Good day, ladies and gentlemen, and welcome to the Volkswagen AG five-year planning round conference call, Enabling the Transformation. For your information, today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Helen Beckermann, Interim Head of Group Investor Relations for Volkswagen AG. Please go ahead, madam.
Ladies and gentlemen, welcome to this conference call, updating you on the highlights from our most recent five-year planning round presentation to our supervisory board, which we have already announced to you via press releases. Dr. Herbert Diess, our CEO, and Frank Witter, our CFO, will take you through the slides. As usual, you will have the chance to ask questions at the end. Christian Dahlheim, Director Group Sales of Volkswagen AG, will also be available in the Q&A session for your questions.
As always, you can follow today's webcast via our website, where you will also find the charts available for you to download. Let me now hand you over to Herbert.
Yeah. Thank you very much, Helen. Good morning, ladies and gentlemen. I am very happy to have this dialogue today with you only two days after approving our planning for the next years. I think the board was very happy, and we ended up with a very positive meeting regarding our planning period. We also reviewed our performance in 2019 and we gave an outlook for 2020. Basically, we can keep our guidance, and we think that we are well prepared for what will come in the next years.
Looking back to 2019, we are very happy with our performance in a really declining market environment, worldwide - 5% until the third quarter. In that environment, we could improve our market share and keep our financial figures at the levels we planned for. So we gained half a percentage point of market share worldwide. In China, even more, where we had a decline of - 7% and we gained about 1% market share, which is important because China is our most profitable market. All in all, we are happy with the three quarters performance and our outlook towards the end of the year is also positive.
We stick to our guidance and we also stick to our KPIs regarding return on investment, CapEx ratio, net cash flow, and liquidity. So I think we can be very happy with what has been achieved so far and with the outlook we give for 2019. The reasons for our relatively good performance are that we have good product momentum. Our product comes along well. We are addressing the right segments, so we are increasing the mix of our product portfolio. We also could get some pricing in some of the markets.
Our product mix is improving and the turnover grows faster than the sales volumes. That has a lot to do also with the strength of our brands and also our global organization, which on the sales side, I think is really well set up. Volkswagen remains very robust in difficult economic conditions. Looking forward, I think the whole industry will face two very important years because we have a step change in our business models because of the fleet targets hitting in between 2020 and 2021.
Only in Europe, that means that we have to reduce our fleet emissions by roughly 30 g per vehicle, which is a step change which we in the industry was never achieved before. So far, if you look back in the industry, and that applies to peers and the whole industry, the improvements were 2%, 3% per year, but not in the tens of percentage points. That means you have to come forward with a totally different approach, coping with the new fleet targets. And you are all aware that the fines involved in not complying are huge.
It accounts into the billions, but it applies to the whole industry. Only in Europe, if we would not master that step change of - 30 g, we would see fines in the billions, roughly around EUR 30 billion for the whole industry. We need to do something about that to avoid these fines. We think that our plan is the best way to cope with these fines. And we think that over the two years period, we will be compliant, so we will not pay fines, at least not in our core markets, which we are addressing.
Why we are so confident? Because we know that EVs, with a positive contribution, are by far the most efficient way. Economically, the most efficient way to cope with those new fleet targets, and our setup is we have a very good product cadence and setup to cope with the new fleet targets. As you know, we are introducing electric vehicles top-down. The first vehicles were already launched, the e-tron, the Taycan, and there is no doubt that we achieve positive margins on those. And we will roll out the product portfolio further down into the mid-size passenger car market.
For 2020, we still have a mix between, let us say, established platform products, MQB, Golf electric, the Up! Electric, and the new products on the MEB base is to come into market only in 2020. But then in 2021, the mix already will shift towards our new platform. Vehicles are mostly MQB based, which is a huge advantage. And just a figure which we explained already a few times. The ID.3 has a cost advantage over the electric Golf of about 40%, allowing for many more features like fast charging, long distance, more range, and also very innovative product features.
This is really a step change to come. Once again, looking back to 2021, we still have a few electric vehicles which are a challenge margin-wise from our, let us say, established technology. But the mix we have to achieve is only roughly 4%. We need 4% electric cars plus plug-in hybrids and all the other activities what we are doing to achieve our fleet targets in 2020 and roughly 8% in 2021, which is well prepared. The company stays focused on the launches for the new products to come.
The production planning is set up in a way that we can comply with the fleet targets in, we think, the most efficient way, if you compare our strategy to our peers. We think we are probably one of the better prepared companies to cope with the transition phase of 2021. Long term, we think we have a big advantage because of our scale in EVs. Also scale will be most relevant in the whole transition phase, where software becomes more and more important over time. Software, as you know, is a scale game.
We have a clear rollout phase to address our economies of scale in software in even better way than we do on the hardware side. We think we are well prepared for the future to come. We are 100% committed to drive the company towards CO2-free mobility towards 2050. We have, in the last planning round, even increased our engagement in EVs and software development. There is still so much potential in the company of synergies between the brands, between our strong brands, that we remain confident for our business.
