Volkswagen Group: A Closer Look at the Automotive Giant
In our series of company profiles, focusing on companies whose stocks we offer as part of our own strategies, we take a closer look at Volkswagen Group this time. Volkswagen is one of the largest automotive companies in the world, but in recent years, it has faced serious challenges.
Symbol of German Engineering
Volkswagen, a symbol of German engineering and one of the most significant automotive conglomerates globally, has a rich and fascinating history. Founded in 1937 under the then-Nazi regime, the company’s goal was to create an affordable people’s car, which in German translates to Volkswagen.
The company embarked on its successful journey with the Beetle model, which became one of the best-selling and most iconic cars of all time. After World War II, when Germany was undergoing a period of reconstruction, Volkswagen became a symbol of the revival of the German automotive industry. Thanks to the popular Beetle, the company gained international fame.
Volkswagen subsequently expanded its portfolio with other models such as the Volkswagen Bus, Volkswagen Golf, and Volkswagen Passat. This move allowed the company to gain an even larger market share and attract various types of customers. The company also began actively investing in acquiring other brands. Volkswagen gradually became the second-largest automaker in the world and one of the most valuable automotive groups globally with a wide range of brands targeting different market segments.
Business Model of Volkswagen Group
The size and significance of the Volkswagen Group are evident from the statistics. In 2023 alone, the company sold 9.24 million vehicles and achieved total revenues of 322 billion euros.
The core of the German group consists of automotive brands such as Škoda, Seat, Cupra, Audi, Lamborghini, Bentley, and Porsche. The Volkswagen Group also includes the motorcycle manufacturer Ducati and commercial vehicle manufacturers Navistar, MAN, Scania, and Volkswagen Truck & Bus (Volkswagen Commercial Vehicles and Traton Commercial Vehicles). These brands are produced in more than 120 manufacturing plants on five continents, employing over 300,000 people.
In addition to manufacturing and selling passenger and commercial vehicles, the company also operates through financial services. Volkswagen Financial Services encompass dealer and customer financing, leasing, banking and insurance activities, and fleet management.
However, the group is currently undergoing its most significant transformation to become a software-driven global leader in sustainable mobility by 2030.
A crucial cornerstone of this strategy is the 10 core brands that cater to all mobility needs and are divided into groups:
Core – Volkswagen, Škoda, Seat, Cupra, Volkswagen Commercial Vehicles
Progressive – Audi, Lamborghini, Bentley, Ducati
Sport Luxury – Porsche
These groups operate independently, with each brand constantly developing and enhancing its global position and strategic focus.
Volkswagen Today
Volkswagen did not embark on its historically largest transformation by chance; it was compelled to do so. Why? The transformation of the automotive industry from combustion engines to electricity and intensified competition from Chinese manufacturers.
Cheaper competition from China is not only pressuring Volkswagen but also other European automakers. The leadership of European automotive companies has been sounding the alarm in recent months. They are urging the EU to restrict the import of Chinese brands and support the domestic market with subsidies, accusing China, in particular, of excessive support for the local electric vehicle market.
Competitiveness in the electric mobility sector is a significant challenge for the Volkswagen Group, as its brands are not competitive either in terms of price or technology. They lag behind the market leader, American Tesla, as well as in comparison to cheaper Chinese competitors Xpeng, Li Auto, Nio, or BYD.
For this reason, the German conglomerate has decided to invest tens of billions of dollars in electromobility, but whether it will be enough remains unknown. By 2025, the company plans to introduce more than 30 additional fully electric vehicles, expand battery technologies, and develop autonomous driving. Investors are likely skeptical that Volkswagen will be able to catch up with its competitors.
Volkswagen Group’s shares have lagged behind its European competitors over the past 5 years, depreciating by 22%. In contrast, BMW’s shares have increased by 40%, Mercedes-Benz by 53%, and Stellantis by a whopping 85%. As a result of recent developments, Volkswagen is currently valued at only $71.3 billion, ranking it only 9th among global automakers.
Ahead of Volkswagen are Tesla, Toyota, Porsche, Mercedes, BYD, Stellantis, Ferrari, and BMW. However, in 2021, its market capitalization was $175 billion. The situation has reached a paradoxical point where the market value of roughly 75% of Volkswagen’s stake in its subsidiary Porsche is higher than the total value of Volkswagen. Investor skepticism towards Volkswagen is also reflected in other indicators, suggesting that its shares are significantly cheaper than those of its competitors.
Strengths and Competitive Advantages
Diversified brand portfolio: The Volkswagen Group owns several strong brands that cover various market segments, from basic models (Škoda, Seat) to luxury cars (Audi, Porsche) and sports cars. This diversification allows the group to reach a wide range of customers and minimize risks associated with market changes in one segment.
Innovation and technological development: Each brand of the Volkswagen Group significantly engages in innovation. For example, Audi is known for its advancements in autonomous technologies and electrification, while Porsche leads in the field of sports models.
Global manufacturing and distribution network: The Volkswagen Group has manufacturing plants and distribution networks spread across the globe, allowing it to efficiently respond to the demands of local markets and reduce logistical costs.
Economies of scale: Given its size and number of brands, the Volkswagen Group can achieve significant cost savings through economies of scale. A common development and purchasing policy for multiple brands reduces production costs and increases margins.
Strong financial position: The group has a strong financial background that enables it to finance extensive research and development projects and withstand economic fluctuations.
Weaknesses and Risks
Reputational risks associated with emission scandals: The history of the Dieselgate scandal, where emissions manipulations were uncovered, still looms over the company as a reputational risk. These scandals can have a long-term negative impact on consumer trust and brand.
Dependency on traditional markets: Despite advancements in electric vehicles, the group is still significantly dependent on the sale of vehicles with traditional combustion engines, which could make it vulnerable in the event of a rapid transition to electromobility.
Competition: The electric vehicle sector is rapidly evolving and attracting many new players, and this competition could reduce the Volkswagen Group’s market share and profitability.
Challenges associated with integration and coordination among brands: Managing such a large conglomerate with many brands brings challenges in coordinating strategies, marketing, and technological development among the various units.
Supply chain disruptions and production disruptions: Global supply chains are susceptible to disruptions caused by political, economic, or natural events. Recent semiconductor supply issues are an example of how such disruptions can affect production.
Technological risks and innovation: Rapid technological advancements mean that Volkswagen must continually invest in research and development to keep pace with innovations and not lag behind the competition.
Conclusion
Volkswagen Group is facing one of the biggest threats in its history, and while many are writing off the European leader, given its strong foundation, it may not be wise to do so. However, the conglomerate must transform into a more agile and competitive company that appeals to customers with technological and affordable vehicles. The next few years will be crucial for the Volkswagen Group. If Volkswagen can overcome its challenges, shareholders may be duly rewarded.
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