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Stratagem
 
VOLKSWAGEN: STRATEGY 2018
Can he upset The Japanese?
Volkswagen has Renewed the term of its CEO, and all Eyes are on The Company as it Seeks to do to Toyota what Toyota did to GM by 2018. Can Winterkorn Indeed win his Most Coveted Prize?
Issue Date - 03/02/2011
 
2010 was surely one of the most relieving years for many companies who were browbeaten by recessionary winds over the past few years; and the largest German auto major Volkswagen is no exception. In fact, the company made all sorts of noises as the calendar year touched the end. For the less informed, even after the company had sold more than seven million vehicles for the first time in its history in a calendar year, the spotlight was on the term renewal of its CEO Martin Winterkorn. The board wholeheartedly voted in favour of extending Winterkorn’s term for another five years for its own set of reasons. Needless to mention, completing the merger with sports carmaker Porsche will be the second most important agenda of his renewed term. Second, because the first one is to displace Toyota as the world’s #1 auto major by 2018 in profitability and unit sales. Notably, the CEO now has the benefit of job security through 2016 for a term that would have expired by the end of 2011. As he is the architect of Volkswagen’s so-called Strategy 2018, the board feels that it makes a lot of logical sense if he captains the ship to that harbour. But is he indeed good enough to run the course?

Before taking control of the reins at Volkswagen AG in 2007, Winterkorn was the Chairman of the Board of Management of Audi and Porsche Automobile Holding SE. The last few years have been nothing but dynamic for this German engineer. Still, even critics accept that the appointment of the new global design chief (Walter de’Silva) is one of the most important decisions he has taken so far. For the uninitiated, de’Silva had previously overseen design at Audi, where he conceptualised the current R8 sports car and A6 sedan. And considering that Toyota has been dealing with an ageing product line-up, Volkswagen’s bet on design may prove to be a gold mine in the years to come. Even the CEO of Toyota Motor Corporation, Akio Toyoda, recently admitted at the North American International Auto Show in Detroit that the company will now be looking at making its cars look better.

 
Moving towards its goal to become the world’s largest auto major, Volkswagen will be doubling its capacity in China to three million units a year with two new plants. Moreover, the company will also be opening another plant in Tennessee to increase both sales and margins in North America. Even if Volkswagen is able to overtake Toyota in unit sales, profitability still remains one of the biggest challenges. While Volkswagen has been operating with an average net profit margin of 2.42% over the past five years, against the industry average of 3.46%, Toyota, on the other hand, has a net profit margin of 3.61% that beats the industry average. “Volkswagen is now trying to reduce costs and increase profit by removing many of its premium traits and also by building a US plant. They are doing this to increase volume but it could backfire because many US buyers won’t want to buy a Volkswagen if it doesn’t feel like a more up-scale option compared to Honda or Toyota,” said Karl Brauer, senior analyst, Edmunds. He also adds that it was in fact the drop in perceived quality for the Japanese automakers that has opened up opportunities for Volkswagen. A compromise on that front would not be a very good idea.

While Toyota is running hard towards its goal to sell 7.7 million units this year, Volkswagen is pushing the accelerator towards its 10 million unit sales target by 2018. “Whether Volkswagen is able to do so (beat Toyota by 2018) or not, it will certainly centralise the efforts of Volkswagen towards ensuring high sales and profitability,” said Christoph Stürmer, research director - OEM Strategy, IHS Automotive.

With the kind of growth plans Toyota has in its mind, Volkswagen may even find it tough to overtake the Japanese giant in unit sales. Stürmer adds, “I believe Toyota will stay at the top of charts in the automobile industry after 2018 as well. But what will work for Volkswagen will be that it can from then work towards a new ‘2025’ vision; which may again be to displace Toyota.” Moreover, Toyota is dealing with more challenges. The sales back home are expected to fall by over 17% in 2011; wherein it will be able to sell 1.3 million units in Japan. Toyota will still produce close to 3.1 million units in 2011; down 5% as compared to the 3.28 million units produced in 2010. The move will expose the Japanese auto major to threatening foreign exchange risk and Toyota will try to stay afloat by cutting costs and reviewing production processes. But the price to earnings ratio of Toyota at a level of 20.15% not only beats the 11.02% figure for the sector but also the 13.21% for Volkswagen.

The global automotive industry is all set to go through a major shift wherein Asian economies like India and China will attract more attention. Anticipating the trend, both Toyota and Volkswagen have earmarked huge investments in these markets. On the one end, Volkswagen’s Chakan plant is gathering pace in the production cycle while Toyota’s unit for the Etios project is helping the company reach new skies on the volumes front. Clearly, it will be the high volumes market where we will see both players fighting it out through to the last lap. While Toyota will like to fight it on the product front as it no longer has the superior technology image (after the 2.3 million unit recalls it recently announced), Volkswagen will be pushing its products on the design front. But since these markets would play the decisive role, Toyota’s climb-down in terms of revenues and focus on volumes would play to its advantage. At least for 2018, Toyota may indeed have the last laugh. For Winterkorn, it may indeed be more prudent to focus on alleviating margin pressures and getting his strategy for India and China right. If he manages this, ‘2025’ could see Volkswagen tip the scales, even though he may have to watch that one from the sidelines.

Pawan Chabra           

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