AUTOFACTS Global Automotive Outlook
VW Group Strategic Analysis:A Company in Transition
2002 Q1 Quarterly Executive Briefing
2© 2002 PricewaterhouseCoopers LLP. All rights reserved.
2002 Q1 Release Data.
VW Group Strategic Summary
Brand image
C-segment competition
Luxury brands
Germany
Forecast Summary for the VW GroupVW’s assembly growth will be smaller relative to its immediate competitors, but it will be
focused on profitable segments of the market.
• 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.
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.
Issue AreasBenchmark AreasEmerging 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.
• 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 VWsnew 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.
• Few mass-market VBE’s can claim VW’slevel 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.
3© 2002 PricewaterhouseCoopers LLP. All rights reserved.
2002 Q1 Release Data.
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
5© 2002 PricewaterhouseCoopers LLP. All rights reserved.
2002 Q1 Release Data.
VW remains committed to achieving profitable sales growth
in North America and West Europe while increasing
assembly in emerging markets.
VW: Global Competitive Context
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 take-over 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
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00
16,0
00Units (000)
BMW Group
Hyundai Group
Honda Group
PSAGroup
VW Group
Renault-Nissan
DCX Group
Toyota Group
Ford Group
GM Group
Global Light Vehicle Assembly
2001 2009
6© 2002 PricewaterhouseCoopers LLP. All rights reserved.
2002 Q1 Release Data.
VW Group Global Light Vehicle Assembly & Capacity
2
3
4
5
6
7
8
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Uni
ts (m
illio
ns)
60%
65%
70%
75%
80%
85%
90%
Capacity
Assembly
Utilization
VW Group Structural Overview
Excess Capacity
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.
Utilization Rate
VW Group Assembly Volume and Share of Global Assembly
0.00
2.00
4.00
6.00
1990
1993
1996
1999
2002
2005
2008
Mill
ions
of U
nits
5%
6%
7%
8%
9%
10%
11%
% S
hare
Assembly
Assembly Share
8© 2002 PricewaterhouseCoopers LLP. All rights reserved.
2002 Q1 Release Data.
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 SUVSouth America
• The Seat brand will play an key role in VW’s regional growth strategyAsia-Pacific
• VW will continue to focus on China➤ Their flirtation with India will remain little more than that over the near term.
9© 2002 PricewaterhouseCoopers LLP. All rights reserved.
2002 Q1 Release Data.
VW Group Share by Region, 1990-2009
Since acquiring Skoda in 1991, VW has focused on East Europe as a centre of assembly for exports to West Europe.
Share of Region Assembly
0%
5%
10%
15%
20%
25%
30%
APEEMEANASAWE
20091990
Volume and Share Change
-500 -250 0 250 500 750 1000
AP
EE
MEA
NA
SA
WE
Units (000)
-0.1 -0.05 0 0.05 0.1 0.15 0.2
Share Points
VolumeChangeShareChange
11© 2002 PricewaterhouseCoopers LLP. All rights reserved.
2002 Q1 Release Data.
0
100
200
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600
2001 2009
Units
(000
)
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2001 2009
Units
(000
)
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2001 2009
Units
(000
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VW Group Brand Relationship MapIm
age,
Pric
ing
Pow
er
VW VBE
Low-Cost Mass-Market Upscale LuxuryBrand Type:N/A
Skoda
SEAT
VW
Audi
= Primary target market for brand= Secondary target market
• VW has a plethora of upmarket brands in the shape of Bugatti, Bentley and Lamborghini
• All appeal to different market segments
• Having the brands in the stable intended to help VW in its strategy to increase pricing power for each of its mainstream brands
Bugatti/Bentley/
Lamborghini0
100
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800
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2001 2009
Units
(000
) 0
20
2001 2008
Units
(000
)
12© 2002 PricewaterhouseCoopers LLP. All rights reserved.
2002 Q1 Release Data.
Market Competitiveness2001-2008
-8%
-4%
0%
4%
8%
12%
16%
-50% 0% 50% 100% 150%Contribution to Growth
Cha
nge
%
VW Group Performance by Brand
Seat
Volkswagen
Audi
The Volkswagen brand is still the prime driver within the group
• Despite all of the attention given to VW’sother 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’sproduct 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 benchmarkThe Volkswagen brand’s global
presence and expanding product line allow it to remain the dominant
force within the VW Group
Skoda
14© 2002 PricewaterhouseCoopers LLP. All rights reserved.
2002 Q1 Release Data.
VW High Volume Platform Snapshot
GM
DCXPSA
Renault
Toyota
Ford
VW
GM
Honda
DCX
PSARenault
ToyotaFord
VW
• VW is the leading proponent of the high volume platform strategy
• VW has one of the industries most co-ordinatedmultibrandstrategies
• 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
Honda
HVPs in 2001
0 1,000 2,000 3,000
AO3
B5
A4
Units (000)
HVPs in 2009
0 1000 2000 3000
B5
AO4
A5
Units (000)
AssemblyExcess Capacity
AssemblyExcess Capacity
2001
0
5
10
0% 50% 100%% of Total Capacity
Milli
ons
of U
nits
2009
0
5
10
0% 50% 100%% of Total Capacity
Milli
ons
of U
nits
15© 2002 PricewaterhouseCoopers LLP. All rights reserved.
