IHS AUTOMOTIVE

Supplying the Volkswagen Group SupplierBusiness supplierbusiness.com

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SUPPLYING THE OEMS

Volkswagen Group Julian Buckley Principal Analyst

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IHS Automotive | Supplying the Volkswagen Group

Contents Production Strategy 38 Production strategy overview 39 Manufacturing network 40 ––Germany 41 ––China 42 ––Brazil 43 ––Mexico 44 ––United States 44 ––Czech Republic 45 ––Spain and Portugal 45 ––Russia 46 ––Slovakia 46 ––Poland 47 ––India 47 ––Future plants 47 Internal supply network 48 Modularisation strategy 48 Supplier parks 49 Cluster of reference 50 Strategies for manufacturing efficiency 50

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Overview 5 Global market overview 6 ––Financial data 6 Volkswagen Group financial overview 7 Product strategy 7 ––Company history and strategy review 7 Major model programmes 9 ––1. Volkswagen Golf 9 ––2. Volkswagen Jetta 12 ––3. Volkswagen Passat 14 ––4. Volkswagen Tiguan 17 ––5. Volkswagen Polo 18 ––6. Volkswagen Lavida 20 ––7. Škoda Octavia 21 ––8. Audi A4 22 ––9. Volkswagen Gol 25 ––10. Audi A6 26

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Vehicle Platforms 30 Platform strategy 31 Major platforms 32 ––1. PQ35 - (including Audi A3, TT; SEAT Toledo, Leon, Altea; Škoda Octavia, Superb, Yeti; VW Golf, Passat, Tiguan, Jetta) 32 ––2. PQ25 – (including VW Polo, Jetta; Škoda Fabia, Rapid, Roomster; SEAT Ibiza, Toledo; Audi A1) 32 ––3. MQB A/B – (including VW Golf, SEAT Leon, Škoda Octavia and Audi A3) 33 ––4. MLB B/C – (including Audi A4, A5, A6, A7, Q5, Q6; Porsche Macan) 33 ––5. PQ34 – (including VW New Beetle, Lavida (China only), Golf; Škoda Octavia; Seat Leon, Toledo; Audi A3, TT) 34 ––6. PL/PQ46-47 – (including VW Passat, Sharan, Magotan (China only); SEAT Exeo, Alhambra; Audi A4) 34 ––7. PQ22 – (VW Gol, Voyage, Saveiro) 35 ––8. PQ24 – (including VW Polo, Fox; Škoda Fabia; SEAT Cordoba, Ibiza; Audi A2) 35 ––9. PL71-72 – (VW Touareg, Audi Q7, Porsche Cayenne) 35 Component sharing 36 Volume planning 37

Purchasing Strategy Purchasing strategy overview Levels of vertical integration and outsourcing Purchasing organisation Purchasing offices Key purchasing personnel ––Purchasing budget

52 53 53 54 55 56 57

Supplier Selection Supply base development Major and strategic suppliers ––Supplier evaluation criteria ––Working with the Volkswagen Group

58 59 59 60 61

Global Sourcing 62 Policy and plans 63 ––EMEA 63 ––APAC 64 ––NAFTA 64 ––LATAM 64 Pricing Policy Cost reduction strategies

66 67

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Raw material price management ––Payment terms

67 68

Quality Management Quality level Quality management systems Supplier integration into product development Management of suppliers and sub-suppliers Supplier awards

69 70 70 71 72 72

––Middle of the ranking: OEMs push cost reduction 91 ––Bottom ranking: Cost overrules quality 91 Profit potential 92 ––OEM level 92 Organization 92 ––OEM level 93 Trust 93 ––OEM level 93 Pursuit of excellence 93 ––OEM level 93 Outlook 93 ––OEM Level 93 SuRe by region 93 ––North America 94 ––Europe 94 ––Asia 94 ––SuRe by company size 94

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Technology 74 Technological positioning 75 Areas of focus 75 R&D organisation 76 R&D spending 77 Access to supplier technology and process development 77 Approach to alternative fuels, electrification and fuel cells 78 Special vehicle development 79

96 97 97

Global Vehicle and Component Sites

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SWOT Analysis and Production Locations SWOT Analysis Global footprint

Interviews 81 Matt Smith, Director of Falken UK 82 Alexander Kocher, President, Automotive Business segment, Elektrobit 83

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Supplier Relationship Survey 88 Introduction to the SuRe Index 89 Methodology 89 Executive summary 89 Performance review – Volkswagen Group 90 2014 SuRe survey results 90 ––Top of the ranking: Trust and future potential drive harmony 90

Forward Model Program Forward Model Program

103 105

Major Suppliers AUDI Q7 (2015) AUDI TT (2014) Porsche 911 Spyder Volkswagen Golf (2014) Volkswagen Passat (2014) Volkswagen XL1

