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Why Ford Is Worried About VW

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Which automaker is the biggest in the world?

For years, there have been only two answers to that question: Detroit's General Motors (NYSE: GM  ) , which held the title for a long time, and Japan's Toyota (NYSE: TM  ) , 2012's reigning champ, which has swapped the crown back and forth with GM in recent years.

Soon, though, there could be a third contender: Germany's Volkswagen (NASDAQOTH: VLKAY  ) , which is in the early stages of riding a radical new approach to designing and building cars to increasing success in markets around the world.

And that radical new approach has many automakers worried, starting with Ford (NYSE: F  ) .

Platforms and the success of Ford's turnaround
Most automakers use some variation of a "platform" strategy to share parts and combine manufacturing of several models. In industry-speak, a platform is simply a set of common dimensions that allow different vehicles to share key parts (which typically aren't readily visible) and to be made on the same assembly lines.

Cars built on the same platform may be -- and often are -- quite different from one another, but because of what they have in common, they cost less to design and produce. For example, Ford's global "C" platform is the basis of the Focus compact, the Escape SUV, and the C-MAX hybrid.

Those are three very different vehicles, but they increase Ford's economies of scale -- and, thus, its profits per vehicle sold -- because of what they have in common. The commonality also makes it simpler and more cost-effective to bring them into emerging markets, leveraging Ford's existing production bases in places like Russia and China, where the Focus has become a top seller.

In recent years, Ford has drastically consolidated the number of platforms (and models) that it uses globally. This move, a key part of the "One Ford" plan that has transformed the company, has resulted in a huge reduction in Ford's global fixed costs. It has also resulted in a significant improvement in quality, as Ford is now able to give each new platform and each new vehicle more design and engineering attention.

That was a huge step forward for Ford. But VW's new approach takes that concept one big step further.

From platforms to Lego bricks at VW
VW has essentially rethought the whole idea of vehicle platforms, coming up with a modular approach to car-building that allows the sharing of designs and components on a massive, global scale. Essentially, VW's plan is to have just three vehicle architectures -- but to design them in a modular way, so that dozens of different, distinct vehicle models can be built from the three sets of common components, as if they were Lego bricks.

The potential scale is vast: Where Ford might order 4 million or 5 million copies of a particular part over the production run of a series of models on one platform, VW might order 30 million or more. That kind of scale should result in huge cost savings: According to a Reuters report, Morgan Stanley has estimated that VW's savings could be as much as $19 billion by 2019, and the company's overall gross margins could approach 10% -- huge for a global automaker.

This is an enormous undertaking. VW owns a whole series of brands, from Skoda and Seat on the cheap side to Audi, Bentley Motors, and Lamborghini on the high end. Sharing parts, engineering, and major component assemblies across the range presents significant challenges -- but it will result in massive savings.

It will also give VW unprecedented flexibility to create and introduce new models on the fly for specific markets -- using pre-existing sets of common underpinnings. The strategy isn't without risk -- if a design flaw shows up, millions of cars around the world could be affected -- but so far, VW has done a good job of managing that risk.

VW's goal is to ride this strategy to the title of world's largest automaker by 2018 -- a goal it may beat by several years. It may also end up being the world's most profitable automaker as well.

That has Ford worried, and it should.

Will Ford and its rivals scramble to catch up?
Last year, General Motors (NYSE: GM  ) unveiled a plan to essentially emulate the globalized "One Ford" approach by the end of the decade. That plan was hailed as a good move for GM at the time. But now the bar is being raised much higher.

Ford has acknowledged that it is benchmarking VW's modular strategy, as has Toyota (NYSE: TM  ) . Among the major global automakers, those two may be in the best position to follow VW's lead -- but if VW's strategy turns out to be the long-term success that analysts expect, the industrywide rush to emulate it will be on.

Ford has been performing incredibly well as a company over the past few years -- it's making good vehicles, is consistently profitable, recently reinstated its dividend, and has done a remarkable job paying down its debt. The stock has recently moved up, and it appears investors have started to notice what Ford is doing right. Does this create an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of our top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Simply click here to get instant access to this premium report.

Read/Post Comments (3) | Recommend This Article (2)

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  • Report this Comment On February 11, 2013, at 10:57 PM, neamakri wrote:

    Okay, so a Skoda and a Lamborghini share a bunch of common parts?

    This I don't get: Ford orders 4 million of one part (which I assume they get a god price) but VW orders 30 million of one part and get a huge cost savings. I don't think so. Any automotive parts order for 4 million parts is going to get nearly as good a price as 30 million. I am sure that the economies of scale has pretty much leveled off at 4 million parts.

    Prove me wrong...

  • Report this Comment On March 14, 2013, at 10:27 AM, TMFMarlowe wrote:

    Consider the costs of designing, testing, and tooling up to produce 4 million copies each of 8 different-but-similar parts versus the costs of doing the same work to produce 30 million of just one part (or one entire subsystem). There's a lot more to it than just manufacturing economies of scale.

    John Rosevear

  • Report this Comment On March 14, 2013, at 10:33 AM, TMFTwoCoins wrote:

    I worked in marketing for an automotive aftermarket company for a few years. I developed products that were manufactured in Taiwan, Mexico, U.S. and China. The difference between ordering 4 million and 30 million is huge. Especially depending on weight and how many containers it fills.

    Not sure how that would translate to parts at Ford or VW, but don't underestimate how long manufacturing production runs cut costs and pricing.

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