Volkswagen Case study

Volkswagen (VW) Group Introduction The Volkswagen Group is one of the world's leading automobile manufacturers and the largest carmaker in Europe, with control of twelve brands: Volkswagen Passenger Cars, Audi, SEAT, KODA, Bentley, Bugatti, Lamborghini, Porsche, Ducati, VW Commercial Vehicles, Scania and MAN. Volkswagen Group UK manages the VW, Audi, KODA and SEAT brands. VWs headquarters are in Wolfsburg, Germany, and the group employed 610,076 people as of 31 December 2015. The group recorded revenues of 213,292 million ($236,766.9 million in 2015 prices) during the financial year ended December 2015, an increase of 5.4% over 2014. The operating loss of the group was 4,069 million ($4,516.8 million) in 2015, as compared to an operating profit of 12,697 million ($14,094.4 million) in 2014. Volkswagen was founded in January 1937 by the German Labour Front, the trade union controlled by the National Socialist Party. In the early 1930s, the average German could rarely afford anything more than a motorcycle. Hitler became personally involved, ordering the production of a basic vehicle capable of transporting a family at 100 km/h (62 mph) and sponsoring an all-new, state-owned factory using Ferdinand Porsche's design. Volkswagen translates as peoples car in English, and the companys efforts to empower common people by enabling them to own and drive a car resonated well with the general public. From 1948, VW became an important element, symbolically and economically, of West German regeneration, and it has grown strongly ever since. Benefiting hugely from a rich legacy as a brand made for the people, Volkswagen became a globally recognised brand known for its down-to-earth approach, making it a household name. In 2010, VW posted record sales of 6.29 million vehicles, with its global market share at 11.4%. By 2012 Volkswagen had become the second largest auto manufacturer in the world. VW aimed to double its US market share from 2% to 4% in 2014, and aims to become, sustainably, the world's largest carmaker by 2018. VW Group's core markets include Germany and China. Market position VW has a strong brand portfolio, covering almost all segments, from motorcycles through cars to heavy trucks and buses. With all its brands, VW has a presence in all relevant automotive markets around the world. Western Europe, China, Brazil, the US, Russia, Argentina, and Mexico are the key sales markets for the group. Moreover, the group's steadily growing presence in all major markets in the world, along with its wide range of financial services, gives the group decisive competitive advantages. During 2015, the group sold 9,320,681 vehicles, including 5,823,408 units of VW passenger vehicles, 1,803,246 Audi, 1,055,501 KODA, 400,037 SEAT, 10,100 Bentley, 3,245 Lamborghini, 225,121 Porsche, and 23 Bugatti. The broad product range assists the group in further enhancing its market share in key markets globally. In addition, it helps the group to leverage its brand strength to drive top-line growth. VW maintains a strong focus on research and development (R&D). The group concentrates on expanding its product portfolio and improving the functionality, quality, safety and environmental compatibility of group vehicle products. VW has also focused on electrification of the group's vehicle range to create an efficient range of engines and lightweight Page 9 construction. In addition, it has worked on increasing its alternative drive technology. In 2015, VW's R&D costs in the automotive division were 13,612 million ($15,110.1 million) compared to 13,120 million ($14,564 million) in the previous year. VWs strong focus on R&D facilitates development of new products and enhancements to existing products, which further helps the group in maintaining a strong market position. VWs market-leading positions across the world give it an overall 12.3% market share, and this is spread across many important regional markets. For instance, VW has currently captured 24.4% of the Western Europe market. Furthermore, the group also had a strong market position in the Americas, Asia, and Africa regions. It operates 119 production plants in 20 European countries and a further 11 countries in the Americas, Asia, and Africa. This enhances VW's brand image and provides competitive edge by helping it in when launching new products and services into new markets. However, the 2015 diesel emissions scandal has the potential to significantly impact VWs brand image and profitability. The scandal broke when VW had to admit that 11 million of its diesel cars were equipped with software that could be used to cheat on emissions tests. Eventual fines could reach about $18 billion. The scandal further affected the group's share prices, which fell by 20% on the Frankfurt stock exchange during 2015 and early 2016. Such scandals would impact the brand image