• Dec 6th 2012 at 5:15PM
  • 141
Volkswagen is run very differently than every other automaker. Actually, its corporate structure looks more like General Motors did from 1920 to 1970. In other words, VW now looks like the GM that was once the largest and most profitable corporation in the world.

VW is not in any danger of having other automakers copying its corporate structure. Most are unaware of VW's modus operandi, and besides, by traditional business school metrics, VW looks like a productivity basket case.

Any efficiency expert would tell you that VW is too vertically integrated, has too much overlap and duplication, and has way too many brands. VW, meanwhile, keeps growing bigger, stronger and more profitable.

The give-away that Volkswagen Group is run differently from every other car company lies with the fact that it employs a staggering 549,300 people globally. Fortune magazine lists it as the eighth largest employer in the world, behind giants such as Walmart and the Chinese post office. VW has almost as many full-time employees as General Motors (213,000), Ford (164,000) and Fiat-Chrysler (197,000) put together. While those three behemoths collectively built 19 million vehicles last year, VW "only" built 8.5 million.

John McElroyJohn McElroy is host of the TV program "Autoline Detroit" and daily web video "Autoline Daily". Every month he brings his unique insights as a Detroit insider to Autoblog readers.

Efficiency experts will tell you that on an employee-per-vehicle basis, Volkswagen looks hopelessly inefficient. Financial analysts will tell you that the company woefully trails its competitors on a revenue-per-employee basis. But VW will tell you that it makes more money than any other automaker – by far.

While VW's stated goal is to become the world's largest car company by 2018, it's already there if you measure it by revenue and profits. Its revenue of $200 billion is greater than every other OEM. Last year's operating profit of $14 billion is the kind of performance you expect from Big Oil companies, not automakers.

Last year's operating profit of $14 billion is the kind of performance you expect from Big Oil companies, not automakers.

How can this be possible? How can VW look so uncompetitive from a productivity standpoint, yet out-earn all of its competitors?

Ah, that's the magic of VW's corporate structure. While business schools teach future MBAs that centralized operations can cut cost by eliminating overlapping work and duplication, VW maintains strongly decentralized operations with lots of overlap. While business schools preach the benefits of outsourcing to cut cost, VW is very vertically integrated.

Anytime a car company buys a component from a supplier, that supplier has to charge a profit. If an automaker can make those components in-house, it gets to keep that profit. VW is building a lot of components in-house.

To dominate you need multiple brands, and VW has more than anyone else.

If an automaker truly wants to dominate the market, it has to accept a certain amount of overlap and duplication. It just goes with the territory. To dominate you need multiple brands, and VW has more than anyone else, which admittedly overlap at the edges. But to VW they are more than just brands.

All of VW's brands (VW, Audi, Seat, Skoda, Bentley, Lamborghini, Ducati, Porsche, Bugatti, MAN, Scania, and VW Commercial) are treated as stand-alone companies. They have their own boards of directors, their own profit & loss statements, and their own annual reports. They even have their own separate design, engineering and manufacturing facilities. Yes, they do share some platforms and powertrains and purchasing, but other than that they're on their own.

Back when GM was great, it too was a holding company that owned nine stand-alone car companies.

Back when GM was great, it too was a holding company that owned nine stand-alone car companies (Chevrolet, Pontiac, Buick, Cadillac, Oldsmobile, GMC, Opel, Vauxhall, Holden). In the 1960s GM had over 700,000 employees, was very vertically integrated, and was the most profitable corporation in the world.

GM's vaunted president and chairman, Alfred Sloan, who led the company from 1923 to 1956, always fought against centralized operations. He kept GM very decentralized until the day he retired. Then the MBAs got ahold of it. In the 1960s they started implementing "efficiencies" and "synergies" and it's been downhill ever since. Their top-down, command-and-control system of management simply choked the company. It still does.

Meanwhile, VW is operating right out of the Sloan handbook. And its corporate structure gives it an enormous competitive advantage. No matter how much VW's competitors try to rationalize, cut cost, outsource, or partner up with one another, they're never going to overcome VW's advantage. I wonder how many of VW's competitors are even aware of what they're up against.