We are not only sure to be able to cope with the two, let's say, very specific years to come, but also on the long term, we are very confident that we have a very robust business model for this transition phase. Thank you very much.
Yeah. Thank you, Herbert. Let's take a deeper dive into the financials with a chart you are all very familiar with. At the end of October, we talked about the outlook for 2019 already. New news today is good news, as we are confirming the outlook for 2019 in all relevant dimensions. Let's now focus on our strategic targets for 2020 and 2025. The fact that we are still consistent with these strategic targets set a long time ago in our Capital Markets Day back in March 2017, is quite a strong story, especially if you take the significant headwinds and challenges for our industry into consideration.
Back then, we anchored in our strategy calendar year 2020 as a first milestone and critical year in our transformation. We have shown over time our resilience, and we are still back on track to deliver. At the time, some of you asked about the ambition in these strategic targets for 2020 and 2025. From what we know today, the answer is obvious. In hindsight, it became very clear that there was a real stretch built into these numbers. Despite this, we are reconfirming our ROS strategic targets for 2020 and 2025.
In relation to the return on investment, you see an adjustment in our targets for 2020 and 2025. We did consider the approximately EUR 5 billion effect from the change in leasing accounting under IFRS 16 that led to both an increase in total assets and total liabilities on our balance sheet. This adjustment causes a knock-on negative impact on our ROI of around 1%. No surprise, when you take our starting point into consideration, the most challenging KPIs to achieve are our CapEx and R&D ratios of 6% each.
Logically, falling revenues are a real pain point and would have a negative impact on both these ratios. Especially the R&D side is a tough piece of work as we balance the costs of CO2 compliance and digitalization, including the full weight of software development. Rest assured, we continue to push very hard to keep our respective commitments. Our improved underlying cash generation shows that we have the ability to finance from within. Cash is king and remains a top priority for everybody in our organization, and we certainly stick to our net cash flow targets.
We are also confirming our net liquidity targets, which are vital for our credit ratings and our refinancing needs. In relation to the individual brands, for Volkswagen passenger cars, we confirm the target of 6% ROS by 2022. For Audi, we confirm the ambition for 9%-11%, and for Porsche, the minimum of 15% by 2025. Without a doubt, the development of the automotive markets in the next few weeks is crucial also in relation to realistic expectations for next year.
As usual, the official guidance for the group and the respective brands, CG Audi, for 2020 will be both disclosed in our annual report for the calendar year 2019 and discussed in detail during our annual press conference in March of 2020. A vital part of securing these strategic targets, especially in a downward-turning market, is to focus hard on countermeasures. You are right that we still have potential to optimize and improve in relevant dimensions. Each brand and transcentral group functions are working hard on their respective profit improvement programs.
We have talked a lot about the different measures. We are moving the needle on cost reduction, sales performance, and rigorously taking out complexity, as Herbert already mentioned. A good example of our sharpened focus is a very synergetic approach for the product family Superb and Passat. More to come also on the bundling of the different compact class products impacting already the early years of the planning round. A further lever is discipline on ramp-ups and launch activities.
With Zwickau and Anting, we have a blueprint that will be applied to all other MEB factories. MQB remains also a key element to drive synergies. Since the initial investments have already been made, the continued rollout of MQB is possible at lower cost. Within the planning round, we are growing the group-wide MQB volume from around 7 million units to 10 million units by 2025. Now, moving on to another core chart, tracking our expectations for calendar year 2020 over time. I know that this chart is very important for you guys, and you will do a lot of number crunching with it.
The key message here is we are still on track for substantially better calendar year 2020 compared to our starting point calendar year 2016. Nevertheless, you also see a necessary adjustment for calendar year 2020 between our last year's planning round and the current planning round 68. On the sales revenue, we have to acknowledge the changed economic framework conditions in the automotive markets. It is fair to say that the very best of the party is over.
Trade conflicts like Brexit and the tariff uncertainties, combined with the rising concern of a cooling off in the global economy, have led us to take out 5 percentage points. The knock-on effect in operating profit and profit before tax shows the very same pattern. Nevertheless, it's fair to say that our expected earnings remain robust. This demonstrates to critics that we are not focusing on growth only. With regard to earnings per share, we are expecting, from what we know today, to be at a slightly lower level than in our previous planning round.
Again, please take note that the official calendar year 2020 guidance will be discussed as usual in Q1. Now to the EUR 1 million question. When will you see a 30% dividend payout ratio? It wouldn't be unreasonable to assume that you reach the 30% for the fiscal year 2022 based on the assumptions in the planning round 68. At our IAA event and during our recent Q3 call, we touched on the topic of cash generating units. As you are aware, the impact of CO2 regulation on future profit streams and the independence of cash flows now also needs to be considered differently for capitalizing R&D projects.
