Bloomberg News

VW’s Revamped Golf: It’s More About Tech Than the Look

September 04, 2012

VW Golf Becomes Rolling Hotspot to Tap $12 Billion Savings

VW shortened the lifecycle of the previous version of the Golf to four years from seven to tap the new technology. Photographer: Jochen Eckel/Bloomberg

For almost four decades, Volkswagen AG (VOW)’s Golf has largely defined the hatchback segment -- as well as VW itself. So with its latest incarnation of the Golf, the German automaker has played it safe, focusing more on technology than the look so it wouldn’t alienate the car’s legions of fans.

Though the makeover is part of VW’s most extensive technology rollout in almost 20 years, the biggest changes won’t be visible to customers. Instead, VW has designed a lighter steel frame that helps reduce fuel consumption by as much as 23 percent and has upgraded the electronics with features such as equipment that can make the car a rolling Wi-Fi hotspot.

The model, which made its global debut at an event in Berlin today, uses standardized components such as electronic systems and axles. The platform, known internally as MQB, is planned to underpin more than a third of the carmaker’s vehicles as it cuts costs to bolster its bid to beat Toyota Motor Corp. (7203) and General Motors Co. (GM:US) in sales and profit by 2018.

“Volkswagen wouldn’t exist today without the Golf,” said Christoph Stuermer, an analyst with IHS Automotive in Frankfurt. “The new MQB architecture is built around the Golf, making the car the backbone of VW’s market strategy.”

The upgrades should help the Golf narrow the gap with the Toyota Corolla and Ford Motor Co. (F:US)’s Focus, the world’s top sellers. Sales of the VW hatchback are expected to jump 11 percent to 710,000 vehicles next year, while the Focus is poised to slip 4 percent to 870,000 and the Corolla and related variants could rise 4 percent to 1.01 million, according to IHS.

Short Cycle

“The Golf is by far the most important vehicle” for Volkswagen, said Chief Executive Officer Martin Winterkorn at the model’s debut today. “The Golf sets the direction for the future of Volkswagen, for the future of the automobile.”

VW shortened the life cycle of the previous version of the Golf to four years from seven to tap the new technology. The Wolfsburg, Germany-based manufacturer forecasts that the new platform will lower production costs 20 percent as it assembles cars faster with fewer components. Savings could total 10 billion euros ($12.6 billion) over five years, according to Juergen Pieper, a Frankfurt-based analyst with Bankhaus Metzler.

The Golf and the Audi A3, which went on sale in Germany last month, are the first two cars that will use the technology. More than 30 other models, including the Polo subcompact and the mid-sized Passat as well as vehicles from the automaker’s Seat and Skoda brands, will be based on the platform as it’s rolled out over the next four to five years.

Cost Squeeze

Volkswagen, which targets annual sales of 10 million vehicles by 2018, anticipates selling 3.5 million small and mid- sized cars a year that share MQB parts. The initiative marks the biggest technology overhaul since Ferdinand Piech, VW’s chairman and its former chief executive officer, pushed the company to use common underpinnings in the early 1990s to stem losses.

The effort to squeeze costs out of compact models reflects increasing competition as upscale carmakers like Bayerische Motoren Werke AG (BMW) and Daimler AG (DAI)’s Mercedes-Benz expand their small-car offerings to attract younger drivers and meet tighter environmental regulations. Mercedes is targeting Golf drivers with its revamped A-Class, which goes on sale on Sept. 15.

Like VW, Toyota is trying to share more parts among its models, said Reto Hess, analyst at Credit Suisse Private Banking in Zurich. “But Toyota is at the moment lagging behind Volkswagen in this,” Hess said.

Toyota also demonstrated the risks of sharing parts in 2009, when defects involving unintended acceleration spread across models and to the Lexus brand. The manufacturer recalled more than 10 million vehicles worldwide and was fined $49 million by the U.S. government for its handling of some of the issues.

Less Choice

The complexity of VW’s approach may limit the ultimate savings from the program, as the manufacturer becomes dependent on just a few large parts makers, IHS’s Stuermer said.

“There are not many suppliers that take the risk and sign such a contract worth many millions of euros,” he said. “Instead of five, VW will more likely have two suppliers to choose from.”

VW’s play-it-safe approach to the new Golf risks opening the door to competitors as they step up their challenge to the German company’s bread-and-butter model. Hyundai Motor Co. (005380)’s i30 has even caught the eye of VW’s Winterkorn. In a video posted on YouTube, he can be seen praising the car at last year’s Frankfurt Motor Show.

The i30 starts at 15,990 euros in Germany, 985 euros less than the current version of the Golf. The top-of-the-line Golf GTI version costs 32,775 euros, about 8,800 euros more than the base price for the new Mercedes A-Class. The new Golf will cost about the same as the current one when deliveries start in the fourth quarter, VW said.

Loyal Clientele

“With the growing competition in the segment, the Golf needs to react quicker to innovations from rivals,” said Stefan Bratzel, director of the Center of Automotive Management at the University of Applied Sciences in Bergisch Gladbach, Germany. The Golf’s successful tradition “might also turn into a handicap as it holds back more radical changes.”

Those concerns don’t bother dealers like Ernst-Robert Nouvertne, who runs two stores in Solingen, Germany, about 25 kilometers (15 miles) northeast of Cologne. The car’s everyman appeal and its loyal clientele means half his allotment is all but sold, he said.

The new version also offers opportunities to lure customers from higher-end models like the BMW 3-Series, thanks to an extended range of options, he said. Those include massage seats, heated steering wheels, three-dimensional navigation maps and the Wi-Fi hotspot, which allows back-seat passengers to use the vehicle’s Internet connection.

Beetle Beater

“The Golf accounts for most of our volume,” said Nouvertne. “The model appeals to new drivers as well as pensioners.”

VW will further broaden its range by making the seventh generation of the model available with engines the burn natural gas as well as offering plug-in hybrid and electric versions, CEO Winterkorn said today.

The Golf is VW’s all-time best-seller, even surpassing the Beetle. Since the hatchback’s introduction in 1974, VW has sold more than 29 million Golfs worldwide, compared with 21.5 million Beetles. VW says a big part of the car’s success stems from the company’s cautious approach in its design.

“A new Golf version should never represent a revolution compared to the previous model,” Ulrich Hackenberg, VW’s development chief, said at a preview event in Wolfsburg last month. “Otherwise, clients of older versions would feel lost.”

To contact the reporter on this story: Christian Wuestner in Berlin at cwuestner@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net


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