An der Vorabend der Lieferung von Elektromobilen rechnet Volkswagen täglich die Zahlen aus.
“Our cost - optimization work is being advanced almost weekly,” said an insider from Volkswagen China. The employee, who has been working at Volkswagen for over 20 years, has never attended as many product workshops in a single year as this year.
The financial reports of the Volkswagen Group released in the third quarter show that the company's business development is still on a downward trend. In China, however, the group is increasing its investments. On November 5th, it announced two new investment projects, which further puzzles the public: Can Volkswagen Group's continuous investments in China achieve the expected returns?
“Volkswagen Group China has a solid financial foundation and is actively transforming for the future. We will continuously promote local innovation and efficient operations,” said Patrick Heinecke, the Chief Financial Officer of Volkswagen Group China, in a reply to the editorial department of Economic Observation. Heinecke took up his position in China in August 2024 and is in charge of Volkswagen China's financial management. This position is crucial because Volkswagen has already invested 50 billion yuan in the transformation in China. Whether the company can build a sustainable profit model in China is crucial for the success of its global transformation.
Although Heinecke's reply sounds rather official, the editorial department has learned that Volkswagen China is constantly “balancing the books”. After more than three years of investment planning and simulation, the “financial model” for the transformation to electric mobility is almost completed, and the corresponding strategic goals have already entered the implementation phase.
Volkswagen China's goals include: In terms of sales, the proportion of electric vehicles in total sales should increase from the current 5% to double - digit percentages when more than 20 electric models are launched on the market by 2026. In terms of profits from electric vehicles, it will not be possible to balance the profitability of combustion engines and electric vehicles during the transition period from 2025 to 2026. It is expected that this will be achieved in the later phase of the planning period (the end time of the period is not specified, most likely 2030). In terms of profits from joint ventures, the contribution should increase to 2 billion euros by 2027 and to 3 billion euros by 2030 (including the profits of Volkswagen Anhui). In terms of costs, a 40% cost reduction compared to the global platform has already been achieved, and the goal is to achieve a 50% cost reduction in the long run.
“Balancing the books” is currently the most important task for the Volkswagen China team. In 2025, Volkswagen will start the delivery phase of electric vehicles in China, and Volkswagen China's profitability will be closely monitored. To meet the challenges, Volkswagen China's management team has started an intensive period of product workshops, and all employees are participating in the analysis of cost details and price forecasting. “Our cost - optimization work is being advanced almost weekly,” said an insider from Volkswagen China. The employee, who has been working at Volkswagen for over 20 years, has never attended as many product workshops in a single year as this year. “Delivery marks the real start of the challenges,” they say in Volkswagen China. This is the beginning of the real transformation into an electric vehicle manufacturer.
The business development has not yet reached the bottom
Although the Volkswagen Group predicted in its 2024 annual report that its business development would further weaken in the next two years, the deficit in the third quarter still shocked the industry. However, as a German automotive expert said in an interview with the local press, the decline of the German automotive industry is not new. The important thing is whether a solution can be found.
The financial reports show that the Volkswagen Group is entering a similar “transition phase” as in China: The more electric vehicles are sold, the less profit is made. “In the first nine months of this year, we have experienced a mixed situation. On the one hand, our product strategy has started to take effect: One in four electric vehicles in Europe already comes from the Volkswagen Group. On the other hand, our financial performance has significantly deteriorated compared to last year,” said Arno Antlitz, the Chief Financial Officer and COO of the Volkswagen Group. The decline in performance is due to the increase in production capacity of electric vehicles with lower margins. In addition, 7.5 billion euros in costs have been incurred, mainly due to increased tariffs, the adjustment of Porsche's product strategy, and the impairment of goodwill at Porsche.
Aside from the new tariffs from the US and the restructuring of Porsche, improving the profitability of electric vehicles is the key to when the Volkswagen Group's business development will pick up again. In China, this question is even more urgent.
In its 2024 annual report, the Volkswagen Group released the return curve of its joint ventures in China. The return has dropped from 2.6 billion euros in 2023 to 1.7 billion euros in 2024, and it is expected that the profits will further decline to 500 million - 1 billion euros in 2025. The business development in 2026 cannot be estimated at present. This is because more than 20 electric models will be launched on the Chinese market this year, and the Volkswagen Group predicts that the price competition in China will continue.
Volkswagen China has admitted that although the sales of electric vehicles will increase significantly, the base is still smaller than that of combustion - engine vehicles. Therefore, profitability cannot be improved through economies of scale, and Volkswagen still has to deal with a large amount of research and development expenses and investment costs. Therefore, profitability will surely be affected.
