Automotive Industry Analysis. The Chinese and American Market, Competitors

The Volkswagen AG


Research Paper (undergraduate), 2016
60 Pages, Grade: 3,7 (93%)

Excerpt

Table of Contents

1. Industry
1.1 An Introduction to the Automobile industry
1.2 Industry Development
1.3 Dynamics
1.4 Automobile Industry Strategies
1.5 Threat of alternative means of transportation
1.6 Rivalry Between Leading Automobile Manufacturers

2. Analysis of the Volkswagen Group
2.1 Introduction
2.2 Analysis and evaluation of the Volkswagen Group’s performance
2.3 Examination and Evaluation of the Volkswagen Group’s Strategy
2.4 VW Management
2.5 SWOT Analysis of the VW Group on the Chinese Market
2.6 SWOT Analysis of the VW Group on the American Market
2.7 Key success factors of VW

3. Competitors
3.1 Analysis of the Competitors
3.2 The Governance Corporate
3.3 Supply Chain Management
3.4 Leadership and Culture
3.5 Profit

4. Recommendation
4.1 Recommendation for the VW Group

Reference

Appendix

1. Industry

1.1 An Introduction to the Automobile industry

In the beginning the creation of the automobile seemed less of a need and more of a luxury, as the cars could only be afforded by the well off. The very first steam car took to the road in France in 1768 - but Cugnot's novel idea did not trigger the beginning of the car industry. After Henry Ford’s model made its debut, owning a car was a symbol of status, because it could only be afforded by the wealthy. Once the process of Henry Ford’s mass production was introduced, cars could be afforded by a wider dynamic of people, and ownership became an affordable growing trend. The production of automobiles was a great help to the economy. It provided jobs across industries including positions in steel and machine tool makers for the different metal parts of the car. The increase in the need of supplies and other parts of the car including the battery, head lights, paint, and interior upholstery, were the driving forces for new businesses to thrive. Cars being a part of the everyday norm meant they would need routine car maintenance which became a major source of business. This also led to the increase of petroleum sales as the demanded use of cars increased. When WWII came the US was able to use the jeep for military use, additionally Chrysler reworked the jeep design to create tanks. Moreover, car production in Europe turned its focus from “the people’s car” to cars designed for the military.

1.2 Industry Development

As the automotive industry developed, the importance of decreasing the carbon footprint become increasingly relevant. In 2008 the European Parliament and Council approved new CO2 emission rules for passenger cars. Japan too had been supporting the efforts of a more eco- friendly environment by way of recycling long before this new regulation. Now they’d turned their attention to supporting a more eco-friendly car. The government offered incentive programs through subsidies and tax incentives to support the cause.

The need for preservation of resources, including raw materials that are needed for part production as well as those needed for the creation of gas we use in our vehicles, created a high need for alternatives. This need brought about the creation of the first hybrid by Lohner-Porsche in the 1900’s (history.com). This market has become increasingly popular in the last decade. It has even gave way to the newer electric automobile technology, which has only begun to scratch the surface of what advancements can be made once more efficient and cost friendly method for electric vehicle development has been discovered. Between that and the government's funding towards clean technologies, there is much to look forward to in the automobile industry. From 1990 to 2015 there were a total of 72.37million units sold for international car sales, and 9 trillion dollars made in revenue (statista.com). Moreover, automobile sales are expected to reach 74.39million units by the end of 2016, and exceed 100 million units by 2020 (statista.com, Appendix One).

1.3 Dynamics

The automotive industry is at maturity, so the number of companies entering the market, excluding those for electric cars options, is very low. According to a new study done by the AlixPartners, the market for the automotive industry will decline in the next five years. This is due to the BRIC countries having an increase in economic issues. Brazil and Russia are facing an increase in taxes, low consumer spending, and currency devaluation. However, China, and India are still contributing to global market growth, but at a lower percentage. The new focus will be on C.A.S.E. (car connectivity, autonomous or assisted driving, new mobility or car sharing, electrified powertrains and components. The market for electric cars is completely separate due to the difference in demographics among other things. Also, the availability of resources also known as the suppliers power is average as there are many different providers of raw materials, however the accessibility of these things are where the power lies.

An example that demonstrates the dynamics of the automotive industry can be show by looking at the product life cycle of a vehicle in the automotive industry. Each year at the IAA trade show new automobile models are showcased before their release in the up and coming year. The yearly release of a new model puts pressure on the companies to continuously produce an automobile with new and exciting features. Once the new automobiles are made available for purchase the next step begins the product life cycle.

