Volkswagen AG (VOW3) Earnings Call Transcript & Summary

Hello, everyone, the analysts and investors, welcome to our Volkswagen Brand Live Audio Webcast and Conference Call on our 2020 results. For this call, I am joined by Ralf Brandstatter, the CEO of the Volkswagen Passenger Car Brand, Alexander Seitz, Board Member for Controlling and Accounting; and Klaus Zellmer, Board Member for Sales, Marketing and Other Sales. As most of you have followed our presentation this morning already, we will kick out for this session just with a brief summary of our key messages and get then straight to the Q&A session, where we will take your questions. Let me now hand you over to Ralf for his brief opening remarks.

Yes. Thank you, Tom Küter. And ladies and gentlemen, welcome to our investor call. I try to make it as short as possible because we brought our main messages in our annual press conference, which were, of course, followed by you. Despite the challenges of the pandemic we are facing, the Volkswagen brand has proven to be robust and powerful in 2020. We successfully ramped up our electric platform, the MEB, with the ID.3 and ID.4. We already have the first 60,000 proof points on the street. And in 2021, we aim to double our sales of electrified cars up to 450,000 units. In terms of digitalization and software, we have laid the important groundwork to becoming a software-enabled car company. Already now, the ID family are ready to be updated over the air. Improvements and new functions will be available every 2 weeks -- 12 weeks, and we are moving forward and looking forward in summer to start with this procedure. The automotive industry is changing radically, and we are determined to be winners of this transformation. On this journey, our profitable ICE build business will generate the need of cash flow to finance the transformation, but our new strategy accelerate will take us then to the next level. We intend to increase our NAV share to 70% in Europe by 2030 in China and North America. Our aim is to be around 50%. Further, we tapped into new data based profit boots like functions on demand with our new business model version 2.0, and we will make autonomous driving available to the volume segment, which will be the next game changer of our industry. And with our lighthouse project, Trinity, we started working on our, let's say, software dream car. While managing the transformation, we are committed to improving our profitability. We are striving for 6% ROS by 2023, and yes, let's begin with the discussions. But first, I'd like to hand over to Alexander, who will take you through the financial details. Thank you.