121 122 125 127 129 131 135

Figures

Figure 1: Global light vehicle production, 2009-2018 6 Figure 2: OEM Supplier Relations - Top of the Ranking 91 Figure 3: OEM Supplier Relations - Middle of the Ranking 91 Figure 4: OEM Supplier Relations - Bottom of the Ranking 92

Figure 5: OEM Supplier Relations - North America 94 Figure 6: OEM Supplier Relations - Europe 94 Figure 7: OEM Supplier Relations - Asia 94 Figure 8: Map for Volkswagen global assembly plant locations 97 Figure 9: Map for Volkswagen European assembly plant locations 98

Tables Table 1: Key financial performance values for Volkswagen AG 6 Table 2: VW Group Top 10 best-selling models worldwide (by Sales brand, Global nameplate) 20082013-2018 9

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Table 3: VW Golf European sales and segment competitors (by Sales brand, Sales nameplate) 20072017 12 Table 4: VW Jetta North American sales and segment competitors (by Sales brand, Sales nameplate) 2007-

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Table 12: VW Group Top 10 most-used Global platforms (by Strategic Group) 2007-2013-2015-2018 32 Table 13: Global OEM total annual vehicle output (by Strategic Group) 39 Table 14: Purchasing volume by brand (over 2013, in EUR billion) 57 Table 15: Automotive sales of SuRe Index survey repondents 95 Table 16: SWOT Analysis - Volkswagen Group 97 Table 17: VW Group Global vehicle and component production locations. 100 Table 18: AUDI Q7 (2015, SLOVAKIA, BRATISLAVA) 122 Table 19: AUDI TT (2014, HUNGARY, GYOR) 125 Table 20: PORSCHE 918 SPYDER (2013, GERMANY, ZUFFENHAUSEN) 127 Table 21: VW GOLF (2014, MEXICO, PUEBLA) 129 Table 22: VW PASSAT (2014, GERMANY, EMDEN) 132 Table 23: VW XL1 (2013, GERMANY, OSNABRUCK) 135

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2017 14 Table 5: Global sales for the VW Tiguan (by region) 2007-2018 18 Table 6: W Polo Global sales and segment competitors (by Sales brand, Sales nameplate) 2007-2017 19 Table 7: Shanghai VW (New) Lavida - China national sales (by sales nameplate) 2009–2017 21 Table 8: Škoda Octavia Global sales (by region) 20072018 22 Table 9: Audi A4 Global sales and segment competitors (by Sales brand, Sales nameplate) 20072018 24 Table 10: VW Gol and Brazilian segment competitors (by Sales Brand and Sales Nameplate) ranked by 2014 figures 26 Table 11: Audi A6 Global sales and segment competitors (by Sales brand, Sales nameplate) 20072018 28

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CHAPTER TWO

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Vehicle Platforms

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Platform strategy

start competing against each other, potentially in the same dealer showroom, and that is before other segment competitors from other OEMs are factored into the picture.

As each successive brand has been added to the Volkswagen Group, there has been a broader effort to reorganize platform usage across all group companies building models of the same segment and size. This process has generally taken two forms: where a single platform has been introduced across an existing segment as a new generation has been introduced; or where a new model is developed by one carmaker, other OEMs within the group are tasked with developing their own version of that vehicle, using the same architecture.

Unlike many global carmakers, the Volkswagen Group has largely managed to avoid this trap. While fundamentally identical architectures are regularly shared across a series of brands, those individual carmakers have worked to create the brand-specific production, equipment and pricing strategies needed to differentiate those models – all while highlighting the brand’s own core ethos, whether it is premium (Audi), sub-premium (VW), value (Škoda) or sporty (SEAT). Within this, suppliers play a key role in delivering that differentiation, producing components and parts which, while meeting key guidelines, have varying designs and characteristics needed to make those parts unique to the brand.

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Sharing platforms can be traced back to the Type I Beetle, which donated updated versions of its chassis to a variety of later models, including the Karmann Ghia coupé and also the 1600 Variant and its derivatives – these compact wagon models included the Brasilia, of which more than one million units were produced in Brazil and Mexico between 1973 and 1982. The first case of actual platform sharing, where models based on the same fundamental structure were in production at the same time, was between the Audi 50 and Mark I Polo; although the Audi was first to market, it was phased out only three years after the launch of the cheaper VW.

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The Volkswagen Group is now well advanced in rolling out the various modular ‘toolkits’, platform systems which, as Volkswagen states, are expected to: ‘significantly reduce the fuel consumption of our vehicles, producing them at globally competitive costs and simultaneously increasing profitability and productivity – these are the Volkswagen Group’s goals for its modular toolkits’.

