPMorgan. “You wouldn’t be able to recognise that they had gone through the diesel crisis.”
Volkswagen’s net cash pile — cash and securities, minus debt — actually rose from €21.5bn in mid-2015 to €25.4bn in late 2017. That was achieved through big cost cuts, simplifying how it builds cars by reducing options — for instance the number of possible steering wheels on a Golf fell from 117 to 43 — trimming administrative expenses and building models fit for each regional market. The increases in efficiency expanded its margins, giving VW extra cash and guaranteeing its investment grade credit ratings.
“At the time of the scandal there was talk of a need to sell assets to pay the bill, but all they did was press a few buttons and turn a few screws in the business,” says Max Warburton, analyst at Bernstein. “They’ve generated all the cash they needed to pay the fines and they generated a business that is significantly more profitable.”
To cut costs, the group clamped down on bloated spending. Capital expenditure, which was 6.8 per cent of sales in 2015, according to Bernstein, is expected to be 5.9 per cent in 2017 and just 4.8 per cent this year. A key challenge now will be to maintain this discipline as it invests in electrification. The VW passenger car brand, which accounts for half of group revenue but historically has suffered from low margins, more than doubled profitability from 2 per cent in the first half of 2016 to 4.5 per cent a year later. It is targeting a 6 per cent profit margin by 2025, even with battery-powered cars likely to lose money in the first year.
“This is a dramatic change from the way VW has been run for 20 years,” says Mr Asumendi. Under Mr Winterkorn, group revenue rose more than €50bn between 2011 and 2015, but operating profits barely budged as margins shrank from 12 per cent to 6 per cent.
“It’s obviously never, ever, a net positive to have done something illegal and to have had such negative press, but actually this was a company that was going down the wrong path,” says Kristina Church, analyst at Barclays. “They are definitely back, fighting to prove it and winning back customer support.”
The question being asked of Volkswagen and its management is whether the lessons learnt over the past two years have actually created a sustainably better company just as the car industry undergoes its biggest overhaul since the invention of the internal combustion engine.
Mr Müller, 64, a VW lifer, first joined Audi in 1972. By the time the emissions scandal enveloped the group, he had worked his way up to leading Porsche where in five years he had doubled sales and produced some of the fattest margins in the car industry. He says he was given just 12 hours to decide if he wanted the job and took over one week after the US Environmental Protection Agency exposed the scandal.
Two colleagues say he was reluctant to take on the role and only agreed on the condition that he would have carte blanche to overhaul the company.
“When Winterkorn finished and retired, that was exactly the starting point to make up [our] mind to turn the whole group in a new direction,” Mr Müller says.
VW: Key players
Herbert Diess
Diess, 59, was lured from BMW in 2015 to head VW passenger cars, the brand which has seen the biggest improvements since the crisis. “You cannot over-state the importance of Diess,” says analyst Max Warburton.
Frank Witter
The chief financial officer, 58, is said to have played a decisive role co-ordinating cost strategy across the 12 brands since the emissions scandal and remains chairman of VW Credit.
The task has been compared to making an elephant dance. Volkswagen, then and now, is seen by analysts as a complex group that is difficult to manage. It had revenues of €217bn in 2016, has 620,000 employees at 170 locations worldwide and produces 43,000 cars each weekday.
Moreover, managers have to deal with “a completely dysfunctional supervisory board”, says Arndt Ellinghorst, analyst at Evercore ISI, referring to how the board is dominated by labour unions, the Lower Saxony government and the Porsche-Piech family — descendants of Beetle designer Ferdinand Porsche — who still hold 52 per cent of the voting rights in the carmaker.
Institutional Shareholder Services, a UK-based proxy adviser, has consistently rated VW’s corporate governance at its lowest level, citing “a lack of sufficient independent directors to oversee management”.
Christian Strenger, a corporate governance expert, says: “I haven’t seen any material changes. Quite often the people — in terms of changing compliance — are people of the old guard, so it doesn’t look convincing.”
Recognising some of the problems, Mr Müller says he has taken steps to revamp the group’s leadership model by undertaking a “major renewal process”.
The latest radical change in direction came in September when Mr Müller revealed Roadmap E — a promise to unveil 50 new all-electric car models by 2025. The Audi e-Tron SUV, a 500km-range electric vehicle to rival the Tesla Model X, arrives later this year. Porsche’s Mission E will hit shop floors in 2019. A year later its mass-market brands VW, Seat and Skoda will roll out their electric options.
VW shares have shot up 38 per cent since the announcement, attracting investors who had shunned VW as ill-governed and inefficient.
“A lot of people said to me 18 months ago that it is too much career risk to even talk to my clients about owning VW,” says Ms Church. “They are now saying it is a career risk not to own the stock. Clients are coming to them saying, ‘the stock has run up 30 per cent, why weren’t we involved?’”
