has volkswagen discovered the holy grail of carmakers

7/29/2019 Has Volkswagen discovered the Holy Grail of carmakers

1/18

Ulrich Hackenberg isn't yet a household name but if Volkswagen's $70

billion bet on his big idea pays off, he may join the likes of Henry Ford,

Alfred Sloan and Taiichi Ohno in the canon of auto industry

pioneers.Since the heyday of Henry Ford and his Model T, the world's

automakers have considered the "global car" to be their Holy Grail - the

same basic design that can be built, in subtle variations, and sold in

different markets.

Take that fundamental concept, stretch it across many different vehicle

types, sizes and brands, then build them by the millions, and you begin

to sense the enormity of Volkswagen's rapidly evolving "mega-platform"

strategy and its potential impact on competitors around the globe.

Has Volkswagen discovered the Holy Grail of carmakers?


2/18

Auto engineer Hackenberg nurtured this bright idea for three decades,

after early pitches to auto executives were largely ignored, until

somebody finally bought it wholesale. The man who bit was Volkswagen

Chief Executive Officer Martin Winterkorn.Hackenberg's fundamental

rethink of vehicle platforms, the industrial Lego from which cars are

designed and made, is helping power the German company to the top ofthe global sales charts several years ahead of its 2018 target. It could

also make VW one of the most profitable carmakers in the world.

The strategy is not without risk. It could, for instance, expose

Volkswagen to the threat of a massive global recall if a single part, used

in millions of cars, fails.


3/18

But rivals have taken note of the power behind its move. Volkswagen'smodular platforms are being benchmarked by most of the world's top

automakers, including Toyota Motor Corp and Ford Motor Co (NYS:F),

according to company executives."We'd be crazy not to," said a senior

Ford official, requesting anonymity because of the proprietary nature of

the subject.VW's work on its largest mega-platform, known internally as MQB,

began in earnest in 2007 and is being implemented over the next four

years at a cost of nearly $70 billion, estimates Morgan Stanley. The

potential payoff is compelling: Projected annual gross savings by 2019 of

$19 billion, according to the bank, with gross margins approaching 10

percent.


4/18

The automaker is expected to announce a record profit for 2012 of more

than $30 billion later this month (February 22), according to Bernstein

Research, whose senior analyst, Max Warburton, observes: "VW looks

to have unstoppable momentum - in China, the U.S., Europe and most of

the rest of the world."That momentum has been building for some time,

even before the initial deployment last year of Hackenberg's brainchild.Industry-leading levels of commonality - the proportion of parts that can

be shared among different models - are nothing new to VW. At a

gathering in Japan five years ago, Renault and Nissan executives lifted

the hoods on several VW Group vehicles side by side - including models

from Skoda, Seat and Audi brands - and saw trouble.


5/18

"They had the same engines, the same clutches, the same ventilation -

all identical parts," says an executive who attended the presentation. "It

was a level of commonality that didn't exist at Renault-Nissan."Late in

2011, as the outlook darkened for French carmaker PSA Peugeot Citroen,

its board was given a similar demonstration, and a similar shock, at the

company's high-security research center in Velizy, southwest of Paris.Technicians took apart the front ends of two different VW cars and

swapped most of their components.

"They were a little dumbstruck by the realization that there was a whole

new world out there - and their development was 10 years behind,"

recalls one participant.


6/18

SIX-YEAR GESTATION

After a six-year gestation, VW has just begun to implement its

sophisticated and highly flexible platform with the deceptively simple

label MQB, a German acronym for "modular transverse matrix."

Virtually all of the group's small and medium front-wheel-drive familymodels, including the latest generations of the VW Golf and Audi A3, are

being designed around MQB as their base.The new platform features a

far greater degree of plug-and-play modularity, flexibility and parts

commonality than at Toyota, General Motors Co, Ford and other

competitors


7/18

MQB "could be the single most important automotive initiative of the

past 25 years," says Michael Robinet, managing director of IHS

Consulting in Northville, Michigan. "It really changes the game."With the

new mega-platform strategy supporting its 12 brands, from spartan

Skoda to Audi, Porsche and Lamborghini, VW is poised to snatch the

global sales crown from Toyota as early as next year, according to

investment bank Morgan Stanley.


8/18

VW envisions enormous leverage from MQB. The plan is to boost global

sales to 10 million or more, with roughly two out of every three cars -

some 40-plus models totaling 6.3 million sales a year - built on some

variation of the MQB platform, according to U.S. research firm IHS

Automotive.None of VW's competitors has the diversity of brands, thebreadth of technology, the sweeping geographic footprint or the deep

pockets necessary to support and take advantage of such a wide-

reaching initiative as MQB.

Even Toyota, the current global sales leader, is playing catch-up with its

German rival.


9/18

"There's no doubt we have fallen behind," says a senior Toyota

executive who declined to be named because of the sensitive nature of

the subject. "We have not even begun to make the fundamental

structural changes that VW has" in designing and applying flexiblevehicle platforms.The sense from competitors and auto analysts is that

VW's rollout of MQB is likely to be as influential as such earlier

innovations as Ford's adaptation of standardized parts, GM's "ladder" of

brands and Toyota's streamlined production system.


