Car makers are the focus of the latest stock of the week and German manufacturer Volkswagen (VOW3) has beaten its rivals to poll position. With many countries bringing forward bans on petrol and diesel cars, automotive companies are in a rush to increase the number of EVs they make and persuade customers to pay more to go green.
Lockdown and increased environmental awareness have made life harder for car makers in the developed world but in emerging markets like China at least, there appears to be rising demand for electric vehicles. European car makers, meanwhile, have the task of taking on Tesla (TSLA), which became the biggest car company in the world in 2020.
New Strategy for VW
Earlier this month, VW unveiled a new strategy which aims to double the percentage of electric vehicles it makes by 2030 to 70%, and gain a hefty market share of 50% in China and the US by the same date. In the near-term, VW is expected to deliver 450,000 electric vehicles this year - double last year's total.
Investors in European car manufacturers have generally been worried that the push to electricification will increase costs and reduce profits, but the recent reaction to VW’s plans has been positive, pushing shares up 10% since the start of March – helped by the prediction it will be the world leader in battery electric vehicles by 2025.
Not only are shares now back above pre-Covid levels, they have breached €200 for the first time since the diesel emissions scandal dented the reputation in 2015. The shares are currently around €225, just below their fair value of €247 – the ordinary shares are rated 3 stars, while the preference shares are 4 stars, meaning they are undervalued, says Morningstar autos analyst Richard Hilgert.
“With an enviable portfolio of brands, a bevy of new and redesigned models, leading shares in many of the world's markets, and a healthy pile of cash (despite Dieselgate-related outlays), Volkswagen has been able to endure substantial fines and judgments while maintaining spending for new technology vehicle launches,” says Hilgert.
VW has built its reputation over decades by producing popular models like the Golf and Polo, but the wider group owns the Porsche, Audi, Lamborghini and Bentley brands, which are starting to make inroads among the new rich in China.
Given VW’s strong brand and dominance of many markets, why doesn’t the company possess an economic moat? Hilgert sums this up in one word: overcapacity. There are too many cars produced in the world, the barriers to entry for new firms are low and the consumer isn’t as brand loyal as it once was. “While Volkswagen brands like Bentley, Bugatti, and Lamborghini evoke images of wealth, luxury, and exotic street-legal racing machines, consumers of these products can easily switch to a competitor's product such as Ferrari, Aston Martin, or Rolls-Royce,” says Hilgert.”
Car Companies and ESG
Given the costs associated with upgrading manufacturing to cater for electric vehicle demand, bigger is better, says Hilgert: “As one of the world's leading volume producers, Volkswagen's economies of scale from common platforms across a growing number of models enable cost savings unattainable by smaller competitors.”
Morningstar-owned ratings agency Sustainalytics rate VW as “Severe Risk” in ESG terms, particularly as the diesel emissions scandal continues to attract regulatory scrutiny: “VW is still exposed to Dieselgate-related fines and compensation. The company’s reliance on diesel models and its relatively late entry to the EV race create challenges for VW to meet the EU emissions target for 2021, exposing it to considerable fines. In addition to risks of defects and recalls, VW is exposed to other product safety issues.”
The shift to electric vehicles across the industry is not expected to be seamless, Sustainalytics analysts warn. “As cars become more connected, software malfunctions may delay production and delivery to customers or trigger recalls.” Car recalls are serious business, not just because of the safety implications and costs to the company, but because of the reputational damage, which can trigger consumers to shift to rival brands. Toyota and Honda, for example, had to recall 6 million cars in 2020 because of an issue with airbags, and VW had to recall 56,000 Golf cars early this year to fix software problems.
