Volkswagen : Presentation - Levers to unleash value

Levers to unleash value

Dr. Herbert Diess

Chairman of the Board of Management Volkswagen AG

January 9, 2020 - New York

Disclaimer

The following presentations contain forward-looking statements and information on the business development of the Volkswagen Group. These statements may be spoken or written and can be recognized by terms such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", "will" or words with similar meaning. These statements are based on assumptions, which we have made on the basis of the information available to us and which we consider to be realistic at the time of going to press. These assumptions relate in particular to the development of the economies of individual countries and markets, the regulatory framework and the development of the automotive industry. Therefore the estimates given involve a degree of risk, and the actual developments may differ from those forecast. The Volkswagen Group currently faces additional risks and uncertainty related to pending claims and investigations of Volkswagen Group members in a number of jurisdictions in connection with findings of irregularities relating to exhaust emissions from diesel engines in certain Volkswagen Group vehicles. The degree to which the Volkswagen Group may be negatively affected by these ongoing claims and investigations remains uncertain.

Consequently, a negative impact relating to ongoing claims or investigations, any unexpected fall in demand or economic stagnation in our key sales markets, such as in Western Europe (and especially Germany) or in the USA, Brazil or China, and trade disputes among major trading partners will have a corresponding impact on the development of our business. The same applies in the event of a significant shift in current exchange rates in particular relative to the US dollar, sterling, yen, Brazilian real, Chinese renminbi and Czech koruna.

If any of these or other risks occur, or if the assumptions underlying any of these statements prove incorrect, the actual results may significantly differ from those expressed or implied by such statements.

We do not update forward-looking statements retrospectively. Such statements are valid on the date of publication and can be superseded.

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Volkswagen with its strong brands is one of the largest players in the automotive industry - covering a wide range of customer needs

12 strong brands and > 150 markets

Vehicle production > 44 k per day

Global sales > 10.8 m. vehicles, market share > 12%1)

Cost-effective electrification of portfolio

Strong, future-ready own captive Financial Services

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1. 2018, Global Passenger Vehicles Market Share

Since 2017 we have been outperforming the industry…

Growth total markets vs. VW Group deliveries to customers

2016			2017		2018			1-102019
Market share	~0,00%		0,21%			0,56%
development
-0,26%
5,5%			4,3%4,3%
3,3%						0,6%
Deliveries
vs. previous year						-1,1%			-0,5%
																	-4,8%

Margin

7.9%2)

Operating	14,6	17,0	17,1
Profit1)

Excl. Ducati, MAN and Scania, LCVs only included in NAR and SAM		Total market		VW Group
1)	Before special items			3
2)	1-9 2019

…and even in a challenging environment we have been gaining market share

Growth total markets vs. VW Group deliveries to customers Jan - Oct. 2019 vs. 2018

World1)

total market	VW Group
	-0.5 %
-4.8 %
2018 - 2019

North America

Europe

VW Group

VW Group

+2.6 %

-1.8 %

-1.2 %

-0.7 %

South America

China (incl. HK)

VW Group

VW Group

-5.6 %

-7.2 %

+0.1 %

-1.7 %

1) Excl. Ducati, MAN and Scania, LCVs only included in NAR and SAM

4

Volkswagen Group - Outlook for 2019

Deliveries to

customers

('000 vehicles)

Sales revenue

(€ billion)

Operating

return on sales

(%)

1. before Special Items.

+0.9%

10.7 10.8

2017 2018

+2.7%

229.6 235.8

2017 2018

7.41)	7.3 1)
2017	2018

Slightly above prior year

(as of January 9 2020; updated from "on the level of prior-year" at Q3 2019)

2019

grow by as much as 5%

2019

Range of 6.5 - 7.5% (before Special Items)

2019

5

We continuously deliver on demanding financial targets

Key financial targets

Operating return on sales

BeforeSpecial Items

Return on investment

Automotive Division beforeSpecial Items

Capex ratio

Automotive Division

R&D cost ratio

Automotive Divison

Cash	a) Net Cashflow1)
Automotive Division
	b) Net Liquidity

2016	2017	2018	2019		2020	2025
Actual	Actual	Actual	Outlook		Strategic	Strategic
					Targets	Targets
6.7%	7.4%	7.3%	6.5-7.5%		6.5-7.5%	7-8%
13.9%	14.4%	13.1%	12-14%		12-14%2)	>14%2)
6.9%	6.4%	6.6%	6.5-7%		6%	6%
7.3%	6.7%	6.8%	6.5-7%		6%	6%
€ 4.9 bn	€ 10.3 bn	€5.6 bn	≥ €9 bn		≥ € 10 bn	> € 10 bn
€ 27.2bn	€ 22.4 bn € 19.4 bn	> € 15 bn2)		> € 20 bn2)	~10% of Group
			turnover

