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Insight: Has Volkswagen discovered the Holy Grail of carmakers?

A unique Volkswagen consumer interactive display that allows potential buyers to spray paint different models in different colors is seen at
A unique Volkswagen consumer interactive display that allows potential buyers to spray paint different models in different colors is seen at

By Laurence Frost and Andreas Cremer and Paul Lienert

BERLIN/DETROIT (Reuters) - 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, 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.

The automaker is expected to announce a record profit for 2012 of more than $30 billion later this month (February 22), according to Bernstein Research, whose senior analyst, Max Warburton, observes: "VW looks to have unstoppable momentum — in China, the U.S., Europe and most of the rest of the world."

That momentum has been building for some time, even before the initial deployment last year of Hackenberg's brainchild.

Industry-leading levels of commonality — the proportion of parts that can be shared among different models — are nothing new to VW. At a gathering in Japan five years ago, Renault and Nissan executives lifted the hoods on several VW Group vehicles side by side — including models from Skoda, Seat and Audi brands — and saw trouble.

"They had the same engines, the same clutches, the same ventilation — all identical parts," says an executive who attended the presentation. "It was a level of commonality that didn't exist at Renault-Nissan."

Late in 2011, as the outlook darkened for French carmaker PSA Peugeot Citroen, its board was given a similar demonstration, and a similar shock, at the company's high-security research center in Velizy, southwest of Paris. Technicians took apart the front ends of two different VW cars and swapped most of their components.

"They were a little dumbstruck by the realization that there was a whole new world out there — and their development was 10 years behind," recalls one participant.

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.

"There's no doubt we have fallen behind," says a senior Toyota executive who declined to be named because of the sensitive nature of the subject. "We have not even begun to make the fundamental structural changes that VW has" in designing and applying flexible vehicle platforms.

The sense from competitors and auto analysts is that VW's rollout of MQB is likely to be as influential as such earlier innovations as Ford's adaptation of standardized parts, GM's "ladder" of brands and Toyota's streamlined production system.

WATERSHED EVENT

VW's suppliers see MQB as a watershed event, a break with a past when really big vehicle platforms might have yielded orders for as many as 5 million or 6 million identical components over their typical six- to seven-year life cycle.

Now, with the implementation of MQB, "they're being asked for quotes on 35 million parts," says a senior European industry executive.

More importantly, the modularity enables VW to design, engineer and build a wide variety of vehicle size and shapes - from a subcompact Polo hatchback to a full-size, seven-passenger crossover that's due in the United States in 2015.

The flexibility of the MQB system also allows VW to create more cars that are more tailored for specific markets at a lower cost, and it doesn't have to sell so many units to break even, according to Morgan Stanley analyst Stuart Pearson.

MQB isn't the only weapon in Hackenberg's arsenal.

Larger Audi, VW and Porsche models with longitudinal engines — mounted in a north-south configuration — will use a similar set of components dubbed MLB that already underpins a number of Audi vehicles.

And many of the group's ultra-luxury and performance brands will employ a third component set called MSB, designed for premium rear- and all-wheel-drive vehicles such as the Porsche 911, the Bentley Continental and the Lamborghini Gallardo.

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.

STRENGTHS AND WEAKNESSES

The modular toolkits seem like the ideal complement to VW's other strengths, not the least of which is the company's sheer size: Group revenue this year is projected by Bernstein Research to top $275 billion.

But the huge volumes planned for the MQB derivatives alone could also expose the group to the same sort of mass recalls of millions of cars experienced in recent years by Japanese rival Toyota. If a single part has a problem, and that part is in many different models, a recall affects many more vehicles.

Analysts, including Morgan Stanley's Pearson and Frankfurt-based Metzler Bank analyst Juergen Pieper, also express concern about VW's growing reliance on emerging markets, notably China, for future growth.

The company was an early investor in China and the only European automaker to form joint ventures with that country's top two manufacturers, FAW Group and Shanghai Auto.

Now, China accounts for 30 percent of VW's global sales. The German group operates 10 assembly/component factories in China and plans to pump another $13 billion with its JV partners over the next three years into plants, equipment and models.

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.

VW is supporting its recent growth spurt with additional production capacity, including a new Audi assembly plant in Mexico, expansion of VW's existing facility in Puebla and a potential increase at the new Chattanooga plant in Tennessee.

The latter two plants will be updated to accommodate new models that use the MQB platform - the latest Golf in Puebla and the big crossover in Chattanooga, according to VW executives.

Top managers are scanning other overseas markets where the company lacks local production facilities, including Africa, much of Latin America and most of the ASEAN region, where VW's modest presence is dwarfed by that of market leader Toyota.

VW is in the process of boosting global capacity, including the investments in China and the United States, to nearly 12 million by 2015, from 8.6 million in 2010, according to Morgan Stanley.

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."

(Reporting By Laurence Frost in Paris, Andreas Cremer in Berlin, Norihiko Shirouzu in Beijing and Paul Lienert in Detroit; Editing by Claudia Parsons)

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