Global Insight Perspective | |
Significance | VW CEO Martin Winterkorn has outlined his company's strategy, including plans to substantially cut production costs, behind the new Golf which is the sixth generation of VW's iconic and best-selling model. |
Implications | As VW's mainstream C-segment passenger car, the Golf is VW's most important car. The high production costs of the A5 version of the model mean that the current generation has not contributed as it should have done to the company's bottom line since its launch in 2003. |
Outlook | Winterkorn has said that the new Golf has "'all the love of Volkswagen". VW and its shareholders will hope that this will be enough for the sixth generation Golf to help the company in its goal to overtake Toyota in 2018 as the world's biggest carmaker at a time when the industry faces unprecedented challenges. |
Will The New Golf Make Par?
Volkswagen (VW) CEO Martin Winterkorn has outlined his company's strategic plan for the new Golf which will debut at this October's Paris Auto Salon. The Golf is VW's best selling model line, with 26 million sold since the model's debut 34 years ago. According to Automotive News Europe, speaking at the presentation Winterkorn said of the new Golf that, "Inside this car is all the love Volkswagen has." While this kind of PR speak is all very well, the company's shareholders will be wondering whether the new Golf will be a significantly bigger cash generator for VW than the old car, which has struggled with high production costs since its launch in 2003. VW is aware of this and a large portion of the presentation was given over to explaining how the new car will be a significantly higher-margin model than the existing car. There appear to be three main strands to VW's strategy to improve the profitability of the new Golf.
- Significantly reducing the man-hours involved in manufacturing a single unit. By the end of 2008 VW forecasts that the production time for a Golf at Wolfsburg will be 20.6 hours. This is almost half the 40 hours that were required to build the current Golf when it was introduced in 2003.
- Reducing production complexity as a result of increased use of standardised components within the model range as well as reducing the current Golf's large and confusing engine range. Automotive News Europe has said that the current Golf has 20 engine options while the new model will have just six. However, this first figure includes all the current engine output options on what are ostensibly the same unit, whilst the second figure appears to relate to base variants.
- The new Golf will share the same PQ35 platform as the current car while 60% of its components will be all-new, including the doors and the majority of the cars interior parts.
Thee have already been industry reports that from VW insiders that the new A6 Golf will be between 1,000 and 1,200 euro cheaper than the old car per unit to manufacturer (see Germany: 9 June 2008: VW Targets 1,000-Euro Production Cost Saving on New Golf), while material costs have also reportedly been reduced by 300 euro per vehicle as a result of extensive use of simplified and standardised components. As a result VW is targeting a profit margin on sales of 8% per unit as opposed to the 3% per unit that the current car manages. VW is also introducing a dual pricing strategy for the A6 Golf which will take pitch the model so it can remain competitive against two distinctive market threats. The first comes from the medium-lower-end of the C-segment market, from increasingly capable models from lower-end brands like the Kia Cee'd and Hyundai i30, as well as the mid-market Opel Astra, Ford Focus and Peugeot 308. As a result VW will offer an entry-level model for just 16,500 euro, which is just 200 euro more than the current equivalent model. But VW also aims to make money by broadening the number of lucrative optional extras that customers can order, which VW hopes will give the model the ammunition to take on the BMW 1-Series and the Mercedes A and B-Class models.
Outlook and Implications
The VW Group needs the "new" Golf to continue its enormous sales success as the company looks to follow its strategic plan of surpassing Toyota to become the world's biggest carmaker by 2018. This will entail VW brand cars selling 6.6 million units a year by that point, while Winterkorn is also looking for VW to be one of the most profitable carmakers with a return on investment (RoI) of 21%. However, there is some debate over whether the A6 should be described as an all-new model, which is what VW is calling it. It shares the same PQ35 platform as the old model and VW itself admits that while 60% of components are new, 40% will be shared with the old vehicle, which is a relatively high proportion for a brand-new vehicle. In addition, the focus of this presentation on how the A6 Golf is going to be a far more profitable vehicle than its predecessor is interesting in itself. While this news will obviously be welcomed by the company's institutional investors and small shareholders, it may also be of interest to potential Golf customers.
It would appear that the A6 Golf could be described as a heavily reworked version of the current car and not a completely brand new model in spirit. It also appears that many of the changes will be made on the production line to reduce costs and aside from some styling changes, which mimic the new corporate VW look as modelled by the Passat CC and the Scirocco, and some interesting new engine options on the horizon, the actual substantive changes to the model may appear somewhat limited. This is especially the case if another new model is due out in 2012, according to the Automotive News Europe report. As well as saving money on production efficiencies and standardised components VW has also saved money on developing a brand new platform with this model cycle. However, the Golf is perceived as a product of inherent quality, which has traditionally been its USP in a crowded market place. As a result the new model may prove a risky strategy in a segment where the competition gets ever hotter with each new model release.