Thursday, July 5, 2012

VW Conquers the world

Germany’s biggest carmaker is leaving rivals in the dust

WHEN Ferdinand Piëch arrived as Volkswagen’s chief executive in 1993, things looked dire. The carmaker was overspending, overmanned and inefficient, and had lost its reputation for quality. How things have changed: last year the VW group’s profits more than doubled, to a record €18.9 billion ($23.8 billion). As other European volume carmakers seek to close factories and cut jobs, VW is seizing market share in Europe, booming in China and staging a comeback in America. It plans to spend €76 billion on new models and new factories by 2016. Its global workforce is more than half a million, and growing.
It took years for Mr Piëch—now chairman, but still with his hands firmly on the wheel—to tame VW’s menagerie of semi-independent brands and get to grips with its global empire of factories. He has been a ruthless hirer and firer of executives: only last month Karl-Thomas Neumann was removed as head of VW’s Chinese operations, supposedly for his disappointing performance, despite the juicy profits VW is making in China. Mr Neumann had been talked of as a possible successor to the chief executive, Martin Winterkorn.
Mr Piëch is a grandson of Ferdinand Porsche, who founded VW after Hitler called in 1934 for the creation of a cheap “people’s car”, a Volkswagen. The Piëch-Porsche clan controls both VW and Porsche, a sports-car maker that is now being folded into VW after the failure of an overambitious and highly leveraged reverse takeover. On July 4th VW agreed to buy the 50.1% of Porsche it does not yet own for €4.46 billion.
Mr Piëch’s plan was for VW to become the world’s biggest carmaker by volume by 2018. Last year, however, as Toyota struggled with the aftermath of Japan’s tsunami and GM floundered in Europe, VW reached its goal seven years early (see chart), if you do not count Subaru, Toyota’s distant affiliate, or GM’s Wuling joint venture in China, which mainly makes Chinese-branded cars.
The 8.5m vehicles VW made last year cover all corners: Volkswagen, Skoda and SEAT in the mass market; Audi in premium cars; Porsche, Bugatti and Lamborghini in sports cars; Bentley at the luxury end; plus various commercial-vehicle brands. Most (SEAT excepted) are firing on all cylinders. IHS Automotive, a forecaster, expects VW easily to beat its target of 11m sales by 2018.

In many of the 26 countries where VW has factories, it has been around long enough to be seen as a domestic firm, so protectionists usually leave it alone. The founding family’s controlling shareholding, and a blocking stake held by the state of Lower Saxony, where VW is headquartered, allow it to resist short-term pressures to pull out of any market that turns difficult. Rivals envy the stability this brings, especially just now, says Mr Winterkorn.
VW can cope with a collapse of the European car market. Others must make deep cuts—or perhaps even, in the case of GM (which has lost $16 billion in Europe since 1999) and Ford (which gave warning on June 28th of deepening losses there), pull out of the continent altogether.
...VW bet on China nearly 30 years ago. Now it is the world’s biggest car market and VW has 18% of it, through two joint ventures. They sell 2m vehicles a year and plan to double this by 2018. A glut of cheap cars is hurting prices in China but VW’s premium models are doing well: the group’s share of its Chinese ventures’ profits rose from €1.9 billion in 2010 to €2.6 billion last year. VW has long been big in Brazil (market share: 22%), and is expanding fast in Russia (9%). 

The “Beetlemania” that VW enjoyed in America in the 1960s, when its Beetle was the pioneer of smaller, cheaper cars, faded in the 1970s. Decades of weak sales and losses ensued. VW closed its Pennsylvania factory in 1988 because the cars it made were lousy. It tried importing from Mexico but couldn’t make this pay. Now, with a big new plant in Chattanooga, Tennessee, a revamped dealer network and the successful launch of the new Jetta, a family saloon, VW is back on a roll in America. Its sales there rose by 23% last year to 444,000, and its aim of selling 1m cars by 2018 looks achievable. 

... Like BMW, another admired German carmaker, VW seems to have succeeded because it is run by petrolheads. Mr Piëch’s passion for engineering pervades the group. He is the strategist; Mr Winterkorn the get-things-done guy. Hans-Dieter Pötsch, the chief financial officer, has helped a lot by controlling costs, says Max Warburton of Sanford C. Bernstein, an investment bank.

...As VW drives relentlessly towards world domination, Bernstein’s Mr Warburton says that Mr Piëch “will go down in history as an automotive legend, in the same class as Gottlieb Daimler, Henry Ford and Kiichiro Toyoda.”

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