Teutonic Displacement: Volkswagen Konzern (Part 2)

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.

2012_VW_Amarok_Highline_-_Car_Review_(7821014328)

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.

12_browning

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.

2014-volkswagen-golf-03As 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. 

2014 Audi A6
2014 Audi A6

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.

2014 Seat Ibiza Cupra-R
2014 Seat Ibiza Cupra-R

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.

Ferdinand-Piech-Der-76-jaehrige-gebuertige-OEsterreicher-denkt-gar-nicht-daran-fuer-Vorstandschef-Martin-Winterkorn-den-Aufsichtsratsvorsitz-zu-raeumen

Some of the analyses and most figures mentioned in this article are courtesy of Süddeutsche Zeitung and Manager Magazin.

25 thoughts on “Teutonic Displacement: Volkswagen Konzern (Part 2)”

  1. I’ve long thought that manufacturers have too many models in the line up. There are economies of scale to be added but surely these scales are eroded by additional costs in body designs, headlamp changes etc.
    Interesting that when I analyse my SAAB history. In 1988 (approx) SAAB a 100,000 volume production business, offered a carburettor, 8 valve injection, 16 valve injection, an 8 valve turbo and a 16v turbo. Also combined body styles 2 door, 3 door, 4 door and a 5 door together with a convertible. As if that wasn’t enough they offered 3 levels of velour trim and a leather trim with 5 different colours (together with carpets and door cards).
    And to add to the mix – the 100,000 cars were shared with the 9000 platform.
    This seemed to me to be an impressive (but costly) mix as classic 900 customers would be unlikely to have moved elsewhere merely because they could only have a 3 door or 5 door option in 2 colours and/or leather trim.

    1. The ‘additional costs’ you’re talking about are much lower nowadays, either because tooling is a lot more flexible and/or because a lot of the cost and risk attached are dumped on 3rd party suppliers.

  2. I appreciate they are lower. My (perhaps naive) belief is that the public don’t actually need that much choice, they’d buy the product anyway if it met the requirements. eg Does the public need an bmw 1 convertible and a 3 series convertible. Does it actually need a an A1, an A2 and an A3 convertible. It’s choice for choices sake.
    However I am only too aware that my opinion has limited viability – my financial circumstances advertise that quite sufficiently. LOL

    1. Personally I have no issue with the number of models available. What really grates as far as I’m concerned is how constrained all other choices are – just try any configurator and see if you can get the exact combination of engine, body colour, interior trim and those basic options you want, and 99% of the time it won’t be possible. It just shows that for all the talk of choice and personalisation / customisation, manufacturers will only sell you what makes sense for them.

    2. I’ve looked at various manufacturers configurators recently and concluded that, for me, the more options available are the more the turn-off. Starting with an extreme, on the Maserati site I viewed a couple of years ago, once I’d chosen what colour brake calipers I wanted, I could then choose what colour contrasting stitching I wanted on various items of interior upholstery. Apart from the fact that it seemed possible to secure some particular hideous combinations, I don’t think I’m alone in the fact that the more options I’m given, the more chance that I’ll get something wrong and live to regret it. There you are outside thinking ‘ that lucky bastard in his Granturismo – no cares in the World’ and there’s me inside thinking ‘bollocks, if only I’d chosen the green stitching and the tuscan beige low-texture leather for the sunvisors I wouldn’t feel so miserable’.

    3. Sean

      at least you were given the choice and all you needed to do was go for a classic combination and trust your good taste…
      Worst thing for me is seeing one of those pop up windows with a message explaining that I can’t get the two-tone dashboard unless I select leather-covered sport seats and £2k worth of ‘infotainment’.

    4. Laurent. Indeed, as I might have mentioned somewhere else, I configurated (?) a Renault Twingo recently (possibly a more likely buying proposition than the Maserati) and thought that maybe the red interior trim would look good with the yellow exterior (did you say something about my good taste?). This illegal combination seemed to throw the configurator into a melt-down and I had to start again. And you’re right that it is frustrating to see something actually useful packaged with something that is not.

    5. Yes the Twingo is one of many I had in mind that I tried to configure recently, only to find out that things aren’t as simple as choosing engine then transmission then exterior colour then interior trim then options from a wide list as most manufacturers seem to imply.

    6. P.S: for me it was either yellow (with 80’s black stickers set) or 70’s baby blue with that red interior. Neither was possible.

  3. As it happens, TTAC has this report on the growing problems of model diversity. I guess what has happened is that choice is now between models rather than between brands; I wonder if you did some maths and some research would you find that the amount of choice in the car market is not a lot different compared to when we had more brands and more choice within the model ranges.
    http://www.thetruthaboutcars.com/2014/11/expanding-portfolios-overwhelm-automakers-consumers-alike/

    1. I was referring to Richards post. My original post was stating that I felt customers had too much choice and that the choice was affecting a manufacturers margins because they were producing too many body choices.

      It’s something I have considered for many years and has grown with the addition of models that are in fact quite close to each other. All it does – to me – is simply mean the customer purchase is spread over body choices rather than options lists

      But you’re not wrong – I am still quite slow LOL

  4. I’m with Stephen on this. The point at which the average onlooker can’t distinguish one model from another without recourse to the spec sheet is when model variation has reachef its limit. I think the manufacturers might realise this. They ended up at this point through an arms race that offered momentary advantages and also smothered the weaker firms. When MB had a handful of body-shells, a new car from them was an event. That’s no longer the case. Can they escape this trap? Hard, as arms races don’t stop until a new weapon changes the game or someone capitulates. Truces don’t happen in the “free market”, that’s a cartel. It’s hard to see the manufacturers going back to much fewer bodies and more distinctive trim variants.
    Until then MB and Cadillac, for example, will need Ludwig Wittgenstein to design their nomenclature systems.