The product life cycle for an automobile begins where all products do. It is first introduced in the introductory stage. Here is where car companies showcase the features of the car that are most unique to the market. Examples of this could include the highlighting of fuel efficiency, voice recognition, and Bluetooth accessibility. At this stage companies are marketing to the wealthier demographic of people expecting them to pay for the cars at their highest price of exchange in order to have the newest and best car. Another example would be what Tesla is doing by allowing eager buyers to put money down to secure a model of what will be their newest Tesla model that is not yet released.

The second stage in the PLC for automobiles is growth. This is where the product is purchased in larger quantities and also where other players enter the market. Companies focus on separating their brand from the others so they can gain more of an advantage. When there are multiple car options that provide the same features, it comes down to a matter of price. If someone can buy the same car for lower than what is being offered at one company, they will likely choose to buy from the less expensive company. However, if the company that is selling the car for more is well known and has a good reputation of selling vehicles of quality, the customer will pay the higher price just for that reassurance of good quality vehicles.

Additionally, companies offer rebates or cash-back incentives to encourage customers to buy from them.

Next in the PLC comes maturity. During this phase growth has greatly slowed down, and the competition is fierce due to the large quantity of players saturating the market with the same products. This phase is where the repositioning of a product can result in success or demise in the future. Companies make great efforts in market segmentation and advertising their product frequently to their target audience in efforts to sway the purchase of the consumer. The final stage in the product life cycle for automobiles is the decline. This is where interests in the current car have diminished and a newer car has taken the attention of potential buyers. In this stage companies give large discounts on cars and offer other incentives to help sell the models from the year before to make room for the newest line of cars, but also to avoid having to pay taxes at the years end for the older models that did not sell (Gerbeau, 2005).

1.4 Automobile Industry Strategies

Strategies of companies in the automobile industry include innovation by way of research. They follow the global strategy of having their supply chain concentrated and not spread out.

Companies do research within their region to understand the needs of their consumers and tailor the car and its aspects to meet those needs. Each need is different depending on the region but each successful company has research and development facilities in their target market areas. They practice the global strategy of having a concentrated supply chain. Volkswagen is a great example of this strategy. The headquarters of their research and development team is located in Wolfsburg (Appendix Two). They “operate international trend and technology scouting with their own research satellites in the US, Japan and China markets” Other success factors include consumer focus, cost reduction, maintaining production quality, and adaptable production and manufacturing (Euler Hermes, 2016).

1.5 Threat of alternative means of transportation

Though there are other means of transportation including bicycles, motorcycles, trains, Uber, and walking, each of these options are limited in their purpose of design. Bicycles were made for use in traveling shorter distances, like within smaller cities for example, but the average person doesn’t want to have to exercise every time they need to get from one place to another. Motorcycles do save on gas so they are a popular thought in that respect, but they have other major factors such as the lacking of safety in a collision when compared to a car.

1.6 Rivalry Between Leading Automobile Manufacturers

Due to the automobile being in the latter portion of maturity, the companies that are the most successful are the well-known brands such as the VW Group, Toyota, GM, and Ford. Each dominating the vast majority percent of the market for automotive sales. Each company is in a constant battle to one up the other company, striving to remain the leader for the most advanced car options. They are constantly improving the safety of their vehicles, and working to accommodate the needs of the consumers as they evolve. In 2006 the leader was Toyota with General Motors coming in a close second (Appendix Three). Since then Toyota has remained in the top 5 companies for the automotive market share (Krebs, 2008).

Recent examples of the efforts for one company to maintain the competitive advantage over another include automotive companies partnering with technology in different ways. A report in the Wall Street Journal announced that Google parent Alphabet Inc. will be partnering with Chrysler and incorporating self-driving technology into 100 minivans.

Even with issues that affect how well the automotive industry does including the globally shared economy and challenges partnering with technology companies, the continuous global expansion of the automobile industry is the future.

2. Analysis of the Volkswagen Group

2.1 Introduction

Volkswagen, a German car manufacturer was founded in 1937 and has developed to one of the leading automobile companies in the world. Today, VW is the largest automobile manufacturer in Europe and the second largest in the world. The Volkswagen Group comprises twelve brands (Appendix Four) and operates 119 production plants located in 20 different European countries, in addition to the 11 countries in Asia, Africa and the Americas. Overall, the group delivered slightly over 10 million vehicles to its customers in 2014. Furthermore, around one out of four new cars in Europe is produced by the Volkswagen Group. In total, almost 41,000 vehicles are produced every week and sold in 153 different countries worldwide (Volkswagen AG 2015).

