Risks and opportunities from the macroeconomy, the sector, markets and sales
For this risk category, the likelihood of occurrence is classified as high (previous year: high) and the potential extent of damage is classified as medium (previous year: medium).
The most significant risks from the QRP arise from a negative influence on markets and unit sales driven among other factors by restrictions on trade and increasingly protectionist tendencies.
Macroeconomic risks and opportunities
We believe that risks to positive growth in global economic output arise primarily from a further escalation of the Russia-Ukraine conflict, turbulence in the financial, energy and commodity markets, supply shortages in connection with imbalances between supply and demand, increasingly protectionist tendencies, structural deficits, which pose a threat to the performance of individual advanced economies and emerging markets, and a failure to contain the Covid-19 pandemic in a lasting way. In addition, there are increasing environmental challenges that affect individual countries and regions to varying degrees. The worldwide transition from an expansionary to a more restrictive monetary policy together with persistently high inflation also presents risks for the macroeconomic environment. High private- and public-sector debt in many countries is clouding the outlook for growth and may likewise cause markets to respond negatively. Demographic change may also inhibit growth. A decline in growth in key countries and regions often has an immediate impact on the state of the global economy and therefore poses a central risk.
The economic development of some emerging economies is being hampered primarily by dependence on energy and commodity prices and capital inflows, but also by socio-political tensions. Corruption, inadequate government structures and a lack of legal certainty can also pose risks.
Geopolitical tensions and conflicts, along with signs of fragmentation in the global economy, are a further major risk factor to the performance of individual countries and regions. In light of the existing, strong global interdependence, local developments could also have adverse effects on the world economy. Any escalation of the conflicts in the Middle East or Africa, and particularly of the conflict between Russia and Ukraine since February 2022, for example, could cause upheaval on the global energy and commodity markets and exacerbate migration trends. An aggravation of the situation in East Asia could also put a strain on the global economy. The same applies to violent conflicts, terrorist activities, cyber attacks and the spread of infectious diseases, which may suddenly result in unexpected market reactions.
Overall, we expect the world economy to grow with a weaker momentum in 2023. However, due to the risk factors mentioned, as well as cyclical and structural aspects, another slump in the global economy or a period of below-average growth rates is also possible.
The macroeconomic environment may also give rise to opportunities for the Volkswagen Group if actual developments turn out to be more positive than expected.
Sector-specific risks and market opportunities/potential
Western Europe, especially Germany, and China are our main sales markets. A drop in demand in these regions due to the economic climate would have a particularly strong impact on the Company’s earnings including financial services. We counter this risk with a clear, customer-oriented, innovative and synergistic product and pricing policy. To diversify our main sales markets, we are pursuing a long-term growth strategy in the USA.
Outside the current main sales markets, delivery volumes are spread widely across the key regions: Central and Eastern Europe, North America and South America. In addition, we either already have a strong presence in numerous existing and developing markets or are working systematically towards this goal.
Particularly in smaller markets with growth potential, we are increasing our presence with the help of strategic partnerships in order to cater to local requirements.
The growth markets of Central and Eastern Europe, South America and Asia are particularly important to the Volkswagen Group. These markets harbor considerable potential; however, the underlying conditions in some countries in these regions make it difficult to increase unit sales figures there. Examples of these are customs regulations or minimum local content requirements for production. At the same time, wherever the economic and regulatory situation permits, there are opportunities above and beyond current projections. These arise from faster growth in the emerging markets where vehicle densities are currently still low.
Price pressure in established automotive markets for new and used vehicles as a result of high market saturation is a further risk for the Volkswagen Group as a supplier of volume and premium models. Competitive pressures are likely to remain high in the future. Individual manufacturers may respond by offering incentives in order to meet their sales targets, putting the entire sector under additional pressure.
There is a risk that excess capacity in global automotive production may lead to a rise in inventories and therefore an increase in tied-up capital. With a decline in demand for vehicles and genuine parts, automotive manufacturers may adjust their capacities or intensify measures to promote sales. This would lead to additional costs and greater price pressure.
Supply chain disruption may give rise to the risk of underutilization of capacity in global automobile production, meaning that existing demand can in some instances not be met and instead moves on.
