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VLKAY AT A GLANCE

 

 

 

 

 

 

Volkswagen AG (FRA:VOW) is the world's fifth largest Auto Maker by production volume, producing over 6.2 million vehicles in 2007 to generate revenues of €108.9 billion and profits of €2 billion.^[1] Volkswagen controls almost 10 percent of the world market share in the automotive industry, with strong footholds in most of Europe, especially Germany, and also a growing market presence in China.

Volkswagen currently produces everything from cheap small cars to super high-end luxury automobiles, also boasting an impressive commercial wing that produces everything from pick-up trucks and buses to heavy trucks. In addition to factories in twelve European countries, Volkswagen currently has production plants in North America, South America, Africa, and Asia. Volkswagen finances the purchase and lease of its vehicles through a successful financial services division. Volkswagen's business focus continues to be largely European, and the country has traditionally struggled in the US. Volkwagen's North American operations are more of a struggle for the company, with the exception of the Audi brand. The VW brand has limited North American product offerings that are expensive compared to similar products from Japanese automakers, partially because of the currency effects of importing cars from Europe. The company's offerings also largely ignore the small SUV, truck, and minivan segments. Conversely, the company's offerings match consumer expectations much better in Europe, where the company continues to be highly successful.

Concern about global warming, and U.S. and E.U. government legislation will drive an increasing demand for smaller, more fuel efficient vehicles, thus benefiting Volkswagen and its relatively environmentally-friendly cars. Despite this, the global auto industry remains plagued by over capacity (making it highly competitive) and Volkswagen's larely unionized work face means the company will face significant hurdles in attempts to improve effiency and reduce costs.

Business Overview

Volkswagen sells vehicles under the following automotive brands^[2]:

Volkswagen Passenger Vehicles delivered 3.7 million vehicles in 2007. Volkswagen focuses largely on smaller, no-frills vehicles for mass consumption. While sales were stagnant in North America and shrank in Western Europe, while sales grew more than 25% in Eastern Europe, Brazil and China.^[3] Due to a cost cutting campaign, margins increased from 1.3% in FY 2006 to 2.6% in FY 2007.^[4]

The auto industry, both in the EU and N. America, has too much capacity compared to demand in its light vehicle sector. As seen in the graph, this trend is increasing. Sooner or later, the auto industry will either need to size down to increase utilization, or increase demand. As for Volkswagen, it hopes to achieve the latter by introducing Up! Source:PricewaterhouseCoopers^[5]

In October 2009, Volkswagen planned to launch its new small car line-up, Up!, in the second half of 2011. Up! will be produced at Volkswagen's Slovakian plant in Bratislava, where the German automaker is investing EUR308 million related to the production of the new model.^[6] Up! represents a change in Volkswagen's line-up of vehicles toward smaller and cheaper cars due to changing demand in the auto industry. First, automakers are increasingly pressured by governments which struggle to meet ambitious carbon-reduction targets. Secondly, by 2020, 40% of new car buyers in developed markets will be over 60 years of age, compared with less than 30% in 2009.^[5] Although the affluent old favor premium brands, they tend to want smaller and cheaper cars as being mostly retired, they are generally buying a car with their own, rather than with a company’s money.^[5]

Volkswagen's introduction of Up! is consistent with other automakers that have realized that using profits from bigger cars to subsidize smaller ones presents long-term profitability issues in the face of changing demand. For example, GM plans to adopt low-cost manufacturing techniques by not installing unnecessary technology in its cheap cars.^[5] On the other hand, Lewis Booth, Ford’s CFO, plans to make small cars that are as good to drive as bigger ones and charge accordingly.^[5]

Audi produces upscale vehicles engineered for greater driving precision. Unit sales increased 5.4% for FY 2007 with operating profit increasing 31.7%, spurred by redesigned versions of the TT, A6 allroad, and Q7.^[7]

Bentley is a super-luxe division based in Britain that produces 7 models, with a combined volume of about 10,000 vehicles.^[8] In FY 2007, sales grew to 2.7% to€1.4 billion and operating profit increasing 13% to €155 million.

Bugatti makes a single model, the Bugatti Veyron, which is the fastest production car in the world with a top-speed of well over 200 mph. The company losses money on every Veyron it sells, with 81 sold in FY 2007, but the car was conceived to be a technological showcase for VW, a task at which it has been enormously successful.

Lamborghini makes super high-performance sports cars. Lamborghini sales are considered as part of the Audi division.

