GM, Renault, VW, others bet on megaplatforms

Mary Barra skipped Europe’s big-gest auto show of 2014 to focus on what is arguably her biggest strategic announcement as General Motors CEO. While other managers were in Paris last month, Barra briefed investors on her ambitious plan to reduce GM’s confusing slew of more than two dozen, largely integrated vehicle architectures to just four modular megaplatforms over the next 10 years.

Like Volkswagen Group CEO Martin Winterkorn, Renault-Nissan boss Carlos Ghosn and Toyota chief Akio Toyoda, Barra knows that having prolific, flexible, globally compatible megaplatforms is a key to success in the fast-expanding, ultracompetitive volume car manufacturing business.

Enormous economies of scale, lower development costs, faster times to market and the ability to build multiple cars on one line are some of the other mouthwatering benefits of megaplatforms. Mastering this part of the business could ultimately decide which automakers survive and which ones don’t as pressures from customers, competitors and regulators escalate.

Two of Europe’s largest automakers, PSA Peugeot Citroen and Fiat Chrysler Automobiles, do not have global megaplatforms and analysts say that leaves them vulnerable in an industry in which bigger is often better, especially when it comes to procurement and establishing a worldwide presence.

Also, by the time GM is finally finished with this mammoth platform revamp it will be 2025 — the kind of distant future one might almost expect from science fiction movies given the auto industry’s current rapid pace of change. By then, it might be commonplace for people to be chauffeured around in self-driven cars powered by hydrogen fuel cells with only water vapor as exhaust.

Just as GM’s chief executive described her long-term vision, VW was busy making those dreams a reality and pocketing the savings for itself. It was ramping up production of its Passat, already the sixth model line underpinned by the group’s ultraflexible modular transverse matrix, better known by its German acronym MQB.

The race is on to find the most flexible, efficient and standardized megaplatform. The stakes are high and VW Group’s head start on its global competition is substantial. Its MQB megaplatform puts it years ahead of rivals when it comes to the next evolutionary stage of mass car production. European competitors such as Renault-Nissan, PSA and Fiat Chrysler are rushing to catch up, shifting to a largely modular approach from a more integral one. But as with any strategic rollout that overhauls entrenched processes and disrupts business relationships, it entails risks.

“The bigger the platform, the bigger the recall will be if there is a problem,” said Ernesto Antolin, vice chairman of Grupo Antolin, the industry’s largest supplier of vehicle headliners. “That is the bad side of supplying a megaplatform.”

Toyota’s massive, image-damaging recall in 2009-10 was hard to contain because it affected millions of vehicles made all over the world. In addition, VW’s launch of MQB, which is forecast to underpin nearly 6 million vehicles by 2020, has included a few bumps that the automaker has been able to contain thus far.

“Modularity is such a better way of thinking and acting and implementing than any other form of platform strategy,” said Luther Johnson of consultancy Modular Management. “But you can also say you’re doing it and do it poorly.”

By breaking vehicles down to their lowest common denominator, VW sets predefined dimensions and standardized interfaces for modules that can easily be swapped back and forth, lowering costs per unit and one-off r&d expenses 20 percent and engineered hours per vehicle 30 percent.

Among the closest to achieving VW’s scale is Renault-Nissan. It aims to have 70 percent of its vehicles underpinned by three common module family platforms for minicars, subcompacts and compact/midsize vehicles by 2020. At that time Renault-Nissan is expected to be making more than 3.5 million vehicles on its subcompact megaplatform, including the Renault Clio, and about 2.7 million cars using its compact/midsize megaplatform, including the Nissan Qash-qai. This should cut purchasing costs 30 percent and engineering expenses 40 percent, the automaker says.

Fiat Chrysler planned to have three megaplatforms with more than 1 million units by this year, but that target has been pushed back to 2018. The automaker believes the move will help it achieve $1.9 billion in cumulative savings. Not to be outdone, PSA wants to reduce its current platforms to two from seven by 2022. Last year the automaker launched the C4 Picasso and Peugeot 308 based on its new Efficient Modular Platform 2. PSA aims to launch 11 models and build 1.5 million cars off the megaplatform by 2018.

“All the carmakers are working on this right now,” said Stuart Pearson, an analyst at Exane BNP Paribas. “I can’t think of anyone who is not, at least among the big names. It’s something that everybody has to do.”

But while they may be following the same goal, neither Fiat Chrysler nor PSA is expected to have one of the 10 largest global platforms by 2020, according to IHS Automotive forecasts.

“PSA is a long way from the industry leaders — in fact, the gap looks likely to only widen from here. We struggle to see how PSA can become competitive on costs until this issue is resolved,” analysts at Morgan Stanley said. “Where PSA falls short is on its lack of absolute volume. Unfortunately this is harder to fix, and with organic growth hard to come by, may require further strategic alliances or M&A in our view.”

