Volkswagen (VWAGY, Financial) has lowered its annual performance forecast for the second time in less than three months. This indicates that Europe's largest automaker may be facing significant challenges. Due to weak car demand, Volkswagen reduced its revenue, profit, and cash flow forecasts last Friday.
The company now expects its 2024 revenue to decrease by 0.7% to 320 billion euros from 2023's 322 billion euros. Previously, the forecast was a growth of up to 5%. The profit margin for 2024 is now projected to drop to 5.6%, down from the previous expectation of 6.5%-7%. Additionally, Volkswagen expects net cash flow from its automotive division to be around 2 billion euros in 2024, much lower than the earlier estimate of 4.5 billion euros.
Volkswagen has also lowered its global car delivery forecast for 2024 to about 9 million units, down from the previously projected 3% growth target over 2023's total deliveries of 9.24 million units. This marks the fourth consecutive year of declining annual deliveries for the company.
Other German automakers, including Mercedes-Benz and BMW, have also recently announced downward revisions to their full-year profit forecasts.
Volkswagen's repeated downward revisions highlight the severity of the crisis the automaker is facing. The main reasons for the forecast adjustments include underperformance in its passenger car segment and significant market share declines in China for its Volkswagen, Audi, and Porsche brands.
Volkswagen once dominated the Chinese market for fuel cars but has failed to keep pace with the rapid shift to electric vehicles. Competitors like BYD have gained an edge with innovative and affordable models. Independent automotive analyst Matthias Schmidt noted that Volkswagen's scale advantages may have peaked as Chinese consumers increasingly favor domestic brands.
The company is also lagging in its transition to electric vehicles, facing fierce competition from new entrants in the European market and dealing with potential conflicts with unions over job cuts and unprecedented local factory closures.
Earlier this month, Volkswagen announced it might close two domestic factories in Germany and terminate a job protection agreement that has been in place for over 20 years. If implemented, this would mark the first time Volkswagen has closed domestic factories since its inception.
CEO Oliver Blume stated on September 2, "The European automotive industry is facing very tight and severe conditions." Blume emphasized the need for decisive action due to the increasingly challenging economic environment and the entry of new competitors into the European market. Additionally, Germany is falling behind in manufacturing competitiveness.
Volkswagen announced that its brands require "comprehensive structural adjustments" and that even closing automotive production and component factories cannot be ruled out. Volkswagen brand CEO Thomas Schäfer mentioned the extreme tension and the need to discuss sustainable restructuring options with employee representatives soon.
Volkswagen seeks to end its employment protection agreement, ensuring "critical structural adjustments" to enhance competitiveness in the short term. The agreement, which has been in place since 1994, promised no layoffs until 2029, covering factories in Wolfsburg, Hannover, Brunswick, Salzgitter, Kassel, and Emden.
Cost reduction and efficiency improvement are urgent needs. In the first half of 2024, Volkswagen's revenue grew by 1.6% to 158.8 billion euros, but operating profit fell by 11.4% to 10.05 billion euros. The operating profit margin dropped to 6.3%, down by 1 percentage point compared to the same period last year. Pre-tax net profit decreased by 14.6% to 10.16 billion euros, and free cash flow from the automotive business was 4.99 billion euros.
The decline in car sales directly impacted Volkswagen's first-half performance. The company sold 4.341 million vehicles in the first half of the year, down by 0.6% year-on-year. While mainstream brands like Volkswagen, Skoda, and SEAT saw a 1.8% increase in sales to 2.494 million units, high-end brands like Audi, Bentley, and Lamborghini experienced a 17.7% decline in sales to 549,000 units. Luxury sports brand Porsche also saw an 11.1% drop in sales to 152,000 units, despite being a key cash generator for the group.
Volkswagen's significant investments in electric and smart technology transitions have also impacted its profits. In the first half of 2024, the group’s R&D expenditure rose by 11.7% to 11.4 billion euros. Its software division, CARIAD, generated revenue of 426 million euros but reported an operating loss of 1.18 billion euros.
Arno Antlitz emphasized that due to lower-than-expected performance in the first half, further cost-cutting is necessary to meet the annual targets. Volkswagen brand will be the first to cut costs, aiming to save 10 billion euros by 2026.
Jefferies analysts, led by Philippe Houchois, suggested in a report that deteriorating performance could accelerate restructuring decisions, particularly as the Volkswagen brand continues to drag down cash conversion rates, posing a survival risk for the group.