A broader approach is now required. Instead of evaluating at a model level, it makes much more sense to apply a brand level approach. To clarify this subject, a high margin SUV will lose profitability when the CO2 burden is considered. On the other hand, a lower margin electric vehicle will gain profitability through its favorable CO2 footprint. Applying a holistic brand approach and bundling the projects for testing is much more comprehensive. The necessary reevaluation triggers the reversal of relevant impairments.
For certain brands, this will lead to a one-off positive impact in 2019. The change also leads to slightly higher capitalization levels in 2019 and some following years. For the years of the planning round, 2020 to 2024, the expected CGU effects are on average less significant versus 2019. Therefore, they don't result in an adjustment from the 2019 and the strategic ROS targets for 2020 and 2025. To sum up on today, our strategy TOGETHER 2025+ guides us well in the fundamental industry transformation.
Despite the unavoidable headwinds, we are reconfirming our strategic targets for 2020 and 2025. We are still on track. Our focus is on delivery and execution while continuing with the same consistency when we started back in March 2017. As I've said many times before, it won't be a walk in the park. However, it goes without saying that we will push as hard as possible to get the best possible results. For now, back to Helen.
Thank you. Thank you, Herbert and Frank. We will start now with the Q&A session. We have allocated about 30 minutes for you to direct your questions to Herbert, and following that, Christian Dahlheim and Frank are available to take any other questions. Operator, over to you.
Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is switched off to allow your signal to reach our equipment. Again, please press star one to ask a question. We will pause for just a moment to allow everyone an opportunity to signal for questions. Our first question today comes from Tim Rokossa from Deutsche Bank. Please go ahead.
Yes, good morning. Thank you very much for doing this call and also for taking our questions. That will be Tim Rokossa, Deutsche Bank. Herbert, I would like to ask about CO2 compliance. Some of your competitors were willing to quantify what this will cost them in terms of lost profit next year or maybe over the 2020 and 2020 timeframe. Would you be willing to do so? Angela Merkel joined you to open up the production of the ID.3. We have also heard about more infrastructure investments by the German government.
Is it the right interpretation that the German government now seems to be a lot more willing to also officially support one of its most important industries again? Or would that be an over-interpretation? Thank you.
Yeah. Thank you very much. First question regarding cost of compliance. We think that we probably have the best plan in the industry to cope with that step change in fleet targets, because by far the most efficient way is to produce and sell electric vehicles with positive margins. Yes, we all know that the vehicles are relatively expensive right now and become probably at the same level or come to the level of combustion engine cars by 2025, 2026, 2027. This will be a transitional phase for us, where we think we have the right approach to manage.
First of all, we start top-down. So we start with the high margin vehicles like Porsche Taycan, like the e-tron from Audi, and then coming down with small compact SUVs, ID.3s and so on. Second, we change over from our old platforms, which were versatile platforms, Golf electric vehicles, Up! EV, to the new dedicated platforms, mostly MEB based and later PPE based. That would mean a cost reduction towards the existing platforms of roughly about 40% and a major step towards comparable costs between ICE cars and electric cars, probably coming to 2025.
So we set measures in place and all the other e fficiency improvement measures in place, looking far more onto synergies between the different groups, also having a focus on material cost, productivity in the plants. We are convinced that we can manage that transition phase without a decrease in our profitability, which was our main target when we started to plan for 2021, 2023, right from the start. This is where we are aiming for. We are confident that you will not see the transition phase in our KPIs and in our guidance, which we are giving.
Second, EVs, yes. I think we see also, politically or we experience a much more political commitment towards EVs meanwhile, because also for the regulators and also for all political parties, it becomes clear that the CO2 targets are only achievable if we have a fast transition into electric vehicles. Between all the parties in Germany, also the regional governments, I think there's a common understanding that we really need to go for an EV push, and there is a commitment.
You're probably aware what we discussed, with the political stakeholders, is now really a big EV push program, which gives tax alleviations for the company cars, which proceeds with the incentive scheme for EVs and plug-in hybrids until 2025. Which also allows government to spend billions on building up a fast-charging infrastructure in Germany. So we are very happy with the commitment we received. And now the focus is really to get into fast rollout and fast introduction.
I think there is a step change in the political willingness also, for quite some months, we saw a discussion about are there any alternatives to electrification? No. And I think the understanding now and the perception through all parties is there is no alternative to a comprehensive EV strategy and making EVs successful. And this is a shared vision now between, I would say, German government and Volkswagen.
Great. Thank you very much. Can I just follow up with one remark and then one other question? The remark would be, it's excellent that you keep the free cash flow target. I think that clearly shows where you have the priorities, and then you keep very disciplined spending levels. So that's fantastic. On the other point, what I was looking for is a number in terms of lost profit so that investors that look at the space can get a bit more confidence also what this industry is facing and able to swallow in terms of lost profit for next year just to comply with the CO2.
Obviously, the most important point is that you feel confident to maintain these levels. That's amazing. But in terms of quantification, is that possible?
