VW wants to simplify its operations, but at what cost?
In an effort to become more profitable, Volkswagen will dramatically reduce the number of models and options it offers. How did we get here?
Germany’s biggest company offers too many models across too many configurations to too few buyers. Ten years ago, VW was the world’s biggest car company, and arguably its most successful. Since then, it’s been struggling.
In China, demand for Audi and VW products dropped by more than 25% in the first half of this year. Porsche, once the most profitable car company by units sold in the world, had its worst year on record.
To understand the scale of the problem, you have to understand the structure. VW is arguably the world’s most complicated car company. It has a motorcycle brand (Ducati), a Spanish legacy brand that it doesn’t sell in most global markets (Seat), and two trucking divisions (MAN and Scania). Then there’s Audi, Bentley, Lamborghini and Porsche. All ultra-premium and luxury car brands.
In a year where its passenger car division has performed poorly, the only silver lining was Škoda. And that’s telling, because in the world’s 2 biggest car markets – the United States of America and China – few people know what a Škoda is.
Leadership at VW has suggested it needs to reduce global headcount by a staggering 100 000 employees. That would be the biggest number of job losses sustained by any car company in history.
VW also wants to close 4 factories in Germany. Bitter negotiations are underway between VW, organised labour and local German governments where those VW car factories operate.
Investors, workers and suppliers are desperate for answers about the future of VW before the European summer shutdown, which runs for most of August.
The Group is simply too big
The current VW Group structure was created in the late 1990s into the early 2000s by one of the best automotive engineers in history: Ferdinand Piëch (1937–2019). However, without his coercive personality, authoritarian control and ability to force through R&D priorities, the complex and layered VW structure is buckling.
Managing the engineering needs of different parts of the VW Group while keeping production costs in check is extremely difficult. VW’s only real rival in terms of scale is Toyota, and its structure and model line-up are both a lot simpler. It also sells a lot more body-on-frame models (bakkies and rugged SUVs), which are cheaper to engineer and build, and easier to make a profit on. VW knows it needs more of a presence in the bakkie and rugged SUV market…
Eastern Cape-born and -educated David Powels has spent his entire career at VW, including stints in South America and China. He now serves in a powerful position as the VW Passenger Car and Group Core CFO in Germany. Many of the most challenging financial decisions about staff reductions and factory closures in Germany need to be guided by Powels.
So, what are the plans? One of the solutions is to cut the global model range by half by 2030. Simultaneously, the Group wants to reduce the number of build options – powertrain, colour, trim, and spec additions – by 75%. These are changes with immense consequences for Germany’s largest automaker, both abroad and in South Africa.
Many fewer choices
VW has been very careful with its wording about the plans to reduce its model range by 2030. The core products will likely remain, i.e. don’t expect the Polo or Tiguan to go anywhere. However, models developed and built for regional markets could be axed.
VW South Africa’s continuation cars, especially the Vivo, have accounted for the bulk of the brand’s local sales over the last few years. But we know that the current Vivo is nearly out of technical runway and viable supplier support, so seeing it disappear won’t be the cause of the unprecedented VW global restructuring. It was always going to happen.
However, other models like the Taigo and T-Roc might be at higher risk. Although these low-roofline crossovers sell for more than their donor cars (T-Cross and Golf), the configuration and production complexity of their unique shapes are costs VW may not be able to sustain.
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The problem with simplification
A simplified VW model range in South Africa, with fewer options and more affordable base models, could work out well. Consumers are cash-strapped and the Chinese brands offer amazing value. VW has been going upmarket in South Africa for a long time, but that looks set to end in the near future. The brand will need to reposition to its roots as a simpler, family-car company.
A potentially bigger issue exists for Audi and Porsche. Customers who spend luxury car money want options, lots of configuration options – from engines to wheels, to cabin trim, to all manner of other individualisation items, including expensive paint options.
Reducing the number of options an Audi or Porsche customer can specify by up to 75% could put both brands in a difficult position. Even more so if their 2 German rivals (BMW and Mercedes-Benz) continue to offer greater depth of options and configurability.
Additionally, no discussion of automotive product planning can exist without mentioning China. Full-house specification is standard with most Chinese models. And increasingly, Chinese brands are offering a depth of factory-level customisation that’s deeply impressive. The recent launch of iCAUR in South Africa, with its extraordinary colour and trim combinations, is proof of that.
In a future car market where Chinese brands are offering more luxury models, with comprehensive specs and lots of customisation options, how does the VW Group respond with a product range that is going to become 75% simpler?
VW needs a Golf 1 moment
This is not VW’s first crisis. The company nearly went bankrupt in the early 1970s because it was too preoccupied with air-cooled engines.
Although the original Beetle and Kombi were globally successful, VW’s product planners obsessed over horizontally opposed air-cooled engines. This came at the cost of developing more traditional family-car configurations such as front-wheel drive and water-cooled, inline-engine platforms.
The air-cooled fixation nearly ruined the company. But in its moment of crisis, it created a product that would save the brand and give it a dominant position in the family car market for years: the Golf 1.
During the early 1990s, the company faced rising production costs and was under threat from Japanese automakers that were building better sedans and hatchbacks. By the early 2000s, VW was pioneering design, cabin comfort, and powertrains in the family hatchback and sedan market. In only 10 years, it went from crisis to product excellence under the powerful leadership of Ferdinand Piëch. Can it do so again by 2030?