VW: Key players
Bernd Osterloh
Aged 61, the powerful head of the Volkswagen works council has been crucial to winning support from VW’s 620,000 workforce for reforms that will cut €3.7bn in fixed annual costs by 2020.
Hans-Dieter Pötsch
Appointed chairman of Volkswagen’s executive board in the aftermath of the 2015 scandal Mr Pötsch, 66, provides a link to the family owners of VW and has kept the trade unions on board with the post-crisis plan.
The credit for the turnround is not all Mr Müller’s, with some analysts saying he was bailed out by an upswing in the market. Before the crisis VW’s footprint was already more global than its rivals, allowing it to benefit faster when the market picked up. Car sales in China, where VW sells two-fifths of its cars, rose 5.1 per cent last year, in part reflecting decisions made decades ago.
Other individuals have also been heavily involved. Hans-Dieter Pötsch, the longtime financial head who was promoted to chairman of the group in late 2015 remains an essential link to the family owners of VW and has kept the trade unions on board with the post-crisis strategy. “As chairman of both Volkswagen and Porsche SE [the parent group], he’s the glue that holds this company together,” says Kenneth Garschina, principal of Mason Capital.
Herbert Diess, the cost-cutting executive lured from BMW in July 2015 to head up VW passenger cars, is also credited by some because that brand has made the biggest improvements in the past two years. Frank Witter, chief financial officer, is also said to have played a decisive role in co-ordinating cost strategy across the 12 brands.
As has Bernd Osterloh, the powerful head of the works council whose pragmatism and cost-cutting solutions were behind the Future Pact signed by unions and management in late 2016 that will see 30,000 jobs lost through attrition. Mr Osterloh did not merely offer support for the plan to cut €3.7bn in fixed annual costs by 2020, he took the unprecedented step of meeting with investors in London to cheerlead it.
“It’s a collective push,” says Mr Asumendi. But it is not without tensions. Last year Mr Diess and Mr Osterloh tussled over the pace and depth of job cuts, with the latter accusing Mr Diess and his colleagues of “flagrantly” violating the terms of the cost-cutting Future Pact “as soon as the ink was dry”.
This array of characters suggests to some that Mr Müller is not really in charge. But it may just be that he is the opposite of both Mr Winterkorn, his details-oriented predecessor, and Ferdinand Piëch, the former chairman who encouraged the appearance of being all-powerful.
These two were the chief architects of a hierarchical culture once dubbed by Der Spiegel as “North Korea without the labour camps”. Workers were encouraged to follow orders and not question them.
“Winterkorn decided everything, in every brand, as regards products and technology,” says Professor Ferdinand Dudenhöffer at the University of Duisburg-Essen. “Müller isn’t doing that. The brands now have the power to decide for themselves.”
This hint of democracy in Wolfsburg is referred to approvingly by many in and around the company.
The old, unquestioning, culture was diagnosed as a key factor in the emissions scandal. And Mr Müller claims his greatest achievement to date has been to reform it — by decentralising decision-making. He has also encouraged projects with the technology sector in areas ranging from electrification to self-driving and internet-connected cars. This month VW announced partnerships with autonomous start-up Aurora and chipmaker Nvidia. Last year it invested in ride-hailing app Gett and launched its own urban mobility brand, MOIA.
“Before my time [as CEO], Volkswagen was a kind of a closed-shop company and not very open to any form of co-operation,” Mr Müller says. “Now we are quite open.”
Risk factors Electric shock, labour costs and a return of dieselgate
Industry analysts are so uniformly bullish on Volkswagen that Bernstein, which has made VW its “top pick” for the sector in 2018, is worried about groupthink. Of 34 analysts who cover Volkswagen, just four recommend avoiding the stock, which has risen 38 per cent since September.
Among them is Berenberg, whose analysts predict that VW stock will trade at €120 within 12 months, 34 per cent below where it trades now. It argues that structural changes at VW are largely illusory. And that sales and profitability are rising not because of management decisions but due to a cyclical upswing. Labour costs continue to rise and despite a pact to trim 30,000 jobs by 2020, headcount rose 1.7 per cent in the first three quarters of 2017. Another key risk identified by analysts is whether VW will be able to trim costs while it focuses on electrification. And if demand for electric cars does not match VW’s aim of selling them in the millions by 2025, it may be left with unrecoverable costs.
The history of feuds between VW’s powerful labour unions and its cost-cutting management team also poses a danger. Herbert Diess, the VW brand chief, is considered by some analysts to be the strongest candidate to be the next group chief executive, but has already clashed with the unions.
The diesel scandal, often considered done and dusted, could yet balloon in Europe, where more than 8m cars were equipped with software to trick emissions tests, although VW has denied breaking any laws. Aman Johal, director of Your Lawyers, a law firm involved in suing VW for allegedly rigging 1.2m cars in the UK, says the legal battles are just getting started. “Stockbrokers think it’s all in the rear-view mirror, as sales haven’t been affected,” he says. “But the adverse publicity against Volkswagen really hasn’t started. That will change.”
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