Final Inspection

VW Looks Terribly Inefficient, Except on the Bottom Line

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Volkswagen rakes in more money every year than any other auto maker by far. While VW’s stated goal is to become the world’s largest car company by 2018, it’s already there if you measure it by revenue and profits.

Good thing American efficiency experts can’t get their hands on Volkswagen. They’d destroy it in a second. By traditional Business School metrics, VW is a productivity basket case.

Get this: VW employs 549,300 people globally, a staggering number. Fortune magazine lists it as the eighth biggest employer in the world, behind giants such as Wal-Mart and the Chinese post office.

VW has almost as many full-time employees as General Motors (207,000), Ford (164,000) and Fiat-Chrysler (197,000) put together. While those three behemoths collectively built 19 million vehicles last year, VW only built 8.5 million.

On an employee-per-vehicle basis, VW looks hopelessly inefficient. It’s even worse if you measure the company on a revenue-per-employee basis.

And yet VW rakes in more money every year than any other auto maker by far. While VW’s stated goal is to become the world’s largest car company by 2018, it’s already there if you measure it by revenue and profits. Its revenue of $200 billion dwarfs every other OEM. Last year’s operating profit of $14 billion is the kind of bottom-line performance you expect from big oil companies, not auto makers.

What’s going on here? How can VW look so uncompetitive from a productivity standpoint, yet out earn all of its competitors?

That’s because the modern way of evaluating the efficiency of a corporation is just plain wrong. Business schools teach MBA’s that centralized operations eliminate overlap and duplication, yet VW maintains strongly decentralized operations with lots of overlap. Business schools preach the benefits of outsourcing to cut cost, yet VW is very vertically integrated.

Business schools teach cost accounting, but they have no clue how to measure value creation. Obviously, VW’s corporate structure is better at creating and capturing value in the automotive vertical.

All the auto maker’s brands (VW, Audi, SEAT, Skoda, Bentley, Lamborghini, Ducati, Porsche, Bugatti, MAN, Scania, and VW Commercial) are treated as stand-alone companies. They have their own boards of directors, their own Profit and Loss Statements, and their own annual reports. They have their own separate design, engineering and manufacturing facilities. Yes, they do share some platforms and powertrains and purchasing, but other than that they’re on their own.

In a way, VW’s corporate structure is similar to that of General Motors from roughly 1919 to the late 1970s. Back then, GM was a holding company that owned nine stand-alone car companies (Chevrolet, Pontiac, Buick, Cadillac, Oldsmobile, GMC, Opel, Vauxhall and Holden). In the 1960s, GM had more than 700,000 employees, was very vertically integrated and was the most profitable corporation in the world.

Then the MBA’s got hold of it. They implemented “efficiencies” and “synergies” and it’s been downhill ever since. The complexity that ensued choked GM. Its top down, command-and-control system of management simply couldn’t cope with all the minutiae that entail running a massive global corporation. It still can’t.

VW is on a roll right now, and it’s only getting started. I bet it does emerge as the largest auto maker in 2018. And that poses a critical challenge to every other auto maker. VW’s corporate structure gives it an enormous competitive advantage that no amount of rationalization, cost-cutting, outsourcing or strategic partnerships is going to overcome.

This is a challenge to the management of every other auto maker. It’s all about organizational structure, and I wonder how many automotive executives are even aware of what they’re up against.

John McElroy is editorial director of Blue Sky Productions and producer of “Autoline” for WTVS-Channel 56, Detroit, and “Autoline Daily,” the online video newscast.

 

 

 

  

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WardsAuto editors share insights and observations on the global auto industry.

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