This early example reveals an inherent flaw in the systematic sharing of vehicle platforms, in that models which are too similar to each other can cannibalize sales of the less-popular variant. Reasons for customers favouring one model over the other are myriad, and include (in no particular order): brand preference; quality; style and sometimes it just comes down to available colour choices. But beyond these, a major driver can be a perceived value for money and in this case, the majority of customers thought the Volkswagen offered more car for less cash in comparison to the Audi.

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Specifically, the group of systems is as follows: New Small Family

Serving the A00 and A0 segments

MQB

Modular Transverse Toolkit

A0 to C segments

MLB

Modular Longitudinal Toolkit

B through D segments

MSB

Modular Standard Toolkit

D and E segments

While vehicle size is the primary difference, the primary distinguishing factor between these platform types are the drivetrain layouts – although other elements, such as a modular infotainment toolkit will see related componentry (screens, switchgear, wiring harnesses, etc.) carried between brands and model ranges. The VW Group has stated that it plans to produce over 40 models on the MQB toolkit, and this might even prove to be a conservative estimate. As it stands, the platform toolkits will allow all group brands to leverage standardization to achieve improved levels of finished vehicle quality, while also delivering the flexibility to make region-specific adjustments to suit customer tastes. In the language of a global automotive production, this is perhaps the greatest of win-win situations.

Although platform sharing offers OEMs the combined advantages of cutting engineering budgets and reducing project development timeframes (which combine to support faster introduction of next-gen models), rampant sales cannibalization is the downside of platform sharing. As the platform structure is generally a rigid, inflexible base on which to build a new car, in many cases vehicles sharing that structure will have the same overall appearance. If care is not taken to differentiate in other areas, vehicles sharing the same platform can

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Major platforms Based on data from IHS AutoInsight covering most-used vehicle platforms (by Strategic Group) across the VW Group in 2013

increase to where in 2012, 3.455m units were assembled on the same fundamental structure. This, though, was the pinnacle of PQ35 output, as the following year, the VW Group starting rolling out the replacement MQB platform. The older platform is expected to remain in production

Table 12: VW Group Top 10 most-used Global platforms (by Strategic Group) 2007-2013-2015-2018 2007

PQ35

2,081,940

PQ24

1,101,239 377,881

PQ34

300,779

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243,964

A2

209,867

B2

203,956

PQ75

202,526

PQ25

201,382

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Platform

2018

Excluded from sample. Available in the full report

1. PQ35 - (including Audi A3, TT; SEAT Toledo, Leon, Altea; Škoda Octavia, Superb, Yeti; VW Golf, Passat, Tiguan, Jetta)

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According to data provided by IHS AutoInsight, the platform most used across global production within the Volkswagen Group over 2013 was the PQ35. Introduced in 2003, the PQ35 is primarily used in production of models using a transverse-mounted front engine and front-wheel drive powertrain. Although in far fewer numbers, it also supports production of all-wheel drive variants, badged 4MOTION (VW), Quattro (Audi) and 4x4 (Škoda). For its part, there have been comparatively few SEAT AWD models, such as the Altea Freetrack and Alhambra 4x4, but as of 2014 the new Leon X-Perience wagon is expected to be the first model in a new AWD sub-brand. The PQ35 is a predominantly steel architecture, although the proportions of steel type, ranging from mild steel through to ultra high-strength steel (UHSS), have increased in favour of the latter as development of the platform has continued over its lifetime. Although the architecture is primarily used across production of C- and D-segment models at the group’s four volume OEMs, it is the platform’s flexibility which has driven total production figures. The PQ35 is used across almost all major bodystyles, including: hatchback; saloon, wagon, convertible, MPV, LCV and CUV crossovers. The PQ35 was already used across production of more than one million vehicles by 2004, just one year after its introduction and total year-on-year output continued to © 2015 IHS

Platform

788,321

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Source: IHS Automotive

2013

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Platform

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as the switchover to the new architecture continues, but numbers will continue to slide until it is removed from the market in 2019.

2. PQ25 – (including VW Polo, Jetta; Škoda Fabia, Rapid, Roomster; SEAT Ibiza, Toledo; Audi A1) Compared to the PQ35, the PQ25 is a relatively recent addition to the VW Group family of platforms, having first been launched into production in 2006 with the Škoda Roomster. Like its earlier contemporary, the PQ25 is a primarily steel unibody architecture which incorporates a series of parts formed from high-strength and ultra high-strength steel grades. The platform is used across production of B- and C-segment models (with an exception being the D-segment Santana), which use a transversemounted front engine layout. Most examples have a front-wheel drive powertrain, although the PQ25 can also support a part-time all-wheel drive powertrain which uses a Haldex clutch to direct power to the rear axle. The PQ25 follows on from the ‘24 and ‘23 versions, which themselves are renamed versions of the A04, A05, etc. The new naming convention breaks down as follows: P – passenger car; Q – transverse engine; 2 – model segment; 5 – generation. Although the PQ25 is being used across production of all-new models, such as the Škoda Roomster, the fifth-generation refers to the VW Polo version which was introduced with this new architecture. Total global production based on the PQ25 has been increasing since it was launched, as more models have

