VW loses $3,500 on every car exported to North America

[cawimmer430]

 

Link: http://www.businessweek.com/globalbiz/content/aug2006/gb20060822_430027.htm?campaign_id=rss_null

Volkswagen Still on Shaky Ground
The German auto maker has been touting big turnaround plans, but it still loses money on each car exported to the U.S.

Europe's largest auto maker, Volkswagen (VLKAY), has tantalized investors since 2004 with its bold restructuring plans and robust profit targets for 2008. In anticipation of a vigorous VW revival, the company's stock has doubled over the past two years, to around ?61 ($77) a share.

But at headquarters in Wolfsburg, progress toward the company's ambitious goals seemed to be bogging down. Product mistakes, boardroom battles, and labor resistance to job cuts have conspired to undermine the turnaround.

Then suddenly this spring, VW's overhaul ignited. Second-quarter sales took off?even in the tough U.S. market?driving the VW brand group's anemic operating profit up 168.5% from a year earlier, to $763 million. New models helped Volkswagen boost its European market share for the first half of 2006 to 19.2%, up from 18% a year ago and near historic highs.

LOSING PROPOSITION.  So, is the much anticipated turnaround at hand? Not quite. With first-half revenues up 14.2%, the $122 billion auto maker is steering in the right direction, but it still faces big challenges. The second-quarter sales vroom isn't sustainable, analysts say, because Volkswagen is at the peak of its yearly product cycle. Worse, the turbocharged profits mask problems that haven't gone away.

The big one: VW is bedeviled by production costs that are twice the level of its competitors. In fact, its costs are so high that the German auto maker still loses money on every car it exports. Last year VW's U.S. losses totaled $1.1 billion. That's roughly $3,500 per car, nearly 33% more than the losses GM suffers per vehicle.

VW's ongoing restructuring will help Volkswagen bring its U.S. losses down to $832 million in 2006, Morgan Stanley analyst Adam Jonas forecasts. But top management concedes that it won't be able to turn a profit in the world's largest auto market for several years. "The problem is not European sales, it's a European cost base applied to North American revenues," says Jonas.

WORK ETHIC.  To fix what ails VW, Chief Executive Bernd Pischetsrieder must deliver on a plan to cut 20,000 employees from the company's bloated 100,000-strong German workforce and clinch a vital pact with labor to boost VW's workweek to 35 hours, up from the current 28-hour week, without a pay increase.

As part of a plan to bring VW's pretax profit up to $6.5 billion by 2008 (more than quadruple the $1.4 billion earned in 2004), Pischetsrieder has targeted some $2.6 billion in annual labor cost savings. In addition to shrinking the workforce and lengthening the workweek, his plan also calls for paying lower wages to new hires.

So far, 9,700 VW employees have agreed to an early retirement package and another 2,500 have accepted a voluntary severance package. Pischetsrieder, who is eager to book the 20,000 job cuts by the end of 2006, is now offering workers an "early booking bonus" of $69,000 for agreeing to depart by Sept. 30.

DOWN TO SIZE.  That's on top of severance packages running from $50,000 to $250,000. The company also is introducing a pay scheme for new hires that eliminates the 20% premium VW's existing workers currently are paid above the average German auto worker wage.

Volkswagen's labor problems have proven intractable to date, since the state of Lower Saxony still owns 18% of the company's shares and has long sought to protect jobs in the region. But the cuts are essential if VW is to regain competitiveness. Its German factories run at a loss of several hundred million dollars a year.

As Japanese and Korean auto makers ratchet up their drive to sell cars in Europe, VW's traditional 18% to 20% market share will come under heavy assault and is likely to ebb, European auto industry experts warn. "In 15 years, VW's market share in Europe will look dramatically different," says Jonas.

CLOUDY VISION.  If Volkswagen starts to cede market share to Asian rivals without getting its costs down sharply, it will end up in the same vicious spiral of red ink, excess capacity, and job cuts that plagues General Motors (GM) and Ford (F). Already, VW's six German factories run at only 60% of capacity?way below a level that ensures profitability, analysts estimate.

"The stock market has recurring visions of a super-competitive Volkswagen. But management is working hard just to maintain its existing position," says Stephen B. Cheetham, an analyst at Sanford C. Bernstein in London.

To restore real competitive muscle, Volkswagen has to prove it can sustain operating margins of 4% to 5% over the long term. It hit 3.3% in 2005, and analysts forecast a 3.6% operating margin this year. But the figures are misleading, since the company has slashed capital expenditure and must invest far more annually to sustain competitive products and factories. "VW's spending level is unsustainably low," says Jonas.

