Volkswagen Details Investment Plans
11/23/2012| 08:06am US/Eastern
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Volkswagen AG (>> Volkswagen AG) will increase investments in new vehicles, plants and technology to 50.2 billion euros ($64.55 billion) over the next three years, despite the market slowdown, to fuel its ambitious global expansion plans and try to dethrone General Motors Co. (>> General Motors Company) as the world's largest auto maker.
"Despite the challenging economic environment, we are investing more than ever before to reach our long-term goals," Volkswagen Chief Executive Martin Winterkorn said Friday following a board meeting.
Europe's largest auto maker by revenue and sales volume is making the investment to boost production capacity across the globe by building new plants and expanding existing facilities. It will also roll out new modular technology--which standardizes vehicle components for use in a range of brands--to speed up the development and production of new vehicles.
The sharing of components and parts across a wide range of vehicles will also allow the company to reap large economies of scale and reduce costs.
Volkswagen didn't give a comparable investment figure for the past three years--a period during which it acquired MAN, Ducati and the rest of Porsche (>> Porsche Automobil Holding SE) it didn't already own, making a direct comparison difficult.
Unlike many of its mass-market peers in Europe, Volkswagen improved both profits and sales volumes in recent quarters, driven by its large presence in faster growing markets outside Western Europe and a diversified product portfolio ranging from Bugatti high-performance sports-cars to Scania heavy-duty trucks.
Volkswagen has also benefited from its financial muscle, which enables it to offer more attractive financing conditions to prospective car buyers in the fiercely competitive European mass-market segment, luring consumers who might otherwise have bought from a rival.
In the European Union, Volkswagen's new passenger car registrations fell 1% to 2.55 million vehicles in the year to October end, compared with the same period in 2011, according to the Association des Constructeurs Europeens d'Automobiles, compared with a 7.3% fall for the market as a whole to 10.33 million vehicles.
NordLB analyst Frank Schwope said in a note to clients that Volkswagen's average annual investment was lifted to EUR16.7 billion from EUR12.5 billion under the previous plan, which shows that the company is pushing ahead full steam to leverage its strong market position to gain further market share at a time when many rivals struggle.
"A few months ago Fiat CEO Marchionne had to delay or cancel investments...Peugeot-Citroen might probably have to accept state aid soon," Mr. Schwope said. He has a hold rating on Volkswagen's stock.
Volkswagen's German peers Daimler AG (>> Daimler AG) and BMW AG (>> Bayerische Motoren Werke AG) are also investing heavily to broaden their product lineup and ramp up production capacity to meet rising demand for their premium cars.
Robust sales growth in Asia and North America along with a firm grip on the booming luxury-car sector has helped German car makers to largely offset poor demand and fierce price pressure in Europe, where high unemployment and the raging sovereign-debt crisis are hurting consumer confidence.
European peers such as PSA Peugeot Citroen SA (>> PEUGEOT) and GM's Opel brand, who rely largely on sales in Europe, are bleeding red ink and face increasing pressure to slash capacity at their core operations in France and Germany. At the same time, most plants of their German rivals are running on profitable production rates as domestic demand is holding up fairly well and exports are surging as global appetite for new cars remains robust.
Of the headline EUR50.2 billion 2013 to 2015 investment figure Volkswagen said EUR39.2 billion will be spent on property, plant and equipment, with sites in Germany accounting for about 60% of the spend. About EUR24.7 billion of the EUR39.2 billion figure will be invested in modernizing and extending the product range across all brands.
"The investment planning...represents a clear commitment to securing jobs and employment at Volkswagen, particularly in light of the difficult conditions seen in the automotive industry," Volkswagen labor chief Bernd Osterloh said.
On top of the total EUR50.2 billion investment, Volkswagen's two Chinese joint-ventures will invest EUR9.8 billion from their own funds in new production facilities and products between 2013 and 2015. Volkswagen's two Chinese joint ventures aren't consolidated.
Volkswagen is the market leader in the Chinese market, partly because of its early market entry.
Defending its leading position in this dynamic market will be crucial for the company to claim the industry's top spot by 2018, which has been a long-term growth target for the company.
China overtook the U.S. as the world's biggest auto market and is already Volkswagen's largest sales region world-wide ahead of its home market of Germany. China emerged as the new center of gravity for the global auto industry as a growing number of affluent customers and robust economic growth fueled demand for new cars in recent years.
Together with its local joint-venture partners FAW Car Co. (>> Faw Car Co., Ltd.) and SAIC Motor Corp. (>> SAIC Motor Corporation Limited) Volkswagen will invest EUR14 billion by 2016 to develop new vehicles tailored to the taste of Chinese car buyers and boost local production, according to previous statements. This is more than the EUR12.4 billion invested so far in total since Volkswagen entered the Chinese market as the first Western auto maker in 1985.
However, analysts have cautioned that growth rates in China vary significantly from region to region and are often influenced strongly by measures from local authorities, which makes it difficult for car makers to plan their production and marketing in the long run.
Write to Christoph Rauwald at christoph.rauwald@dowjones.com
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