Summary of key divisions and business activities of VW and Tesla

Volkswagen (VW) is a German motor vehicle manufacturer with its headquarters in Wolfsburg, Germany. Like any other company, Volkswagen has multiple key divisions, with each division carrying out certain functions (Bhaskaran and Bandyopadhyay, 2018).  The divisions are research and development, IT, E-mobility, human resources, integrity and legal, communications, sales and marketing, quality assurance, procurement, controlling and finance, product lines, and production and logistics. On the other hand, the firm’s key business activities include development, production, and selling of different types of vehicles. Tesla, on the other hand, is an American automotive company that designs and sells electric vehicles (Vynakov, Savolova and Skrynnyk, 2016). The company has a number of divisions that include engineering and production, energy, sales, legal and finance, HR and communications, and software.  On the other hand, the key business activities are designing, developing, manufacturing, selling, and leasing electric vehicles and energy generation and storage systems.

Analysis of historical accounts

The historical account of VW and Tesla is focused on revenue, profitability, investment, and company funding structure in the last 5 years.

VW

In the last five years, that is, from 2017 to 2021, VW has registered generally increasing revenues. For example, the firm’s revenue increased from 230.682 billion Euros in 2017 (Volkswagen, 2017) to 250.2 billion dollars in 2021 (Volkswagen, 2021). However, the company did not register increasing revenue for all the years during the period.  In 2020, the revenue generated reduced to 222.884 billion Euros from 252.632 billion Euros in 2019.

 

With regard to profitability, the company’s gross profit margin has been fluctuating over the last 5 years. For example, in 2017, the gross margin was 18.44%. This increased to 19.65% in 2018 (Volkswagen, 2018) before decreasing slightly to 19.45% in 2019. In 2020, the gross margin reduced further to 17.47% (Volkswagen, 2020) before increasing to 18.88% in 2021. On the other hand, VW’s net profitability has generally been increasing over time, with 2020 being the only year where the net margin reduced (from 5.58% in 2019 to 3.96% in 2020). The reduced net profitability in 2020 could be due to the COVID-19 pandemic which negatively affected businesses around the world.

VW has engaged in a number of investments over the years. Currently, the company holds shares in various companies around the world and they include There Holding, Sinotruk, and Bertrandt. The company has also invested in technologies. For example, in the company’s press release in 2020, it was reported that VW had decided to spend about 73 billion Euros on electrification, digital technology, and hybrid powertrains (Volkswagen Group, 2020). The focus of the above investments includes building software capabilities, development of battery-electric vehicles, and development of hybrid vehicles.

In terms of historical accounts of investments, the company’s annual reports show that the company’s investments have generally been increasing over time. For example, between 2017 and 2020, the company’s investments increased from 30.916 billion Euros to 37.067 billion Euros (Volkswagen, 2020). The investments, according to the financial reports comprises of investment property, equity-accounted investments, and generally equity investments. The equity-accounted investments involve the company’s investments in other companies (Volkswagen, 2020). On the other hand, investment property is basically a real estate property that is acquired with the intention of earning a company returns.  This implies that apart from investing in areas that help it grow as a company, VW has also diversified its investment in unrelated areas like real estate.

Lastly, in relation to funding structure, VW funding structure of debt capital and equity.  However, based on the proportion of each element, the company is funded more by debt when compared to equity. For example, in 2017, the company’s equity made 25.84% of the funding structure while debt made 74.16% of the structure (Volkswagen, 2017). In 2018, the company’s funding structure comprised of 25.61% of equity and 74.39% of debt.

Tesla

Tesla’s revenues have been increasing steadily for the last five years. For example, between 2017 and 2021, the company’s revenue grew from 11.759 billion dollars (Tesla, 2017) to 53.823 billion dollars.

Similarly, the company’s gross profit has been growing in the last five years, increasing from 2.223 billion dollars in 2017 to 13.606 billion dollars in 2021. This is the same case with net profitability. The company’s net profit increased from a loss of 775 million dollars in 2017 to a profit of 5.644 billion dollars in 2021 (Tesla, 2021). In general, the company has been performing well over the last five years in terms of revenue generated and profit made. It is an indication that the company is acquiring more market share with time. The increasing revenue and profitability in 2020 and 2021 shows that Tesla continued to perform well even with the COVID-19 pandemic.

On the question of investments, there is no clear information as to what the company has invested in in recent years. However, considering that it is a technology-oriented company, it is highly possible that Tesla’s investments are focused on developing technologies that would allow it to develop more sophisticated electric cars. This is reflected more in research and development.  For example, the level of expenditure on research and development increased from 1.378 billion dollars in 2017 to 2.593 billion dollars in 2021 (Tesla, 2021). However, it is also possible that the company has invested significantly on expansion efforts and this is reflected in the increased revenue levels over time. Normally, an increase in a company’s revenue level is an indication the firm is selling its products to more customers in the market. While this could mean the company exploring existing market more, it is also an indication that Tesla may have expanded its operations beyond the existing market which has enabled it to generate more sales. Simply, while there is limited historical evidence about Tesla’s investments, the firm’s performance shows that its investments may be limited to product development and expansion.

