Saturday, April 13, 2013

The Car Industry

I like Volkswagen's branding, due to their ownership of multiple brands at different price points.

Unlike Mercedes or BMW, for instance, who risk diluting their brand as the move downmarket to sell cheaper and smaller cars.  Or Toyota, who created an upmarket car, but can't quite break into the luxury market...because its still a Toyota.  Always a bad idea to have your branding based on a single name.

Volkswagen have increased their European market share from 18% in 2005 to 24% in 2012, due to aggressive financing (e.g.: zero percent loans) and scale.

I took a look at their numbers.  It did not take long.  Although revenues and profits have increased nicely:

Free cashflow generation has been low.  Over the last ten years, the 73b profits generated has turned into just 9bn free cash flow:

The culprit is the finance/leasing part of the company.  Despite high capex - higher than depreciation - the Automobile production generated free cashflow every year.  But increased financing of new customers  drains most of the cash generated.

So the long term, increasing car sales consumes most of the cash generated.  As well as the normal drain on working-capital (increasing inventories/receivables), for cars, it also involves financing your customers to buy their vehicles, and building expensive factories.

An optimist could say that 37bn was spent over the past 10 years building the business:  it has quadrupled their revenue, and increased they profits 5 to 10 times.  But companies in other industries can do this and generate free cash flow while doing so (e.g.: Richemont, Coca Cola).

Volkswagen probably will not need to raise money from the stock market soon.   And they are probably better than their European competitors.  But they are the best of a bad lot. 

Toyota has a similar pattern.  Over the same 10 years, 8 trillion yen of profits (net income) turned into 280bn free cashflow consumed:

Again the problem is with the finance segment, though Toyota spent more of this on building up its fleet-for-lease, rather than on financing for buyers.

BMW is even worse, generating free cashflow in 2 of the past 10 years:

Daimler (Mercedes) over the past 8 years:

These are the best companies with the strongest brands in the industry.  The car industry looks like a lousy place to invest.