Thank you, Ralf. Good afternoon, everyone. Also from my side, a warm welcome to our analyst and investor call on the full year results 2020. Let me give you a brief summary of our key financial topics, which we have presented this morning during our Annual Media Conference. Unit sales for the Volkswagen brand in 2020 amounts to 2.8 million vehicles, representing a significant drop of 23% year-on-year. Double-digit losses were recorded in all regions of the world due to the impact of the COVID-19 pandemic, but market shares remained stable. Because of positive mix and price-related factors, the decline in sales revenue of 20% was slower than the drop in sales revenue and sales volume. Despite the significant impacts on sales and revenues, we were able to close the year with our operating profit in positive territory at around EUR 0.5 billion. With an operating profit of EUR 1.4 billion we put in particular, the strong performance in the fourth quarter of 2020, benefiting greatly from our hard work on the cost side as well as from the recovery of the markets. However, various one-off effects also contributed to our operating profit in that quarter. When we turn to the factors influencing the 2020 results, it becomes clear that the year-on-year volume losses of around 840,000 vehicles caused by COVID-19 were the main reason for the decline in profit amounting to EUR 3.3 billion. Exchange rates had a negative impact compared to that previous year, but were more than compensated by pricing measures. Significant effects were felt as hyperinflationary currencies in Argentina, Brazil and Russia, higher expenses for compliance with legal emission standards had a negative impact on earnings of some EUR 400 million. 2 factors, in particular, had a positive year-on-year impact on our earnings. Firstly, a strong focus on costs that resulted in the reduction in fixed cost of more than EUR 1 billion compared to the previous year, an excellent performance. Secondly, there was a positive structural effect amounting to EUR 0.6 billion from the carve-out of the Car.Software Org. We have made provisions amounting to EUR 0.1 billion for the restructuring of our business in Brazil. The associated package of measures will play an important role in achieving the breakeven target in South America for 2021. At the bottom line, we were able to generate an operating profit of approximately EUR 0.5 billion in 2020. And the operating result of minus EUR 0.3 billion after special items contains provisions of around EUR 800 million relating to the diesel issue. The strong second half in terms of earnings also helped us to finish our net cash flow in the positive territory in 2020 with EUR 0.1 billion. Our focus on strict investment discipline helped here as well. In total, we reduced our CapEx by EUR 800 million in 2020 versus the previous year. In 2021, we are confident of achieving a strong improvement in all operational parameters compared to 2020. We expect a significant increase in unit sales and sales revenue. In terms of operating return on sales, we are looking at the target corridor of 3% to 4%. However, I would like to point out 2 risk areas that we need to keep a close eye on: on the one hand, it will be of decisive importance how successful the containment of COVID-19 our main sales markets will be; on the other hand, we need to continue to closely track the situation regarding the availability of semiconductors. We are currently working intensively to find ways of alleviating the current situation as rapidly as possible. As some of you might have noticed already, we have changed our strategic target for our R&D cost ratio from 4% into the corridor, ranging from 3% to 4%. This is because of the carve-out of the cash offer were around EUR 600 million were reallocated to the new organization. Please note that this permanent effect is neutral for the Volkswagen Group, obviously. As you can see on this chart as well, a 6% return on sales by 2023 remains our clear goal. We have defined 4 levers that will enable us to finance our transformation. Firstly, a 5% reduction in our fixed cost by 2023. Last year has shown that we can achieve major improvements through resolute action, and this is how we aim to continue. The fixed cost reduction is supported by an effective level freeze and headcount reduction along the demographic curve. Secondly, further increase in productivity at our plants by 5% annually. Thirdly, lowering our material costs by 7% by 2023. Fourthly, striving for clearly positive net incomes in the regions. This must be stepped up even after reaching the breakeven part. These are the 4 levers we are systematically working on. What makes this work so essential is the fact the electrification and digitalization of our model range and modernization of our plants will require major expenditures for transformation. As most of you have already followed our morning session, let me stop at this point, this is my summary. But before I hand over to Thomas Küter, let me give him a few warm words. So Thomas, you are now working 15 years in Investor Relations. That's a long time. For the group, Volkswagen Group, for the Volkswagen Brand, for China issues, you're very ambitious and very dedicated to the matters. There's a lot of expertise you worked around the clock, especially short before these meetings. And even under the corona conditions, it was a tough call really to handle all the Russian matters at the right point in time. And you kept the close contact to the capital market, and I'm very thankful for that. And so from my side, thank you very much for your big contributions, and we all are happy that you will further support Volkswagen in different functions.

Thank you, Mr. Seitz, for these very warm words from your side. Yes. I'll start these short summaries now from Ralf and Alexander. I think we can start now with the questions from the audience. I think, operator, please go ahead and explain the procedures for it.

[Operator Instructions] And we will take Stephen Reitman with Societe Generale.

My question is about selling the services on the future models. And I think in the morning session, you gave example of potentially offering more range for a time for a period if someone needs that or other kind of functions. Now presumably, that means that you actually have to build that capability into the car from the start. So you'll basically be setting that person a car with a larger battery pack. But presumably, he's paying for something less on other features as well, which he can use from time to time. Now you will make savings, I suppose, in terms of standardization, but can you explain how the economics of all this is going to work?

Yes, Stephen. It's Klaus speaking. Obviously, of course, the cars will have to be equipped with more than what people are willing to pay for to then later on when they use the car and they have a special use case sign up for, for example, more range with the battery, more power, potentially also more capacity in terms of charging frequency or charging speed. It could be anything that you currently can think of. But yes, you are absolutely right, the car has equipped with more than what the customer pays for, and we recapitalize that expenditure from a manufacturer's point of view by selling over-the-air when the need is there for our customers out there. And the first or the initial business cases that we have calculated show that, that can be a very profitable business.

Maybe, Stephen, I can add, because you asked for savings on standardization. Of course, this is part of our strategy in Trinity to go to the lowest level of complexity when we produce that car in our production site. We want to get rid of complex logistic procedures, which are currently due to our, let's say, business model to offer a wide range of equipment for this car. The equipment will be, in the future, more oriented in digital experience, so that means that we take out for Trinity, as an example, a huge amount of complexity, let's call it, complexity and life science. So you will have the car, you will have less equipment, and then you can also be more efficient in production.