2.2 Analysis and evaluation of the Volkswagen Group’s performance

The Volkswagen Group was able to double its sale figures from 2004 to 2014 (from about 5 million to slightly more than 10 million respectively). The Group’s ROI as well as the net cash flow and liquidity reflect the overall performance. However, the financial crisis had a significant impact on the Group (Appendix Five and Six). Most of the Group’s growth came from the Asia/Pacific market, a minor amount from the European market, and almost nothing from the American market (North and South) as it remained almost stable (Appendix Seven). The sales figures for Asia/Pacific and Europe are now almost equal as both are just above 4 million. Most of the growth in the Asian/Pacific market has been contributed through sales in China. In China the VW brand is dominating, which resulted in 2.5 million vehicles sold, (Appendix Eight) and is six cars among the best selling vehicles in 2014 (Isensee 2014). However, even though the VW Group was not able to increase its sales figures in Europe dramatically, it was able to achieve nearly doubled revenue figures (Appendix Nine). Within the 10 years, on the one hand the VW Group was able to maintain its leadership in Europe and gain the lead in the Asia/Pacific area (Toyota has only almost equal numbers due to its dominance in Japan), but on the other hand it was not able to significantly increase its performance in America as the Group is dominated by all of its main competitors (Appendix Ten). Overall, the VW Group managed to increase its sales numbers in each market and had the greatest overall increase in sales numbers compared to Toyota, GM and Ford (Appendix Eleven).

On the 18th of September in 2015, the EPA (Environmental Protection Agency) revealed evidence for its claims that the VW Group cheated on emission tests for several diesel models (Snyder 2015). Shortly after, the Group’s stock was 15 points down, and sales reflected the claims. The Group has had to recall millions of cars and has been facing legal sanctions and lawsuits. The Volkswagen AG set around €6.7bn aside to cover the cost, which in total resulted in its first quarterly loss for 15 years of €2.5bn in late October (Hotten 2015). However, it seems that the crisis has heavily affected the stock market as well as the Group’s savings in order to cover the legal costs of the crisis, but rather weakly the overall sales figures (Appendix Twelve). In the first quarter of 2016 the Group sold 2.5 million vehicles which resulted in an increase of 0.8 percent. Nevertheless, the crisis is reflected by the sales in some way, as Volkswagen passenger cars sales decreased by 2.7 percent compared to the year before. As an effect of the crisis, the VW Group’s sales declined quite strongly especially in the USA (-5.7 percent), sales in Germany resulted in a slight growth though the rate was much lower comparing the last years. Moreover, sales plummeted in Brazil (linked to the economic crisis and decrease of the Brazil currency (Lehman 2015)) and Russia (linked to the Ukraine crisis and sanctions of the EU against Russia (Kallweit 2015). Most credit for the small overall increase has to be given to China as the Group was able to achieve an increase of more than 6 percent which resulted in total sales figures of over 1 million which is almost half of the Group’s total sales (Volkswagen AG 2016). In total, the VW Group was able to sell more vehicles in the first quarter of 2016 than any major competitor (Appendix Thirteen).

Overall, the VW Group highly profits from its diversified portfolio. However, some business units are more appealing in terms of future investments etc. than others (Appendix Fourteen (GE/McKinsey)). The GE/McKinsey matrix show that the majority of the business units are within the field of high competitive strength and high industry attractiveness. Nevertheless, the analysis also displays that some units are in a rather unattractive market in which the brand does not have a great competitive strength. The two business units are Ducati and Bugatti. The reasons are that both units operate in a rather small, barely growing, and low profitable market (e.g. by selling a Bugatti Veyron VW has a negative cash flow (Davies 2013)). Furthermore, the Group’s core competency is nether producing motorcycles nor such expensive cars (Bugatti sells the world’s most expensive vehicles).

