Having looked at the issues besetting the mighty Volkswagen AG (VAG) recently in Part 1 – which can be read here – we can now try and shed some light on the depth of the problems and likely solutions.
Today, the problem is that these cars are all on the verge of being replaced (or have already been replaced, in the Golf VI’s case). The new range taking their place will, even once the glitches related to MQB have been ironed out, not be as lucrative, with profit margins shrinking by as much as two thirds, compared with the Bernhard-era models. This should make future subsidising of models such as the Amarok pick-up (which is said to have a profit margin of -25%) with the Tiguan II’s yields considerably more difficult.
That is the price to be paid for the technological excellence envisaged by Piëch and Winterkorn.
Said technological pretence is also among the reasons for VW’s ongoing failure to crack the US market. But more importantly, it has been VW of North America management’s reluctance to cater to the American taste for yearly detail changes. Perhaps somewhat snottily, VW believed its US offerings could adhere to European product cycles, with a facelift after three and an all-new replacement model after six or seven years. But the lesson had to be learned the hard way that, unlike the premium brands, VW has to play by the rules of the domestic mass market, which cares about model year changes.
At last, VW seems understand this and is changing its policy in this regard. A large, simple SUV aimed exclusively at US costumers is also in the making. But these developments will not be overseen by many members of the management team originally tasked with leading the US offensive, former Jaguar MD Jonathan Browning among them. Instead, VW has dispatched a new batch of executive staff, tasked with changing the brand’s fortunes in the New World – all under the watchful eye of Martin Winterkorn himself, who has pledged to make the North American market a personal priority of his. As history has proven, these are no empty words.
Meanwhile, VW remains a fringe player in the US market, with measures such as the Jetta’s recent cosmetic facelifting only preventing something worse from happening until the US-developed SUV finally arrives.
The good news amid all that doom and gloom is that VAG’s premium brands are still thriving. Particularly Porsche and Audi (who should be among the benefactors of MQB at the end of the day) are generating profit margins of a scale that allows subsidising VW’s enormous – some say bloated – workforce and insufficiently efficient R&D efforts.
There are some grumblings reverberating at both Stuttgart and Ingolstadt regarding the big mothership’s parasite status, but as long as neither of the upper class branches dares to actually sabotage the entire corporation’s operations for the sake of it, there should not be any severe consequences.
For the time being, Audi, Porsche and VAG’s Chinese businesses should ensure the company’s healthy finances, as showcased by the just announced profit increase of 16% for the third quarter of 2014 – which means that a not insubstantial 3.23 billion Euros have been earned over this particular period.
As of today, VAG has not announced any cutbacks, only thought about them aloud. But to analysts, it is clear where the scalpel will be put: even if MQB may eventually work out as intended, once more derivatives have been brought to market, Martin Winterkorn himself has announced that the times of sprawling variants and self-indulgent engineering solutions are over. This should result in an invisible simplification of certain production methods and components, which actually needn’t be to the detriment of the cars themselves: Toyota, lest we forget, has a habit of producing far simpler automobiles that manage to be saleable in more markets, yet are hardly less reliable than VW’s more complex offerings. All of which sounds almost as though Mrs Winterkorn has started serving her husband a slice of humble pie for breakfast recently.
More visible consequences should be the axing of certain models, what with the Eos convertible having been publicly declared to be on the way out and the Scirocco being almost as certainly heading to the Curiosity Section at the Volkswagen Museum.
Talking of components, it is also an almost almost certainty that VAG will close certain component factories, handing over more duties to outside suppliers (yet still maintaining an in-house production depth that’s greater than any competitor’s).
With VAG entertaining the luxury of the largest workforce in the business, it is obvious that this area will not get away scot-free. The head of work council, Bernd Osterloh – a most powerful figure within VAG, what with the company being partially state-owned – has handed over a document consisting of 400 pages of proposals to increase efficiency, as submitted by the staff. On none of these pages any mention of job cuts are mentioned, for obvious reasons, but it is clear that there will be consequences in this regard, too. Most likely to suffer are the vast numbers of temporary workers, who are not protected by Germany’s labour protection laws.
So Germany will not be seeing mass redundancies, but VAG will unquestionably be a leaner operation in the future, if only to protect itself from future threats and uncertainties.
The bottom line is that VAG is not a company in grave danger. There is quite a lot rotten in the state of Ferdinand Piëch, but as a whole, the company is still thriving. The current alarmist announcements and gossip are mainly aimed at preparing this vast empire for the future. Just as boisterous as the claims for (automotive) world domination had been before, the current warning sirens are the weapon of choice for Martin Winterkorn and Ferdinand Piëch to prepare their realm for a new chapter. The irony being that it is these two immense egos who are playing down their empire’s strengths in order to prevent corporate hubris from gaining ground.
Some of the analyses and most figures mentioned in this article are courtesy of Süddeutsche Zeitung and Manager Magazin.