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    • 1 Second Ago
      • 2 Years Ago
      VW and it's companies are making some of the best designed autos in the marketplace today and on a consistent basis. Also VW Group is not pressured to achieve outrageous profits and do not pay their CEOs astronomical sums as they do here in the US and as a result they can focus on making products the marketplace wants as well as take risks...just a reminder that most publicly traded German companies have German states as major stockholders which isn't a bad thing because it seems to be working for German workers as well as their economy which is the strongest in Europe and the world currently...
      • 2 Years Ago
      Great piece, interesting perspective. Only such a popular blog can attract so many trolls!
      • 2 Years Ago
      Great Marketing plus financial and commercial strategies by their CEOs
      • 2 Years Ago
      I couldn't find operating margins for Mercedes Benz (separating out Daimler and MB Truck divisions). However, here are margins for the last quarter: Honda (4.44) VAG (4.79), Ford (5.89), Toyota (6.30), Nissan (6.73) Once again, VAG is only middle of the pack in terms of efficiency when measured by operating margin. I'm not saying I disagree with Mr. McElroy -- I just think the article would be much better if he expanded and flushed out his assertions.
        • 2 Years Ago
        Interesting info on operating margins--what is your source? Not disputing, just curious...
      • 2 Years Ago
      I enjoyed reading the article but it misses the big difference between us and EU companies. In the us, shareholder rules require a company to be as profitable as possible. This requirement doesn't exist in the EU. It means that the short term p&l is far more important to a us company. us companies spend far more effort on accountancy, and sometimes it goes wrong, like with Enron, however, once its a part of the work culture, its very difficult to change to a more traditional structure. I also think that VW get far more support from the EU because of their business model. It might not be direct funding, but when you have the ears of the regulator of the biggest market in the world (the EU block is bigger than the USA) you find that you magically get market advantage.
      r2o3x4 liao
      • 1 Year Ago
      My VW Passat was burnt on highway few weeks ago. All my families were on the car that time. I called the police office, the policemen and firemen arrived and put out the fire in 10 mins. 2 days later, after we checked the car with the investigator from the fire dept and VW's engineer, we found that there are 2 holes on the engine caused the fire. And now, VW said it's because of the aging of my car that is just reaching 100,000 miles! It's really ridiculous especially when seeing the file on youtube! http://www.youtube.com/vw
      Sateesh Magal
      • 2 Years Ago
      Alfred Sloan was a great Automotive legend probably responsible in part for great cars like the Buick 8. Cars like Buick 8 are still worth their weight in Gold. Alred Sloan represented a typical hardworking American of the Pre-1960 era. The M.B.A's have ruined the worlds Banks, Industries and many other manufacturing legends of the world by their false sense of superiority theories. I have had the misfortune of encountering such MBA's in my career as an Architect - MBA's who do not know anything about putting together a building but want to justify their hefty salary by putting on a show of doing their job. I feel sad at the State of GM. As a kid I grew up with my Dad telling me about the GM ad "GM the mark of excellence" aand the pride with which he drove a 1968 Chevy 2 Nova. Today GM makes cheap Chinese assembled cars for export to BRIC countries. Louis Chevrolet must be turning in his grave seeing these miserable cars on the roads of the world. Of course I exclude the American built SUV's and Trucks that Chevrolet makes. Sateesh S. Magal (India - sateesh@magalassociates.com)
      • 2 Years Ago
      Alfred P. Sloan's recipe works today as well as it ever did. GM got in trouble when it went away from Sloan (GMAD, Roger Smith's disastrous CPC/BOC reorg, etc.). What GM did, and now VW has done is manage to manage multiple brands. This is no mean trick, as it was a notable failure at Ford and beyond the ken of many other makers, too. And a word about vertical integration. The efficiencies of vertical integration never went away, but OEMs (primarily in Detroit) baked in high variable (i.e., labor) and fixed (too much capacity) costs which removed those advantages. Hyundai is highly vertically integrated, their steel manufacturing is the standard for the industry. And they are crushing the competition.
        • 2 Years Ago
        You make a great point regarding VW and Hyundai/Kia. These two car companies will be leading the industry by 2020 and this is in large part because they keep the bean counters in lock down. I get so annoyed when people post comments bashing unions, blaming them for the downfall of the Big Three. It should be pointed out that VW works in tandum with organized labor in Gemany and that this is where the bulk of the company's labor resides. In Germany, labor is involved in almost every aspect of business and this has been great for both companies and the national economy. Here, in America, we have GOP class warfare which makes a lot of workers envy (hate) union workers, but this results in a poor economic state as well as biased auto reviews. I only wish that the Auto Taskforce had directed the 'new' GM away from Toyota and in the direction of a VW structure. If VW ran GM, Chevy would be premium Buick would be super premium with Caddy on top; however, each division would have a fair amount of overlap in the way of well-rounded line ups and halo cars. If GM ran VW, the CC would be dead due to its closeness to Audi's turf!
      • 2 Years Ago
      Like others said, good article but makes too many assumptions without going in depth
      • 2 Years Ago
      I always had a nagging suspicion about their way of operations as i've noticed that VW is also one of the most aggressive marketeers for specifically its VW brand. And this is where the seperate 'P&L' comes in. I've often wondered why they dont market their Skoda cars as aggressively as their VW cars- the logic is- as you said, each group/brand has its own BOD, its own P&L etc. Since everything is decentralized, each brand takes its own decisions and does not let the VW Board take decisions for all of it. Nice article!
      • 2 Years Ago
      • 2 Years Ago
      Man, Do we need another Volkswagen Commercial? I will tell you why Hyundai is not run like any other car company. Well, its because its Not another car company, its Hyundai!! I will tell you why Nissan is not run like any other car company. Well, its because its Not another car company, its Nissan!! I will tell you why Ford is not run like any other car company. Well, its because its Not another car company, its Ford!! etc, etc
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