2.3 Examination and Evaluation of the Volkswagen Group’s Strategy

The Volkswagen Group’s does not have an overall public mission statement. However, the group has a vision and related strategic objectives. The vision is to become the leader of the global automotive industry with respect to the economy and ecology. In order to achieve this vision and become the most successful and fascinating enterprise in the automotive industry by 2018, the VW Group has defined four goals (Appendix Fifteen (Volkswagen AG 2015)). The four defined goals display the major responsibilities or milestones which contribute to achieving the Group’s vision. The VW Group’s vision as well as its goals are rather general goals instead of ones that separate itself from its competitors. The separation and differentiation to the competitors is achieved on a single brand level, since the VW Group has a very wide portfolio from luxury over commercial to passenger products targeting the low-, medium- and high-class market (e.g. the same mission and vision for Porsche and Seat could never work out since both subsidiaries focus on completely different market segments). Almost all of the VW Group’s brands focus on different market segments, even though there are a few overlaps. Having different mission and vision statements for each subsidiary ensures that each brand continues to focus on its segment as it is trying to achieve its specific mission, vision, and goals. Therefore, target market segment overlaps are minimized, which enables a greater success of each brand as the brands compete against their competitors and not against other brands within the VW family.

2.4 VW Management

Ever since the emission scandal hit the newsfeed, the management at the VW Group has been anything but stable. This has caused concerns among stakeholders and dealers are alarmed, especially on the American market, where the company was already rocky. The concern was further increased when the VW Group suddenly announced that the executive of the American operations was to step down (New York Times, 2016). This came in the wake of former CEO Martin Winterkorn resigning after it became apparent that the cheating of tests were more extensive than first believed. Following the emission scandal, the management has admitted that it occurred due to a whole chain of errors and because of a corporate mindset and culture, where rule breaking was tolerated (The Guardian, 2015). One managerial aspect that played a role in creating the emission scandal was the pressure from management to achieve certain performance goals in regards to levels of emission produced by the affected engines. This lead to the emission scandal and has acted as an enormous hindering in terms of financial performance for the entire VW Group now. This coupled with the fact that as many as up to 30 managers were aware that the cheating was going on is an indicator of a poor culture, where rule-breaking is accepted as long as you do not get caught. A strategy that may result in short-term financial benefits, until it all comes tumbling down and repercussions turn out to do more economic damage. In addition to the economic damage, the VW Group has a long road ahead of them in terms of rebuilding their image, reputation and most importantly the trust of their customers. In the months following the scandal, the new chief executive officer has appointed a new team of top managers and the overhaul at the top has resulted in rotation of positions as well as the number of top managers that will report to the CEO moving forward, has been almost cut in half. According to the Group this change in structure will speed up the decision-making process, reduce complexity and increase efficiency (Reuters, 2015). They believe that this new assembly of top managers will provide the company with changes, new-thinking and development initiatives that will drive financial performance and once again make the VW Group the largest car manufacturer in the world.

2.5 SWOT Analysis of the VW Group on the Chinese Market

As mentioned in the introduction of Volkswagen, a geographical market where they have experienced great success since they entered the market 30 years ago, is the Chinese market. China is considered to the second home market for the VW Group. Since entry they have delivered more than 20 million cars to Chinese consumers and 89,000 people work for the VW Group in China (Volkswagen Group China, 2014). A reason why the VW Group has experienced great success on the Chinese market, where they have a market share of 21 percent and a market position as the number one, is partly thanks to their diverse portfolio, which contains many variations of compact cars, which is what the Chinese market seek. To further look into the success behind the Chinese market and to analyze the VW Group on the Chinese market we will perform a SWOT analysis.

A strength that the VW Group has on the Chinese market that is a big part of their success, is their recognized brand and image. Chinese consumers like recognizable brands that have a certain level of awareness and they consider VW to be good German quality that is trustworthy and reliable (Reuters, 2014). However, it should be noted that this was recorded before the emission scandal and it may not be the same perception of the company today. Another strength would be their production capacity. They have the ability to follow and keep up with the increasing demand for cars on the Chinese market. Finally, the VW Group portfolio and market share are also considerable strengths. As mentioned above, they have a diverse portfolio that includes cars from all segments and that covers various needs. With their portfolio the Group has managed to create a situation for themselves, where six out of the top ten-bestselling vehicles in China are VW brand models (Volkswagen Group China, 2014). However, despite great success on the Chinese market there are reasons for the Group to be on the lookout for potential changes in the market conditions as well as changes in market needs. In recent years the SUV market in China has grown tremendously. It is the only car segment on the Chinese market that is still enjoying hot growth. During the first 3 quarters of 2015 the SUV sales grew more than 45 percent (Bloomberg, 2015). This is where the VW Group has one of their weaknesses and they need to find a way to tackle their shortcomings when it comes to SUVs. Their lack of multiple SUV’s in their portfolio is a weakness and they are falling behind competitors in this category because they have not been able to introduce suitable SUV models and capture that part of the market yet.

