Volkswagen MQB could vault automaker past Toyota

A visitor walks past Volkswagen AG Passat sedans A visitor walks past Volkswagen AG Passat sedans displayed inside the Oriental Pearl Tower in the Pudong area of Shanghai. (Jan. 30, 2013) Photo Credit: Bloomberg News

advertisement | advertise on newsday

BERLIN/DETROIT - Ulrich Hackenberg isnt yet a household name but if Volkswagens $70 billion bet on his big idea pays off, he may join the likes of Henry Ford, Alfred Sloan and Taiichi Ohno in the canon of auto industry pioneers.

Since the heyday of Henry Ford and his Model T, the worldsautomakers have considered the "global car" to be their HolyGrail - the same basic design that can be built, in subtlevariations, and sold in different markets.

Take that fundamental concept, stretch it across manydifferent vehicle types, sizes and brands, then build them bythe millions, and you begin to sense the enormity ofVolkswagens rapidly evolving "mega-platform"strategy and its potential impact on competitors around theglobe.

Auto engineer Hackenberg nurtured this bright idea for threedecades, after early pitches to auto executives were largelyignored, until somebody finally bought it wholesale. The man whobit was Volkswagen Chief Executive Officer Martin Winterkorn.

Hackenbergs fundamental rethink of vehicle platforms, theindustrial Lego from which cars are designed and made, ishelping power the German company to the top of the global salescharts several years ahead of its 2018 target. It could alsomake VW one of the most profitable carmakers in the world.

The strategy is not without risk. It could, for instance,expose Volkswagen to the threat of a massive global recall if asingle part, used in millions of cars, fails.

advertisement | advertise on newsday

But rivals have taken note of the power behind its move.Volkswagens modular platforms are being benchmarked by most ofthe worlds top automakers, including Toyota Motor Corpand Ford Motor Co, according to company executives.

"Wed be crazy not to," said a senior Ford official,requesting anonymity because of the proprietary nature of thesubject.

VWs work on its largest mega-platform, known internally asMQB, began in earnest in 2007 and is being implemented over thenext four years at a cost of nearly $70 billion, estimatesMorgan Stanley. The potential payoff is compelling: Projectedannual gross savings by 2019 of $19 billion, according to thebank, with gross margins approaching 10 percent.The automaker is expected to announce a record profit for2012 of more than $30 billion later this month (Feb. 22),according to Bernstein Research, whose senior analyst, MaxWarburton, observes: "VW looks to have unstoppable momentum - inChina, the U.S., Europe and most of the rest of the world."

That momentum has been building for some time, even beforethe initial deployment last year of Hackenbergs brainchild.Industry-leading levels of commonality - the proportion ofparts that can be shared among different models - are nothingnew to VW. At a gathering in Japan five years ago, Renaultand Nissan executives lifted the hoods onseveral VW Group vehicles side by side - including models fromSkoda, Seat and Audi brands - and saw trouble.

"They had the same engines, the same clutches, the sameventilation - all identical parts," says an executive whoattended the presentation. "It was a level of commonality thatdidnt exist at Renault-Nissan."

Late in 2011, as the outlook darkened for French carmakerPSA Peugeot Citroen, its board was given a similardemonstration, and a similar shock, at the companyshigh-security research center in Velizy, southwest of Paris.Technicians took apart the front ends of two different VW carsand swapped most of their components.

"They were a little dumbstruck by the realization that therewas a whole new world out there - and their development was 10years behind," recalls one participant.

SIX-YEAR GESTATION

advertisement | advertise on newsday

After a six-year gestation, VW has just begun to implementits sophisticated and highly flexible platform with thedeceptively simple label MQB, a German acronym for "modulartransverse matrix." Virtually all of the groups small andmedium front-wheel-drive family models, including the latestgenerations of the VW Golf and Audi A3, are being designedaround MQB as their base.

The new platform features a far greater degree ofplug-and-play modularity, flexibility and parts commonality thanat Toyota, General Motors Co, Ford and other competitors.MQB "could be the single most important automotiveinitiative of the past 25 years," says Michael Robinet, managingdirector of IHS Consulting in Northville, Michigan. "It reallychanges the game."

With the new mega-platform strategy supporting its 12brands, from spartan Skoda to Audi, Porsche and Lamborghini, VWis poised to snatch the global sales crown from Toyota as earlyas next year, according to investment bank Morgan Stanley.

VW envisions enormous leverage from MQB. The plan is toboost global sales to 10 million or more, with roughly two outof every three cars - some 40-plus models totaling 6.3 millionsales a year - built on some variation of the MQB platform,according to U.S. research firm IHS Automotive.None of VWs competitors has the diversity of brands, thebreadth of technology, the sweeping geographic footprint or the
deep pockets necessary to support and take advantage of such awide-reaching initiative as MQB.

Even Toyota, the current global sales leader, is playingcatch-up with its German rival.

advertisement | advertise on newsday

"Theres no doubt we have fallen behind," says a seniorToyota executive who declined to be named because of thesensitive nature of the subject. "We have not even begun to makethe fundamental structural changes that VW has" in designing andapplying flexible vehicle platforms.

