VW Becoming Number One Will Require Flying LeapBy Dale Buss May 31, 2011
Everything about Volkswagens grand opening in Chattanooga last Tuesday was precise and executed with evident foresight like much-vaunted German auto engineering. VIPs disembarked from a charter jet at the local airport that morning to the sight of a couple dozen gleaming new Passats aligned tightly in equidistant diagonal rows on the tarmac, with black-uniformed drivers standing at the ready beside each vehicle. Hors doeuvres considerately included provincial favorites such as succotash, fried okra and peach cobbler. Plant-tour guides fastidiously avoided protectorates such as the laser-braising area where Volkswagen uses a proprietary technique to weld roofs to car bodies. And throngs of American employees demonstrated a solid grasp of German pronunciation as they deftly formed a hard W in singing Happy Birthday to Chairman Martin Winterkorn on the occasion of his 64th.
But soon, the script from that day in Tennessee will fade like a new-car smell, and Volkswagen will be left with the herculean task of meeting a challenge that no one has forced on it: becoming the worlds leading automaker by 2018. VW executives have had plenty of opportunity to back down from, hedge or soft-pedal this stretch goal of all stretch goals but, instead, they keep doubling down on what has become their very public and unmistakable commitment to overtake Toyota, General Motors and all other rivals in ascending to the global pinnacle of the industry for the first time. One after another last week, from New York, to Volkswagen of America headquarters in Herndon, Va., to the new 1,400-acre plant site nestled in the foothills of the Smoky Mountains, they reiterated 2018 like a mantra.
Normally you dont have this kind of idea just waking up in the morning, Christian Klingler, VWs global sales and marketing chief and a board member, told journalists assembled in Manhattan last Monday. Three or four years ago, we created a 10- or 11-year strategy. Since we announced the plan, a lot of people have said, Go for it, [but] we dont believe you at all. Im sorry were going for it!
The leadership trusts on the strength of Volkswagen and on their very broad portfolio of products and brands, said Stefan Bratzel, director of the Center for Automotive Management at the University of Applied Sciences, in Bergisch-Gladbach, Germany.
What Klingler, Winterkorn and Volkswagens other leaders didnt own up to was the stunning enormity of what they must accomplish to back up their bravado, including several individual components of the plan they have offered. For instance, to reach Winterkorns goal of one million combined sales of VW and Audi brands in the United States alone, seven years from now, for that entire span Volkswagen-company sales would have to expand at an annual rate nearly four times higher than the 3.8-percent average pace enjoyed by Hyundai in the American market over the last seven years. Volkswagen would achieve one of the biggest successes in modern industrial business history.
Breaking it down makes the goal seem even more daunting. The Volkswagen brand, to meet its mark of boosting U.S. sales to 800,000 units by 2018 from about 250,000 last year, would require average yearly growth of 15.3 percent, according to Edmunds.com calculations and this for a marque that currently holds only three percent of the U.S. market, after viewing it for many years mainly as an afterthought. Meanwhile, Audi has been improving in the United States, but VWs accessible-luxury brand still would have to achieve 8.8-percent yearly U.S. growth over the same period to reach its prescribed goal of 200,000 annual sales, up from nearly 100,000 units last year.
And while VWs extremely demanding ambitions in the United States may prove the most difficult, they are only part of what the company must accomplish worldwide, underscoring the breathtaking magnitude of what Winterkorn has set out for his company. GMs total production last year topped Volkswagens 7.35 million worldwide by more than 1.3 million units, and even Toyota during an annus horribilis managed to produce 30,000 more vehicles than VW, Edmunds.com research shows. Its going to be a big challenge for them, especially because becoming No. 1 in the world ideally should be a result and not necessarily a goal, said Rebecca Lindland, analyst for IHS Automotive, in Lexington, Mass. And lets face it: Being No. 1 hasnt exactly been kind to GM or Toyota lately."
Market positions: Setting aside for the moment the clear difficulty of stealing huge shares of the mature market in the United States, VW executives survey the globe and see strength and potential nearly everywhere else. Other, rapidly growing markets are more important than the United States, Bratzel said. For example, in China, now the worlds biggest and fastest-growing car market, Volkswagen has been the sales leader for about three decades, and for most of that time until the Chinese government-directed economic opening of the last several years the German company owned over half the market. Its declining share now has stabilized at around 18 percent, about equal with GMs stake, according to Juergen Pieper, an analyst with Metzler Securities, in Frankfurt. VWs share actually has been slightly growing over the last three years even at a time where everyone is enjoying huge momentum in China at the moment, he said.
