How Volkswagen's outsmarting its competition

Ulrich Hackenberg isn't yet a household name but if Volkswagen's $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 world's automakers have considered the "global car" to be their Holy Grail - the same basic design that can be built, in subtle variations, and sold in different markets.
Take that fundamental concept, stretch it across many different vehicle types, sizes and brands, then build them by the millions, and you begin to sense the enormity of Volkswagen's rapidly evolving "mega-platform" strategy and its potential impact on competitors around the globe.
 

Auto engineer Hackenberg nurtured this bright idea for three decades, after early pitches to auto executives were largely ignored, until somebody finally bought it wholesale. The man who bit was Volkswagen Chief Executive Officer Martin Winterkorn.

Hackenberg's fundamental rethink of vehicle platforms, the industrial Lego from which cars are designed and made, is helping power the German company to the top of the global sales charts several years ahead of its 2018 target. It could also make 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 a single part, used in millions of cars, fails.
 

But rivals have taken note of the power behind its move. Volkswagen's modular platforms are being benchmarked by most of the world's top automakers, including Toyota Motor Corp and Ford Motor Co (NYS:F), according to company executives.

"We'd be crazy not to," said a senior Ford official, requesting anonymity because of the proprietary nature of the subject.
VW's work on its largest mega-platform, known internally as MQB, began in earnest in 2007 and is being implemented over the next four years at a cost of nearly $70 billion, estimates Morgan Stanley. The potential payoff is compelling: Projected annual gross savings by 2019 of $19 billion, according to the bank, with gross margins approaching 10 percent.
 

SIX-YEAR GESTATION
After a six-year gestation, VW has just begun to implement its sophisticated and highly flexible platform with the deceptively simple label MQB, a German acronym for "modular transverse matrix." Virtually all of the group's small and medium front-wheel-drive family models, including the latest generations of the VW Golf and Audi A3, are being designed around MQB as their base.The new platform features a far greater degree of plug-and-play modularity, flexibility and parts commonality than at Toyota, General Motors Co, Ford and other competitors.
 

MQB "could be the single most important automotive initiative of the past 25 years," says Michael Robinet, managing director of IHS Consulting in Northville, Michigan. "It really changes the game."

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

VW envisions enormous leverage from MQB. The plan is to boost global sales to 10 million or more, with roughly two out of every three cars - some 40-plus models totaling 6.3 million sales a year - built on some variation of the MQB platform, according to U.S. research firm IHS Automotive.

None of VW's competitors has the diversity of brands, the breadth of technology, the sweeping geographic footprint or the deep pockets necessary to support and take advantage of such a wide-reaching initiative as MQB.
Even Toyota, the current global sales leader, is playing catch-up with its German rival.
 

Each of the three modular component sets will come in different variations that will enable enormous flexibility in terms of product design, while accommodating a wide range of powertrain options, from gas and diesel engines to electric motors and batteries.

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

Excess exposure to a single market such as China contradicts VW's philosophy of spreading growth evenly and potentially makes it vulnerable to negative market developments and possible government interference, says Pieper.

To hedge its potential emerging-markets exposure, VW also has overhauled its loss-making North American operations - an estimated $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 million vehicles a year between them.
 

CHANGING OF THE GUARD
The full rollout of MQB may not be accomplished until the end of the decade, estimates Pearson. By then, the chief stewards of VW's corporate strategy - CEO Winterkorn and Chairman Ferdinand Piech - may be retired and the next generation of management moved into the top slots.The Austrian-born Piech, 75, is a third-generation auto executive. A mechanical engineer by training, he is the grandson of Ferdinand Porsche, the legendary Austrian designer of the original VW Beetle.
 

VW's supervisory board has yet to clearly anoint potential heirs to Piech and Winterkorn, 65, and it won't be easy, particularly since much of the power has been closely held by the two patriarchs since Winterkorn became CEO in 2007.

As for the company's strategic vision after Piech steps down, Morgan Stanley's Pearson says: "His legacy is (building) the world's largest and most successful auto company. I don't think the strategy will change any time soon."