Volkswagen Group

• Delivering consistently on our top line strategic KPIs and reconfirming guidance
• Record underlying cash flow generation levels
• CAPEX and R&D Ratios on track
• • Already holistic investments in future included (hybridization, electric mobility and digitalization)
• Dividend Pay-out-Ratio of 30% embedded in 5-year-planning
• • By 2022 at latest
• Volkswagen has delivered a TSR of 28.5% over the past year

1) Excl. Diesel payments and M&A
2) Including the negative IFRS 16 impact, effective from 1st January 2019	6
TSR: Total Shareholder Return

However, our company valuation is not where it should be!

Market capitalization 20191) (€ bn)

208
										2)
89										105	3)
56	55	47	47	45						56
		34	31	29			45
					23	21	20

1) As of 21/11/2019	3) Estimation Spring 2019	7
2) According to Morgan Stanley report from 26/09/2019	Source: Bloomberg

To ensure future profits, we drive a fundamental transformation towards electrification and digitalisation

Transformation
1	Electrical transformation:	Commitment to Paris goals 2050
Battery electric vehicles

Conventional platforms	Software & electric platforms
Transformation
		Digital transformation:
2		We will become a leading
	Fully networked vehicles
	automotive software company
	and autonomous driving

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BEVs are the first choice as the most cost-efficient solution for CO2 reduction…

Measures for CO2 reduction in €/g CO2

95 €/g CO2					#1
Diesel ICE EU7	Gasoline ICE	Gasoline ICE Mild	Gasoline ICE	BEV MEB 1st	BEV MEB 2nd
	Hybrid	Hybrid	Plug-In Hybrid	Generation	Generation

Example Volkswagen Brand: Ranking CO2 efficiency indicators (average) for selected CO2 measures		9

…therefore we based our strategy on dedicated BEV platforms already in 2015

	1st wave
26 m. cars	Mission E Cross Turismo
~33 bn. invest	e-tron GT
	ID.3
Battery supply secured	ID. Vizzion
3 World regions	Taycan
China, USA, Europe
	e-tron

MEB Entry Family

ID. Buzz

Vision E

e-tron Sportback concept

ID. Crozz

2nd wave		Our advantage
		• Strong group position in
		EU/CN guarantees scale
		effects
		• Early decisions on
		dedicated BEV
		platforms unleash value
		• Multi-brand platforms
		in dedicated plants
		provide efficiencies

10

Customers already experience comparable TCOs in 2020 - 2nd wave BEV will provide even more attractive TCOs

TCO comparison1)

€
			Government
			subsidies
			Cost of Ownership
			Cost / Leasing
Golf 7 TDI	e-Golf	ID.3	2nd wave MEB
(dedicated		(dedicated	(dedicated
ICE platform)		BEV platform)	BEV platform)

Including government subsidies for many customers BEV TCO are comparable to ICE TCO already today

2nd wave MEB cars will offer better TCOs than ICEs (even without government subsidies)

1) Schematic overview | TCO = Total Cost of Ownership

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Based on strong customer interest, we will significantly increase our BEV deliveries

Volkswagen Group - BEV volume by regions		Europe		China		NAR		RoW
(BEV share of total Group Deliveries in %)					> 20%
e-tron	e-Bora	ID.3	e-Mii						≈ 3 mn units
Taycan	e-Lavida	el-Born	e-Citigo
Q2L e-tron	Moia Shuttle	e-tron SB	Taycan Cross Turismo
eTGE		e-Tharu	Vision iV
		ID.Crozz

• 4%

≈ 1%

2019

2020*

2021*

2022*

2023*

2024*

2025*

* Target

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Our dedicated BEV strategy enables us to meet CO2 requirements

ID.3

…we already started MEB development in 2015	CO2 target
[g/km]
Emissions	NEDC WLTP	…over fulfillment towards Paris 2050 goals
2	Powertrain distribution 100%
CO

								26%*
		1%*	6%*
2017	2018	2019	2020	2021	2022	2023	2024	2025	2026	2027	2028	2029

* Europe only

Otto (conv.)

Diesel (conv.)

