The Volkswagen Group had an ambitious plan to create the world’s biggest car maker by taking over Fiat Chrysler Automobiles – but it has all come unstuck

Ferdinand Piech, chairman of Volkswagen’s supervisory board, has long wanted to see the VW Group become the largest auto maker in the world. It currently has 12 brands, whose production spans everything from city cars to heavy trucks. 

The world’s largest car maker last year was Toyota with 9.98 million sales, followed by General Motors (9.71m) and the VW Group (9.7m). 

Earlier this year, according to sources at VW, company strategists came up with a plan that would have seen the VW Group expand in size by around 50 per cent and become the unassailable leader in the global car market. 

The scheme was remarkably simple: it envisaged VW buying a controlling stake in Fiat Chrysler Automobiles (FCA) and folding the Italian and American brands into its ambitious global platform strategy.

The resulting 17-brand conglomerate would have sold nearly 15 million cars per year and would have been known as Auto Union.

However, this ambitious plan never got much further than the first stages of consideration. Insiders say that by the end of April this year, financial red lights had started flashing within VW’s Wolfsburg HQ. 

Rather than being in a position to create the world’s biggest car maker and execute probably the most ambitious merger plan in automotive history, VW Group management is now involved in a major fire-fighting exercise.

Although it is selling huge numbers of cars and makes healthy profits, the core VW brand – which accounts for 5.9m of the group’s 9.7m sales – saw its profit margins slide below two per cent for the first half of 2014, with a risk of even lower margins next year. 

With rivals Toyota and Hyundai making margins of over eight per cent with their mainstream cars, the mighty VW brand is, by comparison, in trouble. 

According to industry reports, Volkswagen CEO Martin Winterkorn is looking at cost savings of £4bn per year from 2017. These plans could see a number of ‘low profit’ models simply chopped. For example, the Eos (7651 sales last year) and Scirocco (23,400 sales) could be axed.

The Up city car family will also come under scrutiny, because its expensively engineered NSF platform is shifting less than 200,000 units per year in VW, Skoda and Seat guises.

The next two years will be a whirlwind of activity at the wider VW Group as it struggles to rationalise product development, production and production costs. It is clearly in no position to attempt any kind of further mergers or acquisitions.

It’s a pity, because it is clear that the plan to create the new Auto Union could have worked. According to the auto analysts at ISI in London, VW’s production in 2020 should hit 11.8m units. With Fiat-Chrysler rolled into VW’s production system (a tall order by 2020, says ISI), production would have hit 15.84m.

The logic of VW’s strategists ran like this: the merger between Fiat and Chrysler is about to be rubber-stamped, ahead of a massive injection of cash to develop new models, including a range of rear-drive Alfa Romeos as well as new Fiats and Jeep models. 

So, rather than see huge amounts invested in new Fiat-Chrysler products with no certainty of a profitable outcome towards the end of the decade, the logic went, FCA shareholders could cash in by selling up now to VW. 

The VW strategists also figured that the Agnelli family – which still holds a 30 per cent stake in Fiat – as well as other FCA shareholders could be convinced to sell up now. The Agnellis would almost certainly retain the Ferrari and Maserati brands, while happily letting go of the mass-market brands.

There would have been obstacles, though. The biggest would have been the huge time and effort required on the part of the management team to merge the two sides. The VW Group already produces around 65 model lines across its 12 brands. Integrating Fiat-Chrysler would add another five brands and perhaps another 25 model lines. 

Fiat’s successful South American operation would have to have been sold off (probably to a Chinese buyer). Fiat is currently the number one brand and VW number two in that market. 

What’s left of Italy’s car industry would also have been hit, because a future Alfa Romeo family would have been built in VW Group factories. The Seat brand, which has struggled to prosper, would probably have been wound down or sold.

Coming back to the here and now, the VW Group could yet pip Toyota to the title of biggest car maker in the world (it’s ahead of General Motors in the first half of this year, shifting 4.97m units against GM’s 4.92m).

But it might achieve this while relying on two of its premium brands – Audi and Porsche – for the majority of its profits and with its core brand making dangerously slim margins. 

Volkswagen may have started the year with a plan to become the clear global leader in car making through the Auto Union mega-merger, but it is now going to spend the next few years working flat out to save its own skin.

How the merger could have worked

This is how we think strategists would have proposed merging Fiat-Chrysler into the existing VW Group. The business case for the expensively engineered NSF (Up) platform would have been boosted by using it to underpin the big-selling Fiat 500 family. Alfa Romeo and Fiat 500 versions of the Taigun SUV would have also made sense.

VW’s budget PQ26 family of platforms would have been the perfect home for the next-generation Fiat Panda and a revived Punto (a model that still sells in good numbers). Audi’s upgraded version of PQ26 is used for the A1 and could have underpinned an A1-based Mini rival for Alfa Romeo.

The MQB platform would have absorbed the core of Chrysler-Jeep production – growing considerably in scale in the process – and Audi’s upcoming MLB-Evo platform would have been the ideal basis for high-quality Alfa executive models.

