By Craig Mellow
The corporate equivalent of blood in the streets is flowing at Volkswagen, Europe's top auto maker and No. 2 globally. "Decades of structural problems" mean "costs in Germany must be massively reduced," CEO Oliver Blume lately told the German newspaper Bild am Sonntag.
He is demanding 10% across-the-board pay cuts and, smashing German taboo, the closure of three domestic factories.
That means time to buy, says Michael Field, European equity strategist at Morningstar. "If VW can get the factory closures signed off, it could have a V-shaped recovery," he argues. He sees a whopping 65% upside in the stock, which has plunged nearly 40% over the past six months.
Field is also piling into VW's compatriots, Mercedes-Benz Group, Bayerische Motorwerken, and Stellantis, which combines the old U.S. Chrysler with European stalwarts such as Fiat, Peugeot, and Citroën.
Not everyone is so bullish.
"On paper all these stocks look incredibly cheap," says Daniel Schwarz, head of Europe automotive research at Stifel Financial. "But no one knows what tomorrow will bring."
Today has already brought the collapse of a business model based, at least for the German houses, on fat profit margins in a voraciously growing China.
Local competition has slashed Europeans' share of the Chinese luxury car market to 40% from 90% before the pandemic, says Sasha Kachanova, a sector analyst for asset manager abrdn. And the market is shrinking thanks to China's property-driven malaise.
Chinese upstarts like BYD have raced ahead of European elders in affordable electric vehicles, pushing the European Union to slap import tariffs on them up to 35%. "Europe developed demand for EVs, and the Chinese are coming in to fill it," Field comments.
What's looming tomorrow is the threat of U.S. tariffs from an incoming Trump administration. Europe exports twice as many autos to the U.S. as it imports from there, Field notes.
More certain is a tightening of European Union carbon-emissions standards in 2025, which are imposed on auto makers on a fleetwide basis. VW could face up to four billion euros ($4.3 billion) in fines based on its current lineup, Schwarz estimates.
The crunch from Brussels may accelerate Europe's own EV efforts, though. New electric models in VW's upscale Audi and Porsche families will roll out 15% cheaper next year thanks to an improved drive train platform, Schwarz says.
Peugeot and Citroën tried to upstage the Chinese at last month's Paris Auto show with new compact EVs priced around EUR20,000.
"The Chinese have first-mover advantage in EVs, but that can quite easily be replicated," Field says.
Abrdn's Kachanova begs to differ. "European manufacturers need to create a whole new infrastructure for EVs," she says. "Chinese competitors are close to the supply chain and can stay capital-light."
Her house owns Mercedes stock nonetheless because...it's Mercedes. "We still hold onto Mercedes because it's a strong premium brand," Kachanova says.
There's plenty of brand value left in Volkswagen cars too, if Herr Blume can make them cheaper, Schwarz says. "The main problem is not the product, but the cost," he says.
Blume is far from having a free hand. The Volkswagen Law of 1960 enshrined a 20% voting stake for the government of Lower Saxony state. Union board members could in theory veto plant closures.
Are the times desperate enough for him to force through his desperate measures anyway? Investors should watch closely.
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 08, 2024 02:00 ET (07:00 GMT)
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