PHEV

BEV

CNG

HEV

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We expect cost parity between BEVs and ICEs in the near future

Product cost development BEV vs ICE1)

cost1

Product BEV

Dedicated
platform		Scale effect
MEB			2nd Battery
			generation

ICE

EU6

Cost parity

EU7

Time

1) Schematic overview

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In the future, software will be a main differentiator in the automotive industry…

Today

• 100 million lines of code per vehicle
• Approximately $ 10 per line of code
• Example: Navi system 20 million lines of code

Tomorrow

• > 200 - 300 million lines of code are expected
• Level 5 autonomous driving will take up to 1 billion lines of code

120	Lines of Code
	[Million]
100
80
60
40
20
0	Vehicle Debian	Face-	MS	F-35	LinuX	Android	Google
	5.0	book	Office	Fighter	Kernel		Chrome
			2013	Jet	3.1

1200	Lines of Code per Model
[Million]
1000
800
600
400
200
0	2005	2010	2015	2020	2025

Sources: https://spectrum.ieee.org/transportation/systems/this-car-runs-on-code | http://frost.com/prod/servlet//press-release.pag?docid=284456381 |	15
https://www.visualcapitalist.com/millions-lines-of-code/

…therefore, we invest 7 billion Euro in a dedicated software organisation and will start operation in January 2020

A strong team…

Software experts	>10.000						Connected Car
7.000		+46%				Intelligent Cockpit
				Driver Assistance Systems &
							Automated Driving
							Vehicle Motion/ Energy
							Service Platform
							Cross-functional
2020	2025

More customer value…

• Always up-to-date functions in all vehicles
• Higher residual values
• Lower maintenance downtimes

…develops software in-house

• Increase in-house share software development from 10% to 60%
• All news cars on VW.OS from 2025 on
• Migrate parallel solutions to gain scale, e.g. One Infotainment & One cloud

…less complexity for us	~ 0.5 bn
synergies by 2025 from
	standardisation of
• Cost reduction due to
infotainments	Example

• significantly lower direct material cost
• reduced development cost
• smoother new vehicle launches
• reduced warranty cost

16

We rigorously allocate capital and seek intelligent partnerships…

Platform scale	Software Cloud /
	Autonomous Driving

Battery	Production

17

…and continue to drive cost reduction initiatives

Selected examples					Synergies
	Personnel cost		Zero-based budgeting		through structural
€	reduction	€	program 2020	€	improvements
• "Zukunftspakt" VW brand:	• Tight alignment of cost with	• Single-brand cross-
	(gross) Headcount reduction		strategic priorities		functional responsibility for
	>10,600 since the start of		−	Technical development		synergetic vehicle families
	the Zukunftspakt1)		−	Investments		• One-for-all Engineering
	• "Roadmap Digitale
		−	Sales and Marketing		• Worldwide logistics systems
	Transformation" VW brand:
		• Elimination of redundant		optimisation
	up to -4,000 jobs (indirect)
	until 20232)		activities across brands		• New market area concept

• "Audi.Zukunft": agreement with workers council, up to - 9,500 jobs until 2025

1) Net reduction > 6,900, status 09/2019	18
2) Direct: additional productivity improvements to secure mid-/long-term competitiveness (+5% improvement p.a. until 2023)

We group our vehicles in synergy families in order to realise substantial savings

Today

• Successful market positioning
• Brand-specificdesign
• Synergistic concepts
• High share of carry over parts
• Scale effects through modular platform concept

Skoda Karoq	Seat Ateca
(Launch 2017)	(Launch 2016)

Target picture - 1st wave

• 4 cross-brand synergy families
• Cross-functionallead responsibility in one brand

1st Model family

2nd Model family

3rd Model family

4th Model family

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We capture further synergies through "one-for-all" module engineering and reduce complexity significantly

Dedicated module strategies with one lead developer - example front seats

• Uniform, standardized seat mounting for all brands and platforms
• One dedicated high seater module (SUV)
• One dedicated low seater module (Sedan)
• 30% less modules
• 60% less variation

Planned complexity reduction - example engine-gearboxcombinations

within MQB [EU28]:

-40%

≈100

≈60

20192024

VW: -36% engine- / gearbox combinations in Golf 8 vs. Golf 7

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We are convinced that we have a strong Investment Proposition

Shaping

mobility -

for generations

to come.

• Strong brands with clear positioning and great products that inspire customers
• A leading position in China with global footprint and value creating growth
• Fully committed to "Go to Zero" and shaping e-mobility
• Transforming to one of the leading automotive software players
• Business portfolio optimisation and rigorous allocation of capital
• Taking complexity out and pushing for industry-leading economies of scale
• Delivering on demanding financial targets and committed to dividend pay out ratio

Unleash value

Integrity as the foundation of a successful business

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