Volkswagen's 6.5% Margin Target: A Path to Profitability or Pipe Dream?

Volkswagen AG, the world's largest automaker, has set an ambitious internal target to achieve a 6.5% margin for its VW passenger car brand by 2026. This goal, reported by Business Insider, is part of the company's 'Accelerate Forward/ Road to 6.5' plan, which aims to improve cost efficiency and operational performance. However, reaching this target will require significant efforts and may face several challenges.

Volkswagen's new margin target is a significant increase from its current level of around 3.94%, based on the trailing PE ratio provided in the materials. To achieve this, the company has implemented several measures, including:

1. Cost-cutting measures: Volkswagen has agreed with employee representatives on a cost-cutting plan that includes reducing administrative jobs by 20% across the entire group. This will be achieved through termination agreements and a hiring freeze, with the positions that are eliminated not being filled or only in exceptional cases (volkswagen-newsroom.com).
2. Shortening development cycles: The company aims to bring new models to market quicker, in 36 months instead of 50 months, which is expected to save more than one billion euros over the period of the planning round up to 2028 (volkswagen-newsroom.com).
3. Reducing test vehicles: Volkswagen plans to reduce the number of test vehicles in Technical Development by up to 50% by using digitalization and technological progress more, which is expected to save around 400 million euros per year (volkswagen-newsroom.com).
4. Increasing purchasing performance: The company aims to improve its purchasing performance in procurement, enabling savings of over 320 million euros per year (volkswagen-newsroom.com).
5. Optimizing after-sales business: Volkswagen plans to optimize its after-sales business, which is expected to generate more than 250 million euros annually (volkswagen-newsroom.com).
6. Optimizing production times: The company aims to optimize production times along the agreed location pacts, which is expected to save over 200 million euros each year (volkswagen-newsroom.com).

These strategies are part of the 'Accelerate Forward/ Road to 6.5' plan announced in June 2023, which aims to achieve a return on sales of 6.5% for the core brand by 2026.

However, reaching this target will not be easy. Volkswagen faces several challenges and risks, including:

1. Intense competition: The automotive industry is highly competitive, with numerous players vying for market share. Volkswagen must differentiate its products and services to maintain its competitive edge and attract customers. To mitigate this risk, Volkswagen is focusing on innovation, quality, and customer satisfaction to create a unique value proposition for its customers.
2. Rapidly evolving market dynamics: The automotive market is subject to constant change, with new technologies, regulations, and consumer preferences emerging rapidly. Volkswagen must adapt to these changes and stay ahead of the curve to remain competitive. To mitigate this risk, Volkswagen is investing in research and development, particularly in the areas of electric vehicles and autonomous driving, to ensure its products remain relevant and appealing to customers.
3. Regulatory pressures: Automotive manufacturers face increasing regulatory pressures, particularly in the areas of emissions and safety. Volkswagen must comply with these regulations while maintaining profitability. To mitigate this risk, Volkswagen is investing in compliance measures and working closely with regulatory bodies to ensure it meets all necessary standards.
4. Workforce adjustments: Volkswagen has announced plans to reduce its workforce by 35,000 positions by 2030, primarily through voluntary measures. This process may face resistance from employees and unions, potentially leading to disruptions in operations. To mitigate this risk, Volkswagen is engaging in open communication with employees and offering incentives for voluntary separation, such as early retirement programs.
5. Financial liabilities: Volkswagen has acknowledged its obligations related to European Union emissions standards, which may result in significant financial liabilities. To mitigate this risk, Volkswagen is actively managing its financial resources and exploring opportunities to reduce its exposure to these liabilities.

In conclusion, Volkswagen's new margin target of 6.5% for its VW passenger car brand is a significant challenge that requires strategic planning and execution. By implementing cost-cutting measures, optimizing production times, and investing in innovation, the company can mitigate the risks and achieve its goal. However, the automotive industry's intense competition, rapidly evolving market dynamics, regulatory pressures, workforce adjustments, and financial liabilities will all play a role in determining the success of Volkswagen's ambitious plan.