Changes at VAG; Part 1

Winkelman
Source:  Autocar

As I’ve suggested elsewhere, expect the changes at VAG to have two components:

  1. Limiting the damage to VW the company as much as possible, obviously.  In the form of ceremonial lopping off of heads to calm the baying hounds at the door.  It will also include rationalising the balance sheet as much as possible.  This latter needs doing, the VAG balance sheet has become bloated, partly because of the dominance of the IG Metall union in everything the board does (through it’s “unique” governance structure) but also because of lax discipline.
  2. Remaking VW the brand.  This will involve bringing in new people and new blood.

One of the first moves in the latter, according to  Autocar:

Lamborghini boss Stephan Winkelmann is set to leave the Italian supercar brand and join Audi’s Quattro GmbH division, according to reports in Italy.

Winkelmann, 51, has guided Lamborghini through the past decade under VW Group ownership – although he has previous experience with Fiat in Austria, Switzerland and Germany.

Reports in the Italian media suggest that Stefano Domenicali – the man who led Ferrari’s Formula One team between 2007 and 2014 – is being lined up to replace Winkelmann at the helm of Lamborghini. Domenicali is already employed by the VW Group; he joined Audi in October 2014, sparking speculation that the German brand was lining up an F1 entry.

Quattro GmbH would be a return to relatively mainstream products for Winkelmann, even though the Neckarsulm-based company produces relatively high-end, niche versions of Audi models

This is pretty good news for Audi fans.  I don’t personally like Lambo’s but they have become drive-able supercars under Audi tutelage.  And Quattro GmbH makes proper fast cars:  all the RS and S models, and the divine (much better than the Lambo) R8.  The RS and S models (like the Audi’s they are based one) were becoming a bit staid.  Maybe Stephan will shake things up there.

As for VAG going back into F1…that would be a good thing but I hope it won’t be led by Stefano!  Just look what he did at Ferrari!!

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The VAG saga

VW van front

VAG confess they made a mistake trying to grow the US diesel business.  According to Jones Day,

early research pins the start of the problem in 2005. That’s when VW wanted to promote more diesel models in the US, but the automaker didn’t have a way for the EA189 engine to meet nitrogen oxide requirements here within the budget. VW created the software defeat device to get around the issue.

Of course, the obvious question follows: can you play this any other way than a straight short?  I think we can make the case for a short to medium term VAG (VOW:GR) short; this dagger may have a bit more to fall.  However, as we make money on the short (though caution, I’ve always found VAG to be a difficult one to short/long, it’s such a huge XETRA component that other news always screws things up), there are some things to think about

  1. Eventually,VAG will turn around.
  2. I never liked VAG group’s obsession with being number one.  Toyota always tries to get away from the “largest carmaker” label as fast as possible ever since that was first bandied around.  With good reason:  being big is about the ego and that always makes for stupid decisions.
  3. VAG wanted to be the biggest, so they went more for volume, so they went for the TDI 4 (never mind that the margins on those cars are a paltry 2%), and so on…
  4. The cars got boring (and I say this as a proud former owner of blisteringly fast A4 & S6 Plus Quattros).  For future reference, whenever a large automaker with a stable of brands goes to anything remotely resembling common platforms, the cars will get boring at the very least and the company will get into trouble at the very worst.
  5. So how will VW turn around?
    1. VW is Germany, this company and the country dug themselves out of the rubble of WWII, they will overcome this one too.
    2. The brand will morph, the Audi and Porsche brands will be less affected.  I’d say, if a gun were put to my head:
      1. There will be a few more Porsches, going with Lambo’s, Bentley and Bugatti (but that doesn’t count)
      2. There will be a lot more Audi’s, especially smaller ones, those use the VW small car platforms, so there is a cost saving
      3. There will be a lot fewer VW’s, if not for internal reasons than for the simple reason that the brand is tarnished
      4. There probably won’t be a lot of diesels around.  Certainly not at LeMans next year:  I’d say Porsche will certainly be there with their hybrid, not sure about Audi because they use Diesel.  So I guess you can put money down for Porsche winning LeMans next year. 🙂
      5. Winterkorn was too closely tied to the mooted Red Bull F1 deal, so that’s a loss for now.  But VW needs F1 more now than it ever did.  F1 cars use petrol after all.  And they are now on an efficiency kick.
      6. All VAG cars had become boring.  Expect that to change.
  6. So how do you play it?
    1. Wait for the bottom.  I’d say the bottom would be when:
      1. Short interest starts dying down
      2. When its market cap gets close to NAV + cash
    2. Buy
    3. Hold.  VAG is a long play, it will require engineers to change a lot of things and someone with a lot of balls to take a machete to the group.  That kind of patience is for engineers, not traders.

And thank God for that…