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Strategic Tie-Ups, Aggressive Product Plan Drivers as VW Chases 2018 Goal

While the global economic slump has slowed industry sales, executives see no barrier to achieving VW’s long-term sales goals, which include up to a 66% increase in U.S. volume by 2014.

With strategic equity stakes in Porsche AG and Suzuki Motor Corp., a growing portfolio of new models and impending return to manufacturing in the U.S., this year could prove the best indicator yet of whether Volkswagen AG’s quest to be the world’s No.1 auto maker has the necessary legs.

Not likely to hurt the German company’s chances of closing the gap up the sales ladder is the struggle under way at rival Toyota Motor Corp., which has seen its quality and safety reputation blemished by a massive global recall related to unintended acceleration concerns in more than 8 million cars and trucks.

Last year, the Volkswagen Group, which includes brands VW, Audi, Bentley, SEAT, Skoda, Lamborghini and Bugatti, delivered 6.29 million vehicles worldwide. That put it solidly in third position in global sales, as it gained ground on top-dog Toyota (7.81 million).

But with or without a slide by Toyota, VW is confident it is locked in on the trajectory needed to achieve its “Strategy 2018” sales goal to top 10 million units annually within the next eight years and take over as the world’s biggest auto maker.

“Our plans haven’t changed,” Christian Klingler, executive vice president-group sales and marketing, says, noting the global recession negatively impacting new-vehicle demand. “We still want to top Toyota in the world. We work on it every day very hard and try to go in the right direction.”

Despite the global slump, VW managed to set a volume record in 2009 and gain a point of market share to 11.4% worldwide, Klingler points out.

And while he is reluctant to forecast totals for 2010, he says he sees no impediments to hitting the auto maker’s long-term goals, which include up to a 66% increase in U.S. sales to 400,000-500,000 VWs and Audis annually by 2013-2014. Key to that growth is a new 150,000-unit assembly plant set to open in Chattanooga, TN, early next year.

“It is very ambitious,” Klingler says of the target. “But we are very confident due to the investment we’re doing (in the U.S.).”

By then, VW Group global sales should top 8 million units, executives believe.

VW will get a small bump to its tally this year, if Porsche’s 75,000 in annual worldwide sales are included in the group.

Although it will own only 49% of the sports-car maker, Porsche is very much under full control of VW’s management, with former Porsche CEO Wendelin Wiedeking gone and new head Michael Macht now answering to the VW Group board.

The absorption gives VW access to Porsche’s vaunted engineering, and it also could enable greater economies of scale among the group’s luxury brands. It isn’t hard to imagine a future where the Porsche Panamera sedan shares its architecture with the VW Phaeton and Bentley Continental, for example, or Porsche sports cars piggyback on some of the electric powertrain work at Audi.

Another critical move for VW was the December acquisition of a 19.9% stake in Japan’s Suzuki, as part of a pledge to collaborate on vehicle development and marketing.

Exactly how that partnership will evolve remains murky, as well, but VW executives say it should provide the German auto maker with better entrée to critical emerging markets in Asia.

“The Suzuki deal is for us a wonderful opportunity,” Klingler says. “They are present in regions where we are not, like Japan, Southeast Asia and India.

“The other (factor) is that from a technology point of view, they are more exposed to really small cars,” he adds. “And they make money with it. We’ll look at projects and figure out an agenda of what we have to do step by step.”

VW believes a more solid stance in the Association of Southeast Asian Nations markets will be critical to achieving its Strategy 2018 bogeys.

“If you look to the Philippines, Malaysia, Indonesia, Thailand (and) Vietnam, they’re all growing countries and there’s big potential,” points out Ulrich Hackenberg, management board member in charge of product development.

“Toyota’s very strong there,” he adds. “They are selling around a million cars, and we are selling maybe 30,000-40,000. So if we make our market share there, it is a huge potential for us to grow.”

Says Klingler: “We believe step by step we can penetrate this region.”

In Indonesia, for example, VW last year launched a joint venture for partial assembly of several hundred Touran models annually, with a goal of potentially stepping up to complete-knocked-down production of various model lines beginning in 2012.

“But I think our ambitions are stronger than this,” Klingler says. “So there will be more to come.”