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3. MQB A/B – (including VW Golf, SEAT Leon, Škoda Octavia and Audi A3)

According to Morgan Stanley, since the project was started in 2007, VW and the group OEMs have invested approximately USD70 billion in development of the MQB platform system. The group will look to recoup this cash outlay through related economies of scale – it is estimated that the MQB will help reduce production costs by USD1,000 per vehicle. This will only be wholly successful if the four volume OEMs take maximum advantage of MQB, and they are not wasting time in doing just that. By 2013 output had already exceeded one million units per annum and as of 2015, the MQB will be the most-used platform across the VW Group (2.554m). By 2018, total output is forecast to exceed five million units, and it is possible that by 2021, the MQB A/B will be used in production of 6.15m units worldwide. The only way the VW Group could amortize the MQB investment any more rapidly would be to license usage to another OEM – but as yet there is no potential of a deal being made.

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The MQB A/B (Modular Transfer Matrix) is the cornerstone of the new platform sharing programme across the Volkswagen Group. Based around a transversemounted front-engine powertrain, which can have either front- or all-wheel drive, the MQB can support a variety of global and regional powertrains, including: petrol (TSI); diesel (TDI); CNG; LPG bi-fuel; flex fuel (ethanol); plug-in and e-DRIVE.

Looking at individual areas of the platform, Volkswagen states that 85% of the floor structure is constructed using hot-formed UHSS, which has resulted in an 18kg weight saving. At the same time, the crash performance of the structure has been improved and now meets all related global regulations. Future examples of platforms produced using the so-called Modular Transfer Matrix are likely to replace some steel floorpan parts with aluminium to achieve further weight gains. Optimization of the electrical system components (harnesses, etc.) used across the MQB has saved a further 3kg.

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started being assembled on the platform. According to IHS AutoInsight, production peaked in 2014 at marginally more than two million units (2.005m). Although the PQ25 will ultimately be phased out in favour of models using the MQB modular platform system, the relatively recent introduction of the platform within the VW Group manufacturing network will mean that the architecture remains in widespread use over the remainder of the decade, but total output will fall below 700,000 units in 2020, and by the mid-2020s only VW JV factories in China will be producing models on the structure.

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In Volkswagen speak, the MQB modular platform system is described as a ‘tool kit’, which in the most basic of terms implies that the architecture is intended to support development of a vehicle platform from a set number of pre-made, mutually-compatible parts. Yet the MQB system has a far greater reach than this, and adoption of the system will have a direct impact on all aspects of vehicle production. Looking at the basic structure, the MQB has one fixed, uniform area located between the front axle and the engine bulkhead, which is common between all models. Beyond this, the overall length (including the wheelbase, front and rear overhangs), width and height can be adjusted as necessary to produce the desired model type. At first this may appear too loose of a programme to classify as a system, but according to Volkswagen the platform, powertrain and related structures represent 60% of the production cost of a given vehicle, while the top hat makes up the other 40%.

The MQB uses a high proportion of high-strength and hot-formed ultra-high strength steel across the structure – approximately 30% of the structure will be UHSS. Using these materials in place of mild steel has reduced the required sheet thickness, resulting in a final part which both weighs less and (in many cases) is stronger. That said, VW has placed a high priority on only using material where it is required, optimizing the geometries of part profiles and surfaces to reduce overall material usage. Average weight reduction of the MQB over those platforms it replaces is 37kg (dependent on model). © 2015 IHS

4. MLB B/C – (including Audi A4, A5, A6, A7, Q5, Q6; Porsche Macan) As the name of the Modular Longitudinal Matrix (MLB) suggests, this platform is also part of the ‘Modular Matrix’ suite of platform tool kits now being used across the Volkswagen Group. The MLB (also sometimes referred to as MLP, Modular Longitudinal Platform) is the basis for models with longitudinally-mounted engines driving either the front wheels, or with all- or four-wheel drive. As Audi is the single volume manufacturer in the VW Group which uses this engine layout, it produces the vast majority of MLB-based vehicles. The Porsche Macan, positioned beneath the larger, full-size Porsche Cayenne, is related to the Audi Q5 SUV, although most aspects of the donor model have been reworked by Porsche engineers. As with the MQB, the MLB has a series of fixed points, including the front axle and engine bulkhead/A-pillar placement, which further offers standardized engine mounting points to allow the sharing of drivetrain and transmission combinations across a variety of segments. Other common parts include the steering system and 33

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