Seeking Alpha
Industrials, carmakers, brick & mortar retail, online retail
Profile| Send Message|
( followers)

Summary

  • Competition is heating up between Toyota and Volkswagen for winning the global sales crown.
  • Both companies are banking on their new engineering innovations to win the sales race.
  • Volkswagen has already launched cars with its new MQB architecture, while cars with Toyota’s TNGA architecture are due next year.
  • The roll-out of the new architecture is proving to be a bumpy ride for both auto majors.

World's largest automaker Toyota (NYSE: TM) is engaged in a nail-biting race with archrival Volkswagen (OTCQX:VLKAY) as the latter has pledged to surpass it by 2018. A very important strategy in this battle for global supremacy is development of affordable and fuel-efficient cars with plenty of customizations to suit buyer preferences. Both the companies are relying on their respective programs for standardization of platforms and common-parts sharing that would allow them to achieve big cost savings and help them engineer tweaks like turbo charging, direct fuel injections, for different model specifications.

But this is easier said than done. Volkswagen launched its Modular Transversal Toolkit or the MQB platform in 2012, while Toyota has been touting its Toyota New Group Architecture (TNGA) for more than a year now. Both have struggled leading to delay in the launch of important models. And in Volkswagen's case, there's been a key management change as well. As the contest for the top spot intensifies, let's see how the two car makers are faring, what the TNGA strategy is all about and whether it can keep competition at bay.

The Tussle With Volkswagen

Toyota maintained its lead over Volkswagen till last year, but the gap is slowly narrowing. In the first half of 2014, Toyota delivered 5.1 million vehicles, including its Hino and Daihatsu Motor Company units, while Volkswagen delivered 5.07 million units, including heavy-trucks. Additionally, Volkswagen is ahead of Toyota in putting its new platform MQB to use.

The German automaker has rolled out models like Volkswagen Golf, Audi A3, Skoda Octavia and Seat Leon using MQB. It's true that there have been quite a few hiccups, and earlier in the month, Volkswagen's production chief Michael Macht, who was supervising the MQB program, left the company. News reports attributed this to the delay in the introduction of the new Golf model, a key MQB car.

Forbes recently reported that according to Max Warburton, analyst at Bernstein Research, the MQB platform has hit Volkswagen's profitability. Warburton has said, "So far there's little sign of the growing earnings - emerging markets get most of the blame, but in our view MQB is a big issue too." In the first half of 2014, the German behemoth's profits slipped to 3.3 billion euros ($4.4 billion) from 3.44 billion euros ($4.6 billion) in the year-ago period. Operating margin of the flagship VW brand was 2.1%, down from 3% last year.

But Volkswagen is still chasing big targets with the MQB roll-out. It plans to build 4 million MQB cars by 2016, up from approximately 1 million in 2013. By 2020, the company intends to have 20 MQB factories worldwide compared to nine locations presently. This is enough to give Toyota sleepless nights and fast forward its own TNGA program.

What's TNGA?

Toyota's management announced the Toyota New Group Architecture (TNGA) strategy in 2012. The program is centered on standardizing the hip point of the driver's seating position across models, which will allow the automaker to use identical parts for pedal boxes, airbags, seat belts, etc. Toyota uses as many as 50 types of airbags to suit various designs and seating positions in its cars, and TNGA can lower it to 10 or fewer. This new architecture will also help Toyota reduce the overall vehicle weight by up to 20% and enhance the thermal efficiency rate of the TNGA-made power train to over 40%. Currently, the best engines in Toyota's lineup have a maximum efficiency rate of 38.5%. Higher thermal efficiency translates into higher fuel efficiency.

The other big benefit of TNGA will be on the sourcing side. Toyota need not purchase raw material on a per model basis any longer as TNGA will enhance its ability to place bulk-orders of parts 'for multiple models across regions and time frames as a result of the use of common parts and major components.'

The Japanese bigwig expects TNGA to slash production costs and reduce its operating expenses dramatically. Management is hopeful of saving up to 25%-30% on development costs by adopting this strategy. Toyota's executive vice president Mitsuhisa Kato sees auto-parts sharing to be initially at around 20%-30% and finally increasing to 70%-80%. Kato says- "Global competition among automakers is becoming more severe, and TNGA is an effort to make more efficient and more attractive products."

To maximize the impact, Toyota has clubbed a major engine overhaul initiative with its existing TNGA strategy. In July, Automotive News reported that together with designing common parts across several engine types, the automaker will also improve the performance of base engines and add customizations like direct fuel injection, turbo-charging in a cost-effective manner. The new engine initiative is primarily for Toyota's gasoline engines. The report stated that the Japanese auto major is eyeing up to 30% improvement in fuel economy and up to 50% savings on costs of key parts.

TNGA Update

Toyota had initially planned to launch cars made on the TNGA platform in 2015 with Toyota Prius being the first to arrive in Spring. But the company has postponed the launch by six months on account of engineering delays. Latest buzz making the rounds has it that the Japanese auto major is facing more challenges than anticipated earlier, especially in relation to parts sharing among cars with different vehicle dynamics. The delay in the Prius launch could mean that the next models that were lined up for roll out like Camry, Corolla, RAV4 and Avalon could also face delays of up to six months.

The Camry is going to be the first car to be made on the TNGA platform together with an engine built on a customized TNGA line. In contrast, the Prius will get TNGA engines built on existing lines.

Wrap up

Toyota understands that maintaining its global lead is becoming more and more difficult with peers like Volkswagen breathing down its neck. Despite the teething troubles, if the German auto major makes a success out of its MQB program, it can be a huge threat for Toyota. But the Japanese car maker is taking the challenge head on and putting its resources into TNGA to counter the MQB competition. Only time will tell which auto major will win the race, but thanks to their endeavors, the world will surely see cheaper, lighter, and more fuel-efficient cars in the future.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.