Internal Management System and Key Performance Indicators

This chapter describes how the Volkswagen Group is managed and the key performance indicators used for this purpose. In addition to financial metrics, our internal management system also contains non-financial key performance indicators.

The Volkswagen Group’s performance and success are expressed in both financial and non-financial key performance indicators.

In the following, we first describe the internal management process and then explain the Volkswagen Group’s most significant performance indicators, known as the core performance indicators.

INTERNAL MANAGEMENT PROCESS IN THE VOLKSWAGEN GROUP

Consistent, close integration of the Group and brand strategies with the operational planning process ensures transparency in the Volkswagen Group when it comes to the financial assessment and evaluation of strategic decisions. The operational medium-term planning that is conducted once a year and generally covers a period of five years is incorporated into the strategic planning as a key management element of the Group.

Medium-term planning forms the core of our operational planning and is used to formulate and safeguard the requirements for realizing strategic projects designed to meet Group targets in both technical and economic terms – and particularly in relation to earnings, cash flow and liquidity effects. In addition, this planning also serves as a basis for coordinating all business areas with respect to the strategic action areas concerned, namely functions/processes, products and markets.

When planning the Company’s future, the individual planning components are determined on the basis of the timescale involved:

• The long-term sales plan, which sets out market and segment development and then derives the Volkswagen Group’s delivery volumes from this,
• The product program as the strategic, long-term factor determining corporate policy and
• Capacity and utilization planning for the individual sites.

The synchronized results of the upstream planning processes are integrated into the medium-term financial planning. These processes comprise the Group’s financial planning, which extends to the brand groups, the individual brands and the business fields, and covers the income statement, cash flow and balance sheet planning, profitability and liquidity, as well as upfront investments needed for alternative products and the implementation of strategic options in the future. The first year of the medium-term planning period is fixed and a budget is drawn up for the individual months. This is planned in detail down to the level of the operating cost centers.

The budget is reviewed each month to establish the target achievement level. Key internal management instruments in this respect are target/actual and prior-year comparisons, regularly prepared variance analyses and, where necessary, action plans to ensure that targets are met. Detailed forecasts for the quarters and for the full year are prepared four times in each fiscal year, taking into account the current risks and opportunities. Adjustments are also made whenever major events occur. The focus of internal management in the course of the year is therefore on adapting ongoing activities. The current forecast serves as the starting point for the subsequent medium-term and budget planning.

Core performance indicators in the Volkswagen Group

In line with our management process, we have defined core performance indicators in the Volkswagen Group for which we provide an estimate for the coming year in the Report on Expected Developments:

• Deliveries to customers
• Sales revenue
• Operating result
• Operating return on sales
• Automotive investment ratio
• Net cash flow in the Automotive Division
• Net liquidity in the Automotive Division

Deliveries to customers (including the Chinese joint ventures) are defined as handovers of new vehicles to the end customer. This figure reflects the popularity of our products and is the relevant measure we use to determine our competitive position in the various markets. In our view, one of the most important prerequisites for the Company’s long-term success is a strong brand portfolio that – on the basis of outstanding quality – offers tailor-made mobility solutions in the form of safe, connected, resource-efficient and largely emission-free vehicles. This portfolio comprises a diverse product range and a broad spectrum of services throughout the customer and product life cycle, along with competitive technologies, thereby meeting the diverse needs of customers worldwide. Demand for our products and mobility services forms the basis for unit sales and production and consequently for the capacity utilization of our sites and for employment.

Sales revenue, which does not include the figures for our equity-accounted Chinese joint ventures, reflects our market success in financial terms. Following adjustment for our use of resources, the operating result reflects the Company’s actual business activity and documents the economic success of our core business. The operating return on sales is the ratio of the operating result to sales revenue.

The automotive investment ratio indicates the ratio of investment to sales revenue and is calculated by adding the research and development ratio (R&D ratio) and the capex to sales revenue ratio. The R&D ratio in the Automotive Division shows total research and development costs as a share of sales revenue. Research and development costs comprise a range of expenses, from futurology to the development of our marketable products. Particular emphasis is placed on the environmentally friendly orientation and digitalization of our product portfolio, the expansion of our battery expertise, the development of software and new platforms and the creation of new technologies. The R&D ratio reflects the activities we have undertaken to safeguard the Company’s future viability. The ratio of capex (investments in property, plant and equipment, investment property and intangible assets, excluding capitalized development costs) to sales revenue in the Automotive Division reflects both our innovative power and our future competitiveness. It shows our capital expenditure – largely for modernizing, expanding, electrifying and digitalizing our product range, for environmentally friendly drivetrains and boosting our market presence in the USA and China, and for adjusting production resources and optimizing production processes – in relation to the Automotive Division’s sales revenue.

Net cash flow in the Automotive Division represents the excess funds from operating activities available for dividend payments, for example. It is calculated as cash flows from operating activities less cash flows from investing activities attributable to operating activities.

Net liquidity in the Automotive Division is the total of cash, cash equivalents, securities, time deposits and loans to affiliates and joint ventures not financed by third-party borrowings.

Strategic financial performance indicators

We use strategic financial performance indicators for the long-term orientation of our Company beyond our medium-term planning. These indicators are aligned with the Volkswagen Group’s strategic objectives and are aimed at enabling us to maintain our position as a financially robust Group and to remain competitive both now and in the future. Particularly against the backdrop of the evolving geopolitical situation, expectations of slower market growth including the delayed ramp-up of e-mobility, and the related adjustment of our product planning, we lowered our 2030 strategic ambition for the operating return on sales from 9 to 11% to 8 to 10%. We are counteracting these negative factors with our extensive performance programs. The strategic financial performance indicators that are currently being applied are presented in the table below:

We pursue a holistic approach to significant cost cutting through the Drive Cost Disruption imperative within our Group strategy and the operationalized targets of the Group’s Top 10 program. The objective is to secure the Group’s competitiveness for the long term. Innovative solutions that create new potential to optimize technical variance and sustainable value chains are to be promoted by means such as the systematic integration of digital technologies, the realization of AI-based pilot projects, and the establishment of regional centers of excellence. In addition, a resilient basis for strategically oriented capital allocation is to be created through the structured development and consolidation of actions at brand and Group level.

Overall, the program makes a key contribution to the transformation of the Volkswagen Group by establishing forward-looking governance models and actively supporting the generation of ideas throughout the Group to achieve our ambitious cost targets by 2035.