SEAT was a Spanish automotive firm taken over by VW Group in 1990.^[9] SEAT's vehicles are simple and designed for mass consumption, with sales heavily focused in Spain and Latin America albeit expanding in Northern and Eastern Europe. For FY 2007, revenues were flat, but the division produced a profit of €8 million, following a loss of €159 million in FY 2006.^[10]

Škoda was a Czech car manufacturer taken over with considerable success by VW Group in 1991.^[11] Skoda's cars, always known for reliability and simplicity, largely continue these traditions today, being moderately priced and utilizing legacy VW technology. During FY 2007, Skoda's sales increased 11.4%, causing profits to more than triple, the mainstay of these gains were produced by the popularity of the Fabia and Octavia models.

Volkswagen Commercial Vehicles produces eight models that include light commercial vehicles, heavy trucks, and buses, which are marketed globally. In FY 2007, this division sold 434,689 vehicles. For the same period, sales increased 14.9% to €9.3 billion, causing operating profit to nearly double.^[12]

The company employs 329,000 workers worldwide employed at 48 manufacturing facilities located throughout nineteen different countries.^[13] Volkswagen's products are marketed in 154 countries.^[14]

Financial Services

Financing is essential to the company's operations in developed markets. For example, 70-80% of cars marketed in western markets are financed, either through loans or leasing.^[15] This division is also issues insurance and handles the fleet management business. Despite the world economic downturn during the last fiscal year, Financial Services grew its revenue by 14.4% to €10.1 billion, and profits improved by €114 million.^[16]

Ownership Structure

Volkswagen has two large-scale shareholders, Porsche and the German state of Lower Saxony. At the end of 2008, Porsche, which has long sought to take over Volkswagen owns 42.6% percent of shares^[17] and Lower Saxony owns 20%.^[18] Porsche has publicly announced its intention to control 75% of VW's shares by the end of 2009, which would give it effective control over the larger company's operations.

Volkswagen Group Volume Data

Emerging Markets

Although the recent economic downturn has left most automakers thinking more about survival than growth, the long-term growth potential for car sales remains Brazil, Russia, India and China - BRIC countries. VW has done better than most in tapping these growing markets. For example, projections indicate that overall car sales in India will triple over the next ten years, and VW currently has two factories there, and markets Audi, Skoda, and the VW brands therein.^[20] VW organized many years two major joint ventures to produce and market its vehicles in China, today these two companies control about 20% of the Chinese market, with sales increasing 34% for fiscal 2007.^[21][22] Volkswagen has produced and marketed its cars in Brazil since the late 1950s, where sales increased 18.2% for fiscal 2007, due in part to a strengthening brazilian real.^[23][24] Volkswagen recently opened a factory in Russia, where sales increased 37.5% for fiscal 2007.^[25]

Automotive sales in emerging markets has changed considerably over the last several years. Whereas most major automakers once took legacy models from the US or Europe, and simply started manufacturing and selling them in the lower income country, this method is no longer viable as emerging market consumers increasingly expect the most up-to-date technology and models that fit the specific driving needs of their country.^[26] And with increasing competition in the industry, they have become increasingly able to satisfy this desire.

Production and Sales

Trends and Forces

Consumer Trends

Consumer demand is finicky and hard to predict. As gas prices spiked through mid-2008 and the US (CAFE Standards, which require average fleet efficiencies of 35 mpg by 2020) and European Unions (EU series 5 emissions regulation) enacted a variety of stricter emissions standards, most people assumed that car buyers everywhere would want smaller, less powerful cars. In a study recently conducted by J.D. Power and Associates to determine automobile environmental impact, Volkswagen's European pedigree of small, moderately powered cars allowed it to rank highest of the AEI nameplates.^[28] Three of its models were listed in the survey's 30 most environmentally friendly vehicles (the new Beetle, the Jetta, and the Golf).^[29] While Volkswagen ideally hopes to pair high fuel efficiency with relatively low selling prices, combining an appeal to environmental sensibilities with a more pragmatic, price-conscious attraction, as oil prices have plunged the profitability of such a scheme has become less sure.

Another possible problem is Volkswagen's huge diversity of brands that literally range from the absolute cheapest to the most outrageously expensive cars sold today. Meeting such a wide range of customers' demands is a tall order, that one wonders if any company could satisfy. One is reminded of General Motors (GM) once huge diversity of brands and its ultimate inability to make any of these successful.

Exchange rates

Monetary exchange rates have a significant impact on international companies. Volkswagen's large-scale global operations makes it particularly sensitive to fluctuations in the strength of the euro relative to other currencies. As the Euro has been strong over the past several years, the company ends up paying a significant portion of production costs in the relatively more valuable euros. When these same cars are sold in other countries in prices denominated in relatively less valuable currencies, Volkswagen makes less of a profit than it would had these cars had been paid for in euros.