Even those carmakers with sheer scale such as GM, which despite its size still lags the competition in terms of rationalizing its platforms, cannot expect to see big benefits from the move to megaplatforms, experts say.

Exane’s Pearson believes that in an industry in which relative advantages disappear quickly, laggards are motivated more by a defensive fear not to fall too far behind.

“It’s like with any first-mover advantage, whether it’s a hit model or a flexible architecture,” he said. “The leaders tend to generate greater benefits and hang onto them longer than those that come late to the party.”

The rise of such highly flexible and cost-efficient modular architectures is no coincidence because they are, in theory at least, the perfect answer to the dilemmas facing the industry. VW, like its rivals, had been searching for a silver-bullet solution referred to as mass customization, in which it could meet demands for an increasingly diverse range of cars packed with connectivity, infotainment and a host of other driver assistance and safety features — all at a low cost. At the same time VW needed to protect itself against severe pricing pressure and market volatility in Europe, tightening fuel efficiency standards and an ever growing complexity in its production plants and supply chain.

As a group, VW this year is on track to sell 10 million vehicles across a dozen brands, operate more than 100 manufacturing plants and build more than 300 models spanning from mainstream hatchbacks to heavy-duty commercial trucks.

VW’s answer has been MQB, which uses modular toolkits to ultimately create more than 40 cars of different wheelbases, track widths, wheel sizes and seat positions. This allows it to leverage synergies not just horizontally across brands but vertically across entire segments from subcompacts all the way to midsize sedans.

Previously, carmakers could not vary the basic dimensions of a car built off a specific platform, and only had the ability to put a different “top hat” onto the same chassis to differentiate models. So when VW completed the development in 2012, the company used words such as “milestone” and “quantum leap” to describe its ability to build cars of varying shapes and sizes with many of the same underpinnings so long as they shared one basic characteristic.

By mounting engines transversely at exactly the same angle, VW can standardize key elements of a car, such as the exhaust line, driveshaft and transmission location, and reduce the number of engine and transmission variations nearly 90 percent. Two million cars, or one-fifth of VW Group volume, will use MQB this year. That comes on top of the 1 million larger Audi vehicles that share longitudinally mounted engines on the group’s MLB architecture that was developed in 2007.

Two more, smaller toolkits also are planned: one for luxury sedans and sports cars and another for light commercial vehicles.

“The number of MQB vehicles built will rise toward the 4 million mark in 2016,” Winterkorn said. “By then, the modular transverse toolkit will already be deployed in more than 20 plants in a dozen countries worldwide.”

By creating a system of interchangeable building blocks, or modules, that share standardized interfaces, automakers can continually develop and optimize groups of components and subassemblies independent of one another. No longer will an alteration in one part of the car create a cascading effect requiring changes elsewhere, as with integrated vehicle platforms.

Executed properly, this approach lowers development costs, rationalizes the supply chain, reduces complexity, improves quality and speeds time to market. The ultimate result is a model range that can be expanded with minimal effort to target high-demand segments, alternative powertrains or new niche derivatives that previously would not have been economically feasible.

In a benchmark analysis of platform strategies, analysts at investment bank Macquarie did a rough calculation that carmakers could expect a 10 percentage point improvement in operating margins by moving from a pure stand-alone platform strategy to a modular strategy.

While rivals try to match VW with their own superarchitectures, none of their megaplatforms is considered as ambitious, far-reaching and flexible. In theory any MQB car could be built in any MQB factory, helping smooth out uneven use rates across plants that lower profits. For example, VW’s plant in Zwickau, Germany, builds the Golf as well as the Passat station wagon, which had been exclusively assembled at its factory in Emden, northern Germany.

“The most important benefit, however, is also the most often overlooked. Modular toolkits essentially give flexibility to an OEM, including flexibility to switch between products and powertrains to meet peaks and troughs in demand, and flexibility to enter market segments with a lower break-even volume,” Morgan Stanley wrote.

In truth, it’s not as revolutionary as Winterkorn says. Scania, now a unit of VW Group, introduced in 1980 a range of modular trucks with almost an unlimited number of variants. It paved the way for industry-leading profitability and is one of the cornerstones of its corporate philosophy to this day. More recently, modularity was a key part of the business model for Michael Dell’s personal computer company, in contrast to Apple’s far more integrated approach in which swapping out a defective battery in an iPhone requires the whole phone to be replaced.

“The concept [of modularity] has been around for a long time, but the automotive industry is a little slow to embrace it, perhaps because the journey is a very difficult and challenging one,” Modular Management’s Johnson said.

Unlike other management principles such as Toyota’s kaizen, in which management continuously improves best practices, modular production initially requires a radical rethink that affects everything from design and engineering to production, logistics and procurement.

