2012
U.S. market versus Asian market for VW Group and Skoda Auto expansion opportunities
Pavla Kralova Professor: Vaclav Chvalovsky 12/3/2012
University of New York in Prague
European Business Administration
U.S. market versus Asian market for VW Group and Skoda Auto expansion opportunities
Pavla Kralova
.
Year: 2012-13 Mentor: Vaclav Chvalovsky
Acknowledgements
I would like to acknowledge the support I have received throughout my studies at UNYP, not least from professors, faculty members, and for the patience and understanding of my family.
This was invaluable in helping me progress through the studies.
Abstract
U.S. market versus Asian market for VW Group and Skoda Auto expansion opportunities
This study examines the Volkswagen Group and Skoda Auto‘s expansion opportunities in the
U.S. and Asian markets, by first taking a detailed look at the U.S. auto industry and it’s history, and in particular Detroit‘s Big Three, namely the Ford Motor Company, General Motors
Corporation (GM) and Chrysler LLC.
The study then looks at some of the defining moments and turning points of the U.S. auto industry through the 20th century, the impact of modern technologies, shifts in consumer taste and the current U.S. consumer profile.
The following chapters then make a historical overview of the Volkswagen group and the Toyota
Motor Corporation, being the current leader in a global car industry, and Volkswagen’s principal competitor. The study then continues with an overview of the auto industry in the BRIC countries, in particular focussing on China , India and Russia, while deliberately omitting Brazil as a separate study of Latin America was not in scope.
Then the study looks at the current global battle in the auto industry between Toyota and
Volkswagen especially in relation to Volkswagen‘s stated goals.
The research questions and methods were based on comparison of statistical and historical secondary data, taken from a broader perspective with the relevance to the current situation and future development in a car production industry in both western and emerging markets.
Business strategy theories, such as SWOT/TOWS, PESTEL and Competitive Profile Matrices have been implemented in the study in order to evaluate Volkswagen‘s position in the global market.
Following this, the study moves to the current day, looking at the U.S. auto industry today, and
Skoda’s role within the Volkswagen group, and concludes with comments on Volkswagen’s future strategy.
Results show that some patterns among American consumers are unchangeable regardless of external challenges which together with an emerging phenomenon of an increasing trend in the physical size of the U.S. population, should discourage Volkswagen from focusing on the U.S. market, albeit a recovering market, and continue with it’s strategy concentrating on the Asian market.
Contents 1 Introduction...... 1
2 The U.S. Auto Industry...... 2
2.1 The early 20th century ...... 2
2.2 The second half of the 20 th century...... 3
2.3 The U.S. market in the 1980’s ...... 5
2.4 Government Intervention in the 1980’s ...... 7
2.5 Electric Vehicles and Green Technology ...... 11
2.6 U.S. Consumer Profile ...... 13
3 Volkswagen Group ...... 17
3.1 Overview and Goals...... 17
3.2 History of the Volkswagen Group ...... 17
4 Toyota Motor Corporation...... 20
5 BRIC Countries and Auto Industry...... 24
5.1 The Chinese Auto Industry today ...... 25
5.2 Joint ventures in China...... 27
5.3 Volkswagen and the WTO...... 28
5.4 The Indian Auto Industry...... 29
5.5 The Russian Auto Industry ...... 34
6 Global Battle ...... 41
7 Business Strategy Analytical Tools ...... 44
7.1 PESTEL Analysis ...... 44
7.2 SWOT and TOWS Analysis ...... 49
7.3 Competitive Profile Matrix (CPM)...... 53
8 The US Auto Industry Today...... 54
9 Skoda Auto Privatization and the Volkswagen group ...... 58
9.1 Financial turmoil in 2008 and Skoda...... 58
9.2 Skoda Auto today...... 59
10 Conclusion ...... 60
11 Bibliography ...... 63
List Of tables Table 1: Foreign brand import share of U.S. passenger car sales, 1955-80...... 4
Table 2: The Detroit Three's U.S. market share, 1955-2008 ...... 6
Table 3: Estimated Fuel Economy and Annual Fuel Use by Size Class ...... 8
Table 4: U.S. Light vehicle sales, 1960- 2008...... 10
Table 5: Trends in Overweight and Obesity among Adults, United States, 1962-2010...... 15
Table 6: Tariffs, Pre- and Post- WTO Membership ...... 26
Table 7: New ventures in the Indian motor industry ...... 30
Table 8: The Russian Market’s contraction Will be Followed by a Strong Growth Surge ...... 36
Table 9: Russian light vehicle production forecast, thousand of units ...... 39
Table 10: Economic development overview BRIC and U.S. 2012 ...... 46
Table 11: SWOT Analysis Volkswagen...... 51
Table 12: Volkswagen TOWS Matrix ...... 52
Table 13: Competitive Profile Matrix CPM ...... 53
1 Introduction
The recent global economic crisis starting in 2008 has destabilised the financial markets of the developed world, leading to the collapse of a number of prominent companies across several business sectors. Subsequently there has been a massive decline in demand for durables.
