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Automotive Industry

Volkswagen Makes Dean's List

Automotive Industries, April, 1999 by Marjorie Sorge

There's just no stopping this German juggernaut.

Volkswagen Chairman Ferdinand Piech can utter the same words as Leonardo DiCaprio, the hero of the film Titanic, "I'm king of the world." And why not? Everything seems to be going VW's way right now. The New Beetle is the darling of North America. Overall market share is up. Earnings are up. Profit per unit is up, and so is productivity. Last year, VW's net earnings soared 64.8% to $1.2 billion (DM 2.24 billion). Before taxes it was $3.5 billion (DM 6.3 billion).

Like the rest of the automakers, VW watched its Brazilian operations whither. Sales were down 23%. But record sales in Germany helped deflect that downturn.

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That may not be the case in 1999. VW says it doesn't expect a fifth consecutive year of double-digit growth, unless it can substantially expand its market share. That's questionable, given the financial unrest in Asia Eastern Europe and Brazil.

But anything can happen. For this year, VW earns an A- for its outstanding performance. By doing so it makes the Report Card Dean's List for 1999.

Quality: If VW has one Achilles' heel, it's in quality. Only DalmlerChrysler had more defects per 100 vehicles than VW last year, according to J.D. Power. But the company is also "the most improved of any automaker over the last 10 years," notes Chance Parker, Power's director of product research. As we've noted with the other companies, this year's Quality results cannot be directly compared with last year, because J.D. Power changed its methodology.

VW gets a B grade for continual improvement.

Profit Per Unit: Life is good here. VW made $735 per vehicle last year. (We used the German mark in the chart to insure accurate comparisons.)

The Audi A3 and A4 sold very well in 1998, as did VW's Seat and Skoda brands. That's particularly impressive, since almost half of the 4.8 million vehicles VW built last year were on new platforms. In 1997, it was only 25%. That's A work for sure.

Market Share: VW's strong performance continued into market share. Sales in the U.S. rose 56%. While Passat and Jetta sales dipped a bit in anticipation of the new '99 models, sales of the popular New Beetle more than made up for the slip. It also didn't hurt to sell more Audi A4s, A6s and A8s than in 1997.

Sales in Western Europe were up 13.7%.

Market share is a good indicator of a company's performance and VW has gained share in each of the last five years. It earns an A.

Return On Sales: Piech has stated he wants a 6.5% return on sales in the not-too-distant future. He got closer last year with 47%, thanks to continued cost cutting. The rate would have been one point higher, but VW wrote-off $666 million (DM 1.2 billion) incurred when it bought Rolls-Royce and Bentley last year.

VW's ROS has also benefited from cost cutting at the supplier level.

It's an A+ performance.

Productivity: The wave continues. Workers built slightly more Volkswagens per person in 1998 than they did in 1997, as VW continued to streamline manufacturing. While that's good progress for VW, it is still well behind the rest of the Big Five automakers. It sold about 500,000 more vehicles in 1998, but added 18,000 people.

There's a lot of room to enhance productivity, but we grade on improvement. And VW warrants an A grade for that

Management: "It all rests on five letters--P-I-E-C-H," says Chris Benko, managing director of Autofacts Group, a division of PricewaterhouseCoopers. "If I were an investor, I'd be real happy with where it's been, but I'd be worried about where it's going." That's because Piech won't share his succession plato If you ask him, he'll smile and point to his temple. "It's up here," he says. But those who want to know who'll succeed the chairman will have to wait. He reaches 65 in a little over three years.

Piech's been a powerhouse. "He doesn't hesitate to pull the trigger," says Ron Harbour, president of manufacturing consultants Harbour and Assoc.

But management made one huge mistake last year. It outbid BMW for Rolls-Royce, but what it really got was a plant and the right to use the Rolls name only through 2002.

If it wouldn't have been for that mistake VW would have rated a solid A in Management. That blunder drops the grade to an A-.

Engineering: VW perhaps the world leader in platform-based automaking, and continues to make progress in this area. Its aim is to build 50 vehicles off of only four platforms. The company has a good track record in this area -- it already builds 14 models off the A4/A5 (Golf/Jetta) platform.

Add to that deep expertise in aluminum body construction, all-wheel drive and use of modules, and that earns high marks from industry experts. "I'd give Audi an `A+' and VW a `B+' (in engineering),'" says auto analyst Maryann Keller, managing partner at ING Baring Furman-Selz, a New York-based brokerage.

Still, a spate of quality problems during last year's New Beetle launch at the Puebla, Mexico, plant reflect poorly on the vehicles' base engineering, says Sandy Munro, president of Munro & Assoc., manufacturing consultants in Troy, Mich.

Automotive Industry

Volkswagen Makes Dean's List

Automotive Industries, April, 1999 by Marjorie Sorge

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