And if I may add to that, not all the features will be from a hardware standpoint additionally. So a lot of the things you can really steer by software, for example, auxiliary heating or navigation system, how you display the map and long-range driving, sportive driving, this is all software-related, and that is not a cost factor. As far as battery is concerned, yes, you are right, that would be such an item. But through the economies of scale, I think we will be able to handle that to offer it to the customers in a price euro per kilometer or whatever, so it's a mixed calculation. And at the end of the day, it's an additional business opportunity.

And next, we will hear from Henning Cosman with HSBC.

I had asked a similar question in the main call yesterday, but Christian Dahlheim said he didn't want to spill your thunder, so I'm going to ask you again. It's about the positioning of the ID.4, please, and in 2 ways, both against external and internal competition. So the Hyundai Ioniq 5, that is similarly priced. If we look at 77-kilowatt hour battery, for example, but charging speed is a lot faster and the acceleration is also quite a bit faster. I think there was an indication that you may be looking into improving your KPIs of the ID.4 going forward, so I was hoping you could maybe comment in that direction a little bit, maybe specifically with respect to the charging speed, increasing it from the current 125 kilowatts. And the other element is with respect to internal positioning because I would have thought you maybe leverage the opportunity for a greater distinction between your volume brands such as Skoda, for example, I believe that ENYAQ, again, on a similar 77-kilowatt hour battery is priced quite similar to the ID.4. Would you not have hoped to make a clearer distinction between your 2 brands?

Okay. Let me give you some details because you are asking if we are prepared to follow KPIs which competitors are, at the moment, enhancing. When we look to the MEB and a third-party has analyzed and said, okay, the MEB is competitive. But they analyze the current car, and we have -- we are at the beginning of our technology roadmap for the MEB at the moment. So that means we will implement in our MEB platform and all-wheel drive. We will implement performance electric engine, which will give us more acceleration. We will improve the range up to 700 kilometers driving range and also charging speed. And I can tell you, it is prepared as in one of our over-the-air update, which will come soon, that we improve via software the charging speed. But don't nail me today, don't nail me today into the details please. But imagine, imagine only the customer is receiving an over the update from us and we improved from 125 kilowatts to 170 kilowatts, for example, that means the customer can charge not only in 10 minutes, 125 kilometers, he can charge in 10 minutes, 195 kilometers. So all this is prepared. But as I said, don't nail me today, I only will give you an impression that our technical roadmap is running and we will be competitive with our MEB platform over lifetime.

So second question was to Skoda, ENYAQ into the brands, maybe Klaus, I can ask you to answer this question?

Yes, of course. I mean within the platform strategy for the VW Group, of course, has proven to be brilliant in terms of scalability. And of course, we're sharing the platform, the MEB platform, that Ralf just referenced to, that was also praised by some external institutions as the future way to do business. And then the differentiation comes with details such as the design of certain functionalities and the brand itself. So Skoda has got a different positioning than BW and looking at the order intake that we can see right now for both brands with ENYAQ and ID.4 were basically sold out for the year, so the customers find what they prefer and they accept the way we differentiated the products and we share a platform, that means that we financially have got a very sound business proposal.

And next, we will hear from Kai Mueller with Barclays.

3 questions, if I may. The first 1 was earlier today on the call, you mentioned the semiconductor shortage and just now in your opening remarks again. Just to understand it a little bit, is -- how does VW Group and then your brands, in particular, beside on the sourcing, we often understand, obviously, a priority to the higher-margin models? Is that an impact you are feeling as a brand that some ships are being sent to other brands? Or do you have your allocation and you then have to allocate it internally? That's the first one. The second one, maybe a little bit alongside what Henning said as well. We obviously see some other competitors coming in with higher specification, mass market products, other voltages such as the ones by Hyundai. Does it mean the numbers that we see on fast charging that you currently publicly announce, are actually possibly not actually numbers of equipment you're putting in, if you say, there are possibilities that charging speeds can increase via software? And then the third question was on your collaboration with Ford on the MEB platform, would that Ford platform sale to skateboard, will that come through your business? And in addition to that, are there any plans also that you sell the platform to Ford to use on some of their LCD businesses as well?

