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VW “New Auto” Seen As Reiteration Not Direction Change, While Electric Vehicles Fail To Convince

Investors were underwhelmed by Volkswagen’s “New Auto” strategy, said to be more of an echo than news, while some worried VW’s ID range of electric cars weren’t exciting the public.

In a lavish all-singing all dancing presentation earlier this week, Volkswagen CEO Herbert Diess raised the profit target to an 8 to 9% operating return on sales in 2025, up from the previous 7 to 8% target, and repeated the mantra of VW becoming the world leader in electric vehicle sales, while looking forward to what he called “smarter, safer” autonomous cars.

Targets for 2030 included raising mobility spending in a market expected to be worth €5 trillion then, up from €2 trillion today, while battery electric vehicles will account for half of all sales. Diess repeated ambitious spending plans on digitalization and electrification through 2025. VW had already announced it will stop selling internal combustion engine (ICE) vehicles between 2033 and 2035.

“By 2040, almost 100% of the new Group vehicles in the main markets should be emission-free. The group wants to be completely climate-neutral by 2050 at the latest,” Diess said.

“The ICE market is likely to decline by over 20% over the next 10 years,” he said.

VW, in a preliminary announcement, has already reported its 2021 first half operating profit rose to €11 billion ($13 billion), which surpassed pre-pandemic levels.

Bernstein Research analyst Arndt Ellinghorst said the presentation didn’t reveal much that was new, apart from the operating profit margin target. VW was committed to mobility services as a service business model and profit pool. VW was continuing to outspend other big manufacturers with a target Capex and R&D of 13% in 2021/22.

“It’s worth reminding ourselves that Toyota manages to run its business on 8% core spending,” Ellinghorst said.

He said investors applaud VW’s bold embrace of electrification, but worried about its success so far.

“If ID sales continue to fall behind expectations and technical issues persist, the credibility of all of VW’s ambitions will suffer. In light of the inflation of strategy updates and the Group’s enormous spending levels, we feel it’s time to globally deliver technology in a convincing fashion and in scale,” he said.

Sales of the ID.3, the first VW to be built from the ground up as all-electric, stumbled initially because of software and other teething problems.

But German-based auto analyst Matt Schmidt isn’t surprised by VW’s BEV performance and expects it improve strongly.

“If you look at VW’s strategy for 2021 it appears they are expecting exactly that – volumes to double in Q3/Q4 over Q1/Q2,” Schmidt said in comments earlier this month. Schmidt publishes The European Electric Car Report (www.schmidtmathias.de).

VW electric car sales will be boosted later this year as output of the VW ID.4, Audi Q4 e-tron and Skoda Enyaq gather pace.

Investment researcher Jefferies agreed that most of “New Auto” was already known.

Investment bank UBS reckoned the presentation should have been more aggressive.

“As the first mover amongst the global incumbent (manufacturers) with a stronger substance in EV & AV today than most competitors, we hoped VW would set even more aggressive 2030 targets, take more near-term action to crystallize value in software-enabled businesses and simply put, have something big to announce on a day like today,” UBS analyst Patrick Hummel said in a research note.

“This was not the case and the presentation felt like we heard this before from players that neither have the scale, brands nor the early mover advantage VW enjoys like Ford, Renault, and Stellantis,” Hummel said.

The Wall Street Journal’s “Heard On The Street” column pointed to the dangers of trying to forecast many years ahead as it extrapolated the prospects for futuristic areas like mobility services, software business and autonomous cars. Columnist Stephen Wilmot said VW’s electric car strategy was uncontroversial, but its hopes for big growth in “software-enabled revenues” implied a business almost as big as electric vehicles by 2030.

“The risk is that Volkswagen wastes capital on areas it deems “strategic” based on a necessarily fuzzy vision of the future. Talk of mobility has been a red flag for auto investors before. It was infamously a focus for Jacques Nasser, who unsuccessfully ran Ford from 1999 to 2001,” Wilmot said.

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