Volkswagen has a uphill climb

Posted By on July 8, 2005

VW Sales Americas June 2005
* Year to Date figures for VW in the Americas
Painfully for VW, its a continual release of news from reporters covering the VW scandel and lousy business performance. Just today another article was in published in (July 8, 2005) Wallstreet Journal.

In summary (and opinion) of the many articles I’ve read over the last several days, I’ve concluded that VW has an long uphill climb, not easily recognized from a US perspective. As Stephen Power, a WSJ reporter, indicates, “much of Germany is riveted by an investigation in to bribery allegations at VWAG” and the internal shake up happening “behind the scenes at Europe’s largest car maker in terms of sales.”

Much of Germany’s debate is whether to keep Gerhard Schroder as chancellor … but to many, attempting to figure out how to keep VW from losing money is even more critical. The problem stems from “poor product quality, underutilized plants and German auto-manufacturing wages – the highest in the world.” One major problem is that the US division of VW accounts for 60% of unit sales and had a shocking 52 million dollar lost last year … in part due to Dave’s slumping stellar sales. I added that last bit to see who is still reading. 🙂 Most likely the real impact is slumping US auto sales and the difficulty in selling a retooled VW lineup against the heavily discounted ’employee pricing’ marketed brands. The US sales problem for VW is that their sales have fallen 24% in the last year … over what was not necessarily a stellar previous year.

Volkswagen AG has hired a American educated DaimlerChrysler AG guy, Wolfgang Bernhard, and charge him with the turning VW around in both quality and profitablity. At the Chysler Group he did this with slashing costs in production development. Little is being said publicly about his ideas, but concerns between labor in Germany with a 11.6% unemployment rate and high Eurodollar-to-other currency exchange rates will make moving more jobs overseas (ie. Mexico, etc) a necessity although complicated task when dealing with German labor. This problem has been faced by US automakers, but is particularly a problem in Europe in that the largest shareholder is the German state of Lower Saxony … which in keeping with German law require half the seats on the company board to be worker representatives. (again … at a time of 11.6% German unemployment.)

Obviously the bribery scandel is adding fuel to the fire. The allegations are that top Volkswagen officials paid bribes to the company’s top labor leaders as a way to secure cooperation in contract negotiations. Their is also allegations the these Volkswagen officials themselves accepted bribes from parts suppliers. What a mess. The scandel and poor performance is bound to have an effect on management and we are already beginning to see the rats jumping ship. Klaus Volkert, head of the works council, unexpectedly resigned but has denied any criminal wrongdoing.

The industry analysis have pretty much concluded that success at VW will depend on the willingness to cut jobs as capacity is only at 81% which is far below their competitors. (93 and 95% for Toyota and RenaultSA) According to Stephen Cheetham an analysis with Sanford Bernstein, any decisions to cut jobs “has implications for the whole of Germany and German employment.”

VW has made a decided push to improve quality, it has yet to have been seen, but is part of Bernhard’s focus. Seemingly his goal is to raise quality and reduce complexity in Volkswagen cars. The move toward a ‘premium brand’ has not worked well and sales of the popular Golf have fallen as well. He has told his engineers not to worry about keeping up with brands like Mercedes-Benz and focus on competing on value with Toyotas that have been gobbling up European marketshare. (Reminds me of US automakers?) Mr. Bernhard has told his engineers to review their new models and find way to eliminate needless frills. According to the Volkswagen spokesman, Mr. Grosse-Leege, Berharhard says to the staff, “we have to cut this amount of cost from the car or we’re are not going to build the car” He goes on to indicate that “the Japanese are attacking Europe … and that we are going to have to fight them.”

A continual message is “quality,” and Bernhard delivered a “blunt message to VW workers” that they need to raise quality. A bonus structure is being offered to managers that is tied to quality improvements.

There is no question that VW as a whole is in an uphill climb. There quality is lagging, sales are down, desired models unavailable and inefficient German labor connections already experiencing high unemployment dragging on a turnaround. Add to this the allegations of bribes that go both ways along with a management shake up and making VW profitable again becomes even more of a challenge.


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