To what extent can Volkswagen AG benefit from the Volkswagen AG and Porsche AG proposed merger?

Table of Contents

Introduction

Methodology

Findings

Analysis

Conclusion

Works Cited

Appendix

Introduction

The proposed Porsche and Volkswagen merger started in late summer 2009. Since I am a car enthusiast, I wanted to look at a car manufacturing company. Watching the news from Germany almost every day, I familiarized myself with the issue between Volkswagen and Porsche. Being a Porsche fan, I wanted to see what will happen with Porsche and investigated it. The German company Volkswagen AG is Europe’s biggest carmaker and very well known throughout the world. Volkswagen AG owns nine brands including the own Volkswagen (VW) brand. Volkswagen’s product portfolio consists of the brands Audi, Bentley, Skoda, Lamborghini and more. Each brand has its own character and operates as an independent entity on the market (Group). This suggests that each brand caters for a specific market. Porsche AG is one of the most profitable manufacturers of the luxurious sports cars, Porsche. Porsche’s Chief Executive Officer (CEO) Wendelin Wiedeking made Porsche so successful until now. After Porsche obtained more shares of Volkswagen, Wiedeking wanted to take complete control over VW. This seemed impossible to many, as Volkswagen makes sales of $151 billion per year, which is about 16 times the size of Porsche, which generates sales of about $9.3 billion (Boston). Beginning in 2005, Porsche acquired a voting stake of 50.8% in Volkswagen. Porsche planned to increase these to 75% until the end of 2009 (Boston). However, everything turned out the other way, VW took most control over Porsche and Porsche was forced to merge with VW. Porsche AG created these problems themselves by being too ambitious and ignorant to political relationships in order to successfully take control over a giant like VW. Wiedeking’s disastrous attempt to buy VW has led him to resign as the CEO of the Porsche AG at the end of 2009 leaving Porsche with a debt of $13 billion. VW saw this as an opportunity to take control of Porsche. The battle has been going for over three and a half years. This project aims to investigate the benefits of the proposed merger for Volkswagen AG. Volkswagen and Porsche have merged as a sole group under the management of Volkswagen. VW has purchased 41% of Porsche and over the next years, the firms will integrate and merge with each other even closer. Porsche will keep its own brand and still operate independently to some extent.

Methodology

A combination of secondary research will be obtained to analyze the merger. Online articles will be obtained to mainly figure out background information. Finding it hard to obtain financial documents to support this business problem, the commentary is only based on articles and websites. No financial documents could support this business problem, as it is a very recent issue. Also, no recent annual reports could be found for Volkswagen to support the argument and analysis of this document.

Findings

According to the documents it suggests that Volkswagen has mainly benefited in regards to their sales. In the long run, these will clearly increase, as the two companies merge even tighter. Having another widely known brand and company under VW AG’s management allows for greater awareness of their company and brand. This will be beneficial to the goal of becoming the world’s biggest car producer and therefore taking Toyota’s place. Furthermore, the increased size will allow VW to penetrate into other markets, such as the US, and operate there as a multinational company (MNC). The increased size of Volkswagen AG suggests that it can benefit from economies of scale. The Porsche AG and Volkswagen having worked together previously on two similar SUVs suggests for greater and better teamwork to build more efficient cars.

Analysis

In order to assess whether VW will benefit from the merger, a SWOT analysis of internal strengths, weaknesses and external opportunities and threats was constructed. According to the SWOT analysis in Appendix A, the significance of the size of the Volkswagen AG stands out. It is Europe’s biggest car maker, which is beneficial, in regards to competition. Since one of VW’s long-term goals is to take Toyota’s spot as the biggest car manufacturer worldwide, the Porsche merger can be helpful, as it increases its size. VW AG is a world recognized firm that has production plans all over the world and sells in more than 150 countries (Group). International marketing can therefore be increased, after merging with Porsche AG. The size of Volkswagen AG made it easier to take over Porsche, which in comparison is much smaller. Due to the nine car brands that VW already has under its umbrella, one can say that the VW AG is experienced in merging and taking over other car companies. The fact that another world widely recognized brand is being added, improves VW’s image. One of VW’s weaknesses that were identified is the difference in cars that are produced. However, since VW owns Bugatti and Lamborghini, they should be experienced in the manufacturing of sports cars. It could be argued that the image of Porsche will slowly be damaged, since a mass producer takes over, and Porsche spends much more time and effort on the completion of a single car. This is rather harmful to VW, as Porsche clients will decrease brand loyalty.

The short run benefits of the proposed merger include that sales revenue will increase. In the long run, these could be raised even more, and if the company diversifies. Another benefit is that new employment is hardly needed, as VW can employ the existing Porsche employees. In the long run, the merger will benefit VW in becoming the world’s biggest car producer. Earlier, Porsche and VW have already worked together to build a similar SUV, the VW Touareg and the Porsche Cayenne in the same plant. The two cars have the same chassis (Gumbel). The sales of these two SUVs turned out to be very successful. Due to the merger, more cars like these could be built, and knowledge from both companies, VW and Porsche can be applied to produce such cars. Producing two cars, one from VW and one from Porsche will give the customers a greater choice.

Another main advantage of the merger between Porsche AG and Volkswagen AG is that both companies are German, making the communication very easy. This will allow for a smooth start up and less sources of conflict between for example new employees. Employees will be happier to work together. Due to the same language and cultural background there are fewer barriers that could make the merger less effective.

As mentioned earlier, the brand name of Porsche can be very significant to Volkswagen’s future performance in terms of sales. Porsche fans will most likely stay Porsche fans if the brand and firm keep some independence, as it does. The fact that Porsche will still be Porsche is very significant, because over the last decades, Porsche has become a widely recognized automaker. Consumers can keep their brand loyalty to Porsche by purchasing its cars under the same brand name.

Since Volkswagen’s cars stand more for fuel-efficiency and low CO2 emission, it could diversify, by producing more sports cars, together with Porsche.

A merger can result in conflicts due to different business objectives. Employees might therefore disagree with each other, resulting in more difficult decision-making. This could cause disruption in the running of the business.

Conclusion

The merger between Volkswagen and Porsche was an effective way to rescue Porsche, as they had debts up to 13$ billion. In that way Volkswagen benefited in terms of sales, sales revenue, market share and market growth. This is a big step towards the long-term goal of becoming the world’s biggest car producer, taking Toyota’s spot. By adding a well-known brand like Porsche, Volkswagen clearly raises awareness of the company itself. Volkswagen benefited with the promotion created through this merger with such a luxurious car brand. The advertisement of Porsche benefits Volkswagen as no extra costs need to be added to that. Once fully merged, each car brand can operate independently on some basis. Overall, a main benefit for Volkswagen is that they have been merging with a German company who has their headquarters in the same country. This creates ease for communication especially. Excess to information between the two companies is much easier and cost and time saving.

Works Cited

Boston, William. "Porsche and VW Agree to a Merger."Time 07 May 2009: n. pag. Web. 12 Dec. 2009.

Gumbel, Peter. "Why VW and Porsche are On a Collision Course?"Time 02. July 2009: n. pag. Web. 09. Dec. 2009.

“Group portrait”. Volkswagen.de. Volkswagen.de, n.d. Web. 12. Jan. 2010.

“Volkswagen”. glgroup.com. 04. Dec. 2009. GLG, n d. n. pag. Web.

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