Ray Hutton was at the annual Volkswagen media and investor conference in Berlin earlier this month. Attendees heard much on the subject of how the mighty VW Group marches onwards and upwards towards its 2018 target to be global number one. But who will be in charge by then?
The atmosphere was almost smug. The line-up of smartly be-suited executives sitting up on the podium projected confidence and pride of achievement. A few years ago, this Volkswagen Group business conference for media and investors was all about hopes and ambitions. Now there is a sense of the job nearly done. Last year, the Group’s vehicle sales exceeded 10 million – one of its targets for 2018, achieved four years early. It also posted record sales revenue of EUR202.5bn and an operating profit of EUR12.7bn.
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Chief executive Martin Winterkorn set the tone: “We ensured that 2014 was another successful year. Since 2007 we have written an impressive, sustained success story. The Volkswagen Group signifies real value and reliability in a world full of uncertainties.”
Winterkorn, the engineer who rules Volkswagen with a steely will and an obsessive attention to detail, was the architect of Strategy 2018, designed to propel the Volkswagen Group to number one in the world. It has not escaped notice that he will be 70 years old in 2018, when all his goals are expected to be achieved, and there is already intense speculation about who might take his place.
At the Berlin conference, Winterkorn brushed aside questions about his retirement (he has a contract until the end of 2016) but did welcome two new and younger board members and spoke enthusiastically about another to join in the summer.
Already in place are Andreas Renschler, 56, the ex-Daimler executive who has been put in charge of Volkswagen Commercial Vehicles and the alliance between Scania and MAN, and Matthias Müller, 61, the chief executive of Porsche which is now fully integrated with the Volkswagen Group. As the boss of one the group’s three most profitable brands, Müller sits alongside Rupert Stadler, 51, the chairman of Audi, and, from 1 July will be joined by Herbert Diess, the BMW R&D chief who defected to Volkswagen and will take over Winterkorn’s responsibilities as chairman of the Volkswagen Passenger Cars brand.
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By GlobalDataWinterkorn’s successor, who will be appointed by the supervisory board (chaired by the formidable 77-years-old Ferdinand Piëch), is likely to be one of this quartet. He will inherit an operation that has been streamlined as never before. Whilst Volkswagen’s eight car brands have their own research and development capabilities, each is allocated specific projects and areas of expertise for application throughout the group.
In Piëch’s time as chief executive, the brands were encouraged to compete but now all major product and engineering programmes are funneled through the board of management’s technical committee, headed by Ulrich Hackenberg, Winterkorn’s trusted steward, and, with a few exceptions, are based on one of three modular ‘toolkits’: MQB (transverse engine) devised by the Volkswagen brand; MLB (longitudinal engine) from Audi; and MSB (Modular Standard Platform – actually, sports and luxury) being developed at Porsche.
MQB is really the heart of Volkswagen. Last year, this flexible manufacturing system using a set number of standardised components – from parts of the floorpan to door hinges, switches and air conditioners – underpinned 2.7 million cars from VW, Audi, Skoda and Seat, built in 18 plants. By 2018 it should account for 7 million from 29 plants. The rationalisation that MQB brings is key factor in the new efficiency drive that aims to reduce VW costs by EUR5bn; it expects a saving of more than EUR1bn this year.
Cleverly, the Volkswagen Group has been future-proofed by ensuring that every currently conceivable powertrain – petrol, diesel, CNG, hybrid, electric, hydrogen fuel cell – can be accommodated within the MQB envelope. MLB and MSB will be similarly versatile; plans even include a pure electric battery-powered Porsche.
All these alternatives make for a large and complex range but there are also signs that Volkswagen wants to dial back on model proliferation. In his Berlin conference speech, Winterkorn said: “We are discontinuing models that no longer match demand and our return expectations. For example, the compact two-door (more commonly known as three-door hatchback) market is shrinking and so we propose to offer only a four-door (five-door) VW Polo in the future. Also, we will only offer equipment variants which are taken up by at least 5 per cent of customers.”‘ He went on to say that the savings to be achieved from this are “significant: triple-digit millions”.
Expenditure is rising in other areas, particularly e-mobility and digitisation. A programme called Future Tracks is intended to see Volkswagen evolve from an automaker to a global mobility provider, embracing everything from automated vehicles to IT services using ‘big data’ for traffic control. It aims to offer all of its new vehicles with internet access by 2020.
“At 11.5 billion euros, we expended more in research and development than any other company in the world in 2014,” said Winterkorn. “Over the next five years we will invest more than 85 billion euros in plants, products and technologies. On top of this our joint ventures in China will invest 22 billion euros.”
Reviewing Volkswagen’s global activities, Winterkorn accepted that it has more to do in America (where its market share has declined after the fillip given by the US-made Passat) and said that of the BRICS markets, “only China is left standing”.
Volkswagen was a pioneer in China before the market took off and has been the leader there ever since. In the past few months it has extended its agreement with the First Auto Works (FAW) for another 25 years and although market growth has slowed, still expects China to account for 5 million Volkswagen Group cars a year by 2019.
Because its operations in China are joint ventures (with FAW and SAIC), their results are accounted by the equity method and are not included in sales revenue and operating profit of the Group and the individual brands.
There is nothing secret about this but the numbers have tended to be disregarded outside the company. So, this year, Winterkorn spelt them out, explaining that, in 2014, its share of the operating profits in China was EUR5.2bn (up 20 per cent), making a theoretical total profit for the group of 18 billion Euros. “When you take this into account, the profit margin of the Volkswagen brand (which accounts for 2.7 million of the 3.7 million cars it built and sold in China) is markedly higher than reported (2.5 billion euros).’
China remains a vital part of the Volkswagen Group’s success going forward. Despite uncertainties about the economies and market conditions in several other parts of the world, the group expects to increase overall revenue this year by about 4 per cent with a return on sales of between 5.5 and 6.5 per cent – slightly lower than the 2014 result (its 2018 target is 8 per cent).
Winterkorn said that these forecasts were “deliberately cautious, as we always have a good grip on reality”. He also warned that, “today’s success is no guarantee of tomorrow’s success.” But then he sat back, smiled, and that bold confidence returned: “2015 will see our next step towards the top. We are now preparing to overtake.”
