Toyota’s record gains, and Piech’s shattered dreams

Announcing record profits, again

Today, Toyota announced a second year of record net profits, and it forecasted a third. The press conference was held at 3pm in Tokyo, timed to coincide with the close of Tokyo trading, and the start of Friday business in Wolfsburg. You, and Volkswagen, can watch the entire presser on streaming video. For a quick summary of the important numbers, refer to Reuters, or Bloomberg. Instead, let’s focus on a question that was neither asked, nor answered at the press conference: What was Piech’s beef with Winterkorn, and why did Piech have to go? It had to do a lot with today’s numbers.

The world’s top three sold each around 10 million units last year. This is where the similarities end. Let’s charitably book General Motors under “recovering patient.” With an operating margin of only 2%, and with its cars bringing only $16,000 each on a global average, compared to Volkswagen’s and Toyota’s $22,000 per unit, GM may have a hard time surviving the next downturn, unless it recovers fast.

The true duel of the giants is between Toyota and Volkswagen. Both sold slightly more than 10 million units last year. Both sold them for around 226 billion dollars (converted into today’s dollars). Both have their bases in high-cost countries. Then why can Toyota turn its 10 million units into an operating income of $23 billion, when Volkswagen achieves only $14 billion?

This probably was the big question Ferdinand Piech asked Martin Winterkorn, a question Winterkorn could not answer in the presence of the ever-present labor unions. The answer is in the last row of the table. Volkswagen’s global headcount is nearly double that of Toyota. As long as Volkswagen shows profits, and as long as the unions sit at the conference table, jobs are sacrosanct at Volkswagen. RIF is a taboo word in Wolfsburg. Even during times of losses, labor costs had to be saved the hard way, by attrition, by working only four days, and by satisfying the urges of the unions with callgirls.

Winterkorn promised Piech a program that saves $5.6 billion per year, a program that was never delivered. A look at the table above shows why $5.6 billion. With $5.6 billion less spent, Volkswagen could rival Toyota’s results. Unless that’s done, no chance. Piech’s dream was to trounce Toyota, not just in sales, but also in profits. When Winterkorn took over from Piech as CEO in 2007, he promised Piech (who moved into the Chairman position) that his dream will be fulfilled. The promise was named Strategie 2018, and its goal was for Volkswagen to be number one, not just in units, but also in profitability, innovation, customer satisfaction, and probably more, by 2018.

Looking at the table above, Winterkorn may have a chance to become #1 in unit sales. The more important profit goal is unreachable, as long as VW continues on its merry inefficient ways. Winterkorn says he will save the 5 billion by 2017, but nobody is really believing it. Volkswagen will have a hard time matching Toyota in efficiency as long as VW needs two people when the job can be done by one at Toyota. To make matters worse for Volkswagen, Toyota’s TNGA program has just begun. This program aims to raise TMC’s already sky-high efficiency even more. By the time Winterkorn, now unopposed at the top of VW, has saved his 5 billion (if he ever will) Toyota will have moved the target even further into the unreachable. (Hint: Toyota plans to sell fewer cars in the current fiscal, but it also wants to improve its net income.)

At the end of the day, Volkswagen can only match Toyota in efficiency, if it can do the job with one guy instead of two. Martin Winterkorn owes his job and the ouster of Ferdinand Piech to the unions, and to the State of Lower Saxony, both highly averse to a change in Volkswagen’s headcount. In other words: Strategie 2018 will fizzle. Two years ago, Volkswagen’s powerful works council chief Bernd Osterloh already suggested to shelf the Strategie 2018. He will see his wishes fulfilled. The fulfillment of Piech’s vision however, thought to be in touching distance only a few months ago, has become impossible.

And very most likely, that’s why Ferdinand Piech said: “Ursula, we are leaving. Those idiots don’t deserve us.”