Group Dynamics: The Advantages of Sharing

With Porsche raising its stake in the Volkswagen Group to over 50%, one wonders what exactly it means for the customers, the company and most importantly, the future products. Given the reality of the economic conditions of the world, one is invariably inclined toward thinking that the Volkswagen group might have been a cash crunch. That is far from the truth as the group reported €4.12 Billion of profit in the financial year ending 2007. The fact is that Porsche has been trying to raise its stake in the Volkswagen group from around 20% to above 50% for a few years now. Moreover, the advantages of this takeover are not just limited to investment opportunities. They go way beyond.
Let’s start with the most important advantage, platform sharing. Other than Porsche, the Volkswagen Group includes Audi, Seat, Skoda, Lamborghini, Bentley, Buggati and of course, Volkswagen itself. The group has nine major platforms that are shared across the range of all of their subsidiaries. This allows for benefits amounting to millions of dollars for the group as a whole bunch of cars can be built on one platform. For example, Audi A4, Skoda Superb and the Volkswagen Passat are all built on the B-series platform, Audi A8, Bentley Continental GT and Volkswagen Phaeton on the D-Series platform and Audi Q7, Porsche Cayenne and Volkswagen Touareg on the 7L platform. With common platforms, the group can also allow for similar engines, electrical and electronic equipment, layouts and a whole lot else. For example, the popular Skoda Octavia (the model produced in India) 90 bhp 1.9 Diesel engine is used in Volkswagen Passat, Volkswagen Golf, Volkswagen Jetta and the Volkswagen New Beetle worldwide. And now, the group is planning on introducing the Porsche Cayenne with a 3.0 Litre V6 diesel engine from the Audi-Q7 and are developing a hybrid to be used in the Volkswagen Touareg, Porsche Cayenne and possibly the Porsche Panamera. Another major advantage offered is common production facility. This comes into play especially in developing economies and countries where the group is comparatively new like India. Volkswagens Chakan plant, which is ahead of schedule, is all set to start producing the Skoda Fabia starting May this year and plans are to produce the Volkswagen Polo alongside it in late 2009. The group then doesn’t have to set up separate production facilities to produce different marques and can achieve economies of scale and make the life of their suppliers a whole lot easier.
The advantages extend to even training of service station personnel, sales and service and even future product development. Sure, there is a flip side as the number of platforms and engines the group would have if there was no sharing reduces drastically as common development programmes allow for minimal work by individual entities. This, however, is surpassed by the fact that a common Research and Development facility along with expertise from all the group companies makes not only economic sense for the group and its suppliers, but also for the end-customers as benefits are passed on to customers in terms of lower prices, better products and ease in service.
Looking closer to home, let’s look at one of the best small diesel engines out there, the Fiat 1.3 litre Multijet Diesel engine. The Fiat 1.3 Multijet engine is shared by Tata, Fiat and Maruti-Suzuki in India in Tata Indica Vista, Fiat Palio, Fiat Linea, Suzuki Swift and Suzuki Swift Dzire, with minor differences like presence of Variable-Geometry Turbo in the Linea, and of course the different engine names. This has allowed Fiat to achieve economies of scale in the production of the Multijet engine and allowed them to gain another stream of revenue from engine sales to Tata and Suzuki. This has benefited Maruti-Suzuki more than the other two as this engine has had the company laughing all the way to the bank with the sales of their diesel models going through the roof. And this Fiat and Suzuki partnership is not new; the two commonly developed the SX4 crossover which is also sold as the Fiat Sedici. And now, Fiat is all set to partner with Chrysler and swap technology for a 35% stake. This, again, is great news for the end customers as it means more options for the future and possibly, lower prices.
With the world going through a financial slump, it makes economic sense to form alliances and share platforms, engines and everything else under the sun because the amount of money that is spent by each auto manufacturer in solitude amounts to billions of dollars each year, which now is not really an option as most auto makers are reporting losses and are in a crunch for cash. So, dividing R&D expenditure across companies and reducing the aggregate expenditure is the way to go.

- © Anish Arora