Investment bank UBS downgraded its rating on Volkswagen, saying it is the most exposed carmaker to the threat from China, while VW said its activity in China was successful and progressing well, and reiterated its policy that profitability is its top priority.
UBS cut its VW rating to “sell” from “neutral” because the company had ceded its first mover electric car advantage, while in Europe there was a danger to all manufacturers’ profits from oversupply. UBS reckoned, after “tearing down” a BYD Seal, Chinese companies might have an up to 25% cost advantage.
VW said by 2030 it wants to offer at least 30 fully electric vehicles in China. Its recent deals with XPENG and SAIC will help the EV business thrive. VW was responding to a request for comment on a Forbes article “Volkswagen Electric Plans Face Hurdles Including Technology, China”. VW’s statement, which appears later, was made before the UBS downgrade.
“We believe VW is the (manufacturer) globally most negatively exposed to the rise of Chinese carmakers – as the former number 1 in China it is potentially on a path to marginalization and as number 1 in Europe it is likely to be most impacted longer-term by highly competitive Chinese EVs,” UBS said in a report.
“Against our initially positive view, we believe VW ceded its first-mover advantage in EVs with execution in key areas below our expectations. Recent management changes and strategic action address the obvious challenges, but we believe it unlikely VW can weather the upcoming Chinese advance without negative earnings impact,” UBS said.
Schmidt Automotive Research has said by 2030, sales of Chinese BEVs in Western Europe will hit 1.2 million or 9% of electric car sales. Schmidt Automotive Research said in the first 7 months of 2023, Chinese manufacturers like SAIC’s MG, Geely’s Polestar and slowly-at-first BYD models accounted for 8.2% of Western Europe’s new battery electric vehicle (BEV) car market, up from 5.2% in the same period last year.
A recent report from Allianz Trade said Chinese-built BEVs could cost European automakers €7 billion ($7.9 billion) a year in lost profits by 2030 unless the EU takes action to either raise tariffs, boost battery and other technology, or persuade China to build cars in Europe. Allianz Trade is a subsidiary of German insurer Allianz.
The Wall Street Journal’s Heard on the Street column, previewing the IAA Mobility show in Munich, Germany, said VW’s electric vehicles don’t appear to be as competitive as Chinese equivalents. VW’s deal with ZPENG was a historic reversal with German companies now having to learn from Chinese ones.
But Heard on the Street columnist Stephen Wilmot said maybe the pessimism towards VW has been overdone. VW has plenty of time to make its BEVs more competitive, while newcomers like BYD seemed to be aiming at a price level above VW’s products. There was also a powerful tool for Europeans which could be a trump card in the battle for Europe; brand power.
“Investors also risk underestimating the importance of brands in the automotive sector, which are a German strength. BYD is still unknown in Europe, and the consumer nationalism that plays in its favor in China will work against it in the birthplace of the automobile,” Wilmot said.
But UBS pointed out the big cost advantage for the Chinese.
Cash in the hand might well outweigh any brand snobbery.
“Our BYD teardown concluded that BYD will have a structural cost advantage of about 25% over VW in Europe, even assuming local assembly. Additionally, from a cyclical perspective, the European market is quickly shifting into oversupply, with margins likely declining,” the report said.
Volkswagen’s statement from its U.K. operation said –
· The Volkswagen Group is still the clear market leader on the Chinese market.
· The first seven months were determined by a market environment with high price discounts, specific regional incentive programs, and growth in lower price segments (especially plug-in hybrids) where Volkswagen is not represented.
· Nevertheless, the Volkswagen Group was able to keep delivery figures in China almost stable from January to July compared with the same period of the previous year. The market share for ICE models was further expanded. After strong gains from March to May, shipments fell in June and July as the market was stimulated by tax breaks in the prior-year period following the long Covid lockdowns. In addition, the overall Chinese market also showed a decline in July 2023.
· Deliveries of electrified vehicles in the first seven months were almost on a par with the previous year in a particularly fierce competitive market environment with more than 100 local competitors.
· The Group and its brands are systematically supplementing the portfolio with new e-models. With MEB, PPE and in the future also SSP, we have a strong technological basis for the expansion of our product portfolio. These platforms are and will remain the backbone of our electric offensive in China. The product roadmap for the coming years is in place. By 2030, we want to offer at least 30 fully electric vehicles to customers in China.
· In order to continue to achieve a strong market positioning in China, the Volkswagen and Audi brands have additionally entered into partnerships with local manufacturers. The cooperations between VW and XPENG and Audi and SAIC will enable us to take even greater advantage of dynamic market developments from 2025/26 with at least three and up to six additional models. The new models will provide growth impetus in particular in segments where the brands currently have no or only a limited presence.
· In addition, there is the option of developing a joint platform for the next generation of smart electric vehicles with both partners. In this way, we keep all strategic options open to react quickly to market developments.
· And we strengthen profitability for all partners. With our economies of scale, we increase efficiency in purchasing. At the same time, we are creating significant synergies in the development of vehicle projects. This strengthens our cost position in this highly competitive market.
· After all, market shares and volumes are not the determining parameters with which we measure our business success. Profitability is our top priority. Our ambition is to be the largest international OEM in China. Whether or not a national manufacturer sells more vehicles than we do is irrelevant to us.
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