By on September 25, 2012

So far, German car companies Volkswagen and Daimler had been unaffected by the severe downdraft in Europe and brought in record profits. Now, the Teflon seems to be flaking off.

At Volkswagen, the press release has the whistling-in-the-dark headline “Volkswagen Group remains solidly on track,” but reading further, one finds signs of worry. According to the statement, Volkswagen CEO Martin Winterkorn thinks that “conditions had become noticeably harder and tougher.” That little sentence sent the VW share 3 percent lower, Reuters reports.

According to the press release, Winterkorn said that “we want to become the world’s best automaker by 2018.” Do we notice a slight change of tack here? Before, it was always “world’s largest automaker by 2018.” Or, even more audacious: World’s best automaker, in units, in profitability, innovation, customer satisfaction. Climbing down?

Last week, reminds us Reuters, Daimler warned that operating profit at Mercedes will fall short of planned targets, citing the slump in Europe and a tougher China business.

Currently, Volkswagen is in the defensive, scaling down sales plans in Europe. There also are rumors about a massive scale-back of plans in China

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18 Comments on “The Teflon Is Coming Off: Volkswagen And Daimler Not So Sure Anymore...”


  • avatar
    hreardon

    This jives with what a few little birdies have commented to me over the past two weeks. Apparently one of the reasons for the very aggressive MQB Golf launch schedule is to get fresh product onto the market as soon as possible.

    It also would explain why VW is trying to push up the North America launch dates of the new Golf/GTI/Audi A3 Sedan as much as they can: they want to offset some of the declines in Euroloand.

    • 0 avatar
      gslippy

      Hasty launch = quality problems. VW doesn’t need more of those.

      • 0 avatar
        hreardon

        Good point, but Volkswagen has a lot riding on the MQB A3 and Golf – and they know it. They’ve been working on this program for the better part of a decade and based on what I’ve heard from my sources, Winterkorn has been on a rampage to ensure they don’t screw the pooch on this launch.

        Having only been on the market less than a month there’s virtually no data, but for their sake I hope they worked out the bugs in the lab.

        I’ve they’ve based the sourcing and production techniques that Audi pioneered with MLB (A4/A6/A7/A8/Sportback) then Volkswagen should be in good shape. The new MLB product have shown significantly better overall reliability than the models they replaced.

  • avatar
    L'avventura

    The German automakers are heavily reliant on China right now, as the domestic European market is doing horribly due to the debt crisis.

    The talk for the last few months is that Chinese economy may be in for a hard landing. Every data you can look at sees the Chinese economy grinding to a halt; steel imports are a fraction of what they were before(meaning they are using that steel to build things), while Chinese steel companies defaulting on purchase agreements, slowing import and export to and from China, we even have anecdotal stories of Chinese factories that keep pumping product out even when they can’t sell them, because government officials are ordering them to in fear of labour unrest (such as Foxconn riot a couple days ago).

    The big fear is that their housing, debt, and manufacturing bubble may burst. There a unanimous consensus that there is a gigantic bubble (or multiple smaller bubbles) in China, even from the communist party, the question is will the bubble slowly (and safely) deflate or violently burst.

    If there is burst in China’s bubble, the Germans are most exposed.

    • 0 avatar
      gslippy

      If China’s bubble bursts, maybe they’ll call in America’s debt. Then everybody goes down.

      • 0 avatar
        28-Cars-Later

        Mutually Assured Destruction.

      • 0 avatar
        Lorenzo

        China can’t “call in” America’s debt. The bonds are payable when due, and not before. The principal, like the interest, is payable in dollars, which the Fed’s Ben Bernanke will simply print.

        If China wants to convert its holdings to cash before they mature, it can sell the bonds on the market, if there IS a market. Chances are, somebody would buy them, but at a very steep discount, and later make a fortune.

        Debt is only an asset in normal times, when fiat currency appears to have value. In abnormal times, it’s no longer a tangible asset, but an IOU that’s only as solid as the borrowing country and it’s currency.

