Volkswagen is edging closer to its goal of becoming the world's largest carmaker by 2018. But parts of the German company's empire are looking shaky. Feeble overall profitability, highlighted by the group's muted outlook for 2014, is a symptom of a serious problem: the governance is too old-fashioned for a sprawling 12-brand conglomerate.
The brands are mostly strong, the company has leading-edge technology, and performance in China is excellent. Volkswagen does not face an outright crisis. But it is punching below its weight, as investors realise. Volkswagen currently trades on just 7.2 times forward expected earnings, a quarter below BMW and Daimler, Starmine data shows.
The group has been unable to transform impressive volume growth into higher margins. Revenue has grown by a quarter since 2011, but operating profit has roughly stagnated. Volkswagen's muted guidance implies this won't change in 2014.
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The United States, where VW struggles to meet American taste, is another headache. VW brand's sales plunged seven per cent last year. An SUV designed for the US is scheduled to hit showrooms only in 2016, and $7 billion of investments in North America will weigh on profit.
The slow response to problems can be traced back to the group's excessive dependence on two ageing men, Ferdinand Piech, the 75-year-old chairman, and Martin Winterkorn, the 65-year-old chief executive, backed by a board heavily weighted to family members and insiders. The desire for tight control leads to cumbersome long reporting lines. Car companies can thrive with big personalities at the top, but VW is a group with euro 197 billion of revenue that makes everything from Ducati motor bikes to the currently struggling MAN ship engines. It needs a less centralised and personality-driven style. For this company, succession planning for Piech and Winterkorn is most important challenge.