The Chinese market offer great opportunities for the VW Group. The rapid economic growth the country has experienced in recent years together with the increasing middleclass. This results in higher disposable household income that drives private consumer consumption. According to VW reports they estimate that the consumption in China will reach more than $6,000 billion in 2025. Another opportunity is that the Chinese government will further invest in their infrastructure and the construction of connecting cities to the national road network. Finally, less developed cities offer opportunities for the Group to penetrate the market with their low-end portfolio cars (Volkswagen Group China, 2014). Furthermore, there may be opportunities in the traffic restrictions we will discuss in the threats. If the Chinese government introduce traffic restrictions and limits the number of cars in certain cities. This might open the door for the VW Group to introduce electric cars on the Chinese market. Which is something they have been unsuccessful with previous. All this provides them with great growth opportunities to capture market share in the coming years, as well as penetrating markets that has so far been underdeveloped. At the end of 2015 China announced that they had recorded an annual economic growth of 6.9 percent, which was the slowest it has been in 25 years (CNN Money, 2016). This may affect consumers’ spending patterns and their willingness to spend money. This may pose as a threat for the VW Group if China does not continue to experience their rapid growth speed. An additional threat that the Group should be aware of includes traffic restrictions that have been put in place in several Chinese cities (Volkswagen Group China, 2014). This could highly influence Volkswagen in a way, where the demand for their products become less frequent due to these restrictions on the number of cars allowed by the government (Appendix Sixteen).

2.6 SWOT Analysis of the VW Group on the American Market

A geographical market where the VW Group historically has not been very successful is the American market. In 2014 they sold just 370,000 vehicles on the US market (CNN Money 2015). In an attempt to improve their presence on the American market and get the American sales to pick up, the Group opened a new plant in Tennessee in 2011 after decades of not producing cars in the US (NBC News, 2011). This is considered to be one of Volkswagen’s strengths on the American market. The fact that they actually have the capacity to produce vehicles in the US and say that the cars are American made is positive. Another strength could be that brands such as Audi and Porsche, which are both under the VW umbrella but less associated with the brand, are relatively strong and performing well on the American market (Business Insider, 2015). This provides the VW Group with an opening in regards to increasing their sales numbers on the American market. In regards to the Group’s strengths on the American market, it has been difficult to identify many, which perfectly reflects their historically poor performance on the market. Performance and strengths go hand in hand. There are various reasons behind the sluggish sales on the American market. One reason has been the lack of market understanding and following customer trends as well as what US customer wants and needs in a car, shown by the VW Group. As we saw on the Chinese market the American SUV market has also experienced a huge growth and the VW Group has simply not been able to offer what the American consumers consider an attractive SUV or a compact crossover. They have also demonstrated lack of market knowledge in the sense that they went into the American market thinking that it would be similar to the European market, which was not the case. An additional weakness that has affected the overall performance has been their image and reputation on the American market. US consumers do not associate Volkswagen with the same quality or put the same value or prestige in the brand as European consumers. In fact, Volkswagen has been saddled with a reputation of high prices mediocre quality at the most (Forbes, 2013). As if the VW Group did not have enough difficulties the whole emission scandal is sure not to help in the image department. They are in a position, where they need to do damage control and now is a good time to change the existing image they have on the American market. In this connection one of their opportunities is a completely fresh start. A new start with a new CEO and a new strategy that reflects what the market wants, which is gas-powered vehicles that has been modified to suit the American consumer (Business Insider, 2015).

[...]

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Details

Title
Automotive Industry Analysis. The Chinese and American Market, Competitors
Subtitle
The Volkswagen AG
College
California State University, Fullerton
Grade
3,7 (93%)
Author
Year
2016
Pages
60
Catalog Number
V369750
ISBN (eBook)
9783668484429
ISBN (Book)
9783668484436
File size
2507 KB
Language
English
Notes
Includes 20 pages of appendices
Tags
Automotive, VW, Volkswagen, Ford, GM, General Motors, SWOT, Competitor Analysis, Corporate Governance
Quote paper
Jan Kachelmaier (Author), 2016, Automotive Industry Analysis. The Chinese and American Market, Competitors, Munich, GRIN Verlag, https://www.grin.com/document/369750

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