On the comeback trail ... Report says Volkswagen may lose $1 billion in U.S. in 2014; SUV to help

On the comeback trail ... Report says Volkswagen may lose $1 billion in U.S. in 2014; SUV to help

November 27th, 2014 by Mike Pare in Business Around the Region

The Volkswagen assembly plant in Chattanooga has been chosen to build a new SUV.

Photo by Tim Barber /Times Free Press.
 

While Volkswagen's Chattanooga plant grapples with labor issues, a new report says the German automaker's U.S. operations may lose about $1 billion this year.

Production of a midsize sport utility vehicle in Chattanooga should help the automaker in the future, though it's a few years away and is only one part of the carmaker's comeback bid, the report by Bernstein Research analyst Max Warburton says.

The report calls on the automaker to abandon its goal to sell 800,000 VW brand units by 2018, hire more dedicated U.S. management to better understand the American market, improve its product range and develop a consistant marketing message.

It also supports added engineering, research and design in the U.S., which VW plans to do in Chattanooga. The company is slated to bring 200 engineering-type jobs to the city with its current $900 million expansion of the Enterprise South industrial park plant.

"Ultimately, we believe VW can do better in the U.S. - but progress will be costly and slow," said the report. "We fear VW's U.S. losses are unlikely to moderate in 2015 - any meaningful improvement must likely wait until 2016 or 2017."

Production of the new SUV isn't expected to begin until late 2016, the company has said. This year, through October, VW brand U.S. sales are 301,187, down 12.2 percent from last year.

The Bernstein report said that even including Audi, which is profitable in the U.S., the VW Group is losing money in America - with losses widening in 2014 to perhaps $995 million to $1.2 billion. That's with the allocation of some of the development and investment costs of the new SUV to the U.S. Bernstein said VW doesn't break out profit and loss by region.

A Volkswagen of America spokesman had no comment on the report.

While struggling in the U.S., VW Group continues to see big sales, and profits, worldwide as it challenges Toyota for the No. 1 spot globally. The company recently said it plans to invest $107 billion across the globe over the next five years.

Even as the report was critical of some of VW's U.S. efforts, it rates its stock as "outperform." It's Audi and Porsche brands continue to grow impressively and the group's Chinese business remains the envy of the auto industry, Bernstein Research said.

"VW has a number of areas with the potential for improvement - from cost reduction in the core business, to a better European market to a U.S. turnaround. VW is cheap and now unloved," it said about company shares.

Still, the report said VW has seen both market share and vehicle volumes fall in the U.S. in the past two years.

"The U.S. was supposed to be a positive driver for the VW investment case. Now it looks like a liability, with losses (although unreported) surely widening," the report said. It said the VW brand last got close to break-even in 2012, the first full year of Passat production in Chattanooga.

It said VW was making good profits in the U.S. in the early 2000s, when the dollar was strong and products like Passat and Jetta began to show some progress. But then the exchange rate collapsed, taking profitability with it - and VW's market share went into sharp reverse, Bernstein said.

In 2006, VW set up "Project Moonraker," which involved sending German executives to live in California and study the market, the report said.

"Off the back of this came the U.S.-focused Passat and the Chattanooga plant. More U.S.-centric product (slightly larger with less engineering content and lower prices) began to enjoy some success in the period 2009-2012," the research said.

But, it said, VW never seemed to build on the momentum of the U.S. Passat, failed to develop enough SUV product, and "seems to have now gone into reverse."

Jesse Toprak, chief analyst of Cars.com, said VW product is often more expensive than its competition in the U.S. and sometimes "behind the times."

"There are issues that it can't resolve overnight," he told the Times Free Press.

But, William Johnson, general manager of Al Johnson Volkswagen in Dalton, Ga., said its sales are good, though the company "needs to get the word out more about the Passat."

"We're all excited about the SUV," he said.

The report said little about VW's labor issues which have dominated headlines over the last year as the United Auto Workers and a rival group, the American Council of Employees, seek recognition from the company.

The UAW has submitted names to VW for verification of how many employees are members of its non-dues-paying Local 42. ACE continues to sign up workers as well.

Contact Mike Pare at mpare@timesfreepress.com or 423-757-6318.


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