Lastly, the funding structure of Tesla, like VW, comprises of equity and debt. However, the proportion of equity and debt has been varying over time.  In 2017, the proportion of equity in Tesla’s funding structure was 14.79% while the proportion of debt was 80.34% (Tesla, 2017). It means that the company was funded more by debt than equity. An examination of the funding structure over the years shows that the proportion of equity has been increasing while the proportion of debt has been reducing. For example, in 2021, the proportion of equity in the funding mixture was 48.59% against 49.17% (Tesla, 2021).  This shows that there is an almost equal proportion of equity and debt in the company’s funding mixture.  With the company being funded increasingly more by equity when compared to debt it means that its financial position has been improving over time.

When Tesla and VW, it can be deduced that despite making losses initially, Tesla’s performance has been better than VW in terms of revenue generated and profitability. Tesla has been generating increasing revenue and its profitability has been improving consistently over time (Tesla, 2019). This implies that Tesla may perform even better with time. On the other hand, while VW is performing well, there are fluctuations in its performance, meaning that it is not certain how it will perform in future.

Analysis of future expectations for both companies

The two companies, VW and Tesla, can perform in various ways in future based on a number of factors. They include the economic conditions that may change favourably or unfavourably, the strategies they implement, and how adaptable they are to the market changes (Del Negro, Hasegawa and Schorfheide, 2016).  It is thereby not easy to accurately predict how the companies are likely to perform in future. However, assuming the current conditions remain the same, the future performance of the companies in terms of sales, gross profitability, and net profitability will be as follows:

VW

Year	2022	2023	2024	2025	2026
Revenue	256,352.63	262,658.91	269,120.32	275,740.68	282,523.90
Gross profit	49,073.95	50,978.02	52,955.97	55,010.66	57,145.07
Net profit	17,658.89	20,212.36	23,135.07	26,480.40	30,309.47

 

In the next five years, VW’s revenue, based on forecast, is expected to increase to 282.523 billion euros from 250.2 billion euros in 2021. On the other hand, the company’s gross profit is expected to grow from 47.241 billion euros to in 57.145 billion euros (Sezer et al., 2020).  Lastly, the net profit is expected to grow from 15.428 billion euros in 2021 to 30.31 billion euros in 2026. The forecast in this case is based on the average growth rate for the last five years.

As indicated, this is based on the assumption that the conditions will remain the same as those of last five years. However, it is impossible for the company to face the same conditions as before. In addition, it is highly possible that the company will implement strategies aimed to help it improve its performance in the market (Del Negro, Hasegawa and Schorfheide, 2016). To get a better view of future prospects of the company, it is important to carry out further analysis.  In this case, SWOT analysis is used to get better view of the firm.

SWOT analysis of VW

Strengths

One of the strengths of VW is it is an established global brand which is recognized for its high quality vehicles. The company can thereby use its brand name to increase its sales and profitability in the market.  VW has also a diverse product portfolio. This means that the company serves many consumer segments (Chen and Zhong, 2022). This puts it in a position to not only sustain its position in the market but to also enhance its level of performance. Lastly, VW has a global presence, with operations in many regions that include North America, Europe, and Asia. It implies that failure in one market may be compensated by better performance in another market.

Weaknesses

Despite its strengths, VW has also a number of weaknesses that may negatively affect its performance. One of them is the company has in the past suffered from negative publicity due to emissions scandals and this has damaged its reputation (Merwitz, 2020).  Such destroyed reputation may continue to negatively affect its performance in future. VW has also suffered from high recall rates in some of its markets. This has further damaged its reputation as it is an indication of low product quality (Chen and Zhong, 2022). Lastly, the company has low market share in some regions and this has reduced its sales and profitability level.

Opportunities

VW has a number of opportunities it can explore to enhance its performance in the market. One of them is the growing demand for electric cars. The company is already investing in electric cars. With the growing of these cars in the market, it has the chance to significantly improve its performance (Merwitz, 2020). Another opportunity VW has is emerging markets that include South America and Asia. The company can expand into these markets, realizing growth and enhanced sales and profitability.

Threats

The main threat VW faces is competition from other automobile companies. This is the case in all segments. For example, in the electric cars segment, VW faces stiff competition from Tesla which is the main player. There is also the risk of economic downturn which may significantly reduce the demand for vehicles, thereby lowering the firm’s sales (Chen and Zhong, 2022). Lastly, increased government regulations especially in relation to the environment may make it hard for the company to sell its products in the market.

Based on the SWOT analysis, VW has prospects of improving its performance although it faces risks that may limit how well it performs in the market (Chen and Zhong, 2022). The company thereby needs to develop strategies that would enable it to take advantage of the available opportunities while minimizing the risks it faces.

