Why Volkswagen Will Race Ahead Of Auto Peers

1048 words - 5 pages

Volkswagen (VLKAY), world’s third-largest automaker behind Toyota (TM) and General Motors (GM), has been an exceptional performer in the automotive industry, gaining 158% over the last five years. Although the U.S. is one of the Volkswagens smaller markets, it is a top seller in the Europe and China. As the company aspires to become the global industry leader by 2018, here are a few reasons to back up its ambitious claim.

European auto industry poised for a rebound
Europe’s beleaguered auto industry endured a six-year slump, with auto sales falling to the lowest level in nearly two decades, as a sluggish economic recovery put a brake of spending. However, going by the recent data trend, ...view middle of the document...

For instance, brands like Audi and Porsche are selling well in the United States, the world’s largest market for luxury cars. According to the report, Audi sold nearly 1.6 million vehicles in 2013, which yielded a little over 5 billion euros in profits. The brand is going strong this year as well. In fact, the growing demand for Audi’s models boosted its sales to a record high for 38 consecutive months in February. While BMW sold more luxury cars in 2013 than Volkswagen’s Audi, the latter is likely to become the global sales leader in 2014.

Besides Audi, Volkswagen owns a number of luxury brands such as Bentley, Bugatti, Lamborghini, but the one that cannot be overlooked, in terms of 2013 performance, is Porsche.

Volkswagen Group managed to sell 9.7 million vehicles, globally, last year. Porsche accounted just 1.7% (i.e. approx. 162,00) of the total sales volume. However, Porsche represented 22% of VW Group’s total profits. Consequently, the brand made as much profit as the VW brand did by selling nearly 6 million vehicles during the same period. Audi and Porsche together only accounted for 18% of VW’s sales volume, they represented nearly two-thirds of ye company’s total pre-tax profit last year. Unequivocally, this illustrates the profitability of brands like Porsche, which is precisely why automakers around the world are suddenly prioritizing such brands.

Sure enough, the power of luxury brands is forcing automakers to rethink their strategies, but Volkswagen has an advantage that makes its luxury brands so profitable. The company’s luxury brands benefit from economies of scale, shared engineering, R&D, and parts with the mass-market models of VW brand. For example, a lot of parts and engineering are shared between Porsche Cayenne and Audi Q7. This helps the company in keeping its costs low, thus maximizing profits. Of course, luxury brand also provide pricing power to manufacturers, as all they have to do is price cars higher in order to get higher profit margins.

Driven by strong demand for Cayenne model, Porsche sales climbed to 3,232 units in February, not...

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