MARKETING FOCUS: VW takes on the world - Volkswagen is pursuing a highly ambitious expansion plan which it hopes will win it leadership of the world motor industry. David Sumner Smith examines its strategy and predicts deals on the road ahead

Volkswagen started life as a Nazi dream to provide the German masses with affordable personal transportation. Nowadays, VW is driven by a different ambition: to dominate the world motor industry.

Volkswagen started life as a Nazi dream to provide the German

masses with affordable personal transportation. Nowadays, VW is driven

by a different ambition: to dominate the world motor industry.

Not content with dominating Europe - with sales 48% greater than its

closest rival - VW clearly intends to join the likes of General Motors

and Ford on the international stage, perhaps even challenging for

outright dominance. Following the corporate merger strategy gaining pace

within the auto industry, VW is striking deals at a heady pace - most

recently the much-discussed battle for Rolls-Royce against BMW. This

year it has also added Lamborghini to the stable and has been linked

with Volvo. But the biggest alliance of all could be just around the

corner, with strong evidence to suggest a deal with Japanese auto giant


VW’s ambitions are not limited to vehicles. It is planning to expand

into financial services and will open a theme park in May 2000 (see page


The first signs of VW’s expansionist ambitions came in 1966, when VW

purchased Auto Union (later rebranded Audi) from DaimlerBenz. Twenty

years later it purchased a majority share in the Spanish manufacturer


But it was not until 1990 that VW’s growth plan became aggressive.

Having bought the remaining 25% of Seat, it then committed more than

dollars 6bn (pounds 3.78bn) to purchase and modernise Czech car producer


Expansionist tendency

Ferdinand Piech, grandson of Ferdinand Porsche and son of VW’s wartime

factory manager, became ceo of the group in 1993. At the time the

company paid little attention to production costs. Provided profits were

sufficient to pay a small dividend, market share was top priority. But

that year European car demand fell by 17% and VW Group made a net loss

of DM1.94bn (pounds 687m). Piech formulated a plan to cut costs by

moving from 16 to four ’platforms’ by the end of the decade.

A platform includes the car’s engine, gearbox, axles, drivetrain,

steering, foot controls and brakes. It can also include the fuel tank,

seating, exhaust, electrical and heating components. Variations are

possible in terms of size, but a platform’s fundamentals remain

constant, thereby reducing product development costs and permitting

economies of scale.

In the case of the A-platform used for the VW Golf, Audi A3, Seat

Toledo, Skoda Octavia and new-generation Beetle, the number of identical

parts to be produced or purchased is increased from 320,000 to two


The platform strategy does not reduce the range of models produced. On

the contrary, it makes lower production volumes viable for niche


The total number of models will exceed 50 by next year, compared with 38

in 1996.

VW already led the industry in the geographical spread of its


Western Europe still accounts for the biggest share, with Germany alone

being the source of 38% of global production. But other countries

manufacturing VW group products include the Czech Republic, Hungary,

Spain and Belgium.

Further expansion is under way in Slovakia, Serbia, Bosnia, Poland and


More unusual is the group’s long-standing presence in emerging


The company founded a subsidiary in Brazil as long ago as 1953, followed

by South Africa (1956), Mexico (1964), and a joint venture in China back

in 1982. Global long-term thinking has paid dividends. As markets have

expanded, VW’s local dominance has proved valuable. In China, for

example, it accounts for more than 50% of car sales.

Global strategy

The network is expanding further still. While the crippling of the Asian

tiger economies has scared off weaker souls, VW is continuing with plans

for factories in nations such as Thailand and India. Audi chairman

Franz-Joseph Paefgen confirmed: ’The potential is there in ten to 15

years and we have to stay with the programme.’

In the meantime, production in Brazil, Argentina and Mexico is being

stepped up as model lines are incorporated within the global platform

strategy, allowing more output to be sent for export. Mexico is the

source of the new Beetle, for example, and VW South Africa has doubled

production and will supply the new Golf to the UK.

Piech’s restructuring of the production network has brought operational

improvements, with share prices rising as the company achieved improved

profitability. Financial markets were startled when VW announced a

rights issue in September 1997 to raise DM7bn (pounds 2.48bn) of extra

funds. Its explanation that it was needed to fund expansion didn’t wash,

since it was already sitting on enough resources to expand production by

25%. Initially, the rights issue was a flop, with VW’s share price

falling from DM1500 (pounds 531) to DM900 (pounds 319).

