OnLine Case 12.1 VOLKSWAGEN

The situation in 2005

Volkswagen (VW) Europe’s leading car manufacturer, had pursued a number of international strategies. But were they all positive and did they fit together cohesively? The name ‘Volkswagen’ translates into ‘People’s Car’ – and this company name was, in fact, coined first by Adolf Hitler in 1924.

Historically many people would instinctively think of the ‘Beetle’ when confronted with the name Volkswagen – although this will have changed in recent years. This is the car which helped the company grow and prosper after World War II as Germany revived. It has been described as ‘the most popular car in history’ and, of course, it featured as Herbie in the various Love Bug movies. The original-design Beetle was taken out of production in Europe many years ago but since then has been produced under licence in Mexico and exported from there. An updated, modern design is now available but it is nowhere near as popular as the original was.

The Beetle was effectively replaced by the Golf which has been hugely popular and is now at the fifth generation level. The best sales have typically been of the higher specification models. The Golf GTi has always been popular.

VW has acquired Audi (more up-market German cars that allow VW to overlap with BMW and Mercedes to some extent), Seat (Spain) and Skoda (Czech Republic). Seat assembled out-dated Italian designs under licence before being acquired – since when the business has been transformed with new, modern designs and a reputation for high quality. Skoda was one of those Eastern European manufacturers whose cars were the butt of many jokes for poor design and quality. That is no longer the case! VW shares platforms across its various brands to drive scale economies, and operates price differentials based on finishing touches and reputation.

At the same time VW has acquired the really up-market Lamborghini (Italy) business with its associated Bugatti brand and introduced some expensive top-end-of-the-range cars. It also owns the UK’s Bentley business (which was separated out of Rolls Royce) and which it has used to produce six Le Mans (24 hour endurance race) winners.

More recently VW has launched the Phaeton under its own brand. Some believe this is a ‘bridge too far’ for the company and thus very high risk. The Phaeton is custom-built. Buyers can opt for almost any feature imaginable – if they are willing to pay for it! They are invited over to the factory in Dresden where they select their ideal design and colour – their car is then completed within 48 hours. Its price - £68,000 – which some believe is too high for a car with the VW name on the front. China is a key target market. This development was championed by CEO Bernd Pischetsrieder who joined the company from BMW. He carried the responsibility for BMW’s expensive investment in Rover, before it was divested for next to nothing.

To put the company in context:

• VW sales have fallen as the German economy has stagnated • The company has been forced to pursue extensive cost cutting • Luxury cars are cross-subsidised by mid-range models • Productivity is clearly lower than that of Toyota and other sizeable mid- range producers • The development costs of its new cars are relatively high • Overheads in its relatively opulent factories are also high • The reliability of VW cars is not as high as it used to be; and, somewhat inevitably • Profits have fallen.

Supporters argue that VW has simply ‘taken its eye off the ball’ in recent years and that with the new global strategies it can recover in strength. Opponents are more critical and believe VW has ‘lost the plot’, especially with the Phaeton. They believe VW should not have started manufacturing the Polo in China, which has brought about a number of problems, and that it should have developed a Sports Utility Vehicle or a 4-wheel drive model sooner than it did. The new ‘Touareg’ off-road vehicle is a recent development.

In June 2004 VW announced it was proposing to move some components production to the United Arab Emirates in exchange for an equity investment. Some believed it was really being driven out of Europe by new EU regulations on carbon emissions which would place upward pressures on costs which VW could not readily embrace. Energy costs for manufacturing in the Gulf States are relatively low.

At the same time VW has expanded its car leasing activities – it now has the world’s second largest vehicle leasing portfolio. VW believes there are two basic types of car buyer. First, those for whom cars are a means of transportation from A to B, with the least hassle. Brands are not that important when set alongside functionality and value. Second, those who enjoy cars and often drive from A to A for fun and enjoyment. Brands really do matter to them. Leasing can be ideal for the former customers. In addition, most profits in the industry do not come from the basic sale of the car in the first place, but from all the other associated activities.

Interim question: Do you believe VW had a cohesive, global strategy at this point? What suggestions would you have had for future developments?

Recent developments

Volkswagen decided it needed to focus on the Audi brand and range of cars in order to strengthen this marque’s up-market position. The emphases would be on innovation, quality and market awareness.

In 2005 Porsche acquired a significant 20% of VW’s voting shares. This was engineered by Ferdinand Piech, who was Chairman of VW and a retired CEO of the business; he was also a key shareholder in Porsche. His grandfather, Ferdinand Porsche, had designed the Beetle and founded VW. But these are two very different companies in terms of size, strategy, image and market position.

This deal provoked VW executives to open discussions with Daimler-Chrysler where each would take a share in the other. But (as we discuss in a separate case) this company had difficulties of its own implementing the US-German merger and so nothing came of it. There were also failed attempts to oust Piech from the VW Board.

A war of words began between Piech and his successor as VW CEO, Bernd Pischetsrieder, with both calling on the other to retire. In 2006 some production was moved back to Germany from lower-cost plants in Spain, Portugal and Belgium. This was reported as being ‘more political than economic’ – the German plants were not operating at full capacity.

In 2007 Porsche acquired more voting shares and effectively took control of Volkswagen. It now held 31% and key Board seats. Some shares were held by the regional authority and it (eventually) withdrew its initial hostility. The workforce remained hostile. Martin Winterkorn replaced Bernd Pischetsrieder.

VW declared it would increase its investment in China. But in 2008 VW was debating whether to launch its sixth generation Golf in the US market. The relative weakness of the Dollar (against the Euro) and loss-making operations in America were forcing the decision.

In Spring 2009 Porsche and VW announced a full merger of their ten marques. The business would be family controlled, as are BMW, Fiat and Peugeot-Citroen.

Question. Would you see VW being relatively well-placed to remain Europe’s leading car manufacturer?