Volkswagen has embarked on its rebranded strategy of Transform 2025+ but how has the group changed and what are its plans for manufacturing operations?

Volkswagen Werk WolfsburgVolkswagen produces around 1 in 4 of all cars and vans made in Europe. It is the leading developed world brand in China, and despite the continuing fall-out from the diesel emissions scandal, there is no sign of either position changing in the near term. However, with around $15 billion worth of fines already levied on the company and the seeming inevitability of more to come, the group’s management knows that it has to reposition and reorganise the company to face future challenges.

For example, if Audi’s apparent mis-reporting of CO2 emissions in different drive cycles turns out to be rooted in more nefarious activity, the costs and damage to the company’s remaining reputation could well become close to unbearable. The fact that the government of the state of Lower Saxony has a 20% stake in Volkswagen may help to shield it somewhat from wider political fall-out, but Volkswagen has a long way to go to fully address the problems arising from the diesel scandal and sort out the multiple organisational and strategic issues in front of it.

Ahead of these problems emerging last year, the company had embarked on a new strategy, with the strapline ‘Together – Strategy 2025’; this has since been updated and rebranded as ‘Transform 2025+’. But how has Volkswagen really changed in the last year and what are its plans for the years ahead, especially in terms of the company’s manufacturing operations?

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At the heart of the group’s turnaround strategy is the rebuilding of the core Volkswagen brand, which has suffered most in the aftermath of ‘diesel-gate’. This will involve much more than a simple repositioning of the brand; major changes to its operational efficiency and productivity are planned, supported by significant investments in e-mobility, connectivity and electric vehicles. This will not be a quick process and Volkswagen has said it will be 2020 before it will actually launch its major e-mobility offensive; it also plans to sell 1m electric cars a year by 2025, around 10% of current global volumes.

Financial resources being re-allocatedThese changes will be funded by a variety of sources, including money released by discontinuing some low-volume and often barely profitable vehicle lines and variants. These could release as much as €2.5 billion ($2.6 billion)for the e-mobility programme which is expected to generate €1 billion of annual revenue by 2025. A broader cost-cutting exercise was announced in November 2016 under the ‘Future Pact’ strapline, with 30,000 jobs going at the Volkswagen brand, 23,000 in Germany alone.

These job cuts and parallel re-organisation are expected to produce a positive impact on earnings of as much as €3.7 billion annually by 2020, €3 billion from Germany. In parallel, VW wants to double its operating margin from 2% to 4% by 2020 and then to 6% and higher from 2025 onwards. This is clearly needed because in the first nine months of 2016 the Volkswagen brand saw its operating margin fall from 2.8% to just 1.6%.

Electric powertrains will feature strongly in VW’s future vehicle line-up

Electric powertrains will feature strongly in VW’s future vehicle line-up

Confusing multiple straplines...Volkswagen’s potential transformation is nothing if not ambitious, although its strategic direction can appear confusing because of the multiple straplines and announcements of new actions and plans; in addition to those mentioned above, the carmaker is using ‘Volkswagen: Moving People Forward’ to encapsulate its vision for the future. The transformation of the company’s geographic, product range and manufacturing organisation will moreover see the company transformed with “a stronger entrepreneurial spirit, a more transparent discussion culture, flatter hierarchies and more flexible working practices.”

… but a staged process is becoming clear...The re-orientation and transformation of Volkswagen should to take place in three phases:• Phase 1, through to 2020, when the Volkswagen brand will be completely restructured and transformed along its entire value stream, developing new competences at the same time• Phase 2, through to 2025, when Volkswagen wants to take the lead in e-mobility; and by this time the company expects to be leading the industry’s profitability rankings once more• Phase 3, through to 2030 and beyond, when Volkswagen wants to complete the repositioning of the brand at the top of the volume segment, close to the position of premium brand competitors.

… with a revised geographic and model focus ...The detailed plans to enable these broad aims to be reached need to be fleshed out, but some of the specific actions have been revealed, including:• Transforming the brand’s position outside Europe and China, where it is most established. Specifically, its plans to develop its position in North America from that of a niche player into a profitable volume player, changing its product offering towards large SUVs and limousines; full electric vehicles, produced using the group’s new MEB electric platform, will be made in North America from 2021 onwards.

In China, where the brand is already the leading international brand, it will expand the range of SUVs offered and move into electric vehicles as well. In other emerging markets, especially India, South America and Russia, Volkswagen will focus on economy segment vehicles:• The re-opening of the “glass factory” in Dresden which used to make the Phaeton to produce the new e-Golf – with a range of 300km – from April 2017, following a modest investment of €20m.• The launch of a new range of electric vehicles: Volkswagen’s plans remain somewhat opaque because, while it has recently announced two new electric vehicles, based on the MEB platform, it actually plans to launch over 30 purely electric vehicles by 2025 – the majority of these (including the e-tron electric range at Audi) will likely be electric versions of existing vehicles as opposed to entirely new vehicles based on MEB.• Cutting no less than 23,000 jobs in Germany and another 7,000 worldwide from the Volkswagen brand specifically; compulsory redundancies will reportedly be avoided. In partial recompense, the brand will create 9,000 new jobs in future technologies, especially e-mobility and connectivity; these areas need substantial resources in software development as demand for traditional manufacturing skills begins to fall, especially as automation increases and Industry 4.0 practices spread throughout the industry; the company will facilitate retraining, although it is likely that many of the manufacturing jobs lost will result in early retirement as opposed to retraining.• The return of production of the Golf Mk 8 for North America to Wolfsburg (a move which may have been at least partially prompted by the threat of import tariffs on Mexican-built vehicles by the new Trump government inthe US).• Confirmation that a Seat version of the new Tiguan SUV will be added to the production line-up in Wolfsburg.• And the re-focusing of the production activities at Volkswagen’s major component plants in Germany, as detailed below.

