Why Ford Motor Company (F) Is Worried About VW

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Which automaker is the biggest in the world?

Ford Motor Company (F)For years, there have been only two answers to that question: Detroit’s General Motors Company (NYSE:GM) , which held the title for a long time, and Japan’s Toyota Motor Corporation (NYSE:TM), 2012′s reigning champ, which has swapped the crown back and forth with GM in recent years.

Soon, though, there could be a third contender: Germany’s Volkswagen AG (PINK:VLKAY), which is in the early stages of riding a radical new approach to designing and building cars to increasing success in markets around the world.

And that radical new approach has many automakers worried, starting with Ford Motor Company (NYSE:F) .

Platforms and the success of Ford’s turnaround
Most automakers use some variation of a “platform” strategy to share parts and combine manufacturing of several models. In industry-speak, a platform is simply a set of common dimensions that allow different vehicles to share key parts (which typically aren’t readily visible) and to be made on the same assembly lines.

Cars built on the same platform may be — and often are — quite different from one another, but because of what they have in common, they cost less to design and produce. For example, Ford’s global “C” platform is the basis of the Focus compact, the Escape SUV, and the C-MAX hybrid.

Those are three very different vehicles, but they increase Ford’s economies of scale — and, thus, its profits per vehicle sold — because of what they have in common. The commonality also makes it simpler and more cost-effective to bring them into emerging markets, leveraging Ford’s existing production bases in places like Russia and China, where the Focus has become a top seller.

In recent years, Ford has drastically consolidated the number of platforms (and models) that it uses globally. This move, a key part of the “One Ford” plan that has transformed the company, has resulted in a huge reduction in Ford’s global fixed costs. It has also resulted in a significant improvement in quality, as Ford is now able to give each new platform and each new vehicle more design and engineering attention.

That was a huge step forward for Ford. But VW’s new approach takes that concept one big step further.

From platforms to Lego bricks at VW
VW has essentially rethought the whole idea of vehicle platforms, coming up with a modular approach to car-building that allows the sharing of designs and components on a massive, global scale. Essentially, VW’s plan is to have just three vehicle architectures — but to design them in a modular way, so that dozens of different, distinct vehicle models can be built from the three sets of common components, as if they were Lego bricks.

The potential scale is vast: Where Ford might order 4 million or 5 million copies of a particular part over the production run of a series of models on one platform, VW might order 30 million or more. That kind of scale should result in huge cost savings: According to a Reuters report, Morgan Stanley (NYSE:MS) has estimated that VW’s savings could be as much as $19 billion by 2019, and the company’s overall gross margins could approach 10% — huge for a global automaker.

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