The demand that built up in individual established markets in times of crisis could result in a significant recovery if the economic environment eases more quickly than expected.
In Europe, there is a risk that further municipalities and cities will impose a driving ban on vehicles with combustion engines in order to comply with emission limits. China imposed a so-called “new energy vehicle quota” in 2019, which means that battery-electric vehicles, plug-in hybrids and fuel cell vehicles will have to account for a certain proportion of a manufacturer’s new passenger car fleet. In the United States, California has for some years imposed a regulation followed by other US states and which tightens the legal requirements on manufacturers each year for the sale of zero-emission vehicles. To ensure compliance with emissions standards, we continuously tailor our range of vehicle models and engines to the conditions in the relevant markets. These requirements may lead to higher costs and consequently to price increases and declines in volumes.
Economic performance may vary from region to region. The resulting risks for our trading and sales companies, such as in relation to efficient inventory management and a profitable dealer network, are substantial and are being responded to with appropriate measures on their part. However, financing business activities through bank loans remains difficult. Our financial services companies offer dealers financing on attractive terms with the aim of strengthening their business models and reducing operational risk. We have installed a comprehensive liquidity risk management system so that we can promptly counteract any liquidity bottlenecks at the dealership end that could hinder smooth business operations.
We continue to approve loans for vehicle financing on the basis of the same cautious principles applied in the past, for example by taking into account the regulatory requirements of section 25a(1) of the Kreditwesengesetz (KWG – German Banking Act); in particular, this counters the risk of loan defaults.
Volkswagen maintains a selective distribution system. Within the European Union, dealers and service partners are selected – where permissible – using qualitative and quantitative-qualitative criteria in accordance with the provisions of EU Regulations 461/2010 and 720/2022. The previously relevant EU Regulation 330/2010 was revised by the European Commission and replaced by the new, successor EU Regulation 720/2022, which entered into force on June 1, 2022. As things stand at present, this revised EU regulation does not require any changes to be made to the current distribution system of Volkswagen AG.
The “Supplementary guidelines on vertical restraints in agreements for the sale and repair of motor vehicles and for the distribution of spare parts for motor vehicles”, which accompany EU Regulation 461/2010, are currently being revised by the European Commission, with the new rules due to enter into force on June 1, 2023. A final evaluation of whether and to what extent the distribution system of Volkswagen AG will be specifically affected by the changes will only be definitively possible once the new guidelines have been adopted.
Competition law requirements, including the Block Exemption Regulation 461/2010 and EU Regulations 2018/858 and 2021/1244, aim to ensure and promote effective competition in the motor vehicle aftermarket. Volkswagen AG, too, is exposed to this competitive pressure and associated risks in respect of its servicing and maintenance offering.
In Germany, legislation entered into force on December 2, 2020 to restrict or abolish design protection for repair parts through the introduction of a repair clause. In addition, the European Commission is evaluating the market with regard to existing design protection and has presented a draft to amend the directive on the legal protection of designs and models. A possible restriction or abolition of design protection for visible replacement parts, including at European level, could adversely affect the Volkswagen Group’s genuine parts business.
The automotive industry is facing a process of transformation with far-reaching changes. Electric drives, connected vehicles and autonomous driving are associated with both opportunities and risks for our vehicle sales, our after-sales business and our dealerships. In particular, more rapidly evolving customer requirements, swift implementation of legislative initiatives, including in connection with the achievement of climate protection targets, and the market entry of new competitors from outside the industry will require changed products at a faster pace of innovation as well as adjustments to business models and cost structures. There is uncertainty regarding the widespread use of electric vehicles and the availability of the necessary charging infrastructure.
There is also a risk of freight deliveries worldwide being shifted from trucks to other means of transport, and of demand for the Group’s commercial vehicles falling as a result.
Below, we outline the regions and markets with the greatest growth potential for the Volkswagen Group.
Demand for vehicles is expected to increase in the coming years due to the need for individual mobility. This also affects e-mobility, a market that is already dominated by high-volume domestic manufacturers, among others. It is also expected that demand will shift from the coastal metropolises to the country’s interior and that competitive pressure from local manufacturers will generally increase. In order to leverage the considerable opportunities offered by this market – especially with regard to e-mobility – and to defend our strong market position in China over the long term, we are continuously expanding our product range to include models that have been specially developed for this market. We are further expanding our production capacity in this growing market, for example with the new plants for electric vehicles in Anhui and Changchun.