Yeah. I would hand that back to you. I think you are fully capable to do so because you know what fines are involved. It is EUR 95 per gram deviation. We are about 30 g away, and there are even more expensive ways to comply than paying the taxes. For instance, hybridization or shifting the mix to diesel or shifting the mix to mild hybrids would be even more expensive than paying the fine. So if you take the fines, you multiply it with the fleet targets, you might get an idea of how much burden any of our peers and we have to cope with and to shoulder through those two years of transition.
Yeah. It is a billion figure, but if you have a good plan, you can reduce that significantly.
Thank you very much.
Thank you. Our next question today comes from Arndt Ellinghorst from Evercore. Please go ahead.
Yep. Good morning, everyone. Arndt Ellinghorst from Evercore. Herbert, one question for you. You talk a lot about the valuation of the company, and you mentioned in the presentation, we strive for a fair market cap. What do you exactly mean by that? And I guess the market, your investors, they all understand the earnings and cash flow strength right now. They all understand the sum of the parts, the undervaluation, the hidden value of the brand.
You have been talking about non-core assets for a long time, but it seems that the governance is hindering management to lift the massive hidden value that is embedded in Volkswagen. So what can you do now? Are you confident that you can do something in the next one or two years that will change the valuation of the group? That would be my first question.
Yes, Arndt, we are confident, and I think we have made significant steps and progress throughout this year. If you look into our KPIs, core figures, I think you would already be quite happy with the also evaluation and the improvement in our share price. What's your argument very often is governance, no? First of all, yes, we understand, and I think we are working on it. We are really on the way disposing non-core assets. Also structuring our operations which are complex in a better way, making it easier to understand for yourselves, but easier also to govern and control the system.
We are making significant step forwards, which also have the backing of our supervisory board, of our owners, and also of our works council members here. So step by step, we're getting there. Traton was the first step, and we're now, on the way, disposing some of the core assets which we took over from the MAN Group, which are not core business. More to come over the next years. But I think also, it's a bit unfair that we're okay, this government is complicated. Yes, this is a big company. It's a complex company, but we are well set up to run it.
I think the new team in place, the board, how we structure, how we run the company, allows us for good performance. You can see that in our figures 2019, in the outlook we are giving. So I would say, and we have been in discussion over that issue quite some often on, no? But it remains a complex company. We improve in government, but don't be too concerned about government. We will deliver.
Thanks, Dr. Diess. The other question or remark I would have, really. We've now learned that your top-line ambition has been too high, because you take them down. We also look at a company that's operating at the highest inventory level ever, with more than 100 days or EUR 45 billion of inventories. So I just want to make sure that we're not moving back to this old regime of top-line, let's grow out of problems at Volkswagen, so that you really keep an eye on efficiency.
If markets go slower, that we're not waking up next year, or they get more competitive next year, and you have to revise your numbers.
Yeah, I accept that comment, Arndt. We're also not happy with our inventory levels. But you have to see that the markets are really in difficult shape. We have declining markets in many areas. We are in a shift of our product portfolio, first of all, towards more SUVs and then into electric cars. So we are entering new markets, new segments. So that leads to a situation where our stocks level is probably a bit too high, and we are aiming to drive it down. Yes, and stay confident. We are not aiming to be the biggest, the most selling.
You see that in our figures. Now we accepted that our sales figures are decreasing so far. We're not pushing to be number one towards the end of the year. We are much more focusing on the quality of our business. You see that on the turnover, the quality of our business is improving, and it's a main focus. Be sure that also Frank has a very strong focus on our inventories. We will still see a major step towards the end of the year to drive it down, and we keep a very close eye. Because we know that we will enter in a market situation 2020, which is probably not too optimistic.
We will see further markets declining. We also not believing that we will see a lot of growth coming 2020.
Many thanks.
Thank you. We'll go to our next question today from Jürgen Pieper, from Metzler. Please go ahead.
Yes, good morning, gentlemen. I have two quick questions on the strategy. In your statement from Friday, you wrote that among the future areas you spend a lot of money on is also hybridization, besides electric mobility and digitalization. This seems to be a bit new that you put hybrid vehicles more in the focus than before. Is it correct, or did I misinterpret this statement? Secondly, the news from last week, the arrival of Tesla or the soon arrival of Tesla in Germany. Does it have any impact on your plans to produce batteries here?
Secondly, on Tesla, is it possible that Tesla becomes some kind of cooperation partner for you, maybe a supplier for batteries or maybe in any other form of cooperation that this picture changes in the future from what you thought until last week? Thanks.
Okay. First bit, hybridization. There is no change in our policy. We think that the right way forward for improving our performance, also for improving our profitability, but also to cope with CO2 targets, but also to really becoming CO2 free are EVs. Because hybrids are a compromise when it comes to cost. You are adding a lot of cost, and you do not make full use of EV capabilities. You see that on the customer side, those people really turning onto EVs, they do not want to carry along the combustion engine anymore.
EVs is the way forward, is our way forward. We have been long criticized because we are betting on electromobility. Because we have sent clear messages that electromobility is really the right way forward. We just wanted to make sure that even if we fall short on the last 10,000 units in EVs, we are very robustly set up. We have the widest portfolio of engines in the conventional cars. I think we made that transparent when we launched the new Golf.