Focussing on the automobile industry, global statistics show that the annual order for cars in
2009 was just fifty millions units, which did not actually allow any of the global auto manufacturers to generate any profit.
Year to date 2012 records show that profitability in the auto industry has improved in most regions, with the exception of Western Europe. North America is receiving well deserved credit for its improved performance. In addition, profits in Asia (excluding Japan), which is the world’s largest auto market, have continued to make a steady progress.
In response to the financial figures, investors, as well as corporate officials, are continuously questioning the industry’s declining prospects in Western Europe.
Volkswagen Group, consisting of several brands, headquartered in Wolksburg, Germany, is the number one automobile manufacturer in Europe and third on the global market. The aim of the group is to make Volkswagen Group the leading car producer worldwide by 2018. In order to complete its ambition, the Group should be positioning itself outside of the stagnant, saturated
Western market and towards the BRIC 1 emerging markets with its especially tailored models, rather than focussing on the recovering U.S. car market.
1 BRIC-in economics a group acronym that refers to the following countries: Brazil, Russia, India, China 1
2 The U.S. Auto Industry
2.1 The early 20th century
The history of the car manufacturing industry in the United States dates back to the beginning of the twentieth century when the Ford Motor Company was incorporated in 1903, with Henry Ford as vice-president and chief engineer, with a vision to manufacture cheap and affordable cars. In
1908 Henry Ford introduced his first car, the “Model T“, to the U.S. market.
The colossal success of an affordable Model T, which sold 15 007 033 units, can be said to have changed American society in general. Not in the least, it had significant influence on urbanization patterns; it enhanced the development of the highway network, and generally simplified travelling and increased people’s mobility.
Ford continued, along with General Motors (GM) and Chrysler LLC, supplying and satisfying the rapidly growing demand of an American market for cars with new innovative models. GM’s mission statement in 1920’s stated: “… a car for every purse and purpose. ”2. Models like the
Cadillac, Chevrolet, and Hudson were embraced among their consumers beyond being just a car, they were a statement expressing freedom, which was and still is fundamental and essential for all Americans.
The geography of the US alongside having sufficient and affordable access to natural resources allowed building large, heavy cars regardless of fuel consumption and environmental impact.
2 General Motors company web site 2
2.2 The second half of the 20 th century
Between the years 1950 and 2008 the U.S. auto market was dominated by the “Big Three” major car producers, namely Chrysler LLC, Ford Motor Company and General Motors Corporation
(GM), predominantly based in Detroit.
Sharp worldwide economic downturn in 1958 significantly affected the investment in fixed capital in the United States, however this had no more than a marginal effect on income, if any.
On the other hand, a resultant 31% decline in car sales (units sold) made 1958 the worst year on record since the World War II.
At the same time the Japanese Toyota Motor Corporation stepped into the U.S. market and headquartered in Hollywood, and moreover managed to register its first Toyota car in the United
States within the same year.
At the beginning of the 1960’s unemployment in Detroit, the capital of the auto industry in the
U.S, reached 20% 3. Also noteworthy, car imports to the U.S remained high ( see Table 1 ).
McCarthy 4 pointed out that there was a significant change in consumer behaviour in the 1960’s as a response to the current recession. As a result undersized cars, mostly the German
Volkswagen (VW) Beetle, made up 80% of the imports in the small car category.
3 Source: United States Department of Labour , Bureau of Labour Statistic 4 McCarthy, Tom., Auto Mania: Cars, Consumers and the Environment, p.142 3
Table 1: Foreign brand import share of U.S. passenger car sales, 1955-80.
Source: Thomas H. Klier. From tail fin to hybrids, How Detroit lost its dominance of the U.S. auto market
The answer from the “Big Three” was to adjust their production lines to comply with the current demand and produce significantly smaller cars in comparison to their previous models. Taking these measures they managed to radically decrease the level of imports to 4.9% in 1962. Later on, confident with their success, Detroit’s car makers decided to slightly enlarge the current models produced. Kwoka 5 observed that:
“By 1966, the Corvair 6 had grown by 3.8 inches, the Falcon by 3.1 inches, and the Valiant by 4.6 inches. By the end of the 1960s, these vehicles would weigh from 250 to 600 pounds more than at introduction, and it was doubtful consumers perceived them as small cars any longer.”
