Invigorated by a rebound in earnings at its premium car business, a bullish Volkswagen Group hiked its outlook for the full year even as a global semiconductor shortage wreaks havoc on the industry.

Record first-quarter net profit provided Volkswagen investors the perfect opportunity to take profits on a stock that already enjoyed a rally year to date.

The stock underperformed Germany’s broader market, falling 2% after the carmaker warned its operating margin for the second quarter could dip to 5% from 7.7% in the first, owing to a growing shortfall in chips.

“VW delivered the expected solid operating performance, but there is a hair in the soup,“ Bernstein analyst Arndt Ellinghorst wrote in a research note. Profits in China, Volkswagen’s largest market, accounting for 40% of its global sales volume, were deteriorating in stark contrast to those of BMW Group and Daimler brand Mercedes-Benz.

Results at VW’s two main domestic peers were so strong, both deemed them market-relevant enough to disclose headline figures prior to their reporting dates. Daimler also raised its guidance for Mercedes.

China woes

“This should kick-start a more fundamental discussion concerning VW’s position in China,”wrote Ellinghorst.

Chief executive Herbert Diess praised the progress made at Volkswagen’s Changchun-based joint venture with FAW on the back of its long-overdue SUV offensive, before acknowledging the problems at SAIC-Volkswagen in Shanghai.

“It’s a bit of a concern for us,” Diess said, adding SAIC also booked a number of asset write-downs in the period. Moreover, Volkswagen’s southern Chinese joint venture “was probably most hit by the shortage of semiconductors in the group” owing to its specific model range.

A management reshuffle, including a new sales director, along with fresh momentum from new models should power a rebound at SAIC-Volkswagen over the coming quarters, according to Diess.

Volkswagen reported the global chip shortage cost it roughly 100,000 units of production in the first quarter, a loss the group aims to at least partially recoup in the second half of the year.

Semiconductor scarcity

To alleviate the bottlenecks, Volkswagen is in daily talks with chipmakers such as Infineon and even foundries such as Taiwan Semiconductor Manufacturing Co., bypassing the traditional pecking order of suppliers to go straight to the problem.

Once the crisis is over, Volkswagen’s CEO said he aims to change the group’s supply strategy to be less vulnerable going forward. This could entail potentially even building up a one-month supply, despite added costs and the drain on its cash.

The crucial rollout of VW’s battery electric vehicle (BEV) models has thus far been shielded from the problems in the chip industry.

Diess expects a strong ramp-up in BEV volumes for the second quarter over the 59,900 cars sold in the first, citing a strong order book for models like the upcoming Skoda Enyaq.

“So far BEVs are unaffected, and hopefully we get through the whole year,” he said, before adding there were no guarantees.

Volkswagen reaffirmed its goal of selling a combined 1 million BEVs and plug-in hybrid electric vehicles this year. This is critical to be carbon compliant in Europe, where government fines are far more punitive than in the U.S. or China.

By 2023, the company then hopes to avoid paying competitors like Tesla for their regulatory CO2 credits, once VW ramps up BEV production across its other key markets.

On May 5, Stellantis, the new carmaker that emerged from Group PSA’s acquisition of Fiat Chrysler Automobiles, said it aimed to stop paying Tesla for European credits this year to reduce its cost base.

Earlier Volkswagen released results that revealed continued strong performance by Porsche as well as soaring results at its Audi brand that powered record first-quarter net profit for the group, with a sixfold increase to 3.4 billion euros.

Volkswagen now expects an underlying earnings margin of 5.5% to 7.0%, a half a percentage point better on average versus its previous forecast in March and a marked improvement over the 4.3% from 2020.