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Volkswagen’s U-turn

This is an audio transcript of the FT News Briefing podcast episode: Volkswagen’s U-turn

Marc Filippino
Good morning from the Financial Times. Today is Wednesday, April 13th, and this is your FT News Briefing.

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US banks are out with quarterly earnings this week. We’ll get a preview from FT US banking editor Josh Franklin. And companies have another big supply chain headache. The metals they need to make everything from refrigerators to cars are at crazy low levels. And speaking of automobiles, we’ll find out why Volkswagen wants to shift away from making people’s cars and veer towards the more elite driver.

Joe Miller
VW, which was the pioneer of the people’s car, in fact, that’s what Volkswagen means — it means the people’s car — is doing an about-turn.

Marc Filippino
I’m Marc Filippino, and here’s the news you need to start your day.

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Copper, aluminium, nickel, zinc, stockpiles of industrial metals like these are drying up. And it’s creating a huge logistical mess for manufacturers around the world. Inventories of these four key metals have plunged as much as 70 per cent over the past year. The price of zinc hit a 16-year high yesterday, and that’ll affect a whole bunch of industries since zinc is used as a protective coating in construction, cars and appliances. Stockpiles are being drained by booming demand, but soaring energy prices are adding to the problem. Over the past several months, spiking electricity costs have forced companies to cut production. Also, the war in Ukraine is threatening output from Russia.

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This week, US banks report their latest quarterly earnings, with JPMorgan kicking things off today. And results are likely to show that the blockbuster days of the pandemic are in the rear-view mirror. The US banking editor Josh Franklin says banks have been bracing for a slowdown in dealmaking.

Joshua Franklin
But here we are kind of three months later, four months later, and the slowdown has been even worse than banks had expected. They’re blaming a lot of that on Russia’s invasion of Ukraine, and the subsequent market volatility has really dampened appetite to do deals and do transactions. What we’ll see this quarter probably is definitely a steep drop in investment banking fees. It’ll still be supported a little bit by kind of banks earning money on deals that were announced last year. But definitely the pace of announced new deals has really slowed. So it really feels like the kind of pandemic-era boom of dealmaking is slowing for Wall Street.

Marc Filippino
Yeah, but market volatility can swing both ways, right, Josh? I mean, banks, they benefit from all this trading because of the fees they get, right?

Joshua Franklin
Completely. This time a year ago, banks were really benefiting from the volatile markets in their trading divisions. And this is, you know, banks will say this is why they are as big as they are, why they have these different arms. So I think the commentary around that from bank executives over the quarter has been, has been more optimistic. That the volatility favours their market-making activities.

Marc Filippino
So, Josh, what else are you looking out for in these first-quarter earnings?

Joshua Franklin
The big thing for banks in the first quarter really is the outlook. What they see for the year ahead, both in terms of, you know, their outlook for the US economy because really, banks are very heavily geared towards how the economy performs. When the economy performs well, banks do well and the opposite is true, and there are obviously concerns around a potential recession in the United States. So what banks are seeing and expecting there? Also, banks for years have been waiting for the Fed to finally start raising interest rates, which a process which began last month. So what banks say about how much they’re expecting to earn from loans this year is also gonna be something people are going to be watching out for.

Marc Filippino
Josh Franklin is the FT’s US banking editor.

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Boris Johnson has become the first British prime minister found to have committed a crime while in office. Yesterday, police fined him for an illegal birthday party held at Downing Street during a Covid-19 lockdown in 2020. Johnson was fined along with other government officials, including chancellor Rishi Sunak. Details about multiple lockdown parties at Westminster emerged late last year and caused a huge public storm, as well as calls for Johnson to quit. Johnson repeatedly denied he committed any offences, but yesterday in an interview on Sky News, Johnson apologised for his mistakes and said he would pay the fine.

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One of the biggest carmakers in the world is planning a historic shift. A top executive at Volkswagen said the company’s key target is not growth. It is now profit. To talk about what this means, I’m joined by our Frankfurt correspondent, Joe Miller. Hey, Joe.

Joe Miller
Hi.

Marc Filippino
So what does this mean for Volkswagen to say it wants to go for profits instead of growth?

Joe Miller
Put simply, VW, which was the pioneer of the people’s car, in fact, that’s what Volkswagen means — it means the people’s car — is doing an about-turn. And it is going to concentrate not on becoming the world leader in terms of volume, ie on producing as many cars as possible every year which was the goal of the company more or less since its postwar incarnation and especially over the last decade or so where there was this sort of fight between General Motors, Toyota and Volkswagen as to who could sell 10mn cars a year and then who could sell 11mn cars a year. Now, Volkswagen is saying that what it wants to do is it wants to focus on selling more premium cars from its brands like Audi and Porsche and really focus on high-end customers.

Marc Filippino
So what’s behind the big change in strategy?

Joe Miller
Well, it is really a byproduct of the pandemic. At the beginning of the pandemic, it looked like it was Armageddon for carmakers because factories were closing. It didn’t look like they were going to get anywhere near their production targets, and more importantly, no one was buying cars. People were stuck at home. But then what happened very quickly is China reopened, and the demand just really came roaring back. And at the same time, the carmakers were struggling to catch up. So what they were literally forced to do is upend their business model, which was to shift as many cars as possible, and say, right, we only have so many semiconductors. We’re gonna fit them in the cars that make us the most money like the Porsches and the Audis and the high-end SUVs. And as they did that, what they realised was that even though they were selling millions fewer cars, they were making more money, and their investors noticed that as well. And so what you’ve seen is a pivot in the auto industry, saying, hang on a second. Why were we chasing volume in the first place when we can make more money this way? And we’re gonna stick to this and concentrate on higher end and more profitable vehicles going forward.

Marc Filippino
This may be something that, you know, investors may like this, but what does this mean for consumers, drivers?

Joe Miller
Well, it’s a very interesting question because in some ways consumers have been the beneficiary of this old strategy of pursuing growth. People were increasingly able to buy fairly good quality vehicles in what the industry calls the entry-level segment, the segment A, city vehicles as they call them in Europe. And these were cars that, you know, cost between €10,000 and €20,000 and roughly $10-20,000. And it lifted a whole load of families and households on low incomes into the sort of car-owning classes. Now it looks like they’re going to abandon those segments altogether. And in fact, there’s, you know, good data to back that up. The number of models in that segment being produced in Europe is expected to halve in the next few years. The end result will be is that it could be that the opposite of what Volkswagen’s original ambition was, which was to bring the car to every household, that we will see for the first time in decades that trend reversing and the car becoming a luxury item once again.

Marc Filippino
Joe Miller is the FT’s Frankfurt correspondent. Thanks, Joe.

Joe Miller
You’re welcome.

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Marc Filippino
And before we go, a quick correction. Yesterday, we told you about entertainment companies who are gearing up to create a metaverse populated with avatars. We said that Lego had teamed up with Sony to build a metaverse for kids when in fact Lego had teamed up with a game developer Epic on that venture.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: typo@ft.com. We will do our best to make the amendment as soon as possible.

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