23 August 2015

Profit Margins

When the average person such as myself look to see how successful a car company is, we check out sales figures. That is understandable as it is the most visible part of operations. However, it can be misleading. As an industry margins are pathetic.

Lack of cost sharing could be blamed, but the biggest issue how cars are priced. Keeping factories as close to capacity as possible is cost effective....unless you discount to a point that it becomes counter productive. So what are the issues?

Government meddling. In Europe, notably France, decisions about laying off workers or closing a factory are political issues that some governments feel they should decide. What arrogance! It hurts profits, encourages discounting and weakens the industry. Good for votes though.

Buying market share. It looks good on paper but doesn't do much for profit. The VW brand is the biggest in Europe and China, yet currently gets 2.5% return. Why? They are clearly buying market share and long term that is going to be paid for.

Make vehicles people want. If your cars are not that desirable, the price point becomes critical. You can sell them if they are cheaper but that isn't very good for the balance sheet. Make cars people want to own and your margins improve. Nissan is increasing its sales globally and profits are rising. It has reached a 7% margin and is aiming for 8%. Toyota does even better than that.

Conclusion. It isn't just about shifting metal, business exists to make money. The more you make, the happier investors and the more you can reinvest. Europe in particular is a region where mainstream car makers struggle to break even. Sometimes a situation can become a vicious circle and for the car industry making a reasonable return on the massive operational costs is a challenge. Some are managing profit margins better than others.

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