China is one growth sector in which VW is firmly entrenched, controlling about a 19% share of car sales. The auto maker, one of the first to enter the market, has a half dozen vehicle-assembly plants there already with local partners such as Shanghai Automotive Industry Corp. and First Auto Works, producing more than 1 million units annually. But executives say more plants are needed.

“That’s not enough,” Hackenberg says of VW’s current Chinese capacity. “We need more. We are looking at what we have to do, because all the capacity we have we used last year, and the demand is for more.”

VW wants to grow sales, at 1.4 million vehicles in 2009, another 10%-15% this year.

The auto maker also is firmly footed in Brazil, where it is investing €2.3 billion ($3.1 billion) in an attempt to goose annual demand to 1 million units by 2014. Last year, it sold 815,000 vehicles in all of South America.

“Brazil is one of our most important growth markets worldwide,” noted CEO Martin Winterkorn in announcing the volume targets earlier this year.

India is a country in which Suzuki could play a significant role. VW last year launched production at a 110,000-unit plant in Pune, where it is producing Polo hatchback and sedan models alongside the Skoda Fabia. The new €580 million ($787 million) facility marks VW’s biggest investment to date in the country.

But Suzuki, which has had a long presence in India through its Maruti Suzuki India Ltd. operation that now controls 38% of the light-vehicle market, could show VW a thing or two about distribution.

“We want to accelerate in India, and Suzuki knows the market best and can help us,” says Hackenberg. “Our biggest problem is the dealer network. India is a huge country, so you need a lot of dealers to be present there.”

Closer to home, the European market is expected to be a challenge this year and could push VW back a step, with forecasts calling for industry sales to fall by at least a million units in 2010.

“We have to be prudent with all decisions,” Klingler says. “We are making management decisions very close to the markets – very reactive. So if the market is going up, we’re ready, and if it goes down, we’re ready as well.”

Despite the recessionary trials of 2009, VW has been making money and is armed with some $33 billion in cash to fund an aggressive product plan that will see 60 new models introduced this year alone.

With its modular platform strategy, VW has succeeded in creating distinct vehicles of varying sizes from the same building blocks for its myriad brands, and that has smaller competitors concerned the German giant’s economies-of-scale cost advantage will be tough to beat.

The list of 2010 debuts includes a hybrid VW Toureg, revamped Sharan minivan, Polo GTI and new Audi A1 microcar unveiled in Geneva this month, as well as its Amarok small pickup rolled out in South America earlier this year.

Next year, VW’s Chattanooga-built midsize sedan hits the U.S. market and a replacement for the Beetle will bow. The tiny VW Up! line will go into production at VW’s Skoda Auto AS plant in Bratislava, Slovakia, in 2011, and Skoda will introduce a new low-cost car of its own in 2012.

Among products planned is a raft of electrified vehicles, such as the Audi Q5 hybrid due this year, hybrid VW Jetta slated for 2012, and battery-powered versions of the Audi R8 (2012) and Up! and Golf (both in 2013).

“The goal is to become the market leader in E-mobility by the year 2018,” says Winterkorn. “We will take the hybrid out of its niche status with our high-volume models,” he adds, saying VW is aiming to take a 3% share of the nascent EV market.

To achieve its 2018 goal, VW still will have to absorb some bumps along the way. For one thing, not all brands are weathering the current global downturn equally. For instance, Skoda is cutting first-quarter output due to weak demand, while VW’s SEAT SA operation has had to battle it out with labor unions over production-related job cuts in a badly slumping Spain.

The auto maker also will have to avoid distractions that could evolve from its takeover of Porsche and its alliance with Suzuki, while dodging potential quality pitfalls in the U.S. that often come with simultaneously launching an all-new product, plant, workforce and supplier network.

Although brand awareness and quality scores are improving in the U.S., the auto maker still has more ground to cover. The VW marque moved up nine spots in the latest J.D. Power & Associates Initial Quality Study, but it still occupies a middling 15th in the rankings. Audi is landing on more luxury-car shoppers’ consideration lists, but it is just now launching a series of aggressive ads in an attempt to gain more traction with BMW, Mercedes and Lexus buyers.

And if there’s anything to learn from the Toyota recall fiasco, it’s that the road to No.1 has plenty of potholes, and aggressive growth targets have a way of taking a company’s eye off the ball.

But VW executives remain undaunted.