NEWER, CHEAPER.  Much is riding on a revamp of VW's flagship compact, the Golf, which is due out in 2008. The fifth-generation version, unveiled in late 2003, was roundly criticized as overengineered, overpriced, and "boring." Analysts believe VW makes no money on the current version of its largest-selling car because it was forced to pack it with extras or reduce the price in order to drive sales.

Production chief Wolfgang Bernhard is now speeding a revamp of the sixth-generation Golf to market, which market researchers say will be priced as much as ?1,000 ($1,280) lower than the existing model.

At the same time, Bernhard has warned labor leaders that the next Golf may not even be built in Germany if labor costs cannot be lowered sufficiently. "It's ridiculous not using expensive machinery three days a week," says Patrick Juchemich, analyst at brokerage Oppenheim in Frankfurt. "Bernhard needs to bring the cost level down enough to export profitably to the U.S."

UPSCALE MISTAKE.  Volkswagen also desperately needs to polish its product lineup for the U.S. market, where it has been outmaneuvered by rivals such as BMW, with its hot niche models like the X3 baby SUV and stylish Mini. U.S. sales of the VW brand group fell 11.9% in 2005 to 224,000 cars, after declining 8.5% in 2004. BMW has now overtaken VW in U.S. sales volume, even though VW is a mass-market auto maker and BMW sells premium cars.

One reason for VW's slide: Its misguided effort to go upmarket and introduce a $67,000 sedan called the Phaeton. By striving to challenge Mercedes with innovative engineering and classier brand image, Volkswagen lost touch with its core "people's car" customers who associated the brand with good value. It also lost touch with U.S. customers' changing tastes.

But Bernhard is also working to fill the pipeline with some 20 new vehicles over the next five years that will uphold VW's traditional cars-for-the-people values, including a baby SUV based on the Golf platform.

TAXING ISSUES.  "Just shipping the Golf and the Passat to the U.S. is not a successful strategy," says Ferdinand Dudenhoefer, director of the Center for Automotive Research in Gelsenkirchen. "In the long run they have to think about whether it makes sense to export or to build in North America together with Audi."

In the meantime, analysts warn, VW could see its fortunes dip again next year as volumes slide. Lower labor costs from employee departures will not help the bottom line until late in 2007. And an increase in Germany's value-added tax scheduled to take effect in 2007 could also dampen auto sales in VW's home market.

"VW will have a tough 2007?they will struggle just to have earnings equal 2006 levels," says Cheetham. Despite VW's progress, Pischetsrieder's promise of pretax profit of $6.5 billion in 2008 is still a wager many analysts aren't taking.

[Lebowski]

There was an article in the WSJ yesterday about how workers at one German VW plant worked 28 hour work weeks.  They just bumped that up to 33 hours, and the workers were pissed.

Gee, I wonder why their costs are so high 

[pommes-t]

That's two free '91 Polos and some extra cash for each customer! 

[cozmik]

There was an article in the WSJ yesterday about how workers at one German VW plant worked 28 hour work weeks.  They just bumped that up to 33 hours, and the workers were pissed.

Gee, I wonder why their costs are so high 

Seriously.

28 hour work weeks? That's not a work week, that's like 2/3 a work week.

[MX793]

There was an article in the WSJ yesterday about how workers at one German VW plant worked 28 hour work weeks.  They just bumped that up to 33 hours, and the workers were pissed.

Gee, I wonder why their costs are so high 

Isn't the workweek in much of Europe only around 30-35 hours?  I know France enacted a law limiting workers to 35 hours a week.

[SJ_GTI]

There was an article in the WSJ yesterday about how workers at one German VW plant worked 28 hour work weeks.? They just bumped that up to 33 hours, and the workers were pissed.

Gee, I wonder why their costs are so high?

Do their workers not get paid by the hour?

[gasoline]

Isn't the workweek in much of Europe only around 30-35 hours?  I know France enacted a law limiting workers to 35 hours a week.

With the hilarious intent of creating more employment. (That was the original idea anyways)

Either way, it's unsustainable.
They'll either have to raise taxes, or slave away like us Americans--or Japanese do.

P.S. The French law, like any restrictive European law, is circumvent-able.
It is usually worse than it sounds. A lot of employment classes are excluded, and there are ways to collect overtime. Don't ask me how to do it.

[Lebowski]

Do their workers not get paid by the hour?

