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Automotive Industry

Running Near The Front

Automotive Industries, April, 2000 by Dale Jewett

Ferdinand Piech keeps blitzing ahead, despite bumps in South America and Europe.

VOLKSWAGEN OVERALL GRADE B

In many ways, Volkswagen Group spent 1999 right where Chairman Ferdinand Piech likes it -- in the fast lane.

In the United States, VW and Audi sales grew nearly 43 percent in 1999 from the year earlier, as buyers lined up for the New Beetle and Golf. Audi continued its resurgence with the A6 sedan and the addition of the TT Coupe to its lineup.

Yet outside the States, some new challenges cropped up. Europeans aren't as enamored with the New Beetle, being turned off by its high price. VW retrenched by malting plans to produce a lower-cost model.

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While sales across Europe boomed, the home market was a bit more conservative. Germans held back, concerned by fuel prices. In addition, reform of Germany's tax policies took a 389 million Deutschmark bite, knocking profits down to 1.65 billion DM. Nonetheless, it was the second-best bottom line in VW history.

But VW reaffirmed its standing as an engineering company by introducing the Lupo, the first car on sale to need just three liters of fuel to travel 100 kilometers, roughly equivalent to 80 mpg.

Overall, VW continues the growth started when Piech became chairman in 1993. For this year, VW earns a B for its performance.

Quality: VW actually takes a step backward in this category. Its score of 195 problems per 100 four points is worse than last year's score, and below the industry average of 167 problems per 100 on the Power IQS2 survey. "It's the little things, like squeaks and rattles," says Providata's Scott Upham. "Their German heritage carries them along." We give a grade of B-.

Profit Per Unit: This year's score of 1,071 Deutschmarks was a 19 percent decline from last year. The cause: a 21.5 percent decline in pre-tax auto operating profit, which VW says was caused by investments in new products, as well as losses in the South American market. The steep drop merits a C grade.

Market Share: Undoubtedly, the New Beetle continues to be the driving force for VW in the U.S., although the arrival of the new generation Golf/Jetta offered an attractive alternative to buyers unwilling for wait for a New Beetle. Passat is a smash hit. And despite the slowdown in Germany, sales in Western Europe rose 7.9 percent, as new products rolled out of the Skoda and SEAT brands. We give VW an A- for its U.S. share, and a solid A for growing its global share.

Return on Sales: We calculate VW's return on sales for this year's report card at 3.4 percent, a significant drop from last year's 4.7 percent and nowhere near Piech's goal of 6.5 percent. South America cost the automaker 710 million DM, much of it due to costs related to ramping up an assembly plant in Curitiba. Then there was the tax hit in Germany. But such a decline warrants a grade of C.

Productivity: There was a slight decline here to 15.9 vehicles per employee. Production rose 0.6 percent, to 4.85 million units, but the headcount rose nearly three percent, to 305,000 employees. That output is low when stacked against the world's other top automakers. The decline means VW gets a B-.

Management: Discussion of VW's management pretty much starts and ends with Piech, who describes his style as a "democratic dictatorship."

Pitch's strong personality, notes Ron Harbour of Harbour and Assoc., "can be a good thing and a bad thing. In VW's case, he has shown great leadership, but that causes a lot of turnover."

In an atmosphere of merger mania, Piech has been trying to be a player. He offered to buy all of Volvo, before Ford Motor Co. swooped in to buy the car trait. He tried to work his way into BMW AG by offering to share the Golf platform for a new Rover, in exchange for a stake in the company, but was rebuffed. When Volvo's bid to buy truckmaker Scania was shot down by the European Commission, Piech moved in and made the deal.

But is he being wise? Piech wants to boost the VW brand so that it competes with Mercedes-Benz, but that strategy treads on Audi. In Europe, the SEAT and Skoda brands have done well with cars off the new Golf platform -- indeed, so well that they are stealing Golf sales. We give VW a B-.

Engineering: No one has been more aggressive about winnowing down the number of platforms than VW. Unlike General Motors, VW has done a great job of making sure platform siblings look nothing alike -- the New Beetle, Golf and Audi TT, for example.

"They're focusing on fit and finish, and the richness of materials" notes Harbour. "That's where they're winning customers."

With the Lupo, VW was the first to have a 3-liter car on the road in Europe. It will follow that with the Audi A2, a tech-laden 3-liter car that makes extensive use of aluminum. We give VW a B+.

Design: Definitely an advantage for VW these days. "Look at the C-pillar on the Golf -- what an excellent stroke," notes Providata's Upham. "That's why other keep stealing their talent."

The grade remains an A.

Manufacturing: The new plant in Curitiba is serving as a laboratory for VW to develop a new level of modular assembly techniques. Elsewhere, VW's manufacturing expertise is growing, notes Harbour. "When you look at the body, the dimensional accuracy at VW is equal to that of Toyota or Honda," he says. Yet VW continues to grapple with its quality, as the scores show, particularly when launching a new model. The grade this year remains a C+.

Automotive Industry

Running Near The Front

Automotive Industries, April, 2000 by Dale Jewett

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