VW up! assembly line at Taubate, Brazil. Will there be another up! in 2019 and, if so, will Europe get it?

VW up! assembly line at Taubate, Brazil. Will there be another up! in 2019 and, if so, will Europe get it?

Small cars can be a headache for vehicle manufacturers. The problem is that model offerings have proliferated at the low-margin small car end of volume carmaker portfolios and it's something that appears to be exercising managers at Volkswagen Group right now.

Back in the day, European product line-ups had a hatchback supermini (B-Segment VW Polo/Ford Fiesta etc) as their entry-level offering. They were simpler times; the basic small hatchback sat in a part of the market that met many needs and was very distinct from the next size up (C-Segment or 'lower medium' Ford Escort/VW Golf). In the second half of the 1990s advances in manufacturing technologies - principally the arrival of consolidated platforms and component set modules for scale economies - meant that manufacturers could start to spin-off more models and hit new market niches.

At the small car end of the market, an opportunity was seen to make a cheaper-than-supermini car to meet emerging 'city car' and low-cost market demand - A-Segment, sometimes known as 'Sub-B'). Ford came up with the Ka (eventually made in partnership with a Fiat model in Italy, which hinted at how tight margins on such vehicles are) and VW came up with the Lupo.

Fast forward to today and VW has the up! (with sister models Skoda Citigo and SEAT Mii) which appears to sell well in Europe and in some markets around the world. VW Group has considerable industrial might and is able to exploit scale economies across its ranges wherever possible, but margins are always going to be tight on small cars. In the auto industry, it's a fundamental law - akin to gravity - because the major 'fixed' cost elements in any car will be proportionately higher in a small car than in a large one. Think of the plant overheads, the design elements, or the simple fact that every car has an engine, four wheels, a drivetrain etc, whatever its size and retail price. It's the underlying reason that premium badges are generally a licence to print money and explains why Porsche traditionally enjoys the biggest profit margins in the business.

Margins at the small car end of the business are razor thin. This creates a vulnerability in business viability that is especially evident when looking at the Sub-B cars. That will be less of an issue if they can be made cheaply - in emerging markets, where they may also meet burgeoning new demand as the local population's per capita income levels rise along with four-wheel motorisation. The VW up! is made in Brazil (Taubate) and at Bratislava in Slovakia. It certainly helps that it's not made in higher cost Germany. The Brazilian plant also makes the Gol (Portuguese for goal) and is highly geared to meeting local market needs - itself a problematic area as Brazil experienced recession in recent years.  

The issue for the up! is profitability in Europe - where most of its sales are - and how to fit the car into the overall strategy for flexible "modular component system" architectures within VW Group. The MQB (AO) architecture has been set-up as VW's next generation small car architecture - new Polo is on it as is SEAT's latest Ibiza. It has been conceived primarily to meet the needs of group cars in that slightly larger B-Segment. The current up! is on a smaller platform - PQ12 or VAG MHB (sometimes also known as 'New Small Family').

The dilemma for VW is how to replace the up! (new model provisionally expected in Q1 2019). Manufacturing economics points to using the MQB (AO) architecture as a basis in order to exploit standardised VW Group components and design engineering efficiencies. However, that architecture comes with larger dimensions that could be problematic for the up!, which needs to be clearly differentiated on price - and customer perceptions - from the supermini class Polo. It may be possible to do that and go to MQB (AO), but there is nevertheless, a potential issue if next up! becomes a bit larger. And to be blunt, why would VW want to sell a cheaper than Polo similarly sized up! in the European market? It might reasonably prefer to simplify things and just offer the Polo.

Can next up! volumes be justified on a global basis and with a continuation - in some form - of the current platform?

Such a strategy would create a new problem though: a big hole in volumes from the loss of European sales. Can next up! volumes be justified on a global basis and with a continuation - in some form - of the current platform? Can Skoda come to the rescue? Probably not, at least looking at current numbers. The Volkswagen Group sold some 170,000 units of the up! in CY2016, plus 41,250 Skoda Citigos and 18,700 units of the SEAT Mii, so all in all, close to 230,000 cars. But the up! is by far the most significant seller and Europe is the lion's share of that.

One opportunity may lay in the strategy for India, a success story for the Skoda brand that may support a low-cost city car model being manufactured locally. Perhaps the answer for next up!/Citigo/Mii lies in much higher volume for emerging markets and making it as low-cost as possible. That's one way to go and might justify MQB (AO), but with the car not sold in Europe. There is talk of an adapted - and lower cost - MQB platform for India, allied to a big export role for an Indian plant geared up to source emerging markets globally. It would undoubtedly be a stretch to grow the numbers that much outside of Europe though, at least in the medium-term. Much would hinge on assessments of the Indian market's prospects to 2025.

VW has just announced a boost to its electrification strategy, so thinking about that and an electrified up! for Europe may also inform the strategy for the next up!. It does look, however, like something of a dilemma for VW. Does it somehow fudge the numbers and keep it on using an update of the current platform (costly) or somehow put it on MQB (risking cannibalisation of Polo if it is sold in Europe). The up! is applauded by many (including me) as a triumph for design, packaging and refreshing minimalism. It's a fun car to drive. It could well be that the numbers don't quite add up though.

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