The real motives have become apparent since. VW has joined other majors

on a buying spree, with purchases ranging from small specialist

producers like racing car engineers Cosworth to car companies such as


Contrary to previous statements that VW prefers to build businesses

itself, rather than risk culture clashes resulting from mergers and

acquisition, it recently outbid BMW for Rolls-Royce Motors and purchased

Cosworth for pounds 117m to provide engines in place of the BMW units

for which the new Rolls-Royce and Bentley models had been


Brand name blunder

It was at this point that one of the potential weaknesses in VW’s

masterplan became apparent. For despite paying pounds 479m for

Rolls-Royce Motors, it appears to have overlooked the need to buy the

Rolls-Royce brand name. This allowed Rolls-Royce plc to licence

indefinite use of the brand name to BMW for just pounds 40m.

VW salvaged an agreement to continue production of Rolls-Royce cars

until 2003, but after that it will be left with the Rolls-Royce factory

in Crewe and the much less valuable Bentley brand. Neither is worthless,

and VW has revealed plans to sell significantly higher volumes of

Bentley cars.

But analysts are agreed that VW has wasted pounds 100m-pounds 200m and

now it must find a use for Cosworth, since BMW engines will be used

after all. In negotiations with BMW’s streetwise chairman Bernd

Pischetsrieder, VW appears to have been badly caught out.

Nevertheless, other tactical acquisitions are in the pipeline to address

gaps in the model range. While VW Group already produces light

commercial vehicles and a medium-sized lorry in Brazil, it lacks any

presence in the heavy goods vehicle (HGV) sector. Piech is believed to

have held talks with Renault Industrial Vehicles, MAN, Scania and Volvo.

HGV production is critical, as it would extend VW’s reach into freight

and public transport.

The lack of any off-roader is another gap. But there are no specialist

companies appropriate for takeover, so VW is having to resort to


The link is being kept ’in the family’, however. Porsche is developing

the platform for a new premium-priced off-roader for launch in 2002 that

will be sold under both brand names.

Geographical gaps

Interesting though these moves may be, they fail to address problems at

the core of VW’s masterplan. Most important is the lack of a major

presence in either the Japanese or North American markets. Whilst VW is

keen to ’talk up’ its success in both markets compared with other

importers, the fact remains that they are dominated by companies

producing there.

Audi’s Paefgen suggests the common platform strategy could permit shared

production of Audi and VW models in the US. But sales of both brands are

small. Audi volumes are reviving, but will not pass 50,000 units until

next year, and VW’s success is restricted to the new front-wheel drive

Beetle - a fashion accessory rather than a serious contender. The VW

Group product range is better suited to the Japanese market, where it

accounts for 17.6% of all imports, but this sector remains very


If VW is really seeking to dominate the world, a merger strategy is


Recent speculation of a merger between VW and BMW has been fuelled by

Piech’s recent disclosure that the companies could consider selling a

minority share of 24.9% to each other. ’Such an interconnection would

make the companies stronger, even unbeatable,’ he said.

Important though such a link might be, it fails to address the core need

for a partner with strength in North America and Japan. Since General

Motors and Ford are direct competitors and Chrysler has already joined

with Mercedes-Benz, this leaves Japanese producers such as Toyota,

Nissan, Mazda, Honda and Mitsubishi as candidates. Most are already

’spoken for’, with links already established to Ford, General Motors and


But examine bonds being built between Lower Saxony and Japan and the

name Toyota appears repeatedly. The two companies have just agreed to a

two-year recycling project, with Toyota looking after old VWs in Japan

and the Germans looking after Toyotas in Europe. Toyota owns the Duo

sales and distribution network in Japan through which VW Group products

are sold. The two companies are also collaborating on car navigation and

telematics systems and VW has already put its badge on one Toyota

pick-up truck.

Neither company is prepared to discuss any possibility of a merger, but

Chrysler chairman Robert Eaton said in May that he knows of six big

’mergers in the making’ within the motor industry.