"At the heart of the group’s turnaround strategy is the rebuilding of the core Volkswagen brand, which has suffered most in the aftermath of ‘diesel-gate’"

Platform strategy changing too

For many years, VW had been at the forefront of the platform approach, whereby a limited number of core components are used to underpin an at-times-bewildering array of models. While this approach will remain in the new company structure, changes are afoot. Prior to the changes announced for Volkswagen, its sister brand Audi had also announced a number of major changes to its operations. Press reports have also suggested that Audi will progressively switch vehicles from the A6 upwards to the Porsche-developed MSB platform, meaning that the MLB platform will slowly be dropped. The Audi A4 would switch to the Volkswagen MQB platform, which would cover all vehicles from the Polo through to the Passat and A4/A5/Q5; the MHB platform will continue to be used for the Up! and other small vehicles. With MSB for larger and sports cars, and MEB for all-new full-electric vehicles, four platforms will underpin all future VW group models.

Volkswagen revealed core details about its MEB-platform vehicles at the 2016 Paris motor show when specifications of the first MEB models appeared, based around the I.D. concept; these will have a range of at least 250km, although this would be a scalable technology with vehicles potentially having a range of up to 600km; the first of these is expected to be in production by 2019.As part of the cost-cutting exercise that the company is now undertaking, Volkswagen is ‘tweaking’ existing platforms for new models, rather than developing all-new platforms. For example, the MQB platform will be used for the next two generations of cars that currently use this base; as part of the current MQB roll-out strategy, the number of vehicles worldwide using MQB will grow from 2m in 2014 to 7m in 2018. This will cover vehicles from the Polo (and equivalent Seat and Skoda models), through the Golf/Touran/Jetta and wide range of Chinese-market variants to the Passat and CC models. The cost-cutting exercise that the company is now involved in may also see the end of the Beetle, sales of which have fallen in recent years; the replacement for the Scirocco coupe is another vehicle with an uncertain future. In MPVs, VW is expected to retain the Sharan for Europe, although the Seat equivalent, the Alhambra, could well be dropped; Sharan production may also be added in China.

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It will be in SUVs and crossovers, however, that the biggest growth in conventionally-powered vehicles will be seen; Volkswagen is expected to introduce SUVs throughout the size range, as will other brands. A Polo-based SUV (perhaps called Taigun, or T-Cross) is expected to be made at Volkswagen’s plant in Pamplona, Spain within the next couple of years, as well as a Seat version made by Seat in Martorell, in Spain. Volkswagen will make a Seat version of the Tiguan, while Skoda is making its own Kodiaq seven-seater SUV, with a Seat model to follow soon. Audi meanwhile has reportedly registered all the model names from Q1 to Q8, so a very strong Audi SUV line-up can be expected. Alongside the existing Q3/Q5/Q7 range, the Golf-based Q2 is now in early production ramp-up in Germany, while an all-electric Q6 e-tron should go into production in Belgium in 2018. More of these Q models will appear in the coming years.

Major change in ChinaAudi has also outlined a completely new growth strategy for the Chinese market. The carmaker has worked alongside First Auto Works (FAW) since it entered the Chinese market in 1991. Now the two companies will intensify their cooperation, at the heart of which will be five new e-tron (electric) models in the next five years, all of which will be made in China, including models that will have a range of over 500km. More specifically, Audi’s Chinese operations will launch at least one Chinese-made electrically-powered SUV and sedan in each major segment. Audi’s Chinese operations are already producing an electric e-tron version of the A6 long-wheelbase model. These moves, and those by the Volkswagen brand, have been stimulated by new rules from the Chinese authorities that electric vehicles will have to account for 8% of sales in the country; with less than 1% of Volkswagen’s current Chinese sales being electric, the scale of the transformation required is huge and very ambitious – the company would need to sell 60,000 electric vehicles in China by 2018 and double that soon after.

Component companies refocusIn addition to its German vehicle assembly plants in Wolfsburg, Emden, Zwickau and Hanover, Volkswagen Germany has three significant component plants that will be at the heart of its new electric-vehicle strategy. Significantly, it was the senior workers’ representative on the VW Group board – Bernd Osterloh – who announced that the new electric platform (MEB) and its components will be made in Germany and therefore “will make our German locations pioneers of electrification [and] that these future-oriented vehicles will be made in Germany and not in other countries.” In addition to the e-Golf being made at Dresden, two all-new electric vehicles, using MEB, will be made in Wolfsburg and Zwickau, although the size and details of these remain to be confirmed.The key aspects of the electric system used in these new vehicles will be made as follows:• The Braunschweig plant will produce battery systems, both for new MEB vehicles, as well as electric versions of the current MQB models, such as the e-Golf.• The Kassel plant will develop the MEB drive system and also assemble the entire system and electric transmission system in parallel.• The Salzgitter plant will supply MEB drive system components for Kassel and also build battery cells and modules.Volkswagen is certainly changing, trying to rebuild and reposition itself after an especially bruising and financially painful year. Its problems are not over, but it has recognised the need to change and refocus; its plans are ambitious and may work, but the risk of further fines and damage to its corporate standing from the continuing emissions scandal remains – and the costs of these could yet delay or derail the turnaround plans outlined here.