The new Golf is not an EV anymore, but it comes with the latest conventional engine technology, CNG engines, new gasoline engines, new diesel engines, mild hybrids to come, and plug-in hybrids with a really now enhanced range of about 50 km , real range between 50 km and 60 km. So we have the full portfolio and also to cope 2021, because there will not be a full infrastructure in place in many countries. Probably, yes, in Holland, but in Germany it is on the build-up phase. In France, it is on the build-up phase.
I think we still need a mix of hybrids. Plug-in hybrids are the best way forward, but because it is a significant reduction in CO2, it is basically half the amount. Let us say you have to sell two plug-in hybrids to achieve the same effect than to sell one EV. But it is also transitional technology because at the end, it depends on how often the customer charges the plug-in hybrid. Does the customer really accept that the consumption over long-distance traveling is probably even higher than on a diesel? So it is a transitional technology.
We are well-prepared, and we need plug-in hybrids for the transition phase, mostly 2021, 2022, I would say until 2025 or so. In the bigger cars, we would see plug-in hybrids even more. There is also, let us say, differentiation. Plug-ins work very well in the high contribution segment. So in the premium segment, SUVs, they are too expensive in the smaller cars. I think we are borderline on the Golf size of cars with plug-in hybrids. We still can be profitable, but in the smaller cars, it is not a viable way forward.
So our strategy remains, it is full EVs, but we are prepared for the transition phase, also offering plug-in hybrids. The last one was Tesla. We really appreciate that Tesla is coming. I think that is a clear statement towards electromobility. It is a clear statement also, I would say, to European manufacturers because what Tesla probably is looking for is the environment, the infrastructure to build high-quality cars, which is probably much more the case here in Germany than on the West Coast of the United States.
We appreciate Tesla bringing some more competition. We are always looking to learn from Tesla. We have loose ties with Tesla executives in one or the other area where we are trying to synchronize when it comes to charging networks, but there aren't any real products for common sourcing or sharing technology.
Okay. Thank you.
Thank you. We will now go to our next question from Philippe Houchois from Jefferies. Please go ahead.
Yes. Good morning, and thank you for taking my question. I was just wondering, comparing the planning around 68 versus 67. So you have increased the spending on electrification, digitization, etc . There has been no reduction in the more traditional side of your capital spending, including combustion engines. I am just trying to wonder, at what pace the transition will happen, and whether you could see your planning around the EUR 1 versus EUR 5, whereas there is a gradual decline in the amount of capital that is allocated to more traditional automotive technologies.
Yeah. When it comes to the ratios, I think we have very ambitious ratios for CapEx spending, and you have to see that the general business model of EVs is probably even more capital-intensive than on the conventional car side, because all the investment which has to go into the cell production. Cell production is usually expensive investment. We have to invest a certain amount into cell production as well. You're probably aware that we're building up a joint venture with Northvolt here in Germany to build up owned, or let's say partly owned capacities.
But we try to keep most of the investment out of our balance sheet and to incentivize and motivate partners to get into the battery investment financing. In general, I think we have a very balanced plan between keeping our brands vibrant with new products, new concepts to come, new technology, software, but also looking for the synergies for, let's say, spending less in more product. As Frank mentioned, for instance, combining production for different brands in one plant could be a huge reduction in our CapEx spending, and we are on the way doing so.
Using the platforms on a wider scale between the brands is a huge lever to reduce our spending. All in all, I think you see an increase in the new technologies. But we remain at the same CapEx levels, which we promised so far. We doing so, we think we spend enough into new technology, and we are squeezing out all possible synergies in the existing product lineup, reducing complexity and looking for more synergies.
Right. Then in that connection, because I looked at the history of your planning rounds, you have tended to underspend the planning round, which is good news. If I look at this round, it seems like if there's a way to underspend the current budget, it would be on the more traditional side of the autos. Is that the right interpretation?
Yeah. Hi, Philippe. No, I don't think we are underspending. I think we are getting to the.
No, no, I meant it as a compliment that you are spending less than you planned. You give us a plan, and you have tended to stay well within that budget, which is a positive. I am trying to understand, would the flexibility to spend a bit less than the plan would be more on the traditional side of the industry? Is that correct?
Yeah, Philippe, let me try to explain. We want to use that transition phase also to get more synergies out of the system. Now that we are really making a lot of pressure to look for common synergies, common investments, sharing more platforms. You all have said that this is possible, and we also believe that this is possible. So we use the transition phase to getting us to a higher level of efficiencies when it comes to CapEx spending. But we still are confident that there is enough spending in the traditional areas, also with the conventional products, to keep our brands really very competitive and vibrant.
Yep. Understood. Thank you.
Thank you. We will now go to our next question from Kai Mueller from Bank of America Merrill Lynch.
