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VW’s key to overtaking Toyota for global auto domination

There'll be more empty chairs before this is finished.There'll be more empty chairs before this is finished.
There'll be more empty chairs before this is finished.Photograph by Maurizio Gambarini—AFP/Getty Images

Volkswagen’s push to become the No. 1 global automaker hinges critically on its MQB architecture, a method of designing and building cars that VW has hailed as ultra cost-efficient.

At the automaker’s annual financial review in Berlin on Thursday, chief executive officer Martin Winterkorn said that the company’s numerous automotive brands—including VW, Skoda, and Audi— will build 2.7 million cars with MQB architecture this year. That number will rise to 7 million in 2018, as models are renewed.

VW delivered more than 10 million cars to customers in 2014, a company record. Only Toyota, which sells about the same number of vehicles but is more profitable, stands in VW’s way to the summit.

VW Golf, the European version of the Passat, and the Audi A3 are among the more than half dozen car models based on MQB. The U.S. version of the Passat, built in Chattanooga, Tennessee, is based on an earlier design.

“We’re convinced that the massive upfront expenditures for the [MQB] modular toolkit strategy will pay off,” Winterkorn said.

Automakers worldwide are rushing to find strategies to shrink development and manufacturing costs for basic vehicle designs so they can use more capital for advanced connectivity, safety, emission, and autonomous systems. Equity analysts and other automakers have raised doubts that VW’s heavy spending to introduce flexible, modular car designs and the associated investment in factories, tools, and processes will be justified by financial results.

Then again, VW’s 2014 performance suggests that the automaker’s management is proving the critics wrong. Volkswagen posted a 12.7 billion euro operating profit for the year on sales of 202 billion euros. With a pre-tax return on sales of 7.3% for 2014, Hans Dieter Potsch said that the company was on track to achieve the company’s goal of 8% by 2018.

VW doesn’t consolidate its results with joint venture partners in China. Instead, it reports results using the equity method. Its profitability ratios would be even higher if its 5.2 billion euro share of operating profit was fully reflected.

The big profit makers in VW’s portfolio—more or less carrying the company—are Audi and Porsche, with the VW brand serving as a relative drag on results. Last July, the automaker announced an efficiency program for the VW brand, including the cancellation of some slow-selling models.

Oddly, the VW’s brand is struggling most in the U.S., where its sales lag behind much smaller brands such as Subaru. Winterkorn vowed on Thursday that his company is “going on the offensive again in the USA,” with three new SUVs, including a new MQB-based Tiguan, to be built in Mexico starting in 2017.

VW also aims to be a leader in autonomous driving technology. In November, it introduced a VW Passat with Traffic Jam Assist in Europe. The system keeps the car safely in its lane and prevents collisions at low speeds, all without driver intervention. It will soon be available in the U.S. in an Audi A8.

Toyota, for the moment, sells as many vehicles, is about 50% more profitable than VW, and shows no signs of losing its way or backing down. The wizards of Wolfsburg, Germany – where VW is based – are driven, but they are chasing a very swift rabbit.