Born From Kits: Volkswagen Invents The Incredible Money Machine

We have been writing about it for years, now, Bloomberg wakes up to it:

“Volkswagen AG will kick off its biggest technology overhaul in almost two decades.”

Bloomberg still has a hard time of coming to grips with the technological revolution. It’s not just that “more than 40 models will use a set of standardized components such as axles, steering columns and chassis,” as Bloomberg puts it. This is not a parts bin exercise. Through the Volkswagen empire, cars don’t just share the same steering columns. They are designed using standardized building blocks of a common kit architecture.

The kits have Teutonic names like “Modularer Querbaukasten” (MQB) and “Modularer Längsbaukasten” (MLB). Porsche is developing a “MMB” (Modularer Mittelbaukasten) for Mittelmotor (mid-engined) cars.

Volkswagen engineers are already working on the next generation of Baukastens, which could be the Mutter of all Baukasten.

According to Bloomberg, the exercise may lower costs by 5 billion Euros ($6.5 billion) a year, and cut assembly times by 30 percent.

Not quite understanding the kit architecture, Bloomberg raises the specter that one wrong bolt could now bring the whole company down. They cite Christoph Stuermer, a Frankfurt-based analyst with IHS Automotive, which is not known for its precise predictions:

“If something goes wrong, then one may get hit by an epidemic plague. The more connected the structures, the higher the threat of contagion.”

Volkswagen already has quite cleverly leveraged platforms across models, brands and segments. There is very little similarity between an Audi TT and a Volkswagen Beetle, despite them (and a panoply of others) sharing the same underpinnings. The kit architecture takes this principle to a new dimension. Properly executed, it can make for a very profitable car company. Juergen Pieper, an analyst with Bankhaus Metzler inFrankfurt, estimates that the technology will save 5 billion Euros by 2016, and says:

“The parts-sharing program is a very big lever to improve profitability that other companies don’t make use of because of the complexity. Without this cost-cutting program, margins wouldn’t likely rise from this year’s peak.”

Volkswagen reported an operating margin of 7.7 percent through the first nine months of 2011 and has a goal of lifting that to more than 8 percent by 2018. Without the new vehicle architecture, margins could average about 6 percent, said Pieper.