So first question from -- answer from Ralf to your semiconductor shortage question. And no, there is no doubt we have in the group clear rules when we allocate the semiconductors. It is very transparent for us who is getting the volume. It is a complex question sometimes because it's not only 1 semiconductor and 1 part which is affected, so there are different semiconductors and different units, which are then affected. And then we distribute and allocate with fair rules within the group, so it's a clear transparent process. All the brands are on the table when we discuss that topic. So there are no doubt, of course, volume and -- volume planning and margin is an important question to that and we are doing that and allocate according to margin contributions and volumes. So second question was fast charging. Again, I need to emphasize, we also -- and be prepared to -- we are software to improve our charging speed. As I mentioned before, please don't nail me to the specific dates and numbers I mentioned, but believe me, we can compete with our competitors. And Alexander, maybe you can say some words to the Ford business?

Yes. Thank you, Ralf. So we made it public, we made it clear, we are opening up to third-party providers our MEB platform, and the aim is cleared to achieve additional economies of scale and to reduce the costs. So Ford will be one of the first carmakers to take advantage of the MEB. So starting in 2023, we will have MEB vehicle based in the market in Europe, selling more than 600,000 cars within 6 years in Europe. And in addition, the company is examining a second model based on the MEB for the European market. But at this point in time, I would not like to give additional information about that topic.

Maybe how big can this MEB platform be stretched to? Can this go into a category of Touareg, for example, or if you don't need the metrics of the PPE?

No. At the moment, we can achieve with the MEB cars, which are mentioned today, like ID.6 X or ID.6 CROZZ, It's a 7-seater in China. It is a car next to a SUV segment. Until now, there is no Touareg on MEB scheduled. But also, Audi is using the MEB platform. As you know, the Eq. 4 is coming on the MEB platform. SEAT is using that. So all the brands are using the MEB platform. It is, let's say, the MEB is like a blueprint for the whole group, and we are using our strength at Volkswagen to create a platform which is scalable, which is sizable, which can be industrialized in 3 world regions. So we are making the basic technology like a blueprint for the group.

And we will go next to Tim Rokossa with Deutsche Bank.

I have 3 questions, please. The first one is a bid into Henning's and also Kai's question just now. Are you still able to share volume with other common manufacturers on the MEB platform should they be willing to do so? I know there were discussions with FISCA, obviously, publicly in the press, that didn't seem to have worked, but is there still meaningful room for you to potentially sell this to other guys? Or are there any limitations? Secondly, Mr. Dahlheim said yesterday that the order book for the ID.3 is about 2.5 months and that one for the ID.3 -- ID.4 would be even better. Can you put that in context of what the average for VW brand is right now, just to give us a feeling for where the electric costs stand? And then finally, there was a quick report by Greenpeace interestingly coming out about the number of self-registrations in Q4 and especially in December of the electric vehicles, especially from VW brand. It seems to be like 1/3 or so was self-registrations. Can you say something to that, please?

So first question, of course, we are still able to share volume for MEB for third parties. Ford has stepped into the business, and we are still open to share these platform with others. It depends on the business case, of course, but it is, let's say, a profitable margin model for us. Third answer, self-registrations at the year-end 2020. No, that's -- it's not what -- it's clear. If you bring volume in the market launch to the market, always, we fill our system. We fill our systems in dealers. We fill our systems in, let's say, test cars. We fill our systems for our own fleet of management, which are also wants to test this car. This was for us, let's say, like a normal procedure, and we are continuing in this year with an order bank, which will be now commented on from Klaus.

Yes. Obviously, you touched on the registration issue. Our customers are out there. They want to drive the cars, the ID.3 and ID.4, and of course, our dealer organization needs a test fleet, which you then call self-registrations. In terms of our order book, Christian Dahlheim said 2.5 months is our order reach for ID.3 and ID.4 better. We have certain markets that are already crying for more ID.4s, where we are virtually sold out, but we're not sold out throughout the world, of course. The United States sales period is going to start when we deliver cars in calendar week 12. So currently, I can't give you a solid number on the order reach for the ID.4. That's a moving target, but we are ambitious, and we are very confident that this is going to be a great year for ID.4.

And what is it for the VW brand overall just to put the 2.5 months into context whether it's actually a good number on average for just pretty much standard?

It really depends on the model. It depends on the country. There's no such number that you can directly compare because there are some markets in the world, especially United States, where we basically sell from stock, almost 100%, so there's not a typical order book while other markets really love to specify their car, and then it's all sold from the order book. So I beg your pardon, hopefully, you're understanding, we don't have a comparable number for that.

Okay. And if I may just follow-up on the MEB deal with Ford again. We obviously do know the EUR 20 billion revenue number that's associated with that. Can you just remind us of the economics, how this works for you guys? Do you just get a certain amount of money per skateboard? Do you get that plus some fees that you're helping out in production of Ford and Cologne? Or how exactly does that work?

So I think it's business practice that we don't disclose such kind of numbers. But be assure, it's a deal which works for both parties.

And next, we will hear from José Asumendi with JPMorgan.

Yes. I just have a couple of questions, but mainly revolve around is the work you have done in the past years to address the cost structure, both in Brazil, in Mexico as well as in North America. If you could quantify a little bit, what were the losses in the past years? And how is this is turning into an opportunity in the next 2 years? I think this is -- when you compare the next cycle and the previous cycle, your earnings were clearly dragged by the losses you made in Brazil and the U.S. which were substantial. Maybe you can just give us some guidance of, was it 3 triple-digit high figure or not combined across both regions? Where do you stand at the end of 2020 across both regions? Where do you see both regions delivering returns in the next 12 to 16 months?

So 2020 was an extraordinary year. Our starting point is 2019. Maybe you recognize that we achieved for the brand, 4.3% profit margin, so -- and in this year, our losses in Brazil were around EUR 350 million and the North American region, EUR 450 million, and so you can recognize how important it is to achieve then the black zero in North America, U.S. market this year and in the Brazilian market as well. After, let's say, getting the fruits of our strategy on the product substance, and on the other hand, after a significant restructuring in Brazil, so this levers us. This levers us. And if you compare the '19 figures with the losses taking into account that then the, let's say, breakeven will be achieved in U.S. market and Brazilian, South America, this levers our profitability for the next years. And of course, a black zero is not sufficient. We want to achieve, let's say, sustainable profitable business in both regions, and therefore, we are striving.

And to add on that, in North America, the growth plan is decisive. You know that we are changing from limousine to SUVs, so that is a big contributor. We were focusing marketing spending also in direction of digitalization, that is an important issue. We are working on lean management in the staff functions between Mexico and the U.S. If you go to South America, you know that we worked out a restructuring plan to really focus on the right shifts to the right capacity management to increase economies of scale for MQB at 0 and to right size the whole company also in the indirect areas, improving the collaboration between Argentina and Brazil. So the fruits of this, you will definitely see in this year, in 2021. Also, with there's a new model of Polo Trek as an entry model, really gaining market share in that segment, so I think we are well-prepared. And the track record has shown that year-over-year, we improved already the situation in the North and in the South, so we have a very capable management team here on board to tackle these issues.

Maybe, José, I can add a proof point for South America. I said that also in my speech in the morning. Last 5 months, Brazil achieved breakeven. So despite a lower market, this shows that our actions we have taken in place are going into the right direction. Thank you.

I had one little follow-up, please. A 7% reduction in raw materials is over a 3-year time period. Net effect on purchasing bill is probably one of the biggest reductions have seen in the auto industry in a very long time, if it is achieved. Is there so much low-hanging fruit within Volkswagen? I mean I tend to think that you have launched cars on this [indiscernible] architecture is coming through. Where is the -- I guess, we'll have to speak with Murat about this, but what are you looking for? Is it a standardization of components across the more lineup? I struggle to understand how come there can be so much low-hanging fruit in terms of raw material reduction.

Yes. So first of all, I think Murat Aksel has outlined also in some discussions this to you guys, what is the overall direction of the material cost-reduction plan. Some of the issues we have already in our base plans in the operative planning in our budgets. But of the 7%, also some on top topics will come, and he will explain that now in the middle of the year in a separate session. So we keep you posted, and we should really give him the chance as a new group-wide head of purchasing in the Board of Management to explain that in detail to you. But I'm -- as an expert, I think I can tell you, this is very professional, and you will see the foods, and they will help us to come with the right figures to the party.

[Operator Instructions] And next, we will hear from Tom Narayan with RBC.

Tom Narayan, RBC. I got some questions on margins related to the EVs versus ICEs, I normally bug Thomas with, maybe that's why he's leaving. No, I'm just kidding. So on the 6% margin target for -- by 2023, does this imply that BEV margins will be above their ICE cohorts by 2023? I know historically, VW brand margins were kind of below the 6% level, and I know some of that is coming from fixed cost reductions, but just trying to understand that BEV versus ICE cohort dynamic. And then what happens down the road as battery prices come down? As we -- as discussed at this week's battery events, could VW brand margins go above that 6% level down the road? Or do you see that extra cost value going to the consumers in the form of price deflation? And then longer term, what do we expect -- what should we expect from margins of the ICEs. Because presumably lower volumes from ICEs hurts operating leverage for those vehicles. Is it a situation where higher-margin BEVs, because of lower battery prices offset the lower margins from ICEs because of lower operating leverage? Yes, those are my questions.

First of all, Ralf is speaking. And then later, Alexander will continue, will be NEV margin? How we can compare margins of NEVs versus ICEs? I give you only an example. The ID.4, still at the moment, has more or less the same margin as a comparable SUV combustible engine car. So this is -- gives you an orientation that we are, in general, on a good path. Of course, we are at the beginning of our scale effects, which will run up to 25 with a volume of 1.5 million NEVs in our plannings, so therefore, we are looking forward to achieve then also our margin prognosis we have given today. Alexander?

Yes. I think the levers we explained today in fixed cost reduction, material cost reduction, also productivity in the plants works for both BEV vehicles as ICE vehicles. Definitely, at one point in time, we will have the breakeven between ICE and BEV. When that will be, that also depends on the customer. At the end of the day, he will decide what kind of market share we have in BEV and NEV. So I think a tipping point might be in 2025 when we have a significant volume with 35% and then going to 70% even in 2030. Before that, the battery price reduction when we introduced a scalable platform from 2023 onwards, with the unified cell and all that stuff, will help us to really come closer to the point of 2025. But the tipping point, I think in the -- will be in the middle of the decade of the 20s, not earlier.

If I may just have a follow-up. What lease percent -- penetration do you have on the ID.3? Like what percentage of ID.3s are on lease plans as opposed to being finance or bought outright?

Well, currently, we're still less than 50% in terms of our lease rate of ID.3s out there, while with other products, you're very well aware that we crossed the 50% barrier. So currently, it's more cash buyers.

Okay. We also received some questions via e-mail actually, which I will just read out briefly, and then we will answer it from here directly. One is on the cash flow development actually in the second half of 2020, which was quite strong and compensating, basically the full loss of the first half we have seen in 2020. Maybe Mr. Seitz, you can comment on this development briefly?

Yes. I think we outlined it also this morning, that we had a big improvement with EUR 3.8 billion, and this strong effect came from an improving operating result, especially with the mentioned EUR 1.4 billion in the fourth quarter and the improvement in the working capital, which we also have shown where we saw an improvement of at least 10% compared to 2019. And our CapEx spending, we have shown an EUR 800 million reduction was also a big supporter of this development in the second half of 2020.

Okay. Thank you, Mr. Seitz. And another question was actually touching on the fixed cost levers we see until 2023. So what do you expect out of the strong performance in 2020, with EUR 1 billion of fixed cost reductions for the coming years?

So first of all, we have to put the EUR 1 billion fix cost reduction in 2020 in the right context. So we have 4 levers of fixed cost here included. That is depreciation of investment, yes. This is development cost, depreciation of development costs, general overhead costs as well as indirect personnel costs. So that is the EUR 1 billion we really got in-part to the party in 2020. When we talk about the overhead cost reduction going forward, here, we clearly address the indirect personnel cost and the general overhead costs. Dr. Antlitz for the group mentioned yesterday, the EUR 2 billion. So on this EUR 2 billion, 25% to 30% is coming from the brand of Volkswagen, so that means EUR 500 million. And the EUR 1 billion right now, let me say, is a kind of starting point because from now in 2022, 2023, we have to assure a net reduction of 5%. This means all inflationary measures coming from tariffs, coming from increasing prices from service providers, we have to compensate and then bring additional 5%. And the better we get and the more focused we get in 2020, we have a better baseline also until 2023 through this flow through effect. So the EUR 1 billion is a good starting point, but it's not the end of our journey. We have at least to bring home another EUR 500 million in indirect personnel costs and general overhead expenses.

We can have 2 more questions in the phone queue.

And next, we will hear from George Galliers with Goldman Sachs.

I really had a question around the long-term profitability of Volkswagen brand. And specifically, when you benchmark yourself against peers -- I mean when I look at the 2025 target, but actually even looking at 2023, CapEx and R&D ratios look very competitive when we compare them against some of your mass market peers, but your operating return on sales targets don't look particularly ambitious. Now obviously, Volkswagen brand has plenty of volume. We understand that you have a good price position in the market. Your CapEx and R&D looks very competitive. So when you benchmark yourself against some of your mass market peers who are delivering substantially higher operating margins, where do you see the biggest delta? And although you say greater than 6%, is there structurally any reason why Volkswagen brand ultimately can't do high single-digit margins in the long term?

So I think we have to put that in a bigger perspective. Right now, as we start the transformation, the brand of Volkswagen is really preparing and handling all costs related to the industrialization of the MEB platform in the first generation and then followed in the second generation. So we are spearheading the entire transformation processes in all our plants worldwide, and a lot of sister brands are taking their cars on our platform, putting the hats on. So -- and this is something we always should have in mind when we talk about ROS, and you mentioned that our R&D and CapEx management is going quite well. A lot of our peers, this also has to be clearly stated, they include in their business model also the percentage of sales and profits from China. You know that this is not consolidated in our operational profit, it's in the financial results of the group. So to be in all fairness, this has to be taken in consideration when you do the peer consideration. So 6% also means that this leads to a 40% return on investment, and I think that is a relatively good number. Other more ambition beyond 6%, yes, ambition we always have. But we are not famous. We work straight to the point. And to manage such a big transformation, which is the biggest in 120 years of the automotive industry with a clear target of 6% return on sales in our focus, I think, is a good promise to the capital market. And later on, if things work better, it's fine. So it's better to overachieve than to disappoint the stakeholders.

The next question, we will hear from Michael Foundoukidis with ODDO.

Michael, ODDO. I have one question left, which is around the topic that was a bit addressed earlier this week around e-production vertical integration in the future. First, could you explain what are the main elements driving this choice? Is it scale, technology, labor use? And could you explain in more detail what you plan to do yourself in the future compared to the third generation, which seems mostly outsourced, if I'm correct? Is it electric engines only, is it inverters, on-board charger? And in what proportion would you do and how this split with suppliers? And maybe as a follow-up, did I understand correctly that as a group or brand, you plan to be a supplier to other OEMs on these broad trend parts? Any time line, discussions already ongoing? And is it only forward what could it be others?

Okay. Let's start with your question to vertical integration, this was a key question when we started our planning for our MEB project because we have to transform our component plants as well. And we are convinced that we need to take care in our company about the electric drivetrain. So therefore, we decided to invest in own capacities and in own -- to build up own knowledge, for example, the e-machine and battery systems, for example. But anyway, also, our component in-house structure like steerings, brakes are used also for the MEB. Maybe the detailed proportion between in-house and ex-house, we need to deliver later the exact proportion. But the main question is that we are following our idea by using common parts, and with common parts is coming the advantage of high scale effects, and this is what we achieved. When we, for example, decided to build the e-machine, a highly automatized in Castle, for example, and clear that also software will become more important for us and will be more in house. At our current level, only 10% added value of the software is made in-house, we are striving for a share of 60%. We are bundling these in our software organization, but also in the user experience and the integration of software is part of the branch, so we are building up these competencies in-house to have a higher proportion in-house.

Okay. Maybe if I can just have a follow-up, you gave this number from the software, which is 10% going to 60%. Could we have the same kind of, let's say, figures for the powertrain, for the electric one, I mean?

The electric powertrain in Europe is 100% in-house. In China, we have a high proportion, but we have a share between in-house production and a supplier, which is supporting us. So the electric e-machine, we have a high value of internal share. So it's important because in Germany, we are transforming with this, the German plans, which are, at the moment, are oriented in our engine plant for combustible engine, and these plants are integrated in our transformation plan. That means a typical plan is Salzgitter. Salzgitter is producing components for the e-machine, which will be then built up for complete e-machines in CASA, Salzgitter, for example, at the moment, dedicated to ICE combustible engines is preparing cell production together with our joint venture, North World, for example, Braunschweig, our component plant, which was in the past for rear axles and steerings. Of course, real axles and steerings are used also in the MEB platform, but Braunschweig is building up the capacity -- the capability for battery systems for our MEB platform. So we have, I think, a very consequent plan to transform our component plants to e-mobility, and we are building our competence centers to bundle the knowledge. Another example is for battery cells. We have centralized all our experts for battery cells in our center of excellence in Salzgitter. So it is one of the biggest lever for cost improvement, and we are striving, therefore, to have these, let's say, vertical integration for electric vehicles in our company.

Okay. And any update on external sales of these parts to other OEMs?

Can you repeat your question, please?

Just the question was that, do you plan to sell these parts? I mean engines or anything related to other OEMs outside the Volkswagen Group? And if so, are there already discussions on going?

Yes, we have made one deal. Yes, we will be -- we will share these, and we will deliver to third parties. You know the Ford example, we will deliver the whole MEB platform, means all components, which were needed to our fourth partner in Cologne. So this is a very important component strategy business, and we have own dedicated group board member for component strategy. And to, let's say, be the key account to our customers for the component business, and this is, let's say, an asset which is moving cash to our company.

Okay. We have 2 more questions actually coming in per e-mail. One is on the semiconductor outlook. Actually, what is the impact of the current shortage? So maybe Mr. Seitz can elaborate on that one?

So I think we talked on that issue already. We have an outlook of planning for our plans 3 months forward until June for the first half of the year. So we know what will happen now in the next couple of weeks, and we expect a recovery in the second half of the year. So a big task box of at least 40 purchasing and quality people is working on that hardly. So based on that, that we know already, there will be the difficulties in the first half, the company in the second half of the year. We have included the cars which cannot be recovered in our planning already and that might be a potential risk of 50% of the 100,000, which were mentioned yesterday. But to make that crystal clear, this is in our guideline and being taken off. And perhaps we have another chance even to improve that further, but that is the current status.

Okay. Thank you, Mr. Seitz. And the last question for today's call is actually on the current status of our online sales and the role, the dealers play within this online sales channel. I think this one is for Mr. Zellmer.

Yes. Thank you very much. As you might have in our car configurator and our bond shop, which is the platform for dealers in future, commonly used in order to generate online sales, you can already undertake some steps in order to specify your car and do some basic steps towards closing the deal. The deal currently has to be closed at the dealership. Some are onwards here in our home market in Germany, it will be possible to close the deal completely online and take delivery of the car at a dealership. And Germany is working as our blueprint. We are going to use the platform, the digital platform in other European, the main European markets. The rollout will take place later this year. The role of the dealer is very simple, it's part of the journey for our customers. And customers in future can decide on whether they want to conduct business with us online or off-line, and we'll leave it up to the customer to design that journey according to their preferences, be it a test drive, be it a trade-in evaluation of their current car or be it information they need in order to make a decision on the right car for their personal purpose. So dealers are part of the ball game in future as well.

Okay. Thank you, Mr. Zellmer. And yes, before we can -- finish our call today, I would like to take this opportunity to say goodbye to you guys. As Mr. Seitz already mentioned before the Q&A session, I have decided to move on within the Volkswagen group from the next month onwards actually already. I'm still staying within the finance department, but we'll be focusing in my new role in treasury on the fixed income side of the business. And yes, looking back, I have to say it was a really exciting journey with plenty of ups and downs, unfortunately, also for the share price, of course. Currently, we have app, which is very, very nice for you, I think. I always enjoyed the daily communication with you, both on the buy side and on the sell side. And I'm quite sure I will miss this in the future. Just on this position, I'm having at the moment, we are in the process of finding a successor for my role in the meantime, so please feel free to direct your questions to my group or our colleagues in the future. That's it from Volkswagen. And yes, let me say goodbye.

Thank you very much. Goodbye to all.

Thank you.

Take care.

Take care. Stay healthy.

Thank you very much.