Management is certainly aware of this problem as in May 2008, the CEO of Audi (one of Volkwagen's subsidiaries) claimed that the whole company could benefit "tremendously" from the construction of a production facility in North America by mitigating the effects of the strong euro. Volkswagen has since announced plans to build a new manufacturing plant for the North American market in Tennessee, with plans to begin production by 2011.^[30]

Commodity Prices

Commodity Price trends threaten to drive up the cost of both car manufacturing and car ownership.

• Steel: One of the main ingredients in cars is steel, so increases in steel prices reduce VW's margins. Volkswagen cannot easily substitute another material for steel to reduce its costs, unlike almost any other input into car production, even labor.

• Aluminum also affect the company's margins as this metal is also a significant production input, accounting for around 300 pounds of a new car's weight.

• Oil prices: Increases in the cost of gasoline inflate the day-to-day cost of car ownership. Since consumers buy cars only infrequently, rising oil prices have only a limited impact on year-to-year car sales, but over time they cut into the industry's sales, and force companies to design more fuel-efficient fleets.

Inflexible Labor

53.3% of Volkswagen's labor base is in Germany, heavily unionized, and entrenched by some of the world's most strict labor regulations.^[31] This, and the fact that employees elect half of the VW's Supervisory Board, makes difficult any efforts by the company to cut costs, increase efficiency or downsize the labor force.^[32]

Market Share

As can be seen from the chart, Volkswagen has a World-Wide market share of almost 10 percent. However, Volkswagen has a very small market share in North America. This is a concern for the company since the United States is one of the world's largest markets and Volkswagen is fully aware of this. The company is taking on this issue with a few different approaches including providing more affordable and practical cars and introducing technological innovations which would increase the fuel efficiency of its vehicles along with making them more environmentally friendly. In 2008 Volkswagen will introduce its "Clean TDI" to the US markets in its Jettas which will even meet California's new strict emission standards and hopes that this will help increase its market share in the US.

U.S. Auto Industry 2008 Market Share by Sales (May 2008)^[34]

2007 European Automotive Market Share Data^[37]

References

1. ↑ 2008 Annual Report, page 79
2. ↑ Volkswagen: Group Portrait
3. ↑ 2008 Annual Report, page 80
4. ↑ 2008 Annual Report, page 81
5. ↑ ^{5.0 5.1 5.2 5.3 5.4} Small isn't beautiful
6. ↑ Volkswagen Plans To Launch New Up! Model In 2H 2011
7. ↑ 2008 Annual Report, page 82-83
8. ↑ 2008 Annual Report, page 89
9. ↑ Wikipedia: SEAT
10. ↑ 2008 Annual Report, page 82-83
11. ↑ Wikipedia: Skoda
12. ↑ 2008 Annual Report, page 91
13. ↑ 2008 Annual Report, page 2
14. ↑ 2008 Annual Report, page 2
15. ↑ 2007 Annual Report, page 54
16. ↑ 2007 Annual Report, page 93
17. ↑ Bloomberg: Porsche Predicts 'Clear' Decline in Full-Year Sales
18. ↑ IHT: Porsche closes in on control of VW
19. ↑ Volkswagen 2007 Annual Report: Key Figures
20. ↑ 2007 Annual Report, page 61
21. ↑ Wikipedia: Volkswagen Group China
22. ↑ 2007 Annual Report, page 79
23. ↑ Economist: A survey of cars in emerging markets.
24. ↑ [2007 Annual Report, page 79
25. ↑ [2007 Annual Report, page 116
26. ↑ Economist: A survey of cars in emerging markets.
27. ↑ Volkswagen 2007 Annual Report, page 81-91
28. ↑ Indiacar.com: Volkswagen Ranks High in J.D. Power Automotive Environmental Index
29. ↑ Indiacar.com: Volkswagen Ranks High in J.D. Power Automotive Environmental Index
30. ↑ VW Picks Tenn. for 1st U.S. car plant since '88
31. ↑ Volkswagen 2007 Annual Report, page 81-91
32. ↑ Volkswagen 2007 Annual Report, page 106
33. ↑ Auto Oberver - A Historic Year For US Vehicle Sales
34. ↑ ^{34.0 34.1 34.2} US News - How Toyota Could Become the U.S. Sales Champ
35. ↑ [http://oica.net/wp-content/uploads/world-ranking-2007.pdf OICA - World Motor Vehicle Production, 2007]
36. ↑ [http://oica.net/wp-content/uploads/world-ranking-2008.pdf OICA - World Motor Vehicle Production, 2008]
37. ↑ Suite 101: Top Selling Cars in Europe in 2007