Economics, U.S. Economy

Das Auto ist gut

Volkswagen is set to become the world’s largest automaker by the end of 2011, a remarkable achievement for a company that trailed competitors like Toyota and GM by nearly three million car sales per year just three years ago.

Much of VW’s success can be attributed to their visionary CEO, Martin Winterkorn, who has exploited growth opportunities aplenty since taking the helm in 2007. His success as a CEO is primarily attributable to two common-sense, consumer-focused feats.

Firstly, VW has developed extraordinary economies of scale across a product line that includes such diverse brands as Bentley and Seat. By harnessing simple technology to manufacture parts in ways that allow easy convertibility across brands, VW has slashed costs and passed the savings on to consumers. Importantly, VW has also used some of the savings to create consumer loan options in markets where traditional financing has all but vanished in the wake of the financial crisis.

Secondly, VW has become powerful by delivering services to the middle class. VW’s strongest gains have come in China, where the world’s largest car market continues to grow by 20 percent per year. Having recognized this opportunity, VW has provided Chinese middle class consumers with sensible car options, and it has paid dividends. Likewise, in a Europe fraught with financial difficulties, VW has stuck to the idea that even in financial disasters, consumers drive markets. By targeting Europe’s middle class, VW has expanded its sales 8 percent in Europe this year. And despite the cries that the U.S. middle class is shrinking, VW car sales—a decidedly middle class option—have continued to grow.

By contrast, Toyota has lost market share due, in part, to supply chain disruptions in Japan. Not insignificant, however, are the losses Toyota has sustained in fighting legal battles with unions, over-marketing under-performing sports cars, and navigating complex exchange rate and subsidy environments. GM has experienced similar issues as it continues to recover from its financial crisis hangover.

Fundamental economic understanding has vaulted VW upwards over the past three years as they have focused on economies of scale and satisfying consumer demands. By contrast, those companies that have focused on things other than consumers have forgotten that consumers will always drive markets, and they have watched their market share fall.

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