“You’ve got to bring the organization along with you,” said Justin Cox, a production expert at LMC Automotive. “People tend not to like change and this operational challenge you have to overcome is not so obvious until you ask the engineering and purchasing managers to execute. You need to consider these unidentified ‘X’ costs of organizational disruption globally.”

Considerable resources also are needed. Morgan Stanley estimated that VW shelled out the eye-watering sum of $64 billion in development costs and capital expenditure to launch the MQB architecture — a fortune given that VW targets a return on its investment of more than 16 percent in its core automotive business.

“Modularity is a bigger upfront investment and if you look at the automotive industry they’ve got a lot of built-up inertia with their platform methodologies,” Johnson said.

Rivals such as PSA, Renault and Fiat Chrysler that are still trying to emulate VW can take comfort knowing that it is still working out the kinks in the MQB system, and they can learn from their German competitor’s mistakes.

Despite Winterkorn’s claims that initial positive effects from MQB are already being felt, the VW brand’s first-half operating margin narrowed to just 2 percent — far below its target of more than 6 percent. Indeed, the CEO announced in July a $6.4 billion earnings improvement plan, which likely will include ditching convertibles such as the VW Eos, outsourcing some component production such as brake discs and eliminating superfluous options packages built into fewer than 5 percent of its cars.

For example, some 156 steering wheel variations are offered in VW brand cars, which raise purchasing costs, increase assembly time and require more warehousing even though many are only differentiated by the color of the thread stitched into the leather.

VW also suffered from line stoppages at its Wolfsburg plant when it integrated the MQB-based electric Golf into production, since the cars coming off the line were not meeting U.S. crash safety norms.

Reuters cited witnesses who saw workers improvise by handing metal sheets to robots working on the e-Golf to stiffen its frame.

“VW is pursuing ultimate scale yet they clearly haven’t really made that work for them at the moment and that’s the key investor frustration behind why the stock has underperformed over the last year or so,” Exane’s Pearson said. “To be fair they’re still ramping up and are nowhere near the full volume capability — but MQB hasn’t delivered the savings people have been hoping for yet.”

Getting the potential savings is more complex than merely a function of overall volume per platform, the number of models per platform or whether two or three architectures underpin 90 percent of overall production. Renault-Nissan’s Ghosn argues that savings are more tied into the geographic split of volumes, for example.

“What is important is the scale in the region, because the scale in the region is going to determine your capacity to localize,” he told Automotive News Europe.

Analysts are also split since the savings and their ultimate impact on earnings are difficult to model. Macquarie estimated VW can expect $9 billion in gross cost savings, or 5 percent of its passenger car revenue, if the company doubled the volumes of each component through modularization.

“This will be found in the bottom line only to a very small extent, maybe a third. The rest will be passed on to customers and will enable projects without which the modular architecture approach would not be viable,” Macquarie wrote.

Bernstein analyst Max Warburton is skeptical of the true benefits. Cars need to be built in multiple assembly plants on multiple continents, each with its own stamping presses, dies, welding automation, paint shops, tooling and local supply chains.

“Where are the savings?” he asked. “VW’s MQB claims were nonsense from the start. Renault-Nissan and Toyota have come out with similar stuff but it’s mainly confined to their management’s PowerPoint presentations — I don’t think many people internally believe the numbers,” Warburton added.

Increasing the number of shared components also raises the specter of massive recalls. When asked about this risk by Automotive News’ German sibling publication, Automobilwoche, a relaxed Winterkorn — who began his career as a quality guru — said it posed “no risk” so long as workers on shop floors maintained a watchful eye at all times. “They take all the components in hand innumerable times day after day. Our employees immediately see possible problems looming. And we encourage them to immediately set off the alarm and call out the problems,” he said.

An assembly line worker spotting a hairline crack in a chassis control arm is one thing, but recognizing a design flaw of a component built into a Golf in Wolfsburg, a Passat in Emden and a Polo in Pamplona is another. It can take years before a faulty part is discovered. VW only recently was hit by a 1 million car recall to correct a potential problem with the rear suspension.

“I think the benefits of platform scale are far more complex and harder to realize than a lot of the simplistic statements and goals suggest,” Bernstein’s Warburton said. “Put it this way — I don’t think scale has much to do with PSA and Fiat’s financial struggles.”

The benefits of mass customization outweigh the risks, however, and even premium carmakers such as BMW and Mercedes-Benz are following Audi’s lead and looking to scale up by ditching the far more integrated product architectures they preferred in the past.

“The sheer breadth of different vehicles and various technologies that the customer expects from us can only be managed with a modular strategy and it’s our job that we utilize the chances it offers without exposing ourselves to the risks,” Daimler development chief Thomas Weber, told Automotive News Europe. “There is no alternative. We wouldn’t be able to manage in the future otherwise.”