However, this impact does not mean “loss” but a difference in profitability compared to the combustion - engine vehicle industry, and this varies by market segment. Volkswagen believes that the competition in the Class - A vehicle segment is more intense than in the Class - B and - C vehicle segments, which generate higher profits.
Based on the sales forecast of the joint ventures, Volkswagen has preliminarily estimated that the profit contribution of the joint ventures will increase to 2 billion euros by 2027. Before that, Volkswagen has to overcome the challenge of falling profits to the bottom. It is worth noting that the Volkswagen Group has set longer - term financial goals, namely that the profit contribution of the joint ventures in Volkswagen China will increase to 3 billion euros by 2030, including the contribution from Volkswagen Anhui.
Repeated financial simulations
In the past 12 months, Patrick Heinecke has calculated the transformation of the Chinese business many times. However, the changes in the Chinese market require that Volkswagen's financial model be constantly updated. This uncertainty in the return on investment is Volkswagen's biggest concern in China, and cost optimization is the direct way to address this concern.
In the simulation of the new financial model, ensuring the profitability of combustion - engine vehicles and quickly aligning the profitability of electric vehicles with that of combustion - engine vehicles is the main way to address this concern. The editorial department has learned from insider sources at Volkswagen China that the once - generous international company is now saving every unnecessary penny.
For Volkswagen China's management team, it is currently most important to predict the price trends in all market segments and then conduct product workshops. At these workshops, the members of Volkswagen China's board of directors, together with joint - venture partners and suppliers, analyze every cost detail of the new vehicle to optimize the cost of each component. Volkswagen China assumes that the competition in the market will continue to be very fierce, with over 100 brands. The price will continue to fall and stabilize in the medium term. This means that Volkswagen must quickly optimize costs and increase its market share in the short term to ensure its profitability.
Product costs are the key to Volkswagen's successful transformation. It is known that through the locally developed CMP platform and the CEA electronics and electrical architecture, Volkswagen has been able to shorten the development time to about 24 - 30 months. In addition, costs have been reduced by 40% compared to the global platform, and work is currently underway to achieve a 50% cost reduction target. The lithium - iron - phosphate battery jointly developed by Gotion High - Tech and the ADAS function jointly developed by Horizon Robotics are important supports for Volkswagen's cost reduction. Recently, it was found that Gotion High - Tech's lithium - iron - phosphate battery will be installed in the next electric vehicle of Volkswagen Anhui to increase its cost advantages.
In terms of marketing, Volkswagen China's board of directors also delves into the operational details of upcoming models and analyzes the entire sales funnel (the estimation of the number of customers in different phases from complete ignorance of the product to the purchase decision, presented in the form of a funnel. This model is used to identify problems targeted and accurately predict performance) with clearly defined KPIs. This includes from media investment for each model and each market segment to discounts and sales strategies for each vehicle, each market segment, each dealer, and each sales point. Currently, the entire Volkswagen China board of directors is focused on these factors to ensure the efficient use of capital.
It is worth noting that the same cost optimization is also applied to the combustion - engine vehicle industry, which is the profit foundation of Volkswagen. It is known that one of the most important tasks of Patrick Heinecke since his arrival in China has been to improve the capital efficiency of the entire Chinese business structure, especially in the field of combustion - engine vehicles. He has optimized a large number of non - core assets, including the supplier structure, to optimize the cost structure and ensure the profitability of the entire combustion - engine vehicle industry. Currently, Volkswagen has increased its market share of combustion - engine vehicles in China to 22% year by year, although the market share of combustion - engine vehicles is constantly declining.
It was revealed that in the past two to three years, when cost reduction and efficiency improvement were extremely emphasized, an “investor mindset” was formed at Volkswagen China. The entire company is now used to carefully analyzing investments, simplifying the structure, and even actively selling assets. An example is that Volkswagen China has already achieved the Volkswagen Group's goal of improving internal operational efficiency by 20% compared to 2023 one year earlier than the target year of 2026.
It is undeniable that behind the cost optimization is the reality that Volkswagen in China is still in a phase of high transformation investment. In the past two weeks, there has been speculation that Volkswagen's software company Cariad will abandon in - house development and choose an external partnership. Volkswagen China has pointed out that software is a core technology that must be firmly held in hand, and that Volkswagen will continue to invest in key technologies in the Chinese market.
On November 15th, Volkswagen China announced two more investment projects. First, the partnership with Horizon Robotics will be further expanded, and both sides will work together on the development of System - on - a - Chip (SoC). The investment amount is about 200 million US dollars. On the same day, the Porsche Research and Development Center in Shanghai opened its doors, which is the largest outside Germany. “We hope that our local value - creation chain in China will cover all key technologies,” said Volkswagen China.
This article is from the WeChat account “Economic Observation”. Author: Liu Xiaolin. Published by 36Kr with permission.