Posted Dec 6th 2012 5:15PM
Volkswagen is run very differently than every other automaker. Actually, its corporate structure looks more like General Motors did from 1920 to 1970. In other words, VW now looks like the GM that was once the largest and most profitable corporation in the world.
VW is not in any danger of having other automakers copying its corporate structure. Most are unaware of VW's modus operandi, and besides, by traditional business school metrics, VW looks like a productivity basket case.
Any efficiency expert would tell you that VW is too vertically integrated, has too much overlap and duplication, and has way too many brands. VW, meanwhile, keeps growing bigger, stronger and more profitable.
The give-away that Volkswagen Group is run differently from every other car company lies with the fact that it employs a staggering 549,300 people globally. Fortune magazine lists it as the eighth largest employer in the world, behind giants such as Walmart and the Chinese post office. VW has almost as many full-time employees as General Motors (213,000), 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.
Efficiency experts will tell you that on an employee-per-vehicle basis, Volkswagen looks hopelessly inefficient. Financial analysts will tell you that the company woefully trails its competitors on a revenue-per-employee basis. But VW will tell you that it makes more money than any other automaker – 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 US$200 billion is greater than every other OEM. Last year's operating profit of US$14 billion is the kind of performance you expect from Big Oil companies, not automakers.
How can this be possible? How can VW look so uncompetitive from a productivity standpoint, yet out-earn all of its competitors?
Last year's operating profit of $14 billion is the kind of performance you expect from Big Oil companies, not automakers.
Ah, that's the magic of VW's corporate structure. While business schools teach future MBAs that centralized operations can cut cost by eliminating overlapping work and duplication, VW maintains strongly decentralized operations with lots of overlap. While business schools preach the benefits of outsourcing to cut cost, VW is very vertically integrated.
Anytime a car company buys a component from a supplier, that supplier has to charge a profit. If an automaker can make those components in-house, it gets to keep that profit. VW is building a lot of components in-house.
If an automaker truly wants to dominate the market, it has to accept a certain amount of overlap and duplication. It just goes with the territory. To dominate you need multiple brands, and VW has more than anyone else, which admittedly overlap at the edges. But to VW they are more than just brands.
To dominate you need multiple brands, and VW has more than anyone else.
All of VW'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 & loss statements, and their own annual reports. They even 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.
Back when GM was great, it too was a holding company that owned nine stand-alone car companies (Chevrolet, Pontiac, Buick, Cadillac, Oldsmobile, GMC, Opel, Vauxhall, Holden). In the 1960s GM had over 700,000 employees, was very vertically integrated, and was the most profitable corporation in the world.
Back when GM was great, it too was a holding company that owned nine stand-alone car companies.
GM's vaunted president and chairman, Alfred Sloan, who led the company from 1923 to 1956, always fought against centralized operations. He kept GM very decentralized until the day he retired. Then the MBAs got ahold of it. In the 1960s they started implementing "efficiencies" and "synergies" and it's been downhill ever since. Their top-down, command-and-control system of management simply choked the company. It still does.
Meanwhile, VW is operating right out of the Sloan handbook. And its corporate structure gives it an enormous competitive advantage. No matter how much VW's competitors try to rationalise, cut cost, outsource, or partner up with one another, they're never going to overcome VW's advantage. I wonder how many of VW's competitors are even aware of what they're up against.