Their assets are certainly complementary. Toyota is not only the market

leader in Japan, with a market share of more than 39.2%, it also

produces 1.4 million cars in North America, and the Toyota Camry was the

top-selling passenger car in the US during 1997. Other than its

ownership of the premium Lexus brand, Toyota has links with no other

manufacturer, excepting a minority shareholding in Daihatsu and 50% of

Hino trucks. And with established strengths in small- and mid-level

off-roaders, commercial vehicles and Daihatsu city cars - plus a strong

presence in Asian, African and Middle Eastern markets, the ’fit’ between

the two is neat.

Distribution dilemma

The problem that would still remain for any such alliance centres,

ironically, on the brand strategy to which VW Group subscribes. While

the shared-platform concept brings great economies of scale in

production, it is recognised throughout the motor industry that the area

where costs must be shaved is that of vehicle distribution and sales.

Distribution through dealer networks is fundamentally inefficient,

resulting in internal competition and wasteful stockholding and

vehicle-handling logistics.

Motor retail groups have already sought to defend their position through

car sales facilities which bring several brands together. Multi-marque

’auto malls’ have become a common sight in the US and major dealer

groups in Europe are moving toward multi-brand sales facilities in which

administrative costs are shared. The trend will be strengthened by BMW’s

international strategy of ’group dealers’ where the Land Rover, Mini and

MG brands are sold alongside BMW cars and motorbikes.

Marked distinctions

Volkswagen, by contrast, is swimming against the tide by seeking to

build ever-increasing distinctions between its dealer outlets.

Acknowledging the substantial crossover between its product offerings,

it has sought to build distinctions by establishing separate retail

outlets for each marque. Dealers handling both VW and Audi have been

pressured to build separate showrooms, for example, and efforts are

being made to establish VW Commercial Vehicles as a fifth retail

channel. Adding Toyota, Lexus, Hino and Daihatsu to the equation would

compound the duplication of effort and further complicate the issue.

If VW is to build upon its production efficiencies, it will need to

break from its traditional mindset and adopt a bold distribution


Instead of franchising combined sales and service outlets - in which

dealers make little profit from new-car sales, it should accelerate

moves to take ownership of the new-car sales activities itself.

Franchisees should focus solely on service, repairs and used-car sales,

where brand differentiation is less of an issue.

This would not only permit tighter brand management and avoid the

wastage of the conventional car distribution methods, it would also

allow the group to move more decisively into direct sales using the

internet and other digital media.

Through alliance with Toyota and a fresh approach to vehicle

distribution, the VW Group has the capability to become part of a

world-beating partnership.

But its ambitions are not without risk. For all its caution and

methodical approach to expansion, the company can still be caught out by

fleet-footed rivals - as proved by the recent loss of the prized

Rolls-Royce brand name to BMW. It also needs to address inefficiencies,

such as its distribution and dealership strategy, or Ferdinand Piech’s

dreams of dominating the world auto market could yet turn to dust.



The Italian luxury sports-car maker was bought by VW in June for pounds


Lamborghini makes about 600 cars a year at its factory in Bologna,

having been set up in 1963 by tycoon Ferruccio Lamborghini to make farm


The Diablo costs pounds 150,000 and has a top speed of over 200mph.


The butt of endless car jokes is now a fast-growing success story. Since

its acquisition in 1986 by VW, Skoda has overtaken Fiat as central

Europe’s best-selling car. Sales in Europe to June have increased by



The old Auto Union company was bought by VW in 1966. It is the premier

brand in the VW empire and sales in Europe this year are up 7.5%.

The A6 is the latest model to launch .Last year 550,000

Audis were sold worldwide.

Cosworth Engineering

Cosworth was bought by Audi for pounds 117m in June. This, combined with

the recent acquisition of Tom’s, a racing-car body maker, takes the VW

Group into Formula 1 for the first time. VW did intend Cosworth to make

engines for Rolls-Royce and Bentley in place of BMW, but now BMW will be

used after all VW has to find alternative uses for it.


VW bought Seat, Spain’s largest car maker, in 1986 for pounds 343m. It

had its best ever year in 1997, making about 400,000 units. Sales in

Europe this year are up 20% and new, sporty models are in the


Rolls Royce

VW was out-manoeuvred by BMW in its bid to acquire Rolls-Royce. It paid

pounds 480m but lost the brand name to BMW for just pounds 40m. After

2002, VW will make only the Bentley range, which will be extended with

new models.


