CONSUMER CYCLICALS
- Since Handelsblatt reported a shortfall of €2-3bn on VW’s 2024 cost saving targets last week there have been plenty of news stories on the OEM.
- Yesterday’s news that factory closures within Germany would be considered for a first ever was seen as a watershed moment; Lower Saxony’s 20% stake, union power and prohibitive labour laws have historically kept local employment sacrosanct. The unions and government have a majority between them on the supervisory board. Union representatives claim the shortfall is mainly driven by non-labour factors and inefficiencies. Reports today suggest a heated reaction from employees.
- Dramatic cuts will be extremely difficult to achieve without generous settlements and the fact that management are willing to go there highlights the severity of the situation. VW says its overcapacity is 500k cars, 13% of 2023 production.
- That inefficiency is a clear drag on operating performance; margins stand at 7% compared to 12% for BMW, 13% for Mercedes, 12% for Stellantis. Ratings are helped by scale, which feels like a double-edged sword when trying to engineer a turnaround; hence spreads tend to trade wide for the rating, and we don’t expect that to change.
Despite difficulties this year, VW spreads have performed largely in-line with peers. We see this as reflective of the industry wide challenges including EV transition navigation, Chinese competition and higher interest rates. What’s more surprising is that the sector has kept up with the wider market.
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