Volkswagen’s plan to list its truck division later this month could totally remap the global truck market and change the face of VW as an automotive group while also luring rivals into doing something similar.
For decades VW, which is now the world’s biggest carmaker only knew how to expand. It added Bentley, Lamborghini and Bugatti luxury cars, Ducati motorcycles and of course Scania and MAN heavy trucks while taking its network of factories to well past the 100 and its staff count to over 640,000.
Even in the face of the highly damaging diesel-cheating scandal in 2015, VW didn’t trim its portfolio, bolstering investment in electric cars instead and even creating a new division for mobility services.
Now with the pace of change in the auto industry quickening, Volkswagen is trying its hand at re organising the empire.
If the listing of a minority stake in its commercial vehicle organisation, Traton SE, goes well, it would give VW CEO, Herbert Diess more sway to balance the often diverging interests of VW shareholders including the Porsche and Piech owner family, the Lower Saxony government and the powerful German labor unions.
Traton and its three major truck/bus vehicle brands will have a total market value of as much as $AUD26.25 billion (16.5 billion euros).
Volkswagen shares have risen 0.2 per cent to 141.42 euros ($AUD 229) in the past week, taking gains this year to 1.8 per cent.
Diess and Andreas Renschler, the CEO of the Traton subsidiary are seeking deeper technology partnerships and the possible sale of assets like transmission maker Renk AG and MAN Energy Solutions, which develops engines.
It is believed that a successful Traton listing, which is being targeted for June 28, could even spark rival Daimler to follow suit with a carve-out of its own massive truck business.
VW’s Traton truck group comprises three main brands, Scania, MAN and Volkswagen-branded budget trucks sold in South America and Africa, as well as a unit offering digital services to fleet operators.
VW/Traton’s 29 production and assembly sites globally, last year produced and sold 223,000 commercial vehicles. While that’s 14 per cent more than a year earlier, it’s less than half of the volume of Daimler’s truck division, which is the world’s biggest truck and bus maker with sales of more than 500,000 vehicles last year. About 180,000 of those were from its US brands including Freightliner. Rival Volvo Group has gained 26 per cent this year alone.
Volkswagen is offering 50 million Traton shares at between $AUD 44 and $AUD55 (27 euros and 33 euros) each, plus a possible over-allotment of 7.5 million shares, meaning at the top end of the price range, the sale could raise as much as $AUD 3 billion (1.9 billion euros).
Here are the key points in one of the biggest initial public offerings in Europe this year:
Traton is looking to woo investors by combining the technology and strong margins of the Scania unit with the prospect of a turnaround at MAN and growth potential in key markets, according to company presentations and research from advising banks the plan includes the four pillars
Chief executive officer, Andreas Renschler, is the mastermind behind Traton. Renschler made his name turning Daimler’s commercial vehicles business into the world’s largest and he was lured to Volkswagen in 2014 with a similar brief.
Despite the partly overlapping operations of Scania and MAN, he’s improved earnings over the past four years by enforcing closer cooperation between the long-standing rivals truck brands. Investor interest in Traton will largely be a bet on the 61 year old Renschler’s veteran skills to deliver in the cyclical truck market.
The timing of the listing, which was delayed earlier from this year, has been complicated by global volatility and the current window may be as good as it gets.
“It’s no secret that the market environment is very volatile,” VW chief financial officer Frank Witter told reporters.
“It’s not ideal, but it’s not bad either,” Witter said.
VW remains open to sell more Traton stock at a later stage, up to a maximum stake of 24.9 per cent, if market conditions are supportive, he said.
Traton’s biggest perceived weakness is that it has only a quite small beachheads in the key North American and Chinese markets and the prospects for expanding those positions face some obstacles.
In North America — the truck industry’s largest profit pool — Traton owns a mere 16.8 per cent shareholding in Navistar, which at present does not deliver VW a huge benefit.
Lifting the stake will cost money and add complexity for Traton but is believed to be Renschler’s main target to try and increase the company’s penetration in the North American market. Navistar has already benefited from the capital injection that came from Traton’s 16.8 per cent buy in, with some saying that this helped save the organisation from possible bankruptcy.
Renschler of course was the architect of Daimler’s buy in to the US market, engineering the deals to purchase Freightliner, Western Star, and Detroit Diesel engines as well as Thomas Built Buses. Freightliner has become the largest truck maker in the USA largely on the back of the organisation Renschler designed.
Meanwhile Traton’s vehicle for gaining a larger footprint in North America, Navistar faces fierce competition from the market leaders including Freightliner, Volvo/Mack and of course the Paccar brands, Kenworth and Peterbilt.
Daimler and Volvo also both have functioning production ventures in China, which is the world’s biggest truck market by volume. Traton does have a cooperation agreement with Sino Truck in China, where it holds a 25 per cent stake through MAN. However this link up is also yet to deliver hoped-for results.
Alliances can often fall short of aspirations to create economies of scale, with the recent tensions in the Renault-Nissan-Mitsubishi Alliance being a reminder of the difficulties in uniting disparate cultures.
Traton of course has also recently inked a cooperation agreement with the Toyota Group truck maker, Hino, involving electric technology, product development and purchasing. However any speculation that Hino is also on Renschler’s shopping list must be tempered by the fact that Toyota would be unwilling and not that interested in offloading its truck making company as it is both too profitable and a valuable addition to its corporate operations.
MAN has long attempted a turnaround, but improvements have been tepid compared to the aggressive restructuring at Volvo in the past five years that doubled its margins within three years. MAN’s production footprint in high-cost Germany and a lineup that includes less-profitable medium-duty trucks limits the potential for improvement.
For all of those challenges the fact remains trucks are a profitable and in demand and Renschler will have plenty of financial and business resources to build Traton into a global truck maker.
Whether Andreas Renschler can deliver the same results to Traton and its VW masters that he was able to achieve for Daimler, in consolidating its global truck making operations will not be know for a few years yet. However if the determined German’s track record is an indicator and given the massive war chest the IPO is likely to deliver only massive market downturn will prevent him from creating another global truck marketing monolith for VW.