AUTOFACTS Global Automotive Outlook. VW Group Strategic Analysis: A Company in Transition Q1 Quarterly Executive Briefing

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1 AUTOFACTS Global Automotive Outlook VW Group Strategic Analysis: A Company in Transition 2002 Q1 Quarterly Executive Briefing

2 VW Group Strategic Summary Forecast Summary for the VW Group VW s assembly growth will be smaller relative to its immediate competitors, but it will be focused on profitable segments of the market. Benchmark Areas Issue Areas Emerging markets Pricing Power Product quality Platform sharing VW s emerging market strategy has brought positive results. From its assembly base in East Europe to its top position in China, VW is well placed for stable emerging market growth. Few mass-market VBE s can claim VW s level of premium pricing. This should continue as VW moves its brands upmarket and enters new profitable segments of the market, such as SUV s. VW s reputation for product quality, especially in West Europe, has allowed VW to gain market share both in and outside of Germany. Skoda s growth can also be attributed to this reputation. VW is the industry benchmark in terms of platform-sharing. As other VBE s rush to catch up, VW will focus on product differentiation within a platform-sharing strategy, thus staying out front. Brand image C-segment competition Luxury brands Germany Years of platform and component sharing have helped to blur the distinction between the VW Group s four core brands. This has hampered Audi and Seat s success in small cars. The C-segment has been VW s bread and butter in West Europe. However, its primary competitors in the region, Ford, PSA, Renault and others will all take market share from VW in this segment. VW has spent a great deal of time and resources in developing their luxury brands. This will be scaled back as these luxury brands are integrated into VWs new brand groupings. VW s ties with the German government will ensure that they remain tied to their ultra-expensive assembly base in Germany. This will hinder necessary reforms within VW s assembly structure. VW s upmarket shift will continue across all of its brands. This will come at a price, as VW s loses share in relation to its competitors. However, few VBEs can match VW s theoretical potential for profitability over the next decade. 2

3 News: VW s Brand Restructuring One of the first changes introduced by Chairman-elect Pischetrieder was a drastic reorganisation of VW s brands into two distinct groupings. The Classic brand group includes: Volkswagen Skoda Bentley Bugatti The Sporty brand group includes: Audi Seat Lamborghini This reorganisation will allow VW s brands to better attain the market images they have sought to create for each individual brand Witness Seat which has been hampered in its quest to become the Spanish Alfa Romeo by its close relationship with Volkswagen and Skoda 3

4 VW Group Global Competitive Context

5 VW: Global Competitive Context GM Group Ford Group Toyota Group DCX Group Renault-Nissan VW Group PSAGroup Honda Group Hyundai Group BMW Group Global Light Vehicle Assembly 0 2,000 4,000 6,000 8,000 Units (000) 10, ,000 14,000 VW remains committed to achieving profitable sales growth in North America and West Europe while increasing assembly in emerging markets. 16,000 The VW Group will be the smallest of the G6 by 2009 VW is looking to steady, profitable growth in emerging markets VW is consolidating its leading position in West Europe all this will help ensure that VW remains one of the most profitable VBEs in the world VW s size makes it a potential take-over target of one of the larger VBEs The Niedersachsen government (a 20% shareholder in VW) gives VW a degree of security against a takeover bid However, the European Union is considering legislation to outlaw these types of poison pills in the future For a VBE looking to strengthen its long-term position in Europe, there is no more attractive target than VW 5

6 VW Group Structural Overview 8 VW Group Global Light Vehicle Assembly & Capacity 90% VW Group Assembly Volume and Share of Global Assembly % 7 85% 10% Units (millions) Excess Capacity Utilization Rate 80% 75% 70% Millions of Units % 8% 7% % Share 3 Capacity Assembly Utilization 65% Assembly Assembly Share 6% 2 60% % VW will improve their asset utilization through a small-scale rationalization in assembly facilities. What capacity expansion is undertaken will occur in areas where VW is already operating at near full capacity, such as Central Europe. 6