      • 0 avatar
        krhodes1

        You owe the bank a $100,000, the bank owns you. You owe the bank a few trillion $’s, you OWN the bank. Especially when it is our dollars propping up thier government. I think we get the better end of the deal, personally. We send them IOU’s, they send us tangible stuff.

      • 0 avatar
        hreardon

        China can call on our debt all they want – what are they going to do, invade us? No, more than likely it would spark a trade war which would lead to a (thankful) rebalancing of trade and repatriation of manufacturing.

        Sure, there would be some changes (no more $99 40″ LCDs at Wal-Mart), but at the end of the day it won’t be armageddon like some like to think.

        As someone else said, and it bears repeating: When you owe the bank $10,000 it’s bad for you. When you owe the bank $1,000,000 it’s bad for them. The United States definitely has the upper hand so long as China requires US debt to support its mercantilist economy.

      • 0 avatar
        L'avventura

        The US Department of Defence recently did a study to simulate what would happen if China decided to sell 1.5 trillion of its US bonds (the debt that China has). China has threatened to do this every time they get in a dispute, they recently threatened to sell Japanese bonds recently over this last scuffle (they actually don’t own much JGBs to make it even a real threat).

        The Pentagon concluded that it would be no threat if China decided to sell all US bonds. There would be ‘Short term disruptions’, but the market could absorb most of those treasury bills without worry.

        http://www.bloomberg.com/news/2012-09-11/china-s-u-s-debt-holdings-aren-t-threat-pentagon-says.html

        I think people think of ‘debt’ in the same way that how you or I would receive ‘debt’. That is, that its being lent out and we need to pay it back like we pay a mortgage. The big difference for countries like the US is that the US can merely print money. Secondly, these bonds are also purchased by other investors. If the Chinese are selling them cheap (below market), other investors will just snatch them up, if there isn’t enough demand, the US government merely prints money and buys the bonds themselves.

      • 0 avatar
        dejal1

        The USA “Too Big to fail”.

    • 0 avatar
      rnc

      Look at Japan’s official (From BoJ) plan for dealing with the debt bomb they know will go off (on business insider).

      China will be the same (almost all debt held within itself, by government institutions to government institutions) but probably a much larger bomb due to population size, and dozens of other reasons.

      Does the future not scare anyone else? Basically its like the world is dancing around chairs, knowing the music will stop, just hoping (while telling itself) that it won’t.

      • 0 avatar
        L'avventura

        Japan’s debt situation is identical to America’s. Which is to say its not too large a concern. As both economies can print their own currencies and are both fighting deflation.

        The reason, Japanese bonds are 95% controlled domestically, meaning that they can merely print their way out of any debt. Moreover, the very vast majority of Japanese bonds are held by Japanese banks and insurance companies. They are required to hold them by law (they need to have a certain percentage of their assets in JGBs).

        The things that you would need to worry about when printing money is inflation. Which Japan, with a heavily deflationary economy and a yen too strong, won’t have to worry about.

        The fact that the US is going to be printing $40 billion every month for at least the next 3 years means that Japan needs to start printing money to weaken their currency.

  • avatar
    Athos Nobile

    “If there is burst in China’s bubble, the Germans are most exposed.”

    No mate, we are all stuffed.

    Provided the bubble thing is correct…

  • avatar
    Felix Hoenikker

    Deflation is a curse on both the exporter and the importer, but somewhat worse for the exporter.

  • avatar
    dusterdude

    hreardon,

    Agreed, VW has a lot riding on new launches. I believe they will be largely successful.

    As for other German car company being discussed, with Daimler’s products being mostly “mid to high end”, if the economy gets any uglier in China and Europe, they will be in for a very rough ride..

  • avatar
    daveainchina

    Why do I suspect this has more to do with the downturn in China and less to do with the slump in Europe?

  • avatar
    schmitt trigger

    The only silver lining for the German auto industry, is the recent Sino-Nippon quarrel over some rocks lost on the south China Sea.

    As reported on TTAC and other venues, the Chinese are now weary about investing on Japanese goods, and most of the new buyers will migrate towards German vehicles. This could soften their landing.

    The Japanese though, are primed for a new economic Tsunami.


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