Thank you very much for taking my question. The first one is mainly on your EV product rollout. You've obviously now launched the ID.3. You stated the targets in terms of volumes. Can you give us maybe an update on how orders have been progressing as you then see the rollout starting from next year? On that point, you obviously mentioned on the latest VW Golf, you launched a new diesel engine, you launched a new petrol engine. Is that the latest generation of petrol and diesel engines we should expect, or are you investing into another phase to then come beyond 2025?
On that point as well, on your 2020 targets, you obviously outlined today that your top-line assumptions were a little bit high, therefore you took those down, but the margins remain the same, which I think is a very good sign because the costs are under control. If we think about your 2025, when you see the slide 10 where you give us top-line assumptions, when you think about that timeframe, where do you think yourself to grow your top line? Because you obviously outlined the market globally is growing, but you said you're not chasing that growth just for the volume sake.
Can you give us maybe a little indication what your own top-line assumption is over that timeframe?
The first question was volumes on EVs. We need about to comply and also to create positive momentum with our dealerships, with our customers. We need about 4% of our sales volume in Europe in 2019 of EVs, and then in 2020. Then we will double up that in 2022, roughly. Most at 2020 still there will be a mix towards the, let's say, the conventional platforms, which we have been launching, and 2020 that will turn around towards more efficient MEB platforms to hit in. Then you will see a significant growth year- over- year.
You asked about the order bank. Order bank now is I think 37,000 units of ID.3s, roughly. That is good because that's already a significant volume for what we need to achieve. So we are confident to reach those volumes. In most of the European markets, EVs are really picking up. In some markets, we see a doubling of EV sales in 2019 already. As the governments are really shifting towards EV also in their tax schemes, we are very confident that we can achieve those kind of volumes. 4% should be really feasible.
We have really very detailed plans for that. We have the right programs in place in the different markets for all our EV lineup. So the last question was, is this the last generation of engines? No. It won't be. Our plan is that even 2030, we still have 60% of internal combustion engines worldwide. So for sure, we need still updating and upgrading our conventional drivetrain portfolio as well.
Kai, I take over the question on the top-line growth number. Obviously quite a challenging one given the market circumstances. But if you ask me from today's perspective, since we are even at the end of the planning round, not that far off, I would say probably two years.
So what do you mean with two years? Sorry.
I understood your question that basically that you relate to the question, when are you back to a 25% increase in sales revenue over the baseline year 2016?
Okay, I understand. So that would be a sort of a flattish environment over the two years and then pick up again.
I think at least for next year, as Herbert mentioned, we are obviously adding up the numbers. It is very fair to say that the budget for 2020 will be below what we assumed in the planning round for 2020, and that we are very careful in terms of quality of our business and not just pushing volume. We are not dramatically negative for 2020, but realistic. Since you also saw us sticking to the financial guidance and to the top-line KPIs also for the critical financials. So we are balancing the act from today's perspective, and growth is certainly appreciated in our industry.
But if one thing has changed in the last four or five years, pushing volume for the wrong reasons is not on the top agenda anymore, and I think the organization is living accordingly.
Perfect. Thank you very much.
Thank you. We will go to our next question today from George Galliers from Goldman Sachs. Please go ahead.
Thank you for taking my question. The first question just comes back again to what you presented on Friday, and specifically the EUR 27 billion towards hybridization and digitalization. Can you just give us some insight into how much of that is on digitalization and what revenue opportunity you see around digitalization? The second question was just on the ID.3 cost advantage over the EV Golf of 30%. Could you perhaps also give us some insight into what has driven that cost advantage? Is it scale? Is it battery costs?
Is it the fact that you are operating on a dedicated platform in a dedicated manufacturing facility? Or are there other factors we should consider? Thank you.
Yeah. We doubled up our investment in digital from EUR 7.7 in planning round 67 to EUR 14.4. It is a clear push and signal because we think digitalization will be the big influence in our business and also a huge potential for the Volkswagen Group gaining economies of scale. A car already today is a very digital product, so it probably has 10 times the amount of code than any smartphone. It is a very complex product and a lot of our R&D expenditure and also of our bill of material goes into software indirectly.
Most of it comes with computers which we are buying in and then combining. Software will become the most differentiating factor over time for the next 5- 10 years. I would say 90% of the innovation the car would deliver, and also the differentiation cars would deliver, are coming from software. There is a huge potential for differentiation, but also for gaining economies of scale. Software has no proportional cost.
Also, if you combine it with the computer architectures which you need onboard and off board, it is a huge scale game because at the end, it is a one-off payment year by year that you have to roll out on as many products as possible. Given our volumes at 10 million cars, this is I think it is a huge advantage for Volkswagen. That is why we are pushing fast to have a fully owned software stack under our control, which we then will try to roll out on the entire fleet. This is a process which will start. We are preparing already. We are setting up the structures.
We are investing the money. Coming 2023, we will start with a rollout, and then towards the end of the decade, I think we should be fully covered all 100% Volkswagen software stack, which should give us a huge advantage in the software game as well. Because you can imagine if you have 10 million cars, you just can spend a little bit more on software than having 1 million cars or 2 million cars on comparison. That is why we are really pushing the first step you see in this planning road around, but this will be one of the main drivers.
