Through the first nine months, the namesake brand of passenger cars formed almost 60% of Volkswagen AG’s net vehicle deliveries. The heavy reliance of the company’s overall results on the Volkswagen Passenger Cars division makes it crucial for our analysis of the group’s operations. As the division has been struggling to boost volume sales, especially in the aftermath of the dieselgate scandal, the overall group has reported lower-than-expected profit margins through the first half of the year. Volkswagen Passenger Cars operated at only 2% margin through last year, dragging down the group’s overall operating margin to 5.7%. The brand’s margin fell further to 0.3% in Q1, and stood at 1.7% in Q2, due to added expenses and lower sales.
Volkswagen Passenger Cars has reported a decline in sales in most markets this year, but the growth in China has been able to offset those declines.
Approximately 60% of Volkswagen’s net deliveries are constituted by the namesake brand, which, in turn, delivers half of its vehicles to China. According to China Association of Automobile Manufacturers, China’s passenger vehicle sales are up 15% year-over-year through September to 16.75 million units, buoyed by government tax breaks, and high discounts offered by dealers. This includes a high 29% jump in sales in the last month alone.
The government halved the 10% purchase tax on cars equipped with 1.6-liter engines or smaller engines in October of last year, in response to a period of slow growth in the country’s vehicle market. This is why the results so far this year in the country’s passenger vehicle market have been exceptionally positive on a year-over-year basis. Over 70% of cars sold in the country qualify for the incentive, which helps customers save up to $1,500 on a new vehicle purchase. SUVs and Crossovers have been the biggest gainers in China, growing by 40-50% year-over-year through the first nine months of the year.
Volkswagen will take positives from growth in its single largest market, and especially for its namesake brand of passenger cars. However, going into the fourth quarter, this growth might stall. This is as the country will lap the tax breaks offered last October. Slow growth is expected in the fourth quarter in China’s passenger vehicle market, and if the government does not extend the tax breaks, growth could drop to zero or slightly above zero next year. This will mean that Volkswagen will look for growth in terms of increasing its market share.
Volkswagen lost its lead in the country to GM last year, with vehicle deliveries falling about 3.5% to 3.55 million units, compared to the latter’s growth of 5.2% to 3.61 million units. As vehicle demand in China continues to remain relatively strong, Volkswagen is also continuing to invest heavily in the country, irrespective of its cost-cutting plans owing to the emissions scandal. Volkswagen is investing over 4 billion euros ($4.5 billion) in China in 2016, spending on its new SUVs and plug-in models in the country, including models among the 15 new-energy vehicles the company has planned to introduce within five years in China.
Volkswagen Passenger Cars has looked to China in the absence of strong growth elsewhere, but the expected slowdown in the market going into the fourth quarter and next year could again hamper the expected growth. In this case, the division will look to the SUVs and Crossover segment that is booming in the country, and also at the new energy vehicles it is developing, to boost sales in its single largest market.
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