and the reputation of the group, causing it to lose customers, which in turn would cause losses to the group. Furthermore, and in the recent past, VW has had to recall a number of vehicles to its factories and alter them due to various technical and safety issues. For example, in October 2015, VW recalled approximately 8.5 million vehicles in Europe, including 2.4 million vehicles in Germany, due to the emissions scandal. In 2014 the group recalled more than a million cars in the US, China and Germany to inspect their rear suspension systems, due to safety issues. In China, VW and its partner, FAW Group, recalled 563,605 locally made Sagitar sedans, and 17,485 imported Beetle sedans, most of which were made between 2011 and 2014. Such significant product recalls negatively affect consumer confidence in VW's products and its brand image. Market trends, opportunities and threats facing the industry The global automotive manufacturing industry has grown relatively consistently over the past few years, and is expected to continue to grow positively until 2018. The global automotive manufacturing industry generated total revenues of $1,252.6 billion in 2015, an increase of 3.1% over 2014, and is expected to reach a value of approximately $1,577.1 billion in 2019. VW is well positioned to benefit from the growing demand for hybrid electric and alternative fuel vehicles. The group has been focusing on developing cars running on hybrid and alternative technologies. The demand for hybrid electric vehicles (HEVs) across the world is rising steadily, mainly due to global concerns about reducing carbon emissions coupled with the highly volatile prices of vehicle fuel. According to industry estimates, electric vehicle sales are anticipated to reach approximately 7.5 million units by the end of 2020, a growth rate of around 19% for the 201420 period. The key markets for HEVs include the US, Western Europe, and Japan, although the rapidly growing Chinese market is also expected to experience relatively strong demand for these fuel efficient and environmentally friendly vehicles. VW is keen to capitalise on the growing demand for HEVs. The group has made significant investment in the development of hybrid vehicles over the years, as well as placing an appropriate focus on alternative fuels, hybrids and electric vehicles. Further, the Page 10 group's emphasis on hybrid technology will enable it to capitalise on the positive market trends, thus boosting revenues and market share. The worldwide automotive market is highly competitive. VW faces strong competition from automotive manufacturers in its various markets, which is likely to intensify in light of continuing globalisation and consolidation within the industry. Sample factors influencing competition include product quality and features, the amount of time required for innovation and development, safety, and customer service. Increased competition may lead to lower vehicle unit sales and increased inventory, resulting in further downward price pressures. VW uses many commodities to produce its automotive products, such as steel and iron ore. The prices of commodities are constantly fluctuating. For instance, the global composite carbon steel price in February 2016 was $462 per tonne, as compared to a price of $568 per tonne in March 2015. Similarly, the average iron ore price in November 2015 was $46.2 per dry metric tonne unit (dmtu), which further increased to $54.8 per dmtu in May 2016. Volatility in raw material prices could ultimately affect margins if these costs cannot be passed onto VWs customers in the form of higher prices. The automobile industry worldwide is influenced by a broad spectrum of regulations governing the emission levels of exhaust fumes, carbon dioxide/fuel economy guidelines, noise level limitations, recycling-related restrictions, and safety standards. These regulations have become increasingly stringent. For instance, in the US, the Federal Clean Air Act imposes stringent limits on the amount of regulated pollutants that lawfully may be emitted by new vehicles and engines. In the European Union (EU), directives and related legislation limit the amount of regulated pollutants that may be emitted by new motor vehicles and engines sold. Also, many countries, in an effort to address air quality concerns, are adopting more advanced regulations based on the most recent version of European or US regulations. For example, China adopted emission regulations for large cities based on European emissions standards. Korea and Taiwan have adopted stringent US-based standards for gasoline vehicles, and European-based standards for diesel vehicles. Brazil, Argentina, and Chile have also introduced more stringent emissions standards. Thus, any significant change in regulation structures may have a serious impact on VWs business operations. Customer