The secrets of Volkswagen’s success

What lies behind Volkswagen‘s recent rise in profit and profitability? Simply put, it’s selling more cars than ever before: a record 7.2 million unit sales in 2010 and heading for over eight million this year. But of course there is more to it than that. If volume alone were sufficient, General Motors would have avoided …

What lies behind Volkswagen‘s recent rise in profit and profitability? Simply put, it’s selling more cars than ever before: a record 7.2 million unit sales in 2010 and heading for over eight million this year.

But of course there is more to it than that. If volume alone were sufficient, General Motors would have avoided Chapter 11, and Toyota would not have earned less than Honda for the past three years.

Four key elements underpin Volkswagen’s performance, the first of which, after many years of trying, is its growing success in extracting scale economies from its extensive brand portfolio. The efficiency benefits of higher production volumes are being combined with cost reductions as VW increases component commonality through the application of what it terms “modular toolkits”.

Four key elements underpin Volkswagen’s performance, the first of which, after many years of trying, is its growing success in extracting scale economies from its extensive brand portfolio.

Secondly, there’s the growth of Audi, which now stands full comparison with BMW and Mercedes-Benz as a major player in the world’s premium sector. Audi is the dominant division in VW, having for many years made the biggest contribution to Group profit. In the first nine months of 2011, its operating profit of €3.96bn was 74% higher than a year earlier, and its margin of 12.2% was 3.5pts ahead of the already respectable year-ago figure of 8.7%.

Success in China is the third key factor. The rapid increase in Chinese demand is a rising tide that has lifted most boats in recent years, but VW has derived particular benefit through its strong presence in both the mass market and the premium sector, where Audi is the best-selling brand. In 2010, the Group’s sales of 1.9 million units in China represented 26.7% of its worldwide sales and this rose to 27.4% in the first nine months of 2011. Note that VW’s two Chinese joint ventures, Shanghai-Volkswagen Automotive and FAW-Volkswagen Automotive, are not consolidated subsidiaries but VW reports their vehicle sales in its consolidated totals.

Finally, there’s the acquisition of Scania. This writer views VW’s diversification into the truck sector as a mistake. It doesn’t bring any particular competence that will enhance Scania’s performance or value. (Ditto for MAN, in which VW’s stake recently exceeded 50%). However, in simple profit terms, including Scania in VW’s scope of consolidation has undoubtedly boosted margins. Over the first nine months of 2011, the Group’s 7.7% operating margin would have been about 0.5pts lower in the absence of Scania.

There is still room for improvement in key areas, the most notable of which is the still relatively weak profitability of the core VW passenger car division. Although it achieved a much-improved margin of 4.6% in the first nine months of 2011, this is still short of VW’s own target of 5%, and was achieved in favourable conditions with strong demand in domestic and overseas markets.

There is still room for improvement in key areas, the most notable of which is the still relatively weak profitability of the core VW passenger car division.

SEAT also continues to drag down VW’s performance. While the current downturn in Spain explains SEAT’s losses in 2011, the division also lost money during the boom times, reporting operating losses in five of the past six years.

Finally, VW could do more with its finance business. Although profitable, the division earned less in 2010 than, for example, BMW’s or Toyota’s finance divisions. For these and several other OEMs, a sizeable finance operation provides a stable earnings stream which helps to offset the inevitable cyclical downturns in the core vehicle manufacturing business.

The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.

A former OEM financial analyst, Jonathan Storey now works in the consultancy sector providing research, analysis and forecasting services for vehicle manufacturers, suppliers and regulatory authorities. He is the author of AutomotiveWorld.com‘s reports: “The World’s Car Manufacturers – a financial and operating review” and “The World’s Truck Manufacturers – a financial and operating review“. He is also co-author of “Electric Vehicles – prospects for battery, fuel cell and hybrid powered vehicles”.

The AutomotiveWorld.com Expert Opinion column is open to automotive industry decision makers and influencers. If you would like to contribute an Expert Opinion piece, please contact editorial@automotiveworld.com

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