Volkswagen Faces an Even Bumpier Road to EVs Than Detroit

"Volkswagen has a way of making investors feel every jolt on its path to electric vehicles.

The German automotive giant reported third-quarter profit Thursday that included losses for what it calls its "volume" brands, notably the VW badge itself. Like General Motors, it was more affected by chip shortages during the latest quarter than in the first half, but unlike GM and other big peers, it doesn't have high enough margins or flexible enough costs to cope well with a drop-off in car production.

The numbers were better including more-profitable premium brands such as Audi and Porsche, and particularly the financing business, which like its U.S. peers has benefited massively from skyrocketing used-car valuations. But the weakness of the core automotive business still disappointed investors. The preferred shares favored by institutional investors fell more than 4% in European trading. The American depository receipts, ticker symbol VWAGY, that are more widely traded in the U.S. and track VW's ordinary shares, also plunged at the open but later made up the losses.

The relative profitability of the group's various brands last quarter should be taken with a grain of salt. Like other car makers, the company has been giving the limited microchips it can get to higher-margin products. The fact that all its volume brands were badly hit, including the formerly healthy Czech subsidiary Skoda, suggests that semiconductor allocations may have played a big role.

Chief Executive Herbert Diess also has an incentive to exaggerate the poor performance of the core VW brand, which is a stronghold for the company's powerful labor union, to strengthen his case for restructuring. Mr. Diess has won plaudits for his big investments in EVs, but the more awkward flip side of this coin is the need to shrink old engine-related infrastructure. Reducing head count is far more difficult for the German company than its peers because of a government equity stake and voting rights. Skirmishes between Mr. Diess and VW's new union boss, Daniela Cavallo, were a noisy feature of the German press this week.

Sentiment toward VW's chances of dominating EVs in the way it does combustion engines has ebbed and flowed in recent years. Hopes seem to be muted right now, which suggests it might be a good time to buy in. Investors just need to remember that the company faces even more obstacles to success than the likes of GM and Ford. It won't be a smooth ride." [1]

1. Volkswagen Faces an Even Bumpier Road to EVs Than Detroit
Wilmot, Stephen.  Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 29 Oct 2021: B.12.