Volkswagen Group (XETRA:VOW) (VW) may have freshly unveiled its hot new electric vehicle (EV) this week, but UBS has downgraded its rating due to several concerns, including losing its first-mover advantage in EVs and skidding "towards marginalization" in China.
The bank said VW is "highly vulnerable" to the rise of Chinese automakers, having formerly been the number-one manufacturer in the People's Republic and still expecting to generate almost €3 billion operating profit in the country this year, this is about half of what it used to be for the German company.
In 2015, VW made €5.2 billion profit in China from selling 3.5 million cars, so with UBS predicting around 3 million to be sold there this year, VW "already lost half of its profitability despite only losing around 15% of its volumes" and "it doesn't take much to see VW losing all its China profits over the next few years".
The reason is the rise of Chinese OEMs and their specialisation in EVs, where VW has a small fraction of the market it possesses in the internal combustion engine market.
Though it remains the leading OEM in Europe, VW is "likely to face stiff competition" from the competitively priced Chinese EVs, the analysts said, even with a newly launched EV version of its GTI hot-hatch.
Mistakes and management
This also reflects a view that VW "ceded its first-mover advantage in EVs with execution in key areas below our expectations", having initially impressed in 2021 with its ID.3 to raise hopes it could be the leading 'Tesla fighter', the past three years have been littered with product delays, "disappointing" software, high investment in some "arguably...outdated" tech, and other issues have come during a period when Chinese EV leaders have surprised positively with strong products at surprisingly low price points.
Recent changes in management and strategy to address these challenges has not changed the bank's scepticism about the company's ability to handle the impending challenges from Chinese automakers without a negative impact on its earnings.
A major competitive threat is China BYD's where a teardown analysis indicates it would have a "sustainable cost lead of ~25% over a legacy OEM like VW", even if BYD uses local assembly.
Another issue is the European market is seen by the analysts to be quickly transitioning to an oversupply situation, which could lead to declining profit margins.
BYD and Tesla aim to increase their European sales by a combined 2.5 million units by 2030 compared to around 15 million in the overall market today.
UBS thinks the overall market is not going to expand by that much, however.
Based on forecasts that VW's group operating profit will halve to €15 billion by 2025, UBS cut its rating to 'sell' from 'neutral' previously, slashing its price target to €100 from €135.
Renault and Ampere
Renault, after confirming plans this week for the IPO of its Ampere EV arm, was also downgraded to 'sell' by UBS.
Analysts, who cut their price target on the French group to €31 from €42, said it and other legacy mass manufacturers "are at greatest risk of structural market share losses due to intensifying competition from Chinese OEMs and Tesla".
With over two thirds of its sales exposure to Europe and a 10% European market share, Renault is "one of the most exposed names".
The analysts also think the planned IPO of Ampere is "unlikely to unlock significant value for Renault group shareholders".