10/18

WATERSHED EVENT

VW's suppliers see MQB as a watershed event, a break with a past when

really big vehicle platforms might have yielded orders for as many as 5

million or 6 million identical components over their typical six- to seven-

year life cycle.Now, with the implementation of MQB, "they're being

asked for quotes on 35 million parts," says a senior European industry

executive.

More importantly, the modularity enables VW to design, engineer and

build a wide variety of vehicle size and shapes - from a subcompact Polo

hatchback to a full-size, seven-passenger crossover that's due in the

United States in 2015.


11/18

The flexibility of the MQB system also allows VW to create more cars

that are more tailored for specific markets at a lower cost, and it doesn'thave to sell so many units to break even, according to Morgan Stanley

analyst Stuart Pearson.MQB isn't the only weapon in Hackenberg's

arsenal.

Larger Audi, VW and Porsche models with longitudinal engines -

mounted in a north-south configuration - will use a similar set ofcomponents dubbed MLB that already underpins a number of Audi

vehicles.

And many of the group's ultra-luxury and performance brands will

employ a third component set called MSB, designed for premium rear-

and all-wheel-drive vehicles such as the Porsche 911, the BentleyContinental and the Lamborghini Gallardo.


12/18

Each of the three modular component sets will come in different

variations that will enable enormous flexibility in terms of product

design, while accommodating a wide range of powertrain options, from

gas and diesel engines to electric motors and batteries."Modular

platforms have grown beyond the technology (alone) to become amanagement tool which helps support the brands' development. The

toolkits help the brands to preserve their character and sharpen their

individuality," said Hackenberg, now development chief for the

Volkswagen brand.


13/18

STRENGTHS AND WEAKNESSES

The modular toolkits seem like the ideal complement to VW's other

strengths, not the least of which is the company's sheer size: Group

revenue this year is projected by Bernstein Research to top $275

billion.But the huge volumes planned for the MQB derivatives alonecould also expose the group to the same sort of mass recalls of millions

of cars experienced in recent years by Japanese rival Toyota. If a single

part has a problem, and that part is in many different models, a recall

affects many more vehicles.


14/18

Analysts, including Morgan Stanley's Pearson and Frankfurt-based

Metzler Bank analyst Juergen Pieper, also express concern about VW's

growing reliance on emerging markets, notably China, for future

growth.The company was an early investor in China and the only

European automaker to form joint ventures with that country's top two

manufacturers, FAW Group and Shanghai Auto.

Now, China accounts for 30 percent of VW's global sales. The German

group operates 10 assembly/component factories in China and plans to

pump another $13 billion with its JV partners over the next three years

into plants, equipment and models.


15/18

Excess exposure to a single market such as China contradicts VW's

philosophy of spreading growth evenly and potentially makes it

vulnerable to negative market developments and possible government

interference, says Pieper.To hedge its potential emerging-markets

exposure, VW also has overhauled its loss-making North American

operations - an estimated $4-billion investment, according to Morgan

Stanley, that could more than double U.S. sales by 2018 to 1.3 million.

Even then, it would remain a mid-level player in the U.S. market

dominated by GM and Ford, which sell nearly 5 million vehicles a year

between them.


16/18

VW is supporting its recent growth spurt with additional production capacity,

including a new Audi assembly plant in Mexico, expansion of VW's existingfacility in Puebla and a potential increase at the new Chattanooga plant in

Tennessee. The latter two plants will be updated to accommodate new models

that use the MQB platform - the latest Golf in Puebla and the big crossover in

Chattanooga, according to VW executives.

Top managers are scanning other overseas markets where the company lackslocal production facilities, including Africa, much of Latin America and most of

the ASEAN region, where VW's modest presence is dwarfed by that of market

leader Toyota.

VW is in the process of boosting global capacity, including the investments in

China and the United States, to nearly 12 million by 2015, from 8.6 million in

2010, according to Morgan Stanley.


17/18

CHANGING OF THE GUARD

The full rollout of MQB may not be accomplished until the end of the decade,

estimates Pearson. By then, the chief stewards of VW's corporate strategy -

CEO Winterkorn and Chairman Ferdinand Piech - may be retired and the next

generation of management moved into the top slots.The Austrian-born Piech,

75, is a third-generation auto executive. A mechanical engineer by training, heis the grandson of Ferdinand Porsche, the legendary Austrian designer of the

original VW Beetle.


18/18

VW's supervisory board has yet to clearly anoint potential heirs to Piech and

Winterkorn, 65, and it won't be easy, particularly since much of the power has

been closely held by the two patriarchs since Winterkorn became CEO in

2007.As for the company's strategic vision after Piech steps down, Morgan

Stanley's Pearson says: "His legacy is (building) the world's largest and most

successful auto company. I don't think the strategy will change any time soon."

has volkswagen discovered the holy grail of carmakers

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