Auto Realignment

Time

Commentary

The fallout from the Porsche-Volkswagen merger may propel VW to the forefront of the global automobile industry. Gone are the days when carmakers can sit complacently at the top of the home market. Gone are the days when carmakers can rely on old technology. With new energy initiatives to stem global climate change, new environmental regulations, car makers have to take a longer view, and a broader perspective. GM's ex-CEO Rick Wagoner made the move decades ago in China that now positions the company to return to profitability in the world's largest market. Volkswagen is also reaping the rewards from early strategic foundation building.

The cars of the twenty-first century will be as different from those of the past century as they were different from the horse drawn carriages of the nineteenth century.

Excerpts

Nobody can blame Volkswagen CEO Martin Winterkorn for smiling this past week. VW has just turned the tables on would-be raider Porsche, placing Europe's biggest carmaker in the driver's seat for a planned merger with the much smaller and sportier firm. And while colleagues at rivals like Daimler, Fiat, General Motors and Peugeot are busy trying to survive the current economic storm, Winterkorn seems poised to throw VW into high gear.

Compared to its battered competition, VW is coasting through 2009, boosting its share of global car sales to 12% from 9.9% in the first half of the year. Yes VW's second quarter profits, released July 30, were down 83%, but have you seen the competition's numbers? The markets certainly like the look of the German firm: its stock price surged 5% the day the latest figures were released. "Even in a particularly difficult phase in the international automotive markets we were able to gain share in key markets. This has further improved our position on our way to the top," said Winterkorn in a statement announcing the results.

VW is benefiting from its traditional strengths — and even some of its weaknesses. The German firm has a strong position in Latin America, where it is the leading car maker, and in China, where it is ahead of the pack despite intense pressure from GM. Interestingly, the German car maker's weak position in the U.S. market, the world's largest, has turned out to be a blessing in disguise during this crisis. Toyota has been hit hard by falling sales in the U.S. and is closing a manufacturing plant in California, the first closure ever for the world's largest car maker. VW, meantime, is using the downturn to refocus its American efforts. It knows the U.S. market is key to any manufacturer with global ambitions and plans to boost sales there with what VW officials call their "Toyota killer" — a new mid-sized car specifically designed for the U.S. and meant to compete head-to-head with the popular Toyota Camry. The car will be produced in a new plant under construction in Tennessee.

VW still trails Toyota and GM in global car sales, but its Japanese and American rivals have been hit harder by weakened consumer demand. Global car sales fell 18% in the first half of 2009. But the decline at VW was modest, with car sales falling just 5% to 3.1 million vehicles. Toyota sold 3.56 million vehicles, a decline of 26% from a year ago. GM, hot on Toyota's heels as the U.S. car maker emerges from bankruptcy, sold 3.55 million vehicles worldwide, down 22%. "VW is in a very strong position and has managed to ride out the economic crisis much better than the other manufacturers," says Tim Urquhart, automotive analyst at IHS Global Insight in London.

Even so, it won't be easy for Winterkorn to deliver on his promise to make VW the world's biggest automaker by 2018. Winterkorn must defend VW's lead in China, which will soon become the largest car market in the world. According to IHS Global Insight, VW is now the largest manufacturer in China, with first half sales up 22.7% to 652,200 cars. But GM is rising fast in China, even as it struggles in the U.S., Europe and Latin America. (Read: "The Other GM.")

The merger with Porsche could help VW in the U.S. While Porsche may be a niche sports car maker, it's better known stateside than VW's other premium brand Audi and could add to VW's sex appeal with brand-conscious U.S. consumers. "VW's image in the U.S. could benefit significantly from Porsche," says Jürgen Meyer, a fund manager with SEB Asset Management in Frankfurt. "Americans don't know Audi, but they know Porsche as a premium brand and that will rub off on VW. They could possibly use the Porsche brand name to create a group of premium models like we see today with Audi, but with better brand recognition." Winterkorn will need all of that sex appeal if he's to prosper in the coming recovery.