Cost of EVs. Most of the cost reduction comes from the battery cell and from the battery system. We are changing from a multi-use platform where you have to put the batteries around the car to a kind of a chocolate bar battery, which makes the battery much cheaper and also more efficient. The biggest step forward is batteries. But then we also, as focusing only on EVs, you can leave or let us say you can take away some of the effort in the body, on the axle side, in the body stiffness, if you only focus on an electric platform.
All in all, this accounts for about a 40% reduction against the predecessor electric Golf. Most of it comes from sales, battery system, and probably 5%-10% are coming from economies of scale in dedicating an entire plant to EVs, plus really taking away all which you have to provide for combustion engines.
Okay, everybody in the call, just keeping an eye on time. Herbert Diess needs to leave the meeting, so we're finishing up the allocated time for him. Christian and Frank will be here for the remaining questions you might have. Herbert, thank you very much for your participation.
Thank you. We'll go to our next question now from Patrick Hummel from UBS.
That's a pity now. It's Patrick from UBS. Frank and Christian then, two questions. First one on the cash return to shareholders. We all appreciate that you confirmed the EUR 10 billion free cash flow target. Why you think it's the right thing to wait till 2022 to move to the 30% payout ratio target? Wouldn't increasing cash return to shareholder be the right answer to address the still low valuation of the stock? I'm thinking, the earnings power, in 2022, assuming basically that the top line is more or less flattish or volume is more or less flattish.
A 30% payout is like EUR 10 of dividends. That's like EUR 5 billion of cash return to shareholders on a free cash flow that's supposed to stay above EUR 10 billion per annum. So can you just help us reconciling why you're not moving higher with your payout perspective? Despite having the best-in-class cash flow, you're still at the low end of the German OEMs when it comes to the actual payout ratio. My second question is, you haven't put the slide this time, in planning round 68 about the brands and the margin targets.
Can you confirm basically that the brand margin targets that you laid out in the last planning round, that they're still valid? More specifically, can you make a comment on Audi, over the next two years in terms of cost of CO2 compliance? Are we going to see Audi under as much pressure as, for example, the margins at Mercedes-Benz seem to be over the next couple of years? Or do you feel confident to stay in the 8%-10% range? Thank you.
Yeah. Hi, Patrick. I expected certainly a reference to the 30% payout ratio. Obviously, since we are forecasting in a more difficult market environment, I knew that I needed to make a more concrete statement. Helen would have not let me out here without being more concrete. 2022 is the year I gave. That doesn't exclude, obviously the opportunity to think even harder about 2021. But from today's perspective, I'm talking about the planning ground, it's 2022.
But we are not that far off for 2021, and if things turn out, hopefully, maybe a bit better than we currently assumed in our plan, then certainly nobody will hesitate to do it a year earlier. But I wanted to be transparent in terms of what's currently assumed. But 2021 doesn't look so much different and potentially things might improve. I said 2022, I meant 2022, but it is not impossible to think about 2021. We have one, two more years to come, which are challenging from the overall environment. That statement is very true, not only from our statements but also from our peers.
Brand margin targets, I referred to it, obviously in my speech a bit earlier. We will give more details for 2020 also on the brand margin targets in Q1 2020. With respect to Volkswagen, the 6% for 2022 is in the books. Porsche consistently strives for greater 15% ROS, and I called it the ambition for Audi is at the level of 9%-11%. Regarding 2020, that is from today's perspective, a stretch. You know that we are guiding for 7%-8.5% for this calendar year, which we are quite comfortable to be able to deliver.
Fine-tuning for 2020 will be done in light of what is happening in the marketplace within the next couple of days and weeks. Probably would think at a number which might not be yet fully in the range, but this is the very best I can give you, but a pretty strong number if you look left and right.
Okay. Thanks, Frank. Sorry I missed the beginning of the call. Thank you.
Thank you. Our next question now comes from Angus Tweedie from Citigroup. Please go ahead.
Hi. Thanks for taking the questions. Probably two more clarifications, if anything. You normally provide SUV penetration estimates for the coming year. Perhaps you could give us an update on how you are thinking about SUV penetration by region for 2020. Secondly, thank you for your comments and the speech about R&D capitalization. Can I just clarify then, from a margin perspective, we shouldn't be expecting any impact in 2020? Thank you.
Yeah, in terms of margin, that is correct. We expect a little higher capitalization ratio for the next two, three years. But you should think about ratios which are not far off from where we have been in the past, so they are not going exceptionally high. We have seen numbers 40 plus, minus a couple percentage point. That is what we are talking about. So nothing which we haven't seen in the past. I think Christian can shed more light on the SUV penetration for 2020 in particular.
Look, I think as we have commented in the Q3 call, we see an increasing trend in SUV penetration, so that trend is unbroken. If you look at the 2020 numbers, we are reaching the 40 plus something percent with obviously the highest mix being in North America, afterwards China, and then in Europe. We believe that trend will continue into 2025. One of the reasons why we are launching a lot of BEVs also as SUVs. So we expect by 2025, certainly a share above 50%.
