A surprising corporate giant

What company, according to Fortune, is the eighth largest employer in the world, with over 549,000 employees globally?

The answer shocked me: Volkswagen. That's just the tip of the iceberg in terms of fascinating tidbits from this mini profile.

Efficiency experts will tell you that on an employee-per-vehicle basis, Volkswagen looks hopelessly inefficient. Financial analysts will tell you that the company woefully trails its competitors on a revenue-per-employee basis. But VW will tell you that it makes more money than any other automaker – by far.

While VW's stated goal is to become the world's largest car company by 2018, it's already there if you measure it by revenue and profits. Its revenue of $200 billion is greater than every other OEM. Last year's operating profit of $14 billion is the kind of performance you expect from Big Oil companies, not automakers.

Last year's operating profit of $14 billion is the kind of performance you expect from Big Oil companies, not automakers.

How can this be possible? How can VW look so uncompetitive from a productivity standpoint, yet out-earn all of its competitors?

Ah, that's the magic of VW's corporate structure. While business schools teach future MBAs that centralized operations can cut cost by eliminating overlapping work and duplication, VW maintains strongly decentralized operations with lots of overlap. While business schools preach the benefits of outsourcing to cut cost, VW is very vertically integrated.

Anytime a car company buys a component from a supplier, that supplier has to charge a profit. If an automaker can make those components in-house, it gets to keep that profit. VW is building a lot of components in-house.

To dominate you need multiple brands, and VW has more than anyone else.

If an automaker truly wants to dominate the market, it has to accept a certain amount of overlap and duplication. It just goes with the territory. To dominate you need multiple brands, and VW has more than anyone else, which admittedly overlap at the edges. But to VW they are more than just brands.

All of VW's brands (VW, Audi, Seat, Skoda, Bentley, Lamborghini, Ducati, Porsche, Bugatti, MAN, Scania, and VW Commercial) are treated as stand-alone companies. They have their own boards of directors, their own profit & loss statements, and their own annual reports. They even have their own separate design, engineering and manufacturing facilities. Yes, they do share some platforms and powertrains and purchasing, but other than that they're on their own.

Anyone who works in technology will hear an echo in much of this strategy. Volkswagen's model of of running all its brands as independent companies is an example how the biggest tech companies try to push decision-making to the edges, to the teams running a variety of product lines, as a way of trying to remain entrepreneurial, innovative, and nimble. 

The way Volkswagen has vertically integrated is reminiscent of the way Apple has, over time, taken over more and more of the computing value chain, down to opening their own retail stores. Given how Samsung is also vertically integrating and competing head on with Apple in the mobile computing market, it would be surprising if Apple didn't stop sourcing chips from Samsung and take their business elsewhere, to a partner less vertically integrated, like Taiwan Semiconductor.

Volkswagen, by dint of its vertical integration, can capture value wherever it occurs in the value chain, and as the sources of value shift as it often does over the life cycle of technology products, Volkswagen retains its cut. On a related note, look at the last chart on this post at Asymco. Stunningly, Samsung makes more operating income from Android than Google is! In this mobile computing war, Samsung is making money off of both Google and Apple. After Apple, it's difficult to name another company that has profited more from the mobile computing revolution.

Volkswagen is the answer to the subject of this post, but Samsung is nearly as shocking a dark horse of a corporate behemoth.