Volkswagen expects roughly unchanged profits for 2024 but even this modest aim will be hard to achieve because of economic conditions in general and problems with electric cars in particular.

Volkswagen has presented a long-term dilemma for investors. Its vehicles are competitive, but its finances and weak profitability reflect the political nature of its ownership.

VW shares are cheap by industry standards, and compared with Toyota, its counterpart in size and global presence, its efficiency is poor. The Wall Street Journal’s Heard on the Street column put it this way.

“Volkswagen is the archetypal legacy automaker: flabby, slow-moving and valued as if it was going out of business,” said Street columnist Stephen Wilmot, who added VW has yet to convince investors it has tamed what he called “profligate spending”, or electric vehicle technology.

VW is controlled by a 20-seat supervisory board where unions control half the votes and two politicians from the state of Lower Saxony who often vote with them. For decades investors have backed off dabbling in VW shares because this clunky management structure has blocked many attempts to turn VW into a normal corporation which puts responsibility to shareholders ahead of unions.

Volkswagen reported 2023 adjusted operating profit of €22.58 billion ($24.5 billion) on sales of €322.28 billion ($350 billion). The operating profit margin fell to 7.0% from 7.9% the previous year. VW has said the margin in the first quarter will be below the expected outcome for the year of between 7 and 7.5%. VW expects sales to rise 3% in 2024, much slower than in 2023.

“The general economic situation remains challenging, but we are confident about 2024, despite the muted economic outlook and intense competition,” finance chief Arno Antlitz said presenting the results in mid-March.

VW, like most traditional auto manufacturers, is suffering from the recent slowdown in the growth of electric vehicle sales. This is particularly galling for VW because it promised to lead the EV revolution initially. The huge changes required to meet the electric changeover threaten the long-term stability of long-established manufacturers as the Chinese threaten in Europe with a formidable array of EVs. This could lead to mergers or new alliances to ward off the threat.

Frank Schwope, Automotive Industry lecturer at the University of Applied Sciences FHM Hannover, said he expects VW profits to move sideways next year.

“Given the current geopolitical situation and the uncertainty surrounding the further development of electromobility, looking beyond this is more dubious than usual,” Schwope said in an email exchange.

Some analysts have pointed to VW’s upcoming new model program as a boost to its prospects. VW is said to be launching more than 30 group-wide new models in 2024. These include the electric VW I.D7 and ID.7 Tourer, the electric Porsche Macan and Audi Q6 E-tron, and face-lifts for the VW Golf, Tiguan and Passat, the Skoda Octavia and Skoda Superb.

“New models can push the result, but the competition is not sleeping either,” Schwope said.

Renault has said it is discussing the possibility of developing a small EV with Volkswagen, and some commentators have suggested Renault now looks small and vulnerable compared with other European carmakers.

“Cooperation with Renault is conceivable, but also with Stellantis. Or even a collaboration between Stellantis and Renault. However, I am sceptical about such cooperation. Often, after a few years and even fewer successes, they fall out and you realise that you would have worked better on your own,” Schwope said.

Despite investor unease with VW’s ownership model, Schwope said this won’t be changing in the foreseeable future.

Analysts like the fact that for potential investors VW’s share price is cheap but aren’t convinced the path ahead is clear.

“VW looks attractive both in valuation terms and future prospects, but the latter requires patience and faith. A tricky year in terms of model changeovers and further retracement in China is likely to hold the shares back,” HSBC Global Research said.

HSBC Research pointed to problems in China, VW’s biggest market, where the company doesn’t see any imminent improvement.

Bernstein Research wasn’t convinced that plans for VW’s own brand and its failure to make acceptable profits were convincing. VW’s guidance for roughly flat overall profits for 2024 wouldn’t be easy.

“However, this (roughly flat guidance) assumes +4% market growth in Europe and North America, with increased market share in the latter, which we see as very optimistic. The company also expects 2024 to see peak capex (capital expenditure), but we struggle to see a capex holiday as the pace of innovation increases,” Bernstein Research said in a report.

Investment bank UBS said the weakness in VW’s electric vehicle sales points to a potential problem meeting European Union CO2 requirements. UBS said VW has the largest required increase in EV sales, from 15% share of its sales in Europe in 2023 to about 24% in 2025, followed by Renault (12% to 16%). According to UBS, VW is not due to have any “affordable” EVs until 2026 and will have to depend on vehicles like the ID.7 Tourer and new high-priced models from Audi and Porsche. The required increased sales of EVs could hit VW’s profits, UBS said in a report.

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