The demand for new vehicles is likely to increase over the coming years in this important future market, partly due to demographic change. The Volkswagen Group has consolidated its activities in India and launched a model initiative with new models tailored to customers’ needs: the Taigun from the Volkswagen Passenger Cars brand and the ŠKODA Kushaq and Slavia.
In the saturated US market, the proportion of light trucks (particularly SUVs and pickups) is likely to further increase slightly in the coming years. In addition, the electrification of mobility is expected to accelerate due to support measures and legally prescribed fleet emission and fuel consumption targets. The latter factors still depend, however, on which administration is in office. In the USA, Volkswagen Group of America is steadfast in its pursuit to become a full-fledged volume supplier and expand its market share. The expansion of local production capacity – including production for electric vehicles since 2022 – will allow the Group to better serve the market in the North America region. We are also working intensively on offering additional products specifically tailored to the US market. As part of our electrification campaign, we founded a company in the United States in the reporting year with which we aim to tap the market for electric vehicles in the SUV segment with the US brand Scout.
Due to the need for individual mobility, demand for vehicles in Brazil is expected to increase in the coming years, particularly in the low-price, small-vehicle segments. Given existing trade barriers, local production is an important factor in ensuring competitiveness. The growing number of automobile manufacturers with local production has resulted in a sharp increase in price pressure and competition. To strengthen our competitive position in Brazil, we offer vehicles tailored specially to this market that are locally produced, such as the Saveiro and the Nivus.
Political and economic uncertainty in the region weigh on the passenger car markets. In spite of this volatility, the Middle East region offers short-term and long-term growth potential. We aim to leverage the potential for growth with a range of vehicles that has been specifically tailored to this market, without having our own production facilities there.
Global economic trends such as digitalization and the increasing interest in emissions-reducing technologies associated with decarbonization are expected to continue. Growing global energy needs call for innovation in the industry and a growing willingness on the part of governments to invest in line with the global climate policy.
The development of the marine market continues to carry risk given the current uncertainty regarding future fuel and emissions regulations. The continuing uncertain geopolitical and macroeconomic situation holds additional risks, but also offers opportunities, for example in the navy and offshore wind energy business.
In turbomachinery, there is the risk that planned projects and orders will be scaled back or postponed due to negative developments in sales markets or individual applications.
We are countering these risks by constantly monitoring the markets, focusing on less strongly affected market segments, working closely with all business partners such as customers and licensees, and introducing new and improved technologies.
We are working systematically to leverage market opportunities across the world, for example by positioning ourselves as a solution provider for reduced-CO2 drive and energy generation technologies such as large-scale heat pumps, storage technologies and hydrogen production or carbon dioxide capture. Moreover, significant potential can be leveraged in the medium term by enhancing our after-sales business through the introduction of new digital products and the expansion of our service network. The requirements for occupational safety, which will continue to increase in the future, the availability of the plants that are already in operation, their efficient operation and the increase in environmental compatibility, together with the large number of engines and plants, will provide the basis for growth. Digital service solutions, for instance for remote plant surveillance, offer further growth potential.
As part of the capital goods industry, the Power Engineering business is affected by fluctuations in the investment climate. Even minor changes in growth rates or growth forecasts, resulting from geopolitical uncertainties or volatile commodities and foreign exchange markets, for example, carry the risk of significant changes in demand or the cancellation of already existing orders.
The measures we use to counter the substantial economic and extraordinary risks include flexible production concepts and cost flexibility by means of temporary external personnel, working time accounts and Kurzarbeit (short-time working), and the necessary structural adjustments.
There is a risk that the Volkswagen Group could experience decreases in demand, possibly exacerbated by media reports or insufficient communication. Other potential consequences include lower margins in the new and used car businesses and a temporary increase in funds tied up in working capital.
