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German giant powers on in face of recession

I played my part in building the German economic miracle. The first, second and third cars I bought were VW Beetles. But the inelegant little car (or The Love Bug, as Disney called it in the movie) was only a small step in the construction of the VW Corporation of the 21st Century, the biggest European carmaker and the second biggest in the world after Toyota.

It has over 100 manufacturing operations worldwide, including massive units in China, India, Russia, Brazil and the US and it makes cars with sleekness and style that would embarrass the old Love Bug. VW's growth ambitions are intricately tied with the economic growth ambitions of the German republic and it offers an investment possibility with a truly global vision.

The story of VW is a fascinating one.

It was a 1930s invention of Ferdinand Porsche, a designer of luxury cars (now part of VW) who was challenged to come up with a cheap car. He designed one with an air cooled rear engine and a 'Beetle' shape for aerodynamics called 'Volks Auto'. It was built to fit two adults and three children and was priced at 999 Reichmarks ($396). I'm not sure I paid that much for my first Beetle.

World War Two put paid to Porsche's plans and the little car was mothballed. After the war, VW was offered free to the conquering nations. The British thought it was too ugly and too noisy; Ford passed on the offer for the Americans while Renault was too busy being nationalised for Vichy collaboration.

It is ironic that the company owes its existence to a British army officer, Major Ivan Hirst, a Yorkshire man who managed VW for five years after the war. Hirst spotted the army had a shortage of light transport and persuaded them to use the Beetle (painted military green).

And so began the mighty VW group. Within two decades, the company was producing one million Beetles per year.

The last Beetle to leave the production line was number 21,529,464, and it had long claimed the world production record for a single make of car.

For three decades, VW pursued a one-model only policy but in the early 1970s sales declined rapidly in Europe and US markets.

A replacement for the Beetle was a priory. The key to the solution was Audi (acquired in 1964) technology. As a result, a number of cars were launched including the phenomenal Golf (1974). VW never looked back.

Today VW is a long way from a single model built in Wolfsburg. It has two divisions; Automotive and Financial Services. The Financial Services division provides dealer and customer financing, leasing, banking and insurance.

Its revenue in 2012 was €10bn and profits €1.4bn, employing 8,700 people.

The Automotive division has 22 brands in total consisting of VW, Skoda and Seat and other luxury brands employing in excess of half a million people.

In 2008 the company announced a new 10-year strategic plan. A brave decision, given that the world was in a grip of recession.

The plan required the group be the number one in the global auto industry, with pretax margins of 8pc and annual sales of 10 million vehicles. These were challenging objectives given that the previous figures were 6pc and six million cars.

Five years into the plan, the figures are most impressive. Group sales in last year were 9.3 million, revenues increased 60pc to €193bn, and profits before tax were €22bn, an increase of 32pc and global market share 13pc.

The group dominates the European market with an impressive 25pc market share, selling four million vehicles, generating revenues of €115bn. The Asia/Pacific market (particularly China) is VW's second largest market, with sales of 3.2 million vehicles.

South and North America sold approximately one million vehicles each.

The group also reported strong demand for its luxury brands, which includes some mouth-watering names like Audi, Porsche, Bentley, Lamborghini and Bugatti.

To ensure continued growth, VW is planning significant spends, the largest in its history.

It plans to invest in 10 new manufacturing plants (seven in China), a €8,000 car for emerging markets and a range of diesel hybrid cars. VW shares are expensive at €155 up from a yearly low of €110.

The company is valued at €72bn having a dividend yield of 2.25.

The VW group is only half way into its strategic plan, but if it is to achieve its objectives by 2018 the shares could look reasonable. Remember too it is an indispensable part of the German powerhouse.

Dr John Lynch is a former chairman of CIE. Nothing published in this section should be taken as a recommendation, either implicit or explicit, to buy or sell any of the shares mentioned.

Irish Independent