VW was born when automotive engineer Ferdinand Porsche secured Hitler’s

backing for a start-up business in 1938 in Wolfsburg, Lower Saxony.

Hitler was closely involved in the production of the first VW, as it was

his dream to produce a ’people’s car’, capable of cruising at high speed

on Germany’s new autobahns. One of his final journeys, through Berlin in

1945, was made in a VW Beetle saloon.

In VW’s early days the government instituted a savings plan in which

workers could save small amounts with the expectation of receiving a car

three years later. However, few ’Strength through Joy’ cars were

delivered. VW concentrated instead on the production of military

vehicles using the labour of 10,000 Russian prisoners of war and Jews

from concentration camps.

Last month VW agreed to compensate wartime slave labourers, after years

of directing claims to the German government.

British car manufacturers turned down invitations to take over VW after

the war. A senior Ford executive said its products were ’not worth a

damn’. But the post-war success of the Beetle and its bigger Microbus

sister is the stuff of legend, with the rear-engined people’s car

selling over 20 million units.

VW’s history will be displayed in a pounds 240m ’brand experience’ theme

park being built at its Wolfsburg headquarters. Opening in May 2000,

Autostadt 2000 will feature exhibits, vehicle displays and a 135-room

Ritz Carlton hotel. Multimedia displays will detail VW’s history, while

simulators illustrate modern production techniques. It will also be a

new-vehicle delivery centre with a daily capacity to process 1000 cars.

There will also be sections on its truck, commercial vehicle, luxury car

and sports car brands. Cars awaiting delivery will be on display in

glass buildings.

Sales in Europe Jan-Jun ’98


                       (thousands)      % change

Volkswagen Group              1313          +7.8

Volkswagen                     783          +2.8

Audi                           256          +7.5

Seat                           196         +19.4

Skoda                           77         +45.3

Fiat Group                     889          +2.5

Peugeot/Citroen                856         +12.5

General Motors                 840          -1.8

Ford                           812          +2.0

Renault                        774         +17.4

BMW Group                      430          +1.7

Mercedes-Benz                  304         +22.4

Source: ACEA

Production volumes 1997

Car and lorry               units (m)

General Motors/Saab/Isuzu        8.78

Ford/Jaguar/Mazda                6.94

Toyota/Hino/Daihatsu             4.84

VW/Audi/Seat/Skoda               4.26

Daimler-Chrysler                 4.20

Fiat/Alfa/Lancia/Ferrari         2.86

Nissan                           2.83

Honda                            2.32

Peugeot-Citroen                  2.11

Mitsubishi                       1.91

Source: Automotive Management

VW Group cars market share

Worldwide                       10.4%

Western Europe                  17.2

Germany                         27.5

Spain                           21.1

France                          11.3

Italy                           10.0

UK                               8.7

Mexico                          23.4

Brazil                          32.6

Argentina                       19.0

South Africa                    20.9

China                           52.8

Canada                           3.6

US (import market share)         5.2

Japan (import market share)     17.6

Source: Volkswagen AG Annual Report 1997

Regional car market shares 1997

                              Western     North     Japan

                               Europe   America   & Korea

General Motors/Saab/Isuzu        12.1%     31.7%      2.1%

Ford/Jaguar/Mazda                12.5      26.6       4.2

Toyota/Daihatsu                   3.1       8.1      30.9

VW/Audi/Seat/Skoda               17.1       1.1       0.8

Daimler-Chrysler                  4.4      16.0       0.7

Fiat/Alfa/Lancia/Ferrari         11.8       -         0.1

Nissan                            3.1       4.8      13.1

Honda                             1.6       5.5       9.8

Peugeot-Citroen                  11.2       -         0.1

Mitsubishi                        1.4       1.2       8.6

Renault                           9.8       -         -

Suzuki                            1.0       0.2       7.5

Hyundai                           1.1       0.7       6.7

BMW/Rover                         6.2       1.0       0.8

Daewoo                            0.7       -         4.9

Kia                               0.3       0.4       3.2

Volvo                             1.7       0.6       0.3

Fuji (Subaru)                     0.3       0.9       3.9

Source: Automotive News Europe


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