    1. I think the issue isn’t so much about not being able to ‘distinguish one model from another without recourse to a spreadsheet’, but being able to compare specs and prices both vertically (e.g. between a top spec X3 or an entry level X5) and horizontally (e.g. between a Q7 or A7). Not so much of an issue if like I said earlier you can be quite systematic in your approach to speccing your vehicle (size > shape > engine/transmission > interior > options) but that presupposes that the same options are available in all cases and for all models, which isn’t the case.

  5. The horizontal and vertical cross comparisons here assume the models are clearly identifiable in the showroom. In the simple scenario of Polo/Golf/Passat/Phaeton that’s easy enough. Where there are fifteen models it becomes harder to spot what’s vertical and what’s horizontal in the first place. Lucky old Alfa! Their customers know no such muddlement.

    1. Indeed, yet I’m not convinced it’s a real issue – merely an inconvenience.

  6. My suggestion is that the more choices you’re faced with, the more likely you’ll get it ‘wrong’. Like me when I specified a Kangoo for work a few years ago and chose the MPEG compatible radio, assuming that meant it would have a suitable input – but it didn’t. I know that’s not quite the same as being confused as to whether to have the ‘Burlesque HD cup holders or the ‘Tonic-Z’ LS cup holders but the option process, fairly or unfairly, left me with a small grudge against Renault. But of course this is where they make their money.

  7. My rule of thumb is that: The lower down the price ladder you go, the less choice you should give.
    Rolls Royce = ton of options(you pay for it anyway!), visit the atelier
    Bmw = keep choices limited, use more bundles
    Skoda = very limited choices, no frills, no nonsene

    1. It looks as if manufacturers tried to flatten the choice curve. The Mini and Fiat ranges are a blizzard of choices. However, these are not quite the same quality of choices as, say, Rolls offer.
      Skoda would like to offer a few choices but as long as some other maker can make sales by offering options then Skoda, say, will have to follow suit.

    2. That’s the problem, manufacturers follow each other for the sake of following.
      MIni and Fiat 500-sub brand see themselves as near premium. A skoda has no business following that strategy.
      Customers of no frills product don’t care about individuality and style, they want something that just works. Customers of Mini, Fiat 500 are looking for a car that makes a statement; thats why they can afford to pay more for a package with less substance.

      Think of it this way.
      Women who wear high heal shoes tend to have 100’s of different shoes (Image concious, wants to stand out so craves variation/options)
      Women who wear comfortable shoes, tend to have very few shoes (Don’t care)

      Its only a foolish company that will think it can adequately serve both customers with the same basic product in this highly competitive market. (Chose your customer type and hone you products and services to meet their requirements. You can’t do it all).

  8. In my opinion, the problem with VW is the disparate nature of their operations and how its difficult to keep two different mindset under the same roof.
    The luxury mindset where everything is overengineered to perfection and becomes expensive,
    And the Mass market mindset, where you need to think of making things simple, and cost effective.

    At the moment, the Luxury mindset dominates the company and thats why VW brand cars are more complicated, more expensive to make and less reliable than Toyotas. (Because they are building a mass market car with a luxury mind set).

    Mind you, it would have been a worse disaster if the Mass market mindset dominated the company. Look at what it has done to Ford and Fiat’s luxury brands. (Mass market mindset is to take a cheap car and try to improve into a luxury car). But as the saying goes, no matter how much you dress up a donkey, its still an ass.

    1. I don’t get that feeling from Ford anymore. Actually I wish they’d ease off the luxury schtick a little, at least on the smaller cars. I drove a Chevrolet Epica a few years ago and likes its simple style.

    2. Rich, I didn’t mean the effect on the Ford brand, but rather the effect it had on Volvo, JLR and the effect it’s having on Lincoln.

      The current Fords(eg: vignale) are just an effort to overcompensate. The thinking behind that is; we can still put lipstick on a Ford, but this time we will not lie to anyone that its a Jag(X type) or Lincoln (MK-).

      The reason for this desperate measure is that: in europe the market has become bipolar.
      You either make money selling premium cars at high margin(BMW, Audi).
      Or make money selling cheap to manufacture, no frills mass market cars(Skoda/Dacia).

      The carmakers left in the mid-market, mainstream (Ford, Vw brand, Fiat, Renault) are being squeezed by the premium(A class/Cla) at the upper end, and no-frills on the lower end.

      Added to that, they are in a segment(mainstream) with too many competing brands and thus have to now sell cars below cost just to rid of them.

      Ford brand is just trying to move away from the mainstream towards luxury. (Problem is, the Ford brand cant support that strategy. And Lincoln has been amputated because of the strategy to sell tarted up fords as Lincolns.) Thus you have luxuried-up Fords and Vignale’s.

  9. It is fair to say (ref Gordon’s comment) that VW are not only offering a wide range of bodystyles (for what are often very similar cars), a range of trim levels and a range of option lists. They are also offering a brand differentiation SEAT, VW, AUDI, Skoda. This gives good units of scale but also shares sales between the available customer base.
    I help a company with marketing of cooling products and the VW range is littered with difficult to understand radiator options for what are essentially the same vehicle … that doesn’t help units of scale.
    Add to that the distinct similarity now between a SEAT and an AUDI .. the lines of difference are now blurring … many people recognise the SKODA to be the same car – they have made it slightly uglier to put people off. LOL

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