2002 Q1 Release Data.
VW Portfolio Performance – High-Volume Platforms
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.
High-Volume Platforms, 2009
0
1.5
3
60% 80% 100%Utilization Rate
Mill
ions
of U
nits
of C
apac
ity
High-Volume Platforms, 2009
A5
AO4
B5
6
9
12
4 7 10Number of Nameplates
Num
ber o
f Bod
ysty
le V
aria
nts
EffectivenessFlexibility
A5
AO4
B5
16© 2002 PricewaterhouseCoopers LLP. All rights reserved.
2002 Q1 Release Data.
VW Use of High-Volume Engine Families -- Competitive State
GM
Honda
BMW
PSA
Renault
ToyotaFord
VW
DCX
GM
Honda
BMW
PSARenault
Toyota
Ford
VW
DCX
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
2001 VW’s Use of High-Volume Engine Families
0
5
10
0% 50% 100%Installation Rate
Milli
ons
of U
nits
2009 VBE Use of High-Volume Engine Families
0
5
10
0% 50% 100%Installation Rate
Milli
ons
of U
nits
VW was the early adopter of this
strategyAnother diminishing
structural competitive
advantage for VW
18© 2002 PricewaterhouseCoopers LLP. All rights reserved.
2002 Q1 Release Data.
Segment Share of Assembly, 2001-2009 Average
VW Portfolio Analysis -- Volume and Growth by Segment
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10
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30
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100
Car Van SUV Pickup
% o
utpu
t
VBE Industry
0%
25%
50%
75%
100%
1990 1992 1994 1996 1998 2000
VW Assembly by Segment 1990-2009
Car SUV Van Pickup
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.
19© 2002 PricewaterhouseCoopers LLP. All rights reserved.
2002 Q1 Release Data.
Segment Share of Assembly, 2001-2009 Average
VW Portfolio Analysis -- Volume and Growth by Segment
0
5
10
15
20
25
30
35
40
45
A A/B B C C/D D D/E E
% o
utpu
t
VW Industry
0%
25%
50%
75%
100%
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
VW Assembly by Segment 1990-2009
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.
20© 2002 PricewaterhouseCoopers LLP. All rights reserved.
2002 Q1 Release Data.
A-A/B
B-B/C
C
Arosa
Fabia
Ibiza
A3
A8
A6D-D/E
E
A2
Leon
Bora
Passat
Phaeton
Toledo Octavia
Superb
AO4 PlatformA5 Platform
Other PlatformsB5 Platform
1,264,112
2,760,448
1,118,480
C/D
VW Group Product Map, 2005
A4
Golf
Tuareg
TT Cordoba
TangoPolo
Jetta
New Beetle
Gol
Lupo
116,768
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2002 Q1 Release Data.
VW - The Automotive World’s Leader in Utilising Emerging Markets
VW’s use of Mexico as an assembly centre for the affluent North American market emulates their
strategy in East Europe
VW will continue to expand their presence in East Europe, hoping to
lessen their dependence on German labour
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.
23© 2002 PricewaterhouseCoopers LLP. All rights reserved.
2002 Q1 Release Data.
VW - The Automotive World’s Leader in Avoiding Recent Troubles in Emerging Markets
VW’s focus on Brazil in South America has helped them to avoid most of the troubles in Argentina in
late 2001
In Asia, VW has avoided the troubles of the past five years by focusing their activities on high-
growth China
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 avoided the on-again/off-again joint venture negotiations
which most other major VMs have suffered through in Russia. Only
now are they exploring possibilities for a Russian assembly plant
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.
25© 2002 PricewaterhouseCoopers LLP. All rights reserved.
2002 Q1 Release Data.
Key Takeaways
VBE Name Key Success FactorsVBE 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 difficult for VW management to enact necessary assembly reforms
➤ too much of VW’s assembly is tied to the expensive and inflexible German labour market
• 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 difficult for VW management to enact necessary assembly reforms
➤ too much of VW’s assembly is tied to the expensive and inflexible German labour market
How to Compete with VW
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➤ Before “pseudo” Alfa Romeo
succeeds
• Pricing• 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
• Brand Image• VW’s brands risk a blurring of
differentiation between them• Exploit the brands in your
portfolio with real weight➤ Before “pseudo” Alfa Romeo
succeeds
• Pricing• 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 OpportunitiesKey Supplier Opportunities
• HVPs and Modular Assembly
• VW has been an industry leader in this field
➤ Nearly 80% of VW’svehicles 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
• HVPs and Modular Assembly
• VW has been an industry leader in this field
➤ Nearly 80% of VW’svehicles 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