Thank you. We have a question now from Henning Cosman from HSBC.
Hi, good morning. Thanks for taking my questions. Frank, maybe just a very quick clarification to your answer to Kai's question about the two years to achieve the 25%. Do you mean end of 2021 or end of 2022? Just quick clarification. Then, second question on MEB margins. I appreciate that the new assessment of cash generating units. Just so we understand, while volumes are still ramping up on the MEB, could it be that margins get a little lower in 2021 before we get to more significant volumes on the MEB before it gets better then through to 2025?
Or are we thinking more, maybe not linear, but at least not a situation where it gets worse before it gets better? Finally, I think on Friday in the journalist call, you said something about a high three-digit million euro amount as a benefit from the Ford licensing situation. If you could please confirm that and maybe elaborate on that a little bit, if that's a benefit straight to VW, or whether that's shared between the two companies. I think there was also a reference with respect to further licensing in China.
If you could please clarify if that's within the JV or if there's potential further third parties, where you're in discussions about licensing of the MEB. Thank you.
Yeah, unfortunately, I wasn't part in the call, so therefore I'm not exactly sure how the answer was phrased. Obviously, the MEB is of interest to Ford. So we have consensus on one model, and obviously that will generate respective revenue. Obviously we are also licensing the MEB, as you would expect, to our Chinese joint ventures. So that is the reference I could think of which was made, probably not much of a surprise. The profitability for EVs, obviously, the new generation of NEVs coming off of the MEB platform, there's a ramp-up phase when we start, obviously, prepare the two main factories.
Volume will be a player. So the faster we grow into volume in Zwickau and Anting, the better the situation will look like. But obviously, in 2020 in particular, it is a year which certainly will be heavily impacted by ramp-up costs. But over time, with the rollout, the situation will continuously improve. That's the way I would describe it. That's the way you should think of in the greater scheme of. Obviously the very decisive factor is the medium to long-term development of the cost for battery cells and respective raw materials.
That is an area of concern and opportunity, depending on the respective development. But 2020 clearly is a year impacted by significant ramp-up cost in those facilities. The first part, if I remember correctly, was the question of 2021, 2022. Obviously we are a little bit talking into the wind. It's a bit of a moving target. From today's perspective, 2021 seemed to be possible, but let us wrap up the 2020 budget, and then we obviously start having a better handle also on 2021 being the next business year thereafter.
Since we are updating, obviously the first year of the planning round being 2021 for the reasons explained.
Thank you. On 2021, if I may follow up very briefly, would you be prepared to say that 2021 will not be below on group margins compared to 2020? Or would you rather not comment on that?
We gave the guidance of 6.5%-7.5%, and I am quite comfortable to assume that we will be in 2020 in that corridor, and hopefully not at the lower end.
Sorry, it is about 2021.
Yeah, 2021. There is not yet an official guidance, but from today's perspective, I think being quite comfortable in the way we manage the transition with more NEVs, I think 2021 doesn't look that awful from today's perspective. But since 2020 is to be fine-tuned, I think there is the opportunity for continued progress, but from a margin perspective, probably not looking significantly different than 2020.
Thank you very much.
Thank you. As a reminder, ladies and gentlemen, to ask a question today, please signal by pressing star one on your telephone keypad. We'll now go to a question from Demian Flowers from Commerzbank. Please go ahead.
Hello, yes. Thanks very much. My question's about the new guidance relative to the old guidance on EBIT and then on the pre-tax profit. The EBIT guidance you cut by about EUR 700 million, by the look of it, and the pre-tax guidance you cut by more, by about EUR 1.5 billion. I assume that the delta is China. Is it correct to assume that you see a multiple hundreds of millions year-on-year headwind from your China equity accounted income?
Then as a follow-up on the China dividend, seeing as you have kept your cash guidance consistent, is it fair to assume that we see the China payout ratio going up significantly above 100% in 2020? Thank you.
Hi, Demian. Your conclusion is correct. The difference between the adjustment on the EBIT side versus pre-tax is the net equity result, which is very much dominated by our Chinese operations. We've been more conservative on that side. That is basically explaining the difference in these two line items. In terms of Chinese dividends, we assumed a little higher payout, but please keep in mind, our net cash flow is certainly strongly supported, but not only depending on Chinese dividends.
As Herbert and I also stressed at various occasions, we think we need to push hard on all levers, and even though with that Chinese dividend scenario, we still confirm our net cash flow target because we have other levers where we also think that there is potential. But I think in a way, main driver is the net equity result, predominantly China.
I think from where we're seeing, we're finished up all our questions in the call. Thank you very much for your input, Frank and Christian, and thank you to all the participants on the call and to the colleagues in the IR team and to those supporting us in the back office. As always, if you have any further questions, please contact myself or a member of the IR team. Thank you. Bye-bye.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.