The sense from competitors and auto analysts is that VWsrollout of MQB is likely to be as influential as such earlierinnovations as Fords adaptation of standardized parts, GMs"ladder" of brands and Toyotas streamlined production system.

WATERSHED EVENT

VWs suppliers see MQB as a watershed event, a break with apast when really big vehicle platforms might have yielded ordersfor as many as 5 million or 6 million identical components overtheir typical six- to seven-year life cycle.

Now, with the implementation of MQB, "theyre being askedfor quotes on 35 million parts," says a senior European industryexecutive.

More importantly, the modularity enables VW to design,engineer and build a wide variety of vehicle size and shapes -from a subcompact Polo hatchback to a full-size, seven-passengercrossover thats due in the United States in 2015.

The flexibility of the MQB system also allows VW to createmore cars that are more tailored for specific markets at a lowercost, and it doesnt have to sell so many units to break even,according to Morgan Stanley analyst Stuart Pearson.

MQB isnt the only weapon in Hackenbergs arsenal.

Larger Audi, VW and Porsche models with longitudinal engines- mounted in a north-south configuration - will use a similarset of components dubbed MLB that already underpins a number ofAudi vehicles.

And many of the groups ultra-luxury and performance brandswill employ a third component set called MSB, designed forpremium rear- and all-wheel-drive vehicles such as the Porsche911, the Bentley Continental and the Lamborghini Gallardo.

Each of the three modular component sets will come indifferent variations that will enable enormous flexibility interms of product design, while accommodating a wide range ofpowertrain options, from gas and diesel engines to electricmotors and batteries.

"Modular platforms have grown beyond the technology (alone)to become a management tool which helps support the brandsdevelopment. The toolkits help the brands to preserve theircharacter and sharpen their individuality," said Hackenberg, nowdevelopment chief for the Volkswagen brand.

STRENGTHS AND WEAKNESSES

The modular tool kits seem like the ideal complement to VWsother strengths, not the least of which is the companys sheersize: Group revenue this year is projected by Bernstein Researchto top $275 billion.

But the huge volumes planned for the MQB derivatives alonecould also expose the group to the same sort of mass recalls ofmillions of cars experienced in recent years by Japanese rivalToyota. If a single part has a problem, and that part is in manydifferent models, a recall affects many more vehicles.

Analysts, including Morgan Stanleys Pearson andFrankfurt-based Metzler Bank analyst Juergen Pieper, alsoexpress concern about VWs growing reliance on emerging markets,notably China, for future growth.

The company was an early investor in China and the onlyEuropean automaker to form joint ventures with that countrystop two manufacturers, FAW Group and Shanghai Auto.

Now, China accounts for 30 percent of VWs global sales. TheGerman group operates 10 assembly/component factories in Chinaand plans to pump another $13 billion with its JV partners overthe next three years into plants, equipment and models.

Excess exposure to a single market such as China contradictsVWs philosophy of spreading growth evenly and potentially makesit vulnerable to negative market developments and possiblegovernment interference, says Pieper.

To hedge its potential emerging-markets exposure, VW alsohas overhauled its loss-making North American operations - anestimated $4-billion investment, according to Morgan Stanley,that could more than double U.S. sales by 2018 to 1.3 million.

Even then, it would remain a mid-level player in the U.S.market dominated by GM and Ford, which sell nearly 5 millionvehicles a year between them.

VW is supporting its recent growth spurt with additionalproduction capacity, including a new Audi assembly plant inMexico, expansion of VWs existing facility in Puebla and apotential increase at the new Chattanooga plant in Tennessee.

The latter two plants will be updated to accommodate newmodels that use the MQB platform - the latest Golf in Puebla andthe big crossover in Chattanooga, according to VW executives.

Top managers are scanning other overseas markets where thecompany lacks local production facilities, including Africa,much of Latin America and most of the ASEAN region, where VWsmodest presence is dwarfed by that of market leader Toyota.

VW is in the process of boosting global capacity, includingthe investments in China and the United States, to nearly 12million by 2015, from 8.6 million in 2010, according to MorganStanley.

CHANGING OF THE GUARD

The full rollout of MQB may not be accomplished until theend of the decade, estimates Pearson. By then, the chiefstewards of VWs corporate strategy - CEO Winterkorn andChairman Ferdinand Piech - may be retired and the nextgeneration of management moved into the top slots.

The Austrian-born Piech, 75, is a third-generation autoexecutive. A mechanical engineer by training, he is the grandsonof Ferdinand Porsche, the legendary Austrian designer of theoriginal VW Beetle.

VWs supervisory board has yet to clearly anoint potentialheirs to Piech and Winterkorn, 65, and it will not be easy,particularly since much of the power has been closely held bythe two patriarchs since Winterkorn became CEO in 2007.

As for the companys strategic vision after Piech stepsdown, Morgan Stanleys Pearson says: "His legacy is (building)the worlds largest and most successful auto company. I dontthink the strategy will change any time soon."

You also may be interested in: