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Volkswagen is sending an unmistakable statement of intent to other volume carmakers by embarking on a three-year, €50bn plan for new products, plant and equipment. Its Europe-based competitors are incapable of such large investments over so short a spell of time. Several are deep in the red, losing market share, closing factories and laying off workers.
As for non-European rivals, such as Hyundai Motor, they have made impressive strides in Europe since the 2008 financial crisis. But they still trail VW by a distance. With its new investments, the German group wants to exploit its advantage so ruthlessly that its supremacy will be unassailable for many years. From 2005 to 2012 VW’s market share in Europe rose from 18 to 24 per cent. Such growth rates imply that by 2020 roughly one in three cars sold in Europe could be a VW marque.
Rival manufacturers are well aware this is no fantasy. In a survey issued this week by KPMG, the advisory services group, 81 per cent of car industry executives expected VW to gain world market share over the next five years. It was the third successive year that the German carmaker had headed the list.
There are three ways to interpret VW’s European success, which is replicated in Brazil and China, though less so in India and the US. One is to applaud it as a textbook example of capitalism in action. Like Henry Ford with his Model T a century ago, VW is crushing the competition fair and square with superior production techniques, manufacturing operations that span the globe and unmatchable prices.
A second approach is to condemn VW’s methods as irresponsible and predatory. Sergio Marchionne, Fiat’s chief executive, blames VW for provoking a “bloodbath” with aggressive price discounts subsidised by profits from its Chinese and other non-European operations. It is said that the European car sector’s main structural problem is production overcapacity. VW should, therefore, co-operate with other manufacturers and regulators in reducing capacity and, if necessary, encouraging mergers.
A third approach is to recognise that VW benefits not only from the brilliance or ruthlessness of its managers, engineers and salesmen, but also from broader political and macroeconomic conditions in Europe. I have in mind the impact on the car industry of the euro’s launch in 1999, Germany’s labour market reforms in the early 2000s and the seemingly interminable debt crisis. The euro’s introduction was good for VW because it deprived eurozone rivals of the boost once effortlessly gained from appreciations of the Deutschemark. German labour reforms, unmatched in France and Italy, sharpened VW’s competitive edge.
Until 2008, however, demand for new cars was buoyant in Europe and there seemed to be room at the party for every manufacturer. It was a shortlived illusion. Over the past five years, financial market upheaval, recession and politically inspired hymns to austerity have annihilated consumer demand for cars. Worst hit are companies such as PSA Peugeot Citroën and Fiat that rely too much on the European market and face government pressure to keep job losses to a minimum.
The crisis is helping VW, too, by prompting a flight to quality – or safety – among investors that lets it borrow at lower rates than its rivals. Just as the crisis has accelerated Germany’s emergence as the EU’s ringmaster, so it is accelerating VW’s domination of the mass market car industry.
Nonetheless, VW deserves credit for far-sighted steps such as its move almost 30 years ago into China. Every fifth new passenger vehicle sold in the world’s largest car market is now a VW make. Meanwhile, platform-sharing at brands such as Seat and Skoda slashes production costs: the 2013-15 plan’s target is 20 per cent in savings. Lastly, under the watchful eye of Hans Dieter Pötsch, chief financial officer, VW maintains strict investment discipline: the ratio of investments in property, plant and equipment to sales revenue is comfortably below 5 per cent.
For all these reasons, VW’s shares have almost trebled in three years. But the company still trades at a discount to rivals such as BMW and Daimler. There remain concerns about VW’s corporate governance – exemplified last year by the appointment to the supervisory board of Ursula Piëch, wife of the chairman.
In cars, as in any industry, no company’s ascendancy lasts forever. As recently as 20 years ago, VW itself was not in great shape. But the lesson of the euro era is that VW seizes its chances with courage, determination and assiduous attention to detail.
Tony Barber is the Financial Times’ Europe editor
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