It didn't say.  It also didn't say how many shifts they are, or how many hours/week the plant is operating.

Still a 28 hour work week hardly seems like the most efficient way to run a plant.  Even if they are paid hourly, their hourly wage is obviously enough to live on (and apparently live somewhat comfortably since the workers complained about the bump to 33 hours) even though they work only 28 hours.

[pommes-t]

About that 28 hour week in Wolfsburg: Lower Saxony is a part owner of Volkswagen. They have the intention to have low unemployment rates. VW had some problems and would have to fire many workers. So they made a contract that the workers don't get paid so much, but also don't have to work so much so that everybody keeps their jobs.

It's pretty much the opposite as to what's up in Detroit...

[Raza]

Seriously.

28 hour work weeks? That's not a work week, that's like 2/3 a work week.

That's half a work week for my brother.  On a good week.

[SaltyDog]

Working that little would be great.  Americans work the second most of any country I believe.  Turkey works the most IIRC.

[pommes-t]

Working that little would be great.? Americans work the second most of any country I believe.? Turkey works the most IIRC.

There's absolutely no way that'S true! I'm pretty sure it's the Chinese, followed by all other Asian countries with Japan pretty in front, too!

[gasoline]

Here is this graph showing annual hours--from Wikipedia:



http://en.wikipedia.org/wiki/Working_hours#Differences_among_countries_and_recent_trends

[Eye of the Tiger]

I've always heard Norway was a good place to live. Now I know why.

[pommes-t]

Here is this graph showing annual hours--from Wikipedia:



http://en.wikipedia.org/wiki/Working_hours#Differences_among_countries_and_recent_trends

China is missing.

Germany... 

[The Pirate]

Regarding the hours working vs. income, I would gladly lose a bit of pay for more free time.

[GoCougs]

...clinch a vital pact with labor to boost VW's workweek to 35 hours, up from the current 28-hour week...

There you go.

[SaltyDog]

Here is this graph showing annual hours--from Wikipedia:



http://en.wikipedia.org/wiki/Working_hours#Differences_among_countries_and_recent_trends

Wow, so I'm way off.

On an unrelated note, I wonder if someone imported enough VDubs they could put VW out of business.

[Lebowski]

I'm not sure that chart is accurate.  For one thing, wikipedia is notoriously inaccurate (I still use it a lot, though).  Second, for the US, even assuming people take off 3 weeks on average, 1777/49 = 36 hours/week.  Who the hell works a 36 hour week here?  Maybe some people do work 36 hours, but that's not anywhere near the average.  I'd guess the average number of hours for full time workers here is over 40 hours, maybe even close to 50.

[MX793]

I'm not sure that chart is accurate.  For one thing, wikipedia is notoriously inaccurate (I still use it a lot, though).  Second, for the US, even assuming people take off 3 weeks on average, 1777/49 = 36 hours/week.  Who the hell works a 36 hour week here?  Maybe some people do work 36 hours, but that's not anywhere near the average.  I'd guess the average number of hours for full time workers here is over 40 hours, maybe even close to 50.

That chart may be indicative of workers making hourly wages.  Quite a few people are "salary", and thus I doubt their actual work hours are recorded because they don't get paid by the hour.

[TurboDan]

The VAT is what kills Euro products from being as competitive as they could be.  I've had to order marine/boat parts from Europe a couple times, and it's insanely expensive because of the VAT. 

The problem was that after WW2, Europe demilitarized and put all of the money into universal healthcare and various social welfare programs.  Now, it's coming back to bite them, as they can no longer afford it.  They can't raise taxes any MORE, since European tax rates are already sky-high.  They can't cut services because people are used to having them and couldn't survive without them.  In addition, the toll of illegal aliens receiving social services affects European budgets WAY more than any U.S. federal or state budget - especially in Germany, where the Turks are bleeding the system dry.  Couple that with strong labor unions demanding everything under the sun for workers, and you're left with a financial crisis as prices rise. 

Now, I partially agree with mandatory vacation and laws against overworking employees - salaried or not.  Workers have a right to spend time with their families.  They also have a right to maintain their health (mental and physical) by taking vacation time, holiday time, and having a life outside of work.  The way some companies treat their employees in this regard is deplorable, and I would NEVER work for one.  In that sense, European laws have good points - but when coupled with all of the issues I noted above, it doesn't fly. 

