Volkswagen Raises Profit Target Despite Chip Shortage, China Wrinkles

Volkswagen surprised nobody with its strong first quarter profits and improved outlook for the year, but despite the positive performance from the shares – up more than 1% initially Thursday in Europe – VW’s performance in China raised some investor eyebrows.

VW warned that the computer chip shortage might worsen in the current quarter, but still expected profitability for the year to improve to between 5.5% and 7%, compared with the previous target of 5 to 6.5%.   

VW’s 1^st quarter operating profit jumped to €4.8 billion ($5.8 billion) from €900 million ($1.1 billion) in the same, coronavirus-ravaged, period last year. Operating profit of 7.7%, was helped by strong performances from its upmarket brands Porsche and Audi. Electrified cars and SUVs totaled 133,300, including 59,900 battery electric ones. The remainder were plug-in hybrids.

VW said sales recovered strongly in China, but according to Bernstein Research, profitability was poor compared with competitors like BMW and Mercedes.

“VW delivered the expected solid operating performance, but there is a hair in the soup. Firstly, China numbers are weak and secondly R&D spending is exceptionally high,” Bernstein analyst Arndt Ellinghorst said in a report.

Ellinghorst said China operating profit of €661 million ($800 million) compared with a pro-rata €1.6 billion ($1.9 billion) 5 years ago.

“This should kickstart a more fundamental discussion concerning VW’s position in China. VW’s weakening performance in China stands in stark contrast to the strong performance we currently see at BMW/Mercedes,” Ellinghorst said.

Frank Schwope, analyst with Norddeutsche Landesbank Girozentrale, said VW only managed to deliver 231,600 battery electric vehicles (BEV) last year, but in 2021 this could maybe more than double to 700,000.

“In 2022, the Volkswagen Group would then be on a par with the delivery figures from Tesla

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, although both should not yet make a profit (on these BEVs). VW is at the forefront of this first level of disruption in the automotive industry,” Schwope said.

The second level – autonomous driving – is going to be much more complicated, Schwope said.

Barclays Equity Research analyst Kai Alexander Mueller said VW had made a strong start to the year and described its raised profit forecast as “conservative”.

VW, which has bet the ranch on electric cars, expects 25% of European sales to be all electric in 2025. Its €30 billion ($36 billion) electric car plan promises 50 different models by 2025.

VW’s first vehicle designed-to-be-all-electric, the ID.3 sedan, will have a full year of sales in 2021, while the ID.4 SUV is now just appearing in markets. VW plans six new models this year across its brands, including the mass market Skoda and SEAT.

Most sales will be concentrated in Europe, where harsh EU CO2 regulations are now ratcheting down.

VW shares had gained just under 1% by midday Thursday in Europe, compared with the STOXX Europe 600 Automobiles index which was down almost 1%.