Efficiency drive Volkswagen Changes Gear

The carmaker's "efficiency program" is less about cost cutting and more about investing billions of euros now to avoid costly penalties down the road.
Volkswagen chief executive Martin Winterkorn is overseeign some big changes.

Investors had an inkling something was up at Volkswagen a month ago. When the German carmaker’s share price fell below €150 ($186)  in mid-October, many rushed in to buy. By the end of last week, the stock was up 20 percent to €178.

There is a simple explanation for the spike. Last July, when VW chief executive Martin Winterkorn announced a €5 billion “efficiency program” for the core brand, many saw it as a harbinger of tough times.

One analyst after another revised the company’s growth outlook downward. The expectation was that a company like VW – with its broad range of products from heavy trucks to motorcycles – would be especially hard hit by cuts.

Since the firm’s supervisory board met on Friday, however, it is clear that Volkswagen will in fact invest more money than many believed. The efficiency program is more than a cost-cutting exercise. From 2015 to 2019, the company will spend a total of €85.6 billion ($106 billion) on new models, factories and eco-friendly technologies. Spending on product development will be 12 percent more than planned, at a total of €21.9 billion.

E.U. environmental-protection regulations – which require, for example, reducing carbon-dioxide emissions to 95 grams per kilometer driven by 2021 – are forcing manufacturers to spend more now to save more later. Every gram above the limits would lead to millions of euros in fines.

From 2015 to 2019, the company will spend a total of €85.6 billion in new models, factories and eco-friendly technologies

All of Volkswagen’s brands, including Audi, Porsche and MAN trucks, are subject to the new carbon limits. For that reason, the company’s €5 billion efficiency program is being doubled to €10 billion – and it will apply to the entire company.

The company is sending out a message that the costs will be borne by all its brands, but the main burden will fall on Volkswagen.

Now it’s clear what Volkswagen meant earlier this year when it announced the “efficiency program,” which many interpreted as nothing more than austerity cuts. It is in fact a matter of thousands of details, from a reduction in the number of ornamental seat seams to more effective use of factories.

Production capacities will also be redistributed, for example among factories in Hanover, Leipzig and Bratislava, Slovakia, where reducing fixed costs is expected to lead to savings. This will create space for developing engines that are more efficient and more environmentally friendly.

VW's Key Brands-01 Volkswagen brands audi porsche skoda seat

 

A large part of the planned investments will go into expanding the range of models. The idea is more SUVs and fewer convertibles, and maybe fewer vans as well.

Changes can also be expected in commercial vehicles, both with light-duty trucks in VW’s own models and with heavy trucks produced by subsidiaries, MAN and Scania. The word from inside the company is that both types will be made in building-block systems, just as with passenger vehicles.

In the case of light-duty trucks, the basis for the Crafter and T5 models will be unified. A new production site will be set up in Poland for the Crafter, which up to now was built at Daimler’s plant in Düsseldorf, parallel to that company’s Sprinter.

Plans are more complex for the two heavy-truck subsidiaries. Beginning in 2016, the plan is to have one building-block system for both MAN and Scania, in such areas as axles and steering mechanisms. Since both manufacturers produce about the same number of trucks per year, the number of units could be doubled at once.

007 WTB NEU

 

Christian Schnell is a reporter for Handelsblatt in Frankfurt, covering the automotive industry. To contact the author: [email protected]