Controversially, in 1964 the Japanese auto maker introduced its first Americanized Toyota Tiara model also known as Toyota Corona PT20. Toyota’s philosophy and strategy was to simply
5 Dr. Kwoka - the Neal F. Finnegan distinguished Professor of Economics at North-eastern University, teaching industrial organization, antitrust, and regulatory economics. 6 type of car 4
adapt its cars to local users along with designing and building production lines in the same areas in order to strengthen relationships with local suppliers and labour.
2.3 The U.S. market in the 1980’s
In the early 1980’s a sharp increase of gasoline prices, the Iran oil embargo, plus several downturns of the U.S. economy caused that customers swiftly changed their purchasing behaviour and therefore supported and increased the import and sales of small foreign cars, mainly of the Japanese Toyota, which even surpassed the former success of the Volkswagen
Beetle. Accordingly, Toyota soon ranked 3 rd on the U.S. market challenging Ford for 2 nd position.
The consequent development on the U.S. market had reduced the share of the Big Three’s car producers as stated by Thomas H. Klier 7 to 73% in the 1980’s ( see Table 2 ). This time the shift in customer taste was colossal. Detroit’s plants were not technically able to meet the new demand, which ironically helped the foreign car producers to increase the import portion of desirable small cars, which were generally manufactured for other markets and therefore did not cause them serious technical constraints to produce for the new demand.
7 Thomas H. Klier- Thomas H. Klier is a senior economist in the economic research department at the Federal Reserve Bank of Chicago. From tail fin to hybrids, How Detroit lost its dominance of the U.S . auto market 5
Table 2: The Detroit Three's U.S. market share, 1955-2008
Source: Thomas H. Klier- From tail fin to hybrids, How Detroit lost its dominance of the U.S. auto market
As indicated by the National Academy of Engineering and the National Research Council the production of small cars for Detroit’s carmakers was as expensive as their production of the traditional large cars; therefore The Big Three was not able to compete on profitability with importing car producers in this segment. On the other hand, Kwoka 8 argues that the former colossal market power of GM, Ford and Chrysler disabled them from noticing the change in customer taste, and from bench marking against foreign competitor’s invitations.
8 Kwoka, J., “Market power and market change in the U.S. automobile industry , page 517
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Kwoka 9 also boldly states:
“… rendered the companies vulnerable to outside forces and ultimately induce responses that proved damaging to the entire U.S. industry”.
Defenders of the Big Three, Gomez- Ibanez 10 and Harrison 11 advocated that domestic (GM,
Ford and Chrysler) car producers were protecting traditional U.S. values and were fulfilling the demand for large, luxurious cars. They supported their claim with economical and statistical data of a higher Purchasing Power Parity (PPP), lower gasoline price, wider roads and longer distances made by U.S. drivers.
2.4 Government Intervention in the 1980’s
The energy crisis emanating from the Arab oil embargo resulted, in the 1980’s, in regulations imposed on fuel standards called Corporate Average Fuel Economy CAFE, which required motor vehicle manufacturers to ensure that their new vehicles met specified average levels of fuel consumption in each model per year, then dividing cars into three different categories: domestic passenger cars, foreign produced passenger cars and light trucks, according to its fuel consumption. Not meeting the CAFE standards meant paying fines, which were $5.5 per tenth of a mile per gallon over the standard then multiplied by the production that year for the U.S. market. 12 Minivans, pickups and SUV’s belonged to the category of light trucks, where SUV’s were additionally separated into three subcategories. The category of large SUV’s was on
9 Kwoka, J . “Market power and market change in the U.S. automobile industry ”, page 509 10 Gomez Ibanez- Derek C. Bok Professor of Urban Planning and Public Policy, 11 David Harrison-PhD in economics, Harvard University MSc in economics, London School of Economics, "Imports and the Future of the Automobile Industry," pp.319-320 12 Source: Henderson, D. Jenkins on CAFE, Library Economic and Liberty 7
average the least fuel efficient type, but still had lower standards to meet the CAFE standard than a personal car ( see Table 3).
Table 3: Estimated Fuel Economy and Annual Fuel Use by Size Class
Source: Stacy C. Davis and Lorena F. Truett, an Analysis of the Impact of Sport Utility Vehicles in the United
States
According to Cooney and Yakobucci 13 , the primary reason in having different and more lenient standards for the light trucks category was to encourage and benefit small businesses for the use of those trucks. Consequently, sales of those light trucks increased from 2.2 million units in 1980
13 Cooney and Yakobucci,2005, U.S. Automotive Industry : Policy Overview And Recent History,p.87
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to 9.4 million units in 2004, however, most SUV’s (84%) and pickup trucks (73%) were being used for personal transportation, rather than for any kind of business.
