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Summary

  • During the first half of this year, Toyota recorded deliveries of 5.1 million units, while Volkswagen trailed at 5.07 million units.
  • China is the single largest market for Volkswagen.
  • Currently, Toyota takes the lead over Volkswagen in terms of sales of fuel efficient vehicles.

As the gap between the number of units sold by the Japanese and German automobile giants converges, questions arise as to whether Toyota Motor Corp will actually be able to defend its position as the head of the world's largest automobile manufacturer. During the first half of 2014, Toyota (NYSE:TM) recorded deliveries of 5.1 million units, while Volkswagen (OTCQX:VLKAY) trailed at 5.07 million units. Comparing these figures to last year's 4.91 million units and 4.70 million units sold by Toyota Motor Corp and Volkswagen respectively, the gap has significantly reduced from a staggering 21,000 units to a mere 3,000 units difference in sales.

Comparing growth rates of the companies, Volkswagen manages to bag the lead with a growth of 7.8% while Toyota Motor Corp grew at less than half the rate at 3.8%. The German automobile giant aims to keep up its momentum in order to boost sales and recover during the second half of this year and take the lead as the world's largest automobile manufacturer.

Volkswagen capitalizes on momentum to take the lead.

There are several reasons that can account for the German giant's extraordinary performance over the past few years. One of these reasons includes its introduction of the MQB platform or the Modular Transversal Toolkit back in 2012. The toolkit allows the company to standardize production for all sizes of automobiles. Up till now, the platform is being used for the manufacturing of the Audi A3, Skoda Octavia, Volkswagen Golf and Seat Leon. The company plans on extending the use of this platform for more cars in its portfolio. The company has plans to expand its production from 1 million units in 2013 to approximately 4 million units, with the help of this platform, by 2016. Currently, the platform is established in nine factories while developments are in process to equip almost 20 factories with this platform by the year 2020. The platform has done remarkably well in allowing Volkswagen to make immense cost savings, which translates into lower average prices for the vehicles they sell and in turn more market share.

Another factor contributing to Volkswagen's ability to catch up to the Japanese automobile manufacturer is the high vehicle demand in the Chinese market. Volkswagen has secured a stronghold in the Chinese automobile sector. With a boom in the auto market in China, and a high demand for luxury brands like Porsche and Audi by Chinese consumers, the German manufacturer has managed to do tremendously well this year.

Volkswagen in China

China is the single largest market for Volkswagen. Despite facing a decline in sales volumes in the American market, the automobile manufacturer has managed to close in on the gap with its competitor Toyota, mainly due to its hold on the Chinese market. China is currently the leader of the passenger car market in the world and is expected to contribute to about 30% of global automobile sales by 2020.

Despite a slowdown in growth rates of the Chinese economy between 2010 and 2011, consumers in the country still opt for globally renowned brands of automobiles, which is basically what car manufacturing giants, including Volkswagen are capitalizing on. Volkswagen's China volumes of passenger cars experienced an 18.5% growth during June itself, while Toyota trailed behind and experienced a fall in its unit sales by 7.6% in the same month. This year, it is expected that Toyota could bag a potential 1.1 million units in sales while Volkswagen is expected to sell around 3.5 million units this year, which could lead to a potential widening in the gap between Toyota and Volkswagen sales volumes.

Besides the trend in the market, capacity additions are on the agenda. CEO of Volkswagen, Martin Winterkorn said that the company will build two more production plants in the country. In addition to that, launching of new models of vehicles, including ten new green vehicle models, ahead of the strict emission standards and high demand for energy efficient cars, is on the agenda for Volkswagen in this market. Volkswagen is hopeful that this will allow it to leave Toyota Motors trailing behind in pursuit in the near future. In addition to this, the company also intends to expand its dealership network from the current 2,400 to about 3,600 in the next few years to come.

In order to complement its success in the Chinese market, the German giant intends to strengthen its operations in North America to drive growth in the future, outlining aims to become the largest automobile manufacturer by 2018.

Toyota strikes back

Despite the steps that Volkswagen is taking, Toyota refuses to be outdone and had announced its own plans for production standardization called the Toyota New Group Architecture (TNGA) in 2012. The standardization does not seem to be going as smoothly as planned. The company had plans to manufacture a new Prius model through this platform but due to engineering difficulties, the release date for the model has been pushed back to at least six more months.

The TNGA program is expected to allow the automobile manufacturer to make cost savings of about 15%-20%. With the help of this program, the company hopes to reduce the weight of its cars by about 20%, which in turn would make their cars more fuel efficient.

Currently, Toyota takes the lead over Volkswagen in terms of sales of fuel efficient vehicles, and the implementation of the new architecture could assist Toyota in extending that lead even further.

Another benefit that Toyota aims to reap from this standardization is the reduction in costs from car breakdowns. Over the past two and a half years, the company has had to bear hefty costs due to manufacturing defaults and recalling of about 10 million cars. Apart from bearing the replacement costs, the company had to pay off fines worth $17 million during the period and also settle for a $1.1 billion law suit due to the defaults. The standardization aims to not only bring down the faults in the cars but also reduce the variety of models involved, which is one of the key reasons for the high costs that the company incurs.

Conclusion

In light of all the development announcements made by the two automobile manufacturers, the situation could sway either way. However, with the gap narrowing down every year, and Volkswagen growing at a faster rate than Toyota, there are chances that Toyota could fall behind in its conquest to remain in the lead.

Volkswagen currently has a strong hold over one of the largest and rapidly growing automobile markets in the world and it intends on further tightening that grasp by making long-term development plans in the same market.

Alongside that, the long-term development plans and strengthening of operations in other regions could leave Volkswagen reaping fruitful results by next year given that their efforts are already bearing fruit. Unfortunately, by then, it could be too late for Toyota to fight back due to lack of capacity and ill-planned production targets.

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

Source: Can Toyota Cling On To Its Lead Over Volkswagen?