“We’re confident (of increasing) 2010 our market share on a worldwide level,” vows Klingler, sure even a sluggish global economic recovery won’t slow VW down. “Our position will become stronger, even this year.

“We are fully determined to continue our path and strategy to by 2018 become the No.1 manufacturer in the world.”

    2009 Year in Review
  • 5VW announces in early 2009 it would cut 400 jobs at its South African plant as a result of declining vehicle demand in key export markets. Other VW operations in Czech Republic, Spain and Mexico would be affected throughout the year by temporary shutdowns and layoffs as a result of the global economic slump.
  • Serial production of 1.6L 4-cyl. common-rail diesel engines gets under way in mid January at VW’s Polkowice, Poland, plant.
  • Malaysian auto maker Proton Holdings reveals it is in partnership talks with VW, but the year ends without a deal between the two companies.
  • Audi christens its new €100 million (146 million) assembly plant in Changchun, China, in late September. The added capacity was expected to help the brand boost sales to 200,000 units annually by 2015.
  • VW buys bankrupt coachbuilder Wilhelm Karmann GmbH’s Osnabruck, Germany, assembly plant, with plans to launch vehicle production there in 2011.
  • Audi reveals aggressive growth targets for Russia, as it eyes a near doubling of sales to 30,000 vehicles in 2015, from roughly 16,500 in 2009.
  • Former Continental AG Chairman Karl-Thomas Neumann is named to a new position overseeing VW’s electric vehicle development efforts effective Dec. 1.
  • After a rough start to the new year, VW’s South African operation in late November gets a $3.59 billion shot in the arm in the form of an export contract to ship 55,000 Golf and Polo models to the U.K., Ireland, Australia, Malaysia and Singapore. It exported 28,500 cars in 2009.
  • VW announces a $3.5 billion investment in Brazil aimed at making it the country’s biggest auto maker by 2012.
  • Japan’s Suzuki Motor Corp. agrees to sell a 19.9% stake to VW for an estimated ¥222.5 billion ($2.5 billion). The two planned to cooperate on marketing and possibly product development.
  • VW announces it is linking executive pay to customer and employee satisfaction. Sales results and profitability also are key metrics in the new bonus scheme.
  • RIn late February, VW reveals it will not renew contracts for all of its 16,500 temporary workers as a result of the worldwide market crisis. “We will no longer have any temporary workers" by the end of 2009,” CEO Martin Winterkorn is quoted as saying. "That is not good for those who will be affected. But there is no other way to do it.”
  • Mazda Europe CEO James Muir is tapped to head the struggling SEAT SA operations in Spain. Although Muir is named to the job in March, he doesn’t join SEAT until Sept. 1.
  • ©A Skoda plant in Bratislava, Slovakia, is designated the site of production for VW’s new Up! small car beginning in 2011. The 3- and 5-door models were expected to be sold under the VW, SEAT and Skoda brands. Skoda later reveals it will invest about E56.2 million ($76.7 million) to adapt its engine and transmission plant in Mlada Boleslav, Czech Republic, to add production of the new MQ100 manual gearbox for the Up! line.
  • A deal is signed in May with PT Indomobil Sukses Internasional Tbk to assemble cars in Indonesia. Several hundred VW Tourans were to be assembled from semi-knocked-down kits in 2009.
  • China’s First Automobile Works Group Corp. and VW announce they will build a new RMB5 billion ($730 million) plant in Chengdu to produce 150,000 Jettas annually. The plant was expected to employ 4,500 workers.
  • Audi designates a plant in Brussels as the site of production for its upcoming A1 small car. The A1 bowed at the Geneva auto show in early 2010, and sales were expected to begin later in the year.
  • UPorsche headquarters are raided in August after charges are filed with the Stuttgart prosecutor's office in connection with suspected market manipulation related to acquisition of its 50.76% stake in VW in a takeover attempt initiated in 2008. Officials would be cleared of wrongdoing later in the year. Porsche earlier had secured backing from Qatar Holding LLC, which took a 10% stake in the auto maker to help finance its financially crumbling takeover attempt of VW. Ultimately, VW would turn the tables, locking up a 49.9% share of Porsche in late December and taking over management control.
  • Skoda begins sales of its Superb flagship sedan in China, following a midyear production launch of the car there.

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