7 VW Group: Globalisation Strategy

8 VW Group Globalisation Strategy West Europe VW is aggressively gaining market share in West Europe s main markets outside of Germany Skoda and Seat are seen as key competitors for brands such as Peugeot, Renault and Fiat in France, Spain, Italy and the UK East Europe VW will finally be tempted by the riskier markets of Russia and Ukraine Central Europe, however, will remain a key facet of the group s European assembly plans North America VW will continue to seek profitable growth through Audi and VW products such as the new Tuareg SUV South America The Seat brand will play an key role in VW s regional growth strategy Asia-Pacific VW will continue to focus on China Their flirtation with India will remain little more than that over the near term. 8

9 VW Group Share by Region, % 25% Share of Region Assembly Volume and Share Change AP Share Points % EE 15% 10% 5% MEA NA SA WE Volume Change Share Change 0% WE SA NA MEA EE AP Units (000) Since acquiring Skoda in 1991, VW has focused on East Europe as a centre of assembly for exports to West Europe. 9

10 VW Group: Brand/Partner Strategies

11 VW Group Brand Relationship Map VW VBE 20 Brand Type: Image, Pricing Power Units (000) Low-Cost Mass-Market Upscale Luxury N/A = Primary target market for brand = Secondary target market Skoda Units (000) SEAT Units (000) VW Units (000) Audi VW has a plethora of upmarket brands in the shape of Bugatti, Bentley and Lamborghini All appeal to different market segments Bugatti/Bentley/ Lamborghini Having the brands in the stable intended to help VW in its strategy to increase pricing power for each of its mainstream brands Units (000)

12 VW Group Performance by Brand Change % 16% 12% 8% 4% 0% -4% -8% Market Competitiveness Audi Volkswagen Seat Skoda -50% 0% 50% 100% 150% Contribution to Growth The Volkswagen brand s global presence and expanding product line allow it to remain the dominant force within the VW Group The Volkswagen brand is still the prime driver within the group Despite all of the attention given to VW s other brands, it is the Volkswagen brand itself which will remain the primary driver of growth within the group Seat will likely rebound from a couple of poor years which a renewed focus on developing the brand s image plus, Seat will be used as a key brand in Latin America Skoda s growth will taper off as Skoda s product portfolio is now full In addition, Skoda s upmarket push could drive away customers in its traditional Central European markets Audi s total assembly figures will stagnate Audi s comeback is complete and new near-luxury entrants have identified it as the turnaround benchmark 12

13 VW Group: Economies of Scale Strategy

14 VW High Volume Platform Snapshot Millions of Units Millions of Units DCX DCX GM Ford Toyota Renault Honda Toyota Honda 2001 Ford PSA GM VW 0% 50% 100% % of Total Capacity 2009 VW Renault PSA 0% 50% 100% % of Total Capacity VW is the leading proponent of the high volume platform strategy VW has one of the industries most coordinated multibrand strategies 11 key modules is a well-developed platform strategy by any other name - separation into Sporty and Classic key tool in argument against cannibalisation and the next stage in VW s competitive advantage A4 B5 AO3 A5 AO4 B5 HVPs in ,000 2,000 3,000 Units (000) HVPs in Units (000) Assembly Excess Capacity Assembly Excess Capacity 14

15 VW Portfolio Performance High-Volume Platforms Flexibility High-Volume Platforms, 2009 Effectiveness High-Volume Platforms, Number of Bodystyle Variants 9 B5 AO4 A5 Millions of Units of Capacity 1.5 AO4 A5 B Number of Nameplates 0 60% 80% 100% Utilization Rate VW s global strategy of using three main platforms for the majority of their assembly volume will continue. The only deviations will continue to be for niche products and older models for emerging markets. 15

16 VW Use of High-Volume Engine Families -- Competitive State 2001 VW s Use of High-Volume Engine Families 2009 VBE Use of High-Volume Engine Families Millions of Units 10 5 Ford DCX Honda GM Toyota VW was the early adopter of this strategy VW PSA Millions of Units 10 5 Another diminishing structural competitive advantage for VW DCX GM Toyota Ford Renault Honda VW PSA Renault 0 BMW 0% 50% 100% Installation Rate 0 BMW 0% 50% 100% Installation Rate VW s engine strategy is as simplified as its platform strategy: EA111 (82mm bore centre 3- and 4-cylinder gasoline engines), EA827/113 (88mm bore centre 4-, 6- and 8-cylinder gas engines), VR (65mm bore centre 4-, 5-, 6-, 8, 12 and 16-cylinder gas engines) and the EA086/188 diesel engines 16