In most other emerging markets, VW also is well-positioned. In India, VW would seem to be under-represented but is ramping up and already enjoys access through its minority stake in Suzuki, which is Indias No. 1 brand. It has the No. 2 share in South America, to Fiat, according to Pieper; and Ratzler believes that Volkswagen is in the industry pole position for growth in Southeast Asia and in Russia, the latter of which is a promising market if the economy gets better. In Eastern Europe, understandably, Volkswagen is the market leader, with about a 13-percent share.
Even in Western Europe, the worlds other most mature auto market with the United States, there remains untapped improvement potential for Volkswagen, analysts said. The company owns a 21-percent share overall, with its various brands, which on the continent stretch from the bargain basement to the penthouse, including Skoda, SEAT, Bentley, Bugatti, Lamborghini and Scania. A long-developing acquisition of Porsche is expected to be completed this year and add even more volume. In 10 years, VW overall has gained two or three percentage points of market share in Europe while everyone else has lost, including all European volume makers except for Peugeot, and Ford and GM, Pieper said. Both VW and Audi have been successful with most of their new products. And Audi has succeeded in joining the premium market and is now seen in Europe on the same level as Mercedes and BMW.
Overall, in fact, VW came through the global Great Recession in the best shape of any of the biggest automakers relative to its own status before the collapse. VWs production stayed at around six million units annually from 2007 through 2009, while GM lost about 20 percent of production from 2008 to 2009 before recovering all of it and more last year, and Toyota dropped 25 percent of its worldwide output that same year before recovering less robustly last year. But in 2010, GM rebounded to lead automakers with 8.71 million vehicles produced worldwide, with Toyota at 7.38 million and Volkswagen at 7.35 million. (There is not a precise correlation between global sales and production each year, of course, but its close.)
And GMs big lead today is the major obstacle to VWs stealing the top spot within seven years. A renewed GM wont be standing pat; not only is it robust in China, but GM also has been making gains in South America just like VW. And Toyota may be more dangerous than it has been in a generation if management learns from mistakes and disasters of the last few years and can reassert the companys own ambitions to global superiority. Then there is the Hyundai-Kia Group: Koreas giant automaker also might be in the running for first place in the global automotive derby by late decade. If anything, were in a more competitive environment now, Lindland said.
Brand and product portfolio: One of the companys biggest strengths is the diversity of its brands, especially in Europe. Also, like their counterparts around the world, VW executives have been busy globalizing their vehicle platforms to the extent possible and stressing design and manufacturing flexibility that relies on relatively inexpensive local adaptations to differentiate models. In Germany, the acronym for this approach is MQB, said Jorge Luensmann, who covers Volkswagen for the hometown newspaper in Wolfsburg and arguably knows the company better than any other journalist. It gives them more chances to produce different models and cars, more possibilities to go from the basic [platform] to configurations more specific for each market. The new U.S.-oriented Passat is an example.
We know were strong on product, Klingler said. We have more than 200 products around the world, and on 90 percent of them we have delivered what we said. To the VW board member, that importantly includes a steady improvement in manufacturing quality worldwide. While Volkswagen always has gotten a nod for its roots in German engineering, that hasnt always translated to top-shelf fit-and-finish. Now, Klingler said, the company is emphasizing quality more than ever and has figured the criterion for the first time into management bonuses.
Investments in plants and people: Klingler also pointed out VWs robust capital-spending trend worldwide, which will have the company investing more than 50 billion euros over the next several years. Already, VW has committed to huge new outlays for facilities in Germany as well as in far-flung operations such as the new plant in Tennessee. In China alone, VWs plans are to spend more than 11 billion euros over the next several years. Relatively strong financial results even through the Great Recession have positioned VW with the strength to invest in facilities, he said. At the end of the day, Klinger asserted, that [alone] will buy you a certain volume.
The VW board member said that the company want[s] to have the best people on our team, citing excellence in human resources as one of its most important advantages going forward. Certainly, the musical chairs at Volkswagen of America illustrate how the parent company is attempting to put the right people in place at the most crucial levels in one of its most important markets as it readies for a surge. Jonathan Browning took over as chief of the Volkswagen operation in the U.S. last fall after a career as a GM and Ford executive, replacing Stefan Jacoby, who had departed for Volvo. Since then, Browning has brought in new people in marketing, for example, as CMO, Tim Mahoney, who was CMO of Subaru of America, and Scott Vazin as head of communications, who was part of the Nissan brand PR operation.