The Volkswagen Group’s multibrand strategy may weaken individual Group brands if there are overlaps in customer segments or the product portfolio. This effect may be reinforced by the Volkswagen Group’s common-parts strategy, as this strategy means that, in some cases, the differences in product substance between the brands are small. As a result, there could be a risk of internal cannibalization between the Group brands, higher marketing costs, or repositioning expenses. By sharpening the brand identities as part of our Best Brand Equity instrument, we are working to minimize these risks.
The fleet customer business continues to be characterized by increasing concentration and internationalization, accompanied by the risk that the loss of individual fleet customers may result in relatively high volume losses. Viewed over an extended period, the fleet customer business is more stable than the business with retail customers. The Volkswagen Group is well positioned with its broad portfolio of products and drive systems, as well as its target-group-focused customer care, and counteracts a concentration of default risks at individual fleet customers or markets. The consistently high market share in Europe shows that fleet customers still have confidence in the Group.
Consumer demand is shaped not only by real factors such as disposable income, but also by psychological factors that cannot be planned for. For example, households’ worries about the future economic situation may lead to unexpected buyer reluctance, as is currently the case due to high energy costs. This is particularly the case in saturated automotive markets such as Western Europe, where demand could drop as a result of owners holding on to their existing vehicles for longer. We are countering the risk of buyer reluctance with our attractive range of models and our strict policy of customer orientation.
A combination of buyer reluctance in some markets as a result of the crisis, and increases in some vehicle taxes based on CO2 emissions – which have already been observed in many European countries – may shift demand towards smaller segments and engines, for example. We counter the risk that such a shift will negatively impact the Volkswagen Group’s financial situation by constantly developing new, fuel-efficient vehicles and alternative drive technologies, based on our drivetrain, fuel and mobility strategies.
Automotive markets around the world are exposed to risks from government intervention such as tax increases, which curb private consumption, and from restrictions on trade and protectionist tendencies such as tariffs and sanctions. Furthermore, there are future risks from the sale of electrified vehicles if the minimum requirements for local content under free trade agreements cannot be achieved. Sales incentives may lead to shifts in the timing of demand.
Commercial vehicles are capital goods: even minor changes in growth rates or growth forecasts may significantly affect transport requirements and thus demand. The resulting risk of production fluctuations calls for a high degree of flexibility from the manufacturers. Although production volumes are significantly lower, the complexity of the trucks and buses range does in fact significantly exceed the already very high complexity of the passenger cars range. Key factors for commercial vehicle customers are total cost of ownership, vehicle reliability and the service provided. Furthermore, customers are increasingly interested in additional services such as freight optimization and fleet utilization, which we offer in the commercial vehicle segment through the digital brand RIO, for example.
Power Engineering’s two-stroke engines are produced exclusively by licensees, particularly in South Korea, China and Japan. The global demand for ships is increasing due to the overall positive development in world trade; however, the volatility in new shipbuilding orders poses the risk of declining license revenues. Due to changes in the competitive environment, especially in China, there is also the risk of losing market share.
The ongoing Russia-Ukraine conflict continues to hold risks for the performance of the global economy, for growth in the industry and for the business activities of the Volkswagen Group, in particular with regard to rising prices and declining availability of energy.
The Volkswagen Group does not have any material subsidiaries and equity investments in Ukraine.
In relation to the net assets, financial position and results of operations of the Volkswagen Group, the business activities of the Volkswagen Group in these two countries are insignificant.
In addition to the risks outlined in the individual risk categories, there are other factors that cannot be predicted and whose repercussions are therefore difficult to control. Should these transpire, they could have an adverse effect on the further development of the Volkswagen Group. In particular, such occurrences include natural disasters, climate-induced extreme weather events, pandemics (such as the spread of the SARS-CoV-2 virus), violent conflicts (such as the current Russia-Ukraine conflict), terrorist attacks and interruptions to the energy supply.
There is a risk that the Covid-19 pandemic could intensify again, due to reasons such as changes in the virus. All areas of the Volkswagen Group are affected by the pandemic. There are risks arising in particular from a fall in demand and an increasing intensity of competition. In production, there are risks especially with regard to stable supply chains and protecting the health of our staff. We have put in place increased hygiene and protective measures that we can fall back on where necessary to ensure that plants can operate.