17 VW Group: Product Strategies

18 VW Portfolio Analysis -- Volume and Growth by Segment Segment Share of Assembly, Average 100% 75% VW Assembly by Segment % output % 25% 0% Car Van SUV Pickup Car SUV Van Pickup VBE Industry VW s reliance on West Europe is highlighted by their dependence upon car assembly. As VW expands in Asia and the Americas, this will change, albeit slowly, as seen in Volkswagen s upcoming SUV. 18

19 VW Portfolio Analysis -- Volume and Growth by Segment Segment Share of Assembly, Average 100% 75% VW Assembly by Segment % output % % 5 0 A A/B B C C/D D D/E E VW Industry 0% A/B B C C/D D D/E E Others Again, VW s reliance on West Europe is highlighted in the pre-eminent position of B- and C-segment vehicles. However, they will, for the most part, avoid the unprofitable A- and A/B-segments as their brands attempt to shift upmarket. 19

20 VW Group Product Map, 2005 A5 Platform AO4 Platform B5 Platform Other Platforms A-A/B Lupo Arosa B-B/C A2 Polo Gol Ibiza Tango C A3 TT Golf New Beetle Leon Cordoba Fabia 1,264,112 C/D A4 Bora Jetta Toledo Octavia 2,760,448 D-D/E A6 Passat Tuareg Superb 1,118,480 E A8 Phaeton 116,768 20

21 Lessons Learned: The VW Group s Emerging Markets Strategy as a Benchmark

22 VW - The Automotive World s Leader in Utilising Emerging Markets VW will continue to expand their presence in East Europe, hoping to lessen their dependence on German labour VW s use of Mexico as an assembly centre for the affluent North American market emulates their strategy in East Europe Thus far, VW has only set up major build where you sell facilities in two emerging markets, China and Brazil. Russia looks to be next. 22

23 VW - The Automotive World s Leader in Avoiding Recent Troubles in Emerging Markets VW has avoided the on-again/offagain joint venture negotiations which most other major VMs have suffered through in Russia. Only now are they exploring possibilities for a Russian assembly plant In Asia, VW has avoided the troubles of the past five years by focusing their activities on highgrowth China VW s focus on Brazil in South America has helped them to avoid most of the troubles in Argentina in late 2001 In the Middle East and Africa region, VW has focused their efforts on establishing South Africa as a centre of export assembly to West Europe VW has shown foresight and constraint in their emerging markets strategy over the past decade. By focusing on low-risk markets with either a probable market expansion or a high export potential, VW is well positioned to avoid future shocks. 23

24 Key Takeaways

25 Key Takeaways VBE Name Key Success Factors Brand Management VW s reorganisation of their brand structure highlights the precarious situation they face in differentiating their core brands Upmarket Push VW proposes to move not one, but three core brands upmarket in the coming years while maintaining Audi s current position Labour Flexibility VW s leading shareholder, the government of Niedersachsen, makes it it difficult for VW management to enact necessary assembly reforms too much of of VW s assembly is is tied to to the expensive and inflexible German labour market How to Compete with VW Brand Image VW s brands risk a blurring of differentiation between them Exploit the brands in your portfolio with real weight Pricing Before pseudo Alfa Romeo succeeds Weak at bottom end as Skoda moves up Product VW slow to react to any developing niches. Key Lesson Despite plethora of me-too VW-like products in West Europe in recent years only one company has really succeeded, that s Skoda. Recent success stories have been Peugeot and Citroen - simply right price and the right product, with interiors that are functional and utilitarian Key Supplier Opportunities HVPs and Modular Assembly VW has been an industry leader in this field Nearly 80% of VW s vehicles will come off of its three main platforms VW s modular assembly strategy is designed to share eleven components across most products Expansion into non- European markets VW is counting on significant growth in North America, Brazil and China throughout this decade VW is exploring sites in Russia, Ukraine, India, US and Mexico 25