As General Motors Corp. and Toyota Motor Corp. battled for the No. 1 sales ranking in recent years, Europe’s biggest carmaker Volkswagen AG seemed mired in a set of distinctly European problems.
It was saddled with a large, highly paid work force and a German state as its leading shareholder. Senior executives became tabloid fodder in 2005 during a sex and bribery investigation, and the chairman squandered money developing expensive vehicles far removed from Volkswagen’s original mission to be the ‘People’s Car’ maker.
But in the global auto industry, winners can turn into losers overnight, while laggards can suddenly exhibit surprising vigor. Volkswagen, long dismissed by investors, looks quite fit in this downturn. While most of its rivals are losing money, the Wolfsburg, Germany-based manufacturer earned $1.7 billion in the first half of the year on its car-making operations and a net profit of $700 million.
Propelled by its leading position in Europe and strong presence in China and other emerging markets, Volkswagen is on track to become the world’s second-largest automaker, behind only Toyota, possibly as early as this year, according to forecaster CSM Worldwide in Northville.
While General Motors Co., Ford Motor Co. and other automakers are slipping down the ranks after retrenching and shedding brands, Volkswagen is preparing to absorb the legendary Porsche brand after a bitter takeover fight.
Now, VW is pushing aggressively in the one major market where it is not doing well at all — the United States. It is investing $4 billion to set up U.S. manufacturing operations and develop vehicles designed specifically for American car buyers.
‘In 2018, our objective is to be the No. l automotive group globally. And if you want to be No. 1, you have to have a decent position in the United States,’ said Stefan Jacoby, president and CEO of Volkswagen of America.
VW is building a car plant in Chattanooga, Tenn., and adding at least two new models to its American lineup to nearly quadruple its U.S. VW brand sales to 800,000 by 2018, he said. Including the premium Audi brand, the automaker’s sales target is 1 million.
VW’s American dealers say these moves will help them compete more effectively against the Japanese. Producing models locally will ‘change the way they price their cars and what models they offer,’ said Eddie Lee, managing partner of Lewisville Volkswagen in Texas and a member of the national dealer council.
With its U.S. sales expected to grow, VW’s global sales are forecast to increase to 8.3 million vehicles in 2015 from 6.3 million last year, according to CSM.
Volkswagen is profiting now from ‘cash for clunkers’ plans in Europe that have stoked demand for small, fuel-efficient cars.
It is also benefiting from the setbacks at major rivals hurt by the severe U.S. downturn — Detroit’s automakers, Toyota and Germany’s luxury carmakers with their dwindling profitability. ‘In this recession, Volkswagen is clearly the company with the best financial results,’ said Jürgen Pieper, auto analyst at Metzler Bank in Frankfurt.
‘There are reasons to believe their success will continue,’ he said, pointing to Volkswagen’s fresh lineup and full pipeline.
Volkswagen’s solid performance seems to vindicate the strategy of Ferdinand Piëch, 72, the former chief executive of VW who still holds sway as chairman of its supervisory board.
A talented engineer, Piëch has pushed the carmaker hard to develop appealing vehicles across all its brands and innovations. VW is renowned for its diesel technology, its use of aluminum and its engineering processes.
Piëch is also a shrewd tactician who has balanced the interests of the carmaker’s many stakeholders: its workers and investors, including the state of Lower Saxony where Volkswagen has its headquarters.
VW bites back
His corporate combat skills were in evidence this year when VW turned the tables on Porsche, a tiny sports car manufacturer which set out in 2005 to buy VW.
Porsche eventually acquired 50.8 percent of VW, including an 8 percent stake bought last December for $13 billion in cash. But it still didn’t control VW because Lower Saxony’s 20 percent holding gave it veto power under a contentious law. By March, Porsche was running low on cash.
Its owners, the descendants of Ferdinand Porsche, including Piëch, his grandson, agreed to settle the fight by integrating the two carmakers. Porsche CEO Wendelin Wiedeking, who led the buyout charge, was dismissed in July, and VW is expected to outline a deal today.
The Porsche and Piëch families are expected to be the leading shareholders of the new integrated group, followed by Lower Saxony and the Gulf state of Qatar.
While Porsche’s 99,000 annual vehicle sales won’t expand VW perceptibly, it will enhance the group’s brand equity, Peter Schwarzenbauer, an Audi board member who was formerly at Porsche, said earlier this year.
Porsche is expected to become the 10th Volkswagen brand, joining such illustrious marques as Audi, Bugatti, Lamborghini and Bentley.
Although the takeover fight was fierce, Porsche has little to fear, say executives at VW’s other luxury brands. ‘Volkswagen is an extremely responsible parent,’ said Alasdair Stewart, worldwide director of sales and marketing for Bugatti Automobiles.
‘It allows the brand its own space, but provides the support and backup required.’
Bugatti, based in Molsheim in eastern France, has its headquarters in the Chateau Saint Jean once owned by the family of Ettore Bugatti. When Piëch acquired the brand in 1998, Volkswagen built a workshop on the grounds where 1,001 horsepower Bugatti Veyron sports cars costing more than $1 million apiece are built at a rate of 70 a year.
‘Because the Veyron is such an extreme car, it’s very hard to share components in many ways,’ Stewart said. But Volkswagen engineers developed the car’s dual-clutch system and the 16-cylinder engines are produced at a VW factory in Salzgitter.
Volkswagen’s efforts to generate economies of scale among its brands haven’t always been successful. Its platform-sharing strategy in the 1990s led to criticism that VW and premium Audi vehicles looked too much alike.
Gunning for Toyota
Volkswagen refined its strategy and now aims to produce all of its vehicles on one of two sets of flexible underpinnings. Smaller vehicles would be based on the transversal build kit, which includes the engine and transmission, and larger models on the longitudinal kit. ‘We can stretch the platform lengthwise and widthwise, and it’s very versatile,’ said Johan de Nysschen, president of Audi’s U.S. operations.
But in recent years, political infighting and a long bribery probe that led to high-level resignations and convictions in 2008 overshadowed VW’s engineering achievements.
In the United States, VW’s reputation was tarnished by lapses in quality and reliability, which executives say CEO Martin Winterkorn has worked hard to fix.
When Winterkorn was put in charge of the management board three years ago, he didn’t set financial ratios as goals but designated a target instead. ‘He gave it a name, and the name was Toyota,’ said a VW official who spoke on condition of anonymity.
Winterkorn and his management board colleagues drafted a plan to turn Volkswagen into the world’s No. 1 automaker by 2018.
When VW announced its half-year results in July, it said it had increased its share of the global passenger car market to 12 percent from 9.9 percent. By its count, it was already No. 2.
‘Even in a particularly difficult phase in the international automotive markets, we were able to gain share in key markets,’ Winterkorn said. ‘This has further improved our position on our way to the top.’