Motoring ahead

Well-oiled performance shows VW on right track

Volkswagen had a better-than-expected first quarter. Operating profit at Europe's largest carmaker grew 16.6 per cent to euro 3.3 billion. Strong cash generation drove the industrial unit's net liquidity to a whopping euro 20.7 billion.

The smooth start to 2015 scotches any thoughts that ex-Chairman Ferdinand Piech's surprise attack on Chief Executive Martin Winterkorn might have been related to trading woes. On April 10, Piech told German news magazine Der Spiegel that he had "distanced" himself from Winterkorn. A boardroom battle followed, with other key stakeholders backing the CEO. Piech then resigned on April 25.

The support for Winterkorn looks well founded judging by the group's operational progress. Volkswagen is making headway tackling its main headache, the lacklustre profitability of its core VW passenger car brand. An efficiency programme launched in the summer of 2014 is showing the first tentative results. VW says the positive profit effect in the first quarter was in "the low triple-digit millions of euros," lifting the unit's operating margin from 1.8 per cent a year ago to 2 per cent. That's still a far cry from the 6 per cent targeted for 2018, but is moving in the right direction.

The restructuring of the group's commercial vehicles business, which currently makes an operating margin of 2.7 per cent, is also under way. Volkswagen's new trucks tsar Andreas Renschler, poached from Daimler, started his job in February. His plans to merge MAN and Scania into a joint holding promises to cut back office and R&D costs.

There are unanswered questions about the VW brand's business in the US. But Audi and Porsche, the group's profitable premium brands, are growing strongly. It has a robust Chinese joint venture and a strong balance sheet. Piech's exit reduces the risk of empire-building M&A and gives post-Piech Volkswagen the opportunity to modernise its governance, which gave disproportionate power to an ageing patriarch.

Shares in the Wolfsburg-based giant have suffered from a long-standing valuation discount on German rivals. The stock is currently trading at 9.9 times forward earnings, 16 per cent below BMW and Daimler, Thomson Reuters data shows. That may now shrink. Higher profitability and better governance may see VW shares accelerate into the fast lane.