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Comments
24

3 August 2014
If VW can't make SEAT a winner, after thirty years of trying, then what chance do they have with four more SEATs? FIAT, Alfa, Lancia and Chrysler would only add "negative value" to VW. They are worthless brands, poisoned by decades of mediocrity. Plus there is a finite limit on the number of times you can clone a Golf. But Herr Piech's bonkers plan for a new Alfasud was the best bit: nobody under 50 actually knows what an Alfasud is any more.

4 August 2014
VW should have bought Chrysler when it went under. It would have solved plenty of issues in the US for them. The rest of Fiat is largely worthless. Who needs Fiat, Alfa and Lancia really? Fiat 500 is worth while but the rest makes no sense. It will take plenty of time and money to make Alfa work.

4 August 2014
Remorseless mediocrity gets a setback. One would have though that the VW brand would be extremely profitable as the products are not exactly as cheap as chips.

4 August 2014
The major chunk of VW's profitability comes from its Chinese operations. It sits in the market in a comfortable position selling bucket-loads of Audis and VW models based on much older platforms. Both these modes of operation help VW maintain very good margins...............................................But if profitability of the Chinese operations are taken out of the equation VW is very very brittle........The European operations have wafer thin margins and are becoming more cost competitive...........and elsewhere VW is struggling...........Its big push into India has'nt worked and they have heavily scaled down targets unable to compete with locally established rivals..........Seat is yet to turn profitable.........They are far behind Japanese makers in Africa and Asia and their North American operations is swallowing money..................But the big issue is how exactly does VW recover........They are the worlds largest private R&D spender with a very very expensive development cycle.............................Most of these are on similar platforms to achieve marginal improvements, nothing revolutionary...........It is a highly inefficient process.........Most other companies are able to spend just half as much on similar development targets.................For eg..VW invested in a new American R&D centre 3 years ago.........but for what exactly??!! VW do not have any American specific models, Toyota and Honda on the other hand have a range of pick up trucks that give them volumes and good margins..................the same can be said of their Indian operations...........So where exactly is the returns in this massive R&D programme coming from.................Most of which will be consuming money over the next few years!!

4 August 2014
Looking at our own UK market, both Sirocco and UP all numerous at launch, but how many '14 plate cars do we see? And despite the UK being Europe's convertible capital, EOS has never sold in numbers. There are a few others in the VW group that could easily be ditched as a cost cutting measure: Exeo? Phaeton? Touareg? They may be good cars but what's the point in producing something that doesn't sell?

4 August 2014
VW don't lead when it comes to niche models. They have had the resources and the ideas but then don't go ahead and other manufacturers mop up. Nissan turned their European business around this way. Why are VW so slow with getting a B segment crossover to market? Where is the small B segment mpv promised when the Polo was launched in 2009? Why on earth didn't they make the Bluesport two seater sports car? The VW model range is vast, and often excellent, but there are two many dead end cars in it. For what it's worth though, and maybe the figures tell a different story, but I see plenty of Ups on the road and the owners seem to love them.

4 August 2014
I am also glad this (world domination) plan didn't work. The current leadership of the Volkswagen Group are almost approaching the mad genius levels where they'll soon want to own everything in the world. Forget the fat-salaried VW strategists, let me give Piech a peach of a tip - Go buy Toyota! Then there'll be no doubt in any mind left that you're the biggest!

4 August 2014
On the one hand this plan would have been even more unworkable then the creation of British Leyland with its many brands under one roof, on the other hand (at least in theory) can think of quite few Fiat-Chrysler models in which use of Volkswagen platforms (and some engines) would be a huge improvement with Volkswagen in turn benefiting from a few Fiat-Chrysler engines. One example would be a new Fiat 500 or even a sub-500 Fiat Topolino built on the lighter NSF platform and mated to either a 875cc 2-cylinder Multiair petrol or a 800cc 2-cylinder turbodiesel. Anyway, the only reason the UP! and related models are probably not doing as well is because of Volkswagen constantly flipfloping on whether the UP! GT is entering production or not, when it should be a given that the UP! needs a sporting halo version as city cars typically (though not always) cater to younger drivers. What is the point of building small lightweight cars and potent downsized engines is carmakers have no intention of combining to two to show what both are capable of?

4 August 2014
Whatever happened to Julian Rendell? It's at times like this that you need his hard-nosed investigative journalism. Not so long ago VW was lauding the financial benefits of MQB and the automotive media lapped it up. How about going back to some of those claims to test if the savings have really been delivered? Also interesting to note that the VW Production Chief quit last week, citing differences of opinion on MQB. Saviour technology of VW? Maybe not.

6 August 2014
soldi wrote:
Whatever happened to Julian Rendell? It's at times like this that you need his hard-nosed investigative journalism. Not so long ago VW was lauding the financial benefits of MQB and the automotive media lapped it up. How about going back to some of those claims to test if the savings have really been delivered? Also interesting to note that the VW Production Chief quit last week, citing differences of opinion on MQB. Saviour technology of VW? Maybe not.
It can't be working because why would VW stick beam suspension in the rear axle when they previously used multilink? Switching to a cheaper and greatly inferior setup is one example of their desperate cost cutting. Then there are the longevity build problems with latest Golfs and Passats falling to pieces within the first year. It's very hard to build a reputation and all so easily to lose it. Just ask Mercedes in the 90s.

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