McCarthy 14 in his work states that media such as the Times, Business Week and Forbes assumed that after the recent oil crisis, the era of low priced energy was irretrievably in the past, along with the future of big, fuel inefficient cars. Moreover, a majority had also believed that the gasoline crisis from the 1970’s taught a lesson and consumers would permanently prefer smaller cars. However McCarthy in his work noted:
” the real question was what kind of cars would American consumers buy should conditions change [again]?”
Stacy S. Davis and Lorena F. Truett 15 analysed in their work the shift in customer preferences towards SUV vehicles belonging to the “light trucks” vehicle category. They concluded that
SUVs are desirable for its U.S. consumers because they are large, sturdy, high priced, appropriate for hauling or towing, safe (at least to the SUVs occupants) and trendy.
14 McCarthy, 2007,Tom. Auto Mania: Cars, Consumers and the Environment,p.227-228,230 15 Stacy S. Davis and Lorena F. Truett,2002, An Analysis of the Impact of Sport Utility Vehicles in the United States
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Table 4: U.S. Light vehicle sales, 1960- 2008
Source: Thomas H. Klier. From tail fin to hybrids, How Detroit lost its dominance of the U.S. auto market
Following the CAFE regulations, in May 1981 the Reagan Administration suggested that Japan agree with the so called Voluntary Export Restraint (VER), which limited the number of exported Japanese cars into the United States.
Berry, Levinsohn, and Pakes 16 in 1999 conducted research focused on the effect of this limitation, concluding that the smaller volume of Japanese cars after the VER restraint caused a considerable increase in their price. They argued that the key result of VER was actually that the higher prices deterred cost sensitive consumers from purchasing foreign cars and therefore
16 Berry, Steven, James Levinsohn, and Ariel Pakes. 1999. Voluntary Export Restraints on Automobiles: Evaluating a Trade Policy. American Economic Review 89(3): 400-30.
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increased a preference for domestic cars, which resulted in higher sales and profit only for U.S. car producers, while U.S. consumers were generally worse off than they would have been without restrictions.
2.5 Electric Vehicles and Green Technology
The historically lower cost of fuel in the United States together with the lenient attitude of their administration to the reduction of vehicle emissions, (the United States did not sign the Kyoto agreement protocol introduced in 1997), might have caused that a typical American consumer is less concerned about fuel efficiency when buying products compared to a similar consumer from
Europe or Asia.
In 2004 Auto Pacific 17 conducted a survey amongst 40 000 U.S. respondents concerning their next car purchase. The result was ranked from the most important criteria, dependability and safety, to the least important which were fuel economy and price.
However, time changes and the price of gasoline and growing pressure for environmentally responsible behavior are having a vast impact on the auto industry also in U.S. market.
Green energy was a topic in the first presidential debate on the 3 rd October 2012 in Denver.
President Barack Obama’s goal is to have 1 million electric cars on the U.S. roads by 2015. To support his ambition, the president has already invested $5 billion of tax payer’s money. The
Republican presidential candidate says it is money wasted on “losers”.
17 Auto Pacific is a future-oriented automotive marketing research and product-consulting firm. 11
Statistics so far have shown that the president’s target is far from being feasible. Sales of electric vehicles from 2011 reached 50 000 units which only achieves about 5% of the aforementioned aim.
The CEO of General Motors Dan Akerson estimates a sale of 40 000 units of plug-in Chevrolet
Volt for 2012 which is lower by 60 000 units in comparison to the previous year.
To explain this trend, Brett Smith, co-director of manufacturing, engineering and technology at the Centre of Automotive Research in Ann Arbor, Michigan says :
“The reality is that the business model is not there yet. It is not there for volume, it is not there yet for reaching mass consumer and it probably is not going to be there for a while.”
Matthew Stepp, a senior clean energy policy analyst at the Information Technology and
Innovation Foundation in Washington states that :
“Government investments in high-risk, high–reward technology are critical” he continues, “The last century of breakthrough technology development has shown this to be true, but with any breakthrough idea, it sometimes takes a while to develop new technologies and make it to market.”
The consumers’ point of view could contradict the experts’ notion. The price of plug-ins is first to be discussed. Jesse Toprak 18 argues that Chevrolet Volt price starts at $39,145, Ford Motor
Co’s Focus EV at $39,200 and Toyota Prius costs at least $32,000, which is higher than comparable non-electrics vehicles such as entry level luxury sedan BMW 328i.
18 Jesse Toprak – vice president of market intelligence at TrueCar.com 12
Overall not all automakers are so clear about electric vehicle’s position in the near future. Honda and Hyundai Motor Co. have preferred to invest in fuel-cell vehicles, whereas Volkswagen focused on improvement in use of cars with natural gas engines.
Worthy of notice is a statement made by Clark Steven, a White House spokesman, claiming that:
"The goal of the administration's support of advanced vehicles is to foster a domestic