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VW to ring-fence investment on product development with EUR84.2-bil. investment over next five years

Published: 11/25/2013
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VW has outlined a five-year investment plan focusing on product development and presenting some cost reductions in comparison to previous plans.



IHS Automotive perspective

 

Significance

The VW Group has announced a new five-year capital investment plan that will see the company spend EUR84.2 billion on the automotive division over the period.

Implications

The company has opted to ring-fence and maintain capital expenditure on new model development while marginally cutting spending on non-product-related areas between 2103 and 2015.

Outlook

This plan would appear to be an attempt for VW to maintain margins in recognition of the stagnant state of the European market and some concern over the medium-term development of the Chinese market. The company's growth in recent years has been underpinned by desirable, high quality vehicles with highly efficient powertrains and the company is wisely continuing to invest and focus on vehicle R&D.

The Volkswagen (VW) Group has announced a new five-year capital investment plan outlining spending plans of EUR84.2 billion (USD114.14 billion) on new model development and new production capacity over the next five years, according to a company press release. The vast majority of the investment which is being made in the company's core automotive division will be made in product development and vehicle research and development (R&D), with two-thirds of the overall figure directed in that area. However, in recognition of the difficult environment in the European market and possible concerns over the development of the market in China the company is cutting spending plans in some non-core product development areas. In total investments in property, plant and equipment in the Automotive Division will amount to EUR63.4 billion. However, average investments in property, plant and equipment will be down by EUR0.5 billion per year between 2013 and 2015 in comparison to the previously stated three-year plan between 2013 and 2015. Commenting on the company's slightly more cautious spending outlook, Group CEO Martin Winterkorn said, "We will continue to invest strongly in our innovation and technology leadership, despite the uncertain economic environment. This will once again significantly boost the Group's competitiveness and safeguard its future. I am convinced that this will give us extra power on our way to the top." He added, "In times like these, our disciplined cost and investment management will remain a cornerstone of our activities." The company said that lower of investment in property plant and equipment is "due among other things to the postponement of construction projects and capacity optimization." Investment in products and technologies remain unaffected by the decline. In addition to investments in property, plant and equipment, the plan also includes capitalised development costs of EUR19.5 billion and other investments. including for financial assets in the amount of EUR1.3 billion. The increase in capitalised development costs as against previous planning is due to upfront investments in connection with the Group's CO2 targets.

In terms of the total amount spent on total investments in property, plant and equipment in the Automotive Division EUR41.2 billion, around 65% of the total spend, will be allocated to new product lines and modernising existing ones across the group's brands. These will be based on new vehicle launches based on the company's two new main modular product architectures, the new MQB platform and the MLB platform for longitudinal-engined vehicles. In addition, much of this investment will be directed at revamping the group's conventional ICE powertrain offerings in order to ensure compliance with the Euro-VI emissions standard. The company will also continue to invest heavily in its alternative powertrain programme, which includes the development of hybrid and electric vehicles (EVs), as well as the company's existing natural gas powered vehicle programme, including the Audi A3 g-tron. In addition, the Group will make cross-product investments of EUR22.2 billion over the next five years, including spending to expand capacity.

Outlook and implications

The new five-year investment plan is a recommitment to the firm's core values of spending heavily in the areas of vehicle and powertrain R&D, which has been integral to the company's growth in recent years, and the recognition that to maintain its margins, it needs to reduce spending in some areas given the flatlining European market and some concerns over the future medium- and long-term development of the Chinese market, where the group is the market leader in terms of combined vehicle sales. VW's strong reliance on China would mean it would be disproportionately affected by any overheating of the Chinese economy or marked slowdown in the country's passenger car market. However, the Chinese JVs with Shanghai Automotive (SAIC) and First Automotive Works (FAW) are not consolidated and are therefore also not included in the above investment budget figures. In turn, VW will invest a total of EUR18.2 billion in new production facilities and products between 2014 and 2018. These investments will be financed from the JVs' own funds. The company has become more cost-conscious as a result of the instability in some of its core global markets. In September CFO Hans Dieter Pötsch said that "further belt-tightening" was needed, and soon afterwards outlined plans to boost profitability at the VW and SEAT brands (see Germany: 13 September 2013: Frankfurt Motor Show 2013: VW Group to focus on profitability in difficult European market). At a presentation at the Frankfurt Motor Show, Pötsch said that the company was setting margin targets for the core VW brand of 6%, after a 4% margin last year. SEAT has been set a margin target of 5% despite losing EUR156 million last year, while Skoda will have a margin target of between 6% and 8%, which it is currently managing having posted a 7% margin in 2012. The company has also stated that it is already benefiting in terms of its cost base from its new modular architecture, which has already been consolidated into the company's spending plans and which should generate significant cost-savings going forward, although there is so debate about exactly how much cost benefit VW will derive from the MQB programme (see Germany: 1 November 2013: VW CFO says MQB platform is already saving money). Perhaps the biggest concern relating to VW Group's overall cost base and competiveness relating to its investment plans is its ongoing need to invest heavily in domestic production and R&D operations as a result of how integrated the works council model is to VW's operations. It has served VW well for decades and led to harmonious and mutually beneficial relations. However, in times of global economic uncertainty it might be better served by having more flexibility in the geographical spread of its investment programme. More than half of the investments in property, plant and equipment (almost 60%) will be made in Germany.

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