Personally, I think they should do what the Japanese (as well as MB and BMW) do:  simply manufacture products in the U.S.  That does NOT mean in Mexico!  That means at plants in the U.S. with American workers.  It's better for quality control, and profits will rise if cars are more reliable.  The Mexicanized VWs have always been horrible.

[pommes-t]

The VAT is what kills Euro products from being as competitive as they could be.? I've had to order marine/boat parts from Europe a couple times, and it's insanely expensive because of the VAT.?

The problem was that after WW2, Europe demilitarized and put all of the money into universal healthcare and various social welfare programs.? Now, it's coming back to bite them, as they can no longer afford it.? They can't raise taxes any MORE, since European tax rates are already sky-high.? They can't cut services because people are used to having them and couldn't survive without them.? In addition, the toll of illegal aliens receiving social services affects European budgets WAY more than any U.S. federal or state budget - especially in Germany, where the Turks are bleeding the system dry.? Couple that with strong labor unions demanding everything under the sun for workers, and you're left with a financial crisis as prices rise.?

Now, I partially agree with mandatory vacation and laws against overworking employees - salaried or not.? Workers have a right to spend time with their families.? They also have a right to maintain their health (mental and physical) by taking vacation time, holiday time, and having a life outside of work.? The way some companies treat their employees in this regard is deplorable, and I would NEVER work for one.? In that sense, European laws have good points - but when coupled with all of the issues I noted above, it doesn't fly.?

Personally, I think they should do what the Japanese (as well as MB and BMW) do:? simply manufacture products in the U.S.? That does NOT mean in Mexico!? That means at plants in the U.S. with American workers.? It's better for quality control, and profits will rise if cars are more reliable.? The Mexicanized VWs have always been horrible.

That pretty much sums it up. I don't completely agree with what you say about the Turks though. When we had more labour than people, German companies brought many foreigners in so they could do the jobs germans didn't want to do anymore, because they weren't well paid. Many not well educated Turks came here to do easy work. Now their children and their children's children don't get jobs, because many as well aren't well educated (their parents often can't teach them, then they often feel superior because of their culture and so don't respect the teachers...). And so many are on welfare.

The problem was that they made contracts in the 60ies that allowed all the immigrants to come here and stay forever. Now they changed the laws and only people who are well educated and bring benefit for germany, who need asylum or who marry germans may come here. And those who are extremely criminal must leave the country. All others, including forigners on welfare and criminals may stay.

Not a very simple situation... 

[cawimmer430]

There was an article in the WSJ yesterday about how workers at one German VW plant worked 28 hour work weeks.  They just bumped that up to 33 hours, and the workers were pissed.

Gee, I wonder why their costs are so high 

It's also the labor unions which demand that workers get paid well. Also, the cost of living is expensive overhere and people need to be paid accordingly to be able to survive.

[cawimmer430]

Here is this graph showing annual hours--from Wikipedia:



http://en.wikipedia.org/wiki/Working_hours#Differences_among_countries_and_recent_trends

Lazy Dutch. 

[cawimmer430]

The VAT is what kills Euro products from being as competitive as they could be.  I've had to order marine/boat parts from Europe a couple times, and it's insanely expensive because of the VAT. 

The problem was that after WW2, Europe demilitarized and put all of the money into universal healthcare and various social welfare programs.  Now, it's coming back to bite them, as they can no longer afford it.  They can't raise taxes any MORE, since European tax rates are already sky-high.  They can't cut services because people are used to having them and couldn't survive without them.  In addition, the toll of illegal aliens receiving social services affects European budgets WAY more than any U.S. federal or state budget - especially in Germany, where the Turks are bleeding the system dry.  Couple that with strong labor unions demanding everything under the sun for workers, and you're left with a financial crisis as prices rise. 

Now, I partially agree with mandatory vacation and laws against overworking employees - salaried or not.  Workers have a right to spend time with their families.  They also have a right to maintain their health (mental and physical) by taking vacation time, holiday time, and having a life outside of work.  The way some companies treat their employees in this regard is deplorable, and I would NEVER work for one.  In that sense, European laws have good points - but when coupled with all of the issues I noted above, it doesn't fly. 

Personally, I think they should do what the Japanese (as well as MB and BMW) do:  simply manufacture products in the U.S.  That does NOT mean in Mexico!  That means at plants in the U.S. with American workers.  It's better for quality control, and profits will rise if cars are more reliable.  The Mexicanized VWs have always been horrible.

Well said, Dan.

Add to that the Japanese also buy tons of American Dollars to keep their currency artifically weak and make their products cheaper in the USA.