Perennial loss-making Spanish subsidiary Seat is dragging Volkswagen down and it would make sense to close it down and use its factories for other profitable group brands, an auto industry expert has said.
“Seat is the undisputed black sheep in the VW family,” Ferdinand Dudenhoeffer, director of the Centre for Automotive Research at the University of Duisburg-Essen, told Reuters. “It would be economically more sensible to close it down and use its facilities for other group brands.”
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“Skoda covers the same (compact to midsize) segments and is a thoroughly reliable mass market brand. Why bother keeping Seat?” asked Dudenhoeffer, a former Peugeot official.
But, despite Seat and Europe’s deepening debt crisis, VW has continued to report higher profits and record deliveries while adding production capacity in expanding Chinese and Russian markets, Reuters noted.
Seat losses have totalled about EUR1bn euros (US$1.24bn) since 2008 and it has made a profit in only one of the last 10 years, a dismal performance that, the news agency noted, VW nonetheless seems committed to fix despite the suggestions it should close the Spanish unit.
Battered by the slump in economically troubled Spain, where car registrations have been in uninterrupted decline for more than two years, Seat is the only brand among VW’s five main car nameplates to be stuck in the red, VW’s quarterly results published on 26 July showed.
Though Seat posted a first half 2012 16% year on year increase in unit sales to 218,000 vehicles worldwide, despite a further decline in Spain (“which continues to deteriorate,” the automaker noted), sales in Germany and the UK were up and the brand’s operating loss narrowed by EUR6m to EUR42m.
Reuters said VW, which bought Seat in 1986 to increase its exposure to the then fast-growing Spanish market, had been trying for years to overcome losses caused by underutilised capacity at Seat’s main factory in Martorell which can make 500,000 vehicles a year. Output at the plant near Barcelona had slumped by almost a third to 345,000 cars in 2010 from 2000.
Two years ago, VW carried out a wave of cost cuts in management and manufacturing and moved production of Audi’s new Q3 compact SUV to Martorell from June 2011 to boost utilisation. The plant has a target to build 100,000 Q3s a year and also assembles four Seat model lines.
VW’s problems with Seat began in the early 1990s when a global recession wiped out the brand’s car sales, shattering ambitious targets after the German parent had spent heavily on the new Martorell factory and development of new models such as the Ibiza compact and the Toledo sedan, Reuters noted.
“We had only three options: Wipe out the Seat brand, shut half its facilities or halve the workforce,” former VW chief Ferdinand Piech wrote in his memoirs, Auto.Biographie, published in 2002.
The automaker decided against closing the brand and slashed Seat’s labour force by a third to about 15,000 by the end of 1994. The division now employs about 14,000.
About two decades later, there are still no signs that VW’s patience with Seat is exhausted, though the German company has said profits should return next year.
The loss-making brand is pushing its broadest model rollout to date, including the revamped Ibiza subcompact, which accounts for about 55% of brand sales, and the redesigned Leon compact, to be unveiled at the Paris car show in September.
“The new Leon plays a decisive role in Seat’s growth strategy,” Manfred Kantner, head of the brand’s German operations, told Reuters.
He said the car would be based on VW’s new cost-saving architecture [which made its debut last year, underpinning the VW Up city car and its Seat and Skoda variants] which allows for greater use of standardised components in small and midsize vehicles across the VW brand, Audi, Skoda and Seat.
Reuters noted that, unlike General Motors, which keeps its ailing European unit Opel largely from penetrating lucrative overseas markets, VW wants Seat to become less reliant on crisis-ridden Spain and instead seize potential in China and Russia, both of which it entered this year.
There are plans eventually to build Seat at VW-owned joint venture factories in China.
Seat plans to open 15 showrooms in major Chinese cities including Chengdu, Nanjing and Shenzen by the end of the year, exploiting growing demand from young buyers for sporty compacts. The average Seat buyer is 34 years old, giving the brand the youngest customer profile in the VW family, Reuters said.
“VW is reinforcing its commitment to Seat by tying them firmly into their modular production system and by throwing them the overseas lifeline,” Albrecht Denninghoff, a Frankfurt-based analyst at Silvia Quandt Research, told the news agency.
“There’s definitely an element at VW of never say die,” he said, adding that fixing Spain’s biggest carmaker is part of VW’s agenda to overtake Toyota as the world’s top carmaker by 2018.
Opening up Seat to non-European markets may be the best way to boost volumes, Reuters said. Global deliveries of Seat models may surge 75.1% to 506,331 vehicles by 2018, outpacing increases of 32.4% at Ford and 27.7% at Opel, according to IHS Automotive.
“We mustn’t think that we’ve made the grade or that VW is now rich and invincible,” VW personnel chief Horst Neumann has said. “Instead, we need a clear look at strengths and risks. Then, we’re able to fix the weak spots.”