behaviour, preferences within the sector As demonstrated in the UK, but also in other mature markets, customers are showing increasing preference for driving small and medium-sized cars. Small saloons/hatchbacks account for 32% of cars owned, while medium saloons/hatchbacks account for a further 28%, giving them a total share of 60%. Young adults are more likely to own a small car. In contrast, older adults are more likely to have broader tastes and own a greater variety of cars, with interest in larger models and more specialist designs. As with car ownership, individual factors such as family status and location can have a major impact on the type of car owned. Two thirds of adults in the UK own a car, with many factors impacting on the type of car owned, such as income, age, location and the presence of children. Used cars are more likely to be owned than cars purchased from new, with over half (53 %) of owners having purchased a car used, while 45% have purchased a car from new (a further 2% of owners received their car as a gift). The likelihood of owning a car increases with age. Whereas only 49% of those aged 17-24 own a car, this rises to 76% for those aged 55+. Further, the likelihood of owning a car is Page 11 lower in urban than suburban and rural areas. Whereas 62% of adults living in urban areas own a car, this stands at 71% for those living in suburban areas and 72% for those living in rural areas. Currently car hire and car sharing, both established ways of accessing a car without owning one, are the most popular. For those without a car, interest in alternatives to ownership is more limited. Only a few would consider car hire, although a much higher proportion, would consider car sharing. Men and young adults are most interested in buying new cars, especially within the last two years. Some 24% of men bought a new car in the last two years, while 27% brought a new car more than two years ago. By age, 26-27% of new car buyers in the last two years were aged between 17-34. Women, in contrast, are more likely to own a car purchased second[1]hand, with 32% of women currently owning a car more than two years old. Older adults are another important owner group for second-hand cars, with 36% of those aged 45-54 owning a secondhand car purchased more than two years ago. Commuting is one of the main primary uses for a car, with around eight out of ten consumers asked placing it as the most important use. Less important, but still notable, primary uses for car use/ownership relate to education and shopping. Beyond such primary uses, cars are often put to a much wider range of uses by their owners, including visiting friends/family and various leisure purposes. Features to improve driving, such as reverse assistance and in-built satellite navigation, are both widely sought after by consumers. Different owners look for different features. Men appear to have a focus on technology while women show greater interest in driving enhancements. Some 45% of owners believe that cars should match their lifestyle needs. Many also express interest in environmental factors, changing the model of their existing car and seeing greater use of technology. Yet interest in what could be viewed as emerging developments in the market is more limited. Only 16% want a car that can drive itself, 15% are interested in a fully electric vehicle, and 10% want to switch to a more luxurious make when they next change their vehicle. VWs vision, mission, organisational culture and strategic direction VWs vision and strategic direction have been best captured in its ten-year Strategy 2018 document, first published in 2008. Unsurprisingly for one of the worlds biggest carmakers, Volkswagens strategy is rooted in the clear aim to increase unit sales and profitability for the long term. Put simply, VW intends: to become the global economic and environmental leader among automobile manufacturers by 2018 The company defines four goals it says will make it the most successful, fascinating and sustainable carmaker in the world by 2018. In summary, these cover: deploying intelligent innovations and technologies to become a world leader in customer satisfaction and quality. VW says it sees high customer satisfaction as one of the key requirements for its long-term success. Page 12 generating unit sales of more than 10 million vehicles a year and, in particular, to capture an above-average share of growth in the major growth markets. aiming for a long-term return on sales before tax of at least 8%, to ensure a solid financial position and ability to act even in difficult market periods. being the most attractive employer in the automotive industry by 2018, building the best team in the sector; highly qualified, fit and motivated.

Question

How does the Volkswagen company monitor value, and how does this lead to redefining its market and understanding value?