Saving costs is near the top of any company’s board meeting agenda, and the issue has always been at the heart of automotive suppliers’ and OEMs’ strategies. Yet while issues like overcapacity and M&A have occupied the automotive business press in recent years, cost saving (read “cutting”) has been less prominent.
Until the last few days, that is, when Volkswagen and Daimler made cost a headline issue in the same week.
VW is looking to cut €5bn annually at the VW brand from 2017 to reduce staff costs, increase efficiency and profitability, and get closer to its profit margin target of 6%… “From 2017” is interesting, given VW’s goal to overtake Toyota as the world’s number one in 2018
It appears a strict platform manufacturing strategy alone cannot control costs at the 12-brand Volkswagen Group. Chief Executive Martin Winterkorn addressed a hastily-arranged meeting of workers to outline why “painful action” is needed to reduce costs across the group. Winterkorn may have been talking about the VW group, but it’s at the OEM’s core Volkswagen brand where the main problems have been identified.
According to reports, VW is looking to cut €5bn (US$6.7bn) annually at the VW brand – which accounts for around half of the group’s turnover – from 2017 to reduce staff costs, increase efficiency and profitability, and get closer to its profit margin target of 6%, a target that remains out of reach.
“From 2017” is interesting, given VW’s goal to overtake Toyota as the world’s number one in 2018. The difficulty of targeting the number one spot, demanding an acceleration in model launches and necessitating a global footprint expansion, whilst also calling for drastic cost cutting, has not gone unnoticed by the OEM’s works council; industry watchers are poised for a public rift between board and management, with the head of the works council, Bernd Osterloh, calling for intelligent use of resources and decision making, rather than drastic cost cutting.
Like Winterkorn, Daimler’s Dieter Zetsche is combining an industry leadership target with an acceleration of an already ambitious cost saving target. Zetsche’s goal – number one premium OEM – is to be reached alongside existing plans to save €2bn (US$2.7bn) by the end of 2014. Despite a strong Q2, Zetsche says more needs to be saved; this has come about as a result of increasing sales in the compact segment, which is made up of lower margin vehicles like the A and B-Class. Currently accounting for around 30% of the OEM’s sales, the launch of the renewed smart range is likely to take Daimler’s compact sales up to 40%.
OEM cost savings may be implemented at OEM level, but one of the first points of impact is at supplier level. We’ve already seen signs of renewed supply base consolidation, and more supplier M&A is widely anticipated
All OEMs have defined leadership targets; and all OEMs want to cut costs. PSA’s Carlos Tavares quickly launched ‘Back in the Race’, a range of measures that included cost savings; easy to do when you’re the new sheriff in town. That two major German-headquartered global OEMs – and two well-established sheriffs – have openly discussed the need to accelerate cost cutting measures will see the issue accelerate to the top of the agenda across the industry.
OEM cost savings may be implemented at OEM level, but one of the first points of impact is at supplier level. We’ve already seen signs of renewed supply base consolidation, and more supplier M&A is widely anticipated. Add up the cost to suppliers of the VW and Daimler savings alone, and it’s clear that the supply base needs to do something to defend its interests.
Martin Kahl is Editor, Automotive World.
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