Volkswagen MQB platform fails early to meet lofty expectations

Volkswagen may face a new challenge to its bid for the top slot among global carmakers, as the very platform the German giant has spent the last six years creating to take it to a higher level in the rankings may not be working to plan.

For the launch costs of the highly adaptable "MQB" vehicle platform, which was heralded last year by VW as the dawn of a new era for carmaking, keep weighing on profits and its eventual savings may fall short of ambitious targets, analysts said.

They are now looking to third-quarter results on Wednesday to see how the program is progressing as the number of cars produced based on MQB grows.

A German acronym for "modular transverse matrix", MQB enables VW to design virtually all the small and medium front-wheel-drive models of its four biggest car brands on a single platform, affecting as many as 4 million vehicles a year, including the Golf and Audi A3.

Featuring a greater degree of plug-and-play modularity and parts commonality than at Toyota and General Motors Co, the new platform was hailed by analysts as the philosopher’s stone for a company that wants to become the biggest and most profitable carmaker in the world.

VW has fanned those expectations, predicting the technology may reduce material costs by 20 percent and shorten assembly times by as much as 30 percent over time, yielding potential savings in annual costs which Morgan Stanley has estimated could total $19 billion by 2019.

But euphoria is fading. The costs of the engineering overhaul are outrunning the benefits at a time when Europe’s biggest carmaker, pursuing vigorous growth overseas, is mulling spending cuts in its home region to counter weak demand.

"MQB is overhyped," London-based Bernstein analyst Abbas Quettawala said, citing high costs for installing the technology at plants around the globe and suppliers’ difficulties in tooling up to make their components fit. "The savings have been massively exaggerated," he said.

Bernstein has said a look under the bonnet of the MQB-based new Golf hatchback, VW’s best-selling model, clearly shows that the platform draws on top-quality materials and applies high-end engineering solutions to a mass-market vehicle, but asks whether that will save costs or add to them.

"It’s more likely that VW has a cost problem on MQB," said Quettawala, a co-author of the note.

"Maybe VW fell victim to the old disease of changing too many things with MQB and is building the cars in a too expensive way," said Frankfurt-based Bankhaus Metzler analyst Juergen Pieper.

Wolfsburg-based VW declined to comment ahead of its results, apart from referring to a September 9 investor presentation on MQB savings, which omitted the previously published percentage savings goals.

One analyst is now predicting savings from the modular technology may amount to only about 3 percent of the group’s total costs.

Synergies will be much smaller than previously estimated, London-based Barclays Capital analyst Michael Tyndall said, predicting savings in production will climb from about 900 million euros next year to 4 billion a year by 2018, the year VW has pledged to hit the top of global sales charts.

"There’s still quite a lot of spending going on in terms of bringing new models to the market and subsequently transitioning existing production lines to MQB," Tyndall said. "We still see upfront costs as a headwind in the third quarter."

Operating profit in the July-September period may be up 18.3 percent to 2.77 billion euros ($3.82 billion) on record deliveries at premium brands Audi and Porsche which add a combined two thirds to group profit, a poll of analysts showed.

Underlying operating earnings may keep growing in the next two years, but consensus forecasts have slipped back to 13.9 billion euros in 2014 and 15.6 billion euros in 2015, from 14.1 billion and 16.1 billion respectively in the previous July poll.

VW has a goal for 2013 of matching last year’s record operating profit of 11.5 billion euros and to exceed that level in 2014.

Last month the company denied a report in Germany’s Manager Magazin claiming that Europe’s top carmaker was at risk of missing its financial targets, including an intention to boost the group pre-tax profit margin to over 8 percent by 2018 from 6 percent in 2012, because of higher than expected costs for its new modular platform.

"It’s good fiscal management if the company gives the message ahead of people setting their budgets that things are still tough and spending plans need to be sensible," Tyndall said, referring to next month’s decision by the supervisory board on VW’s rolling budget plan.