When most American investors think about investing in the auto industry, they usually focus on a few big names: General Motors Company (NYSE:GM), Ford Motor Company (NYSE:F) and Toyota Motor Corporation (ADR) (NYSE:TM).However, there is one major growing company that is often overlooked –Volkswagen (NASDAQOTH:VLKAY), the third largest automaker in the world – since it is only available to U.S. investors on the OTC pink sheets. However, Volkswagen is a company that auto investors should pay attention to, since analysts believe that it could overtake General Motors Company (NYSE:GM) and become the second largest automaker in the world by the end of 2013.
Source: Google Finance, 12-month price
Closing in on the 10 million mark
During the first quarter of 2013, Volkswagen (NASDAQOTH:VLKAY) sold 2.27 million vehicles, a 5.9% increase from the prior year quarter. Sales in China surged 21.3%, and sales in North America rose 14.9%. Volkswagen’s strong results in these two key markets were attributed to its 2012 acquisition of iconic luxury brand Porsche. In addition to Porsche, Volkswagen’s brands include Audi, Bentley, Bugatti, Lamborghini, SEAT and Skoda. It also sells motorcycles under its Ducati brand. In other words, Volkswagen is the creator of some of the most well-known luxury vehicles in the world.
If Volkswagen can maintain its current momentum, then it is on track to reclaim the number two spot in world automakers after Toyota. In 2012, Toyota sold 9.75 million vehicles, GM sold 9.29 million, and Volkswagen sold 9.07 million.
For the current year, market leader Toyota Motor Corporation (ADR) (NYSE:TM) expects to sell 9.7 million-9.9 million vehicles, but has stated that it is focusing on quality over quantity, in an effort to avoid repeating the damaging recalls of 2009 and 2010, when consumers reported problems with stuck accelerators and defective air bags. Toyota is also taking a slow and steady approach to rebuilding its business, after the devastating tsunami in 2011 crippled its supply chain and temporarily made GM the largest automaker in the world.
Volkswagen expects to sell up to 9.5 million vehicles by the end of the year, and its strong performance during the first quarter signifies that it is on track to hit that goal.
A pricing war in Europe
However, Volkswagen (NASDAQOTH:VLKAY)’s victories in North America and China were offset by losses in Europe, where its fellow automakers have also struggled since the onset of the European sovereign debt crisis. Auto sales across Europe have hit their lowest point since the mid-1990s, and unemployment has hit a record-high average of 12.0%.
In February, Volkswagen’s sales slid 7.2% in its home country Germany and declined 5.9% across all of Europe. While Volkswagen’s losses looked grim, it stayed ahead of the rest of the auto industry, which posted an 11.4% decline during the month. Volkswagen’s sales in Russia were a rare bright spot, posting double-digit growth.
Volkswagen’s big profits from North America and China have given it the ability to prolong a pricing war against General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) in Europe. GM and Ford, Europe’s second largest automaker, have both reduced their prices in response, crushing their own margins in their worst market. So far, these extreme measures have not helped. GM and Ford’s European sales in February declined 20.6% and 21.0%, respectively. Meanwhile, Toyota Motor Corporation (ADR) (NYSE:TM) posted a more manageable 8.0% year-on-year decline.
While Ford has expressed concerns regarding its European prospects, rival GM has decided to continue investing heavily in the market. GM recently announced that it would invest another $5.2 million in its loss-making German brand Opel over the next three years, to support launches of new models. GM hired Karl-Thomas Neumann, the former head of Volkswagen’s China business, to oversee these turnaround efforts.
Will China save GM and Ford?
Although Volkswagen (NASDAQOTH:VLKAY) performed well throughout the first quarter and in February, its March sales were less impressive. Volkswagen delivered 864,000 vehicles, a 0.2% gain from the previous year, due to worsening economic headwinds in Europe. Meanwhile, GM posted 6.4% global sales growth in March and Ford Motor Company (NYSE:F) bounced back with 6.9% growth.
GM and Ford’s recovery was fueled by robust growth in China. GM China’s sales rose 12.6%, while Ford China posted a whopping 65% gain. Volkswagen’s sales in China rose 12.4%.