ONE question being asked in the industry about Volkswagen is why the company’s top managers are making such alarming statements that have the potential to undermine buyer confidence in the company’s future.

For individuals, the resale value of a car is fundamental because it dictates what is going to be left of the household’s second biggest purchase (first biggest if they are renters) and confidence in the company making that car is paramount.  

For business, government and other fleet buyers the biggest factor deciding the whole-of-life cost of a business purchase is the residual value and there are plenty of alternatives if one of the choices they are making gets a bit of a whiff about them.

For that reason OEMs have always avoided making any statements likely to undermine confidence in the financial viability of a brand.

But recently Volkswagen Group, at the highest levels, has been very candid that all is not well in Wolfsburg.

First the company has cut shifts at one of its main EV production plants and delayed the start of production of the key new EV model the I.D7 being delayed by six months.

The head of one of its unions told the media the cutbacks follow “strong buyer reluctance” to purchase the company’s EVs.

Thomas Schaefer

Then, in a recent call to 2000 of the company’s top managers, Volkswagen CEO Thomas Schaefer told them: “The roof is on fire”. 

This has been taken to be a reference to mean that VW managers are spending so freely on their programs that no-one has noticed that the finances are going up in smoke and the whole place could come crashing down if the roof is allowed to burn on.

According to various media reports around 2000 executives gathered for the call were told by Mr Schaefer: “All is at stake”.

Then VW Group’’s chief financial officer, Patrik Andreas Mayer, told another management meeting that the company’s vehicle business is “unwell” and told them that what Mr Schaefer had said in his message was “a last call.”

Mr Schaefer said there would have to be an immediate freeze on spending and that managers were now charged with finding $A16.4 billion in savings because managers had been “letting the costs run too high in many areas”. 

He said managers would find the next months very challenging.

The problem appears to be that as EVs (which are marginally or not profitable) cannibalise VW Group ICE sales (which provide the base load power for the financial bottom line) the company is not making enough money to cover the massive $60 billion investment it has made in EVs.

There is also a factor when VW committed to the $60 billion investment in EVs, interest rates were far lower than they are today putting even more pressure on getting return from electrification. 

This apparent financial emergency has been exacerbated by lower than expected sales of EVs in Europe and China as the company is forced to discount EVs to find buyers who are missing in action.

The CEO of the Volkswagen Group’s Chinese operations, Ralf Brandstätter, recently warned of the danger in the electric vehicle market brought about by high capital investment in EVs and discounting.

He warned that the EV market was overheating and that discounting to gain or hold market share required high levels of capital.

Speaking at the 2023 China Automobile Forum he said that there are more than 120 EV OEMs in China which will launch around 150 new models this year.

He predicted that many OEMs under pressure from high battery costs and the cost of discounting will leave the market or will require fresh investment from their backers. 

He said: “The fierce competition has led to deep price discounts in recent months. This will ultimately harm the interests of consumers. They will no longer be able to get services from retired brands or they will see a significant price cut (resale value) on the models they buy.”

“We are facing a situation where the market is overheating. Consolidation of the playing field is in full swing,” he added.

“Mr Brandstatter said the Volkswagen Group regarded profitability as the most important focus for the Group and that it would not engage in “unhealthy market competition in order to achieve short-term delivery growth”.

 But escaping from costly discounting in China will be a forlorn hope given VW’s large commitment as a participant in that market. The company, he said, is also maintaining a strong focus on its ICE line-up. 

“We will continue to leverage our advantages in the internal combustion engine market,” he said.

“Although its overall size is shrinking, the group still maintains considerable profitability by virtue of its own scale and cost advantages. By 2030, we will launch a total of 17 new internal-combustion-engine models. 

“In addition, we are promoting the development of hybrid technology and gradually transforming petrol models to plug-in hybrids, becoming a strong player in this market segment.”

There are four schools of thought about these candid remarks.

• The first is that senior management felt that progress by staff in finding cost savings and efficiencies was not proceeding fast enough and that it became necessary to light a fire under them by being forthright about the state of the company’s true financial position.  Mr Schaefer said the company’s systems and processes are “still too complex, slow and inflexible” and that needed to change urgently.
• The second is that the cash position of the company is really challenging and the roof is on fire.
• The third is that VW is beginning a softening up process designed to warn politicians that the rush to EVs is creating serious financial obstacles for a company even as big as VW Group and those politicians could see the closing of plants and the losses of jobs in their electorates. 
• Fourthly, with the huge increase in Chinese EV and ICE vehicle imports into Europe is providing serious competition especially for the German OEMs in the European market, perhaps these candid remarks are designed to get some political interest in import restrictions to slow the Chinese down.

Footnote: In 2022 world demand for EVs was 10.1 million units. China’s share was 5.9 million units.

Comment by John Mellor