Tesla

When it is assumed that the current conditions will remain in future, and using the average growth rate, the performance of Tesla in the next five years will be:

Year	2022	2023	2024	2025	2026
Revenue	80,197.95	119,494.95	178,047.48	265,290.74	395,283.21
Gross profit	22,131.52	35,999.13	58,556.18	95,247.49	154,929.57
Net profit	9,367.35	15,546.99	25,803.33	42,825.79	71,077.96

 

Looking at the revenue, gross profit, and net profit in the next five years, it can be seen that Tesla is likely to improve in performance significantly. For example, the company’s revenue may increase by more than 600% in the next five years. Similarly, the company is likely to register significant growth in its gross and net profit.  However, as was the case with VW, Tesla is likely to face conditions that may make it to perform better than forecasted or negatively affect its performance. The company’s strengths and weaknesses as well as general capabilities may also influence the company‘s future performance.

SWOT analysis of Tesla

Strengths

One of the strengths of Tesla is its strong brand name especially in relation to electric cars. When electric cars are mentioned, the first company that comes to mind is Tesla (Jiang, 2022). This strong brand name has helped the company to maintain a leadership position and it is responsible for its good performance in the recent years.

Tesla has the first-mover advantage. Tesla is solely focused on developing and selling electric cars and it is considered the pioneer in this sector.  The first-mover advantage has enabled the company to create a loyal customer base and acquire a market leadership position (Wang, 2022). Lastly, Tesla is focused on research and development and innovation. This means that the company is constantly developing better quality vehicles. This is likely to help it maintain its leadership position in the market.

Weaknesses

One of the weaknesses of Tesla is its production capacity is smaller when compared to other more established companies.  This may reduce its competitiveness especially if other companies begin producing electric cars on a large scale or fully shift to production of electric cars. Tesla has also a history of failing to meet production and delivery targets (Dai, Jiao and Wu, 2022). The company is thereby unable to maximize sales. On the other hand, inability to meet delivery targets has had a negative impact on the company’s reputation. Lastly, Tesla suffers from high research and development costs which negatively affect its profitability (Jiang, 2022). These weaknesses may have a negative effect on the company’s performance in future and lower its competitive advantage in the market.

Opportunities

There are various opportunities that Tesla can explore to improve its performance. One of them is expansion into new markets. Electric cars are a fairly new phenomenon in the automotive industry, meaning that there is a large market that is unexplored (Wang, 2022). Tesla can explore this market to increase sales and enhance its profitability. Another opportunity for the company is the increasing demand for sustainable vehicles in the market. With electric cars being the most environmental friendly, Tesla can explore this demand to realize growth.

Threats

Like VW, one of the key threats Tesla faces is high level of competition in the market. Many automotive companies, including VW, are investing in electric cars. This threatens to significantly reduce the company’s sales. Another threat Tesla faces is economic uncertainty (Dai, Jiao and Wu, 2022). The global economy is always volatile and this threatens to negatively affect the company’s sales and profitability.

Fundamental differences between Tesla and VW

One of the key differences is VW is more established than Tesla. Tesla was established in 2003 meaning that is less than 20 years old while VW was established in 1937. Another difference is Tesla produces exclusively electric cars (Liu, 2021). On the other hand, VW produces all types of cars. VW has thereby a wider product portfolio than Tesla.

Conclusion and recommendation

Basically, VW and Tesla are two of the most established automotive companies in the world today. VW is a German motor vehicle manufacturer while Tesla is American automotive company. While VW produces all types of cars, Tesla focuses only on electric cars. In the last five years, both companies have experienced varying levels of performance in terms of sales and profitability. For example, VW has experienced generally rising sales although in 2020, the company’s sales reduced when compared to 2019. The company’s gross and net profitability had the same trend, where in 2020 the gross and net profit margins reduced when compared to 2019. Tesla, on the other hand, has been registering rising sales and profits in the last five years. This is the case even in 2020 where most companies like VW experienced reduced sales and profitability because of the COVID-19 pandemic.  However, from 2017 to 2019, Tesla suffered losses, only registering profit in 2020. A forecast based on average growth shows that both companies are likely to perform better in future, with both registering rising revenue and profitability. However, this is based on the assumption that the conditions the firms are facing now will be the same in future. This is unlikely to be the case. The future performance of the two companies depends on many factors that include its strengths and weaknesses, the opportunities available in the market and the threats the firms face.

With both VW and Tesla performing fairly well over the last five years, the question that emerges is whether they are good investment options. Based on current performance, Tesla shows that it is a good investment option because its profitability is likely to increase in future. However, it is also important to consider other factors that may affect its profitability in future. Analysts’ reports show that the company is unlikely to maintain its good performance because of rising level of competition and a weak economy in most of its markets. Tesla’s products are expensive, meaning that a weak economy will automatically reduce its sales and profitability. Similarly, rising competition will lower the company’s sales and profitability. For VW, forecasts indicate that the company’s stock is likely to increase in price. For example, between 2020 and 2025, the company’s stock is expected to rise from 144.05 euros to 162.82 euros. This is an indication that the company’s performance is expected to improve significantly over time. However, there is no clear evidence as to how the two companies will perform in future. Investment in any of them holds a certain level of risk due to uncertainties in the market. Nonetheless, based on expert analysis, VW seems to be a more stable option when compared to Tesla. Investment in the company’s stock may thereby yield returns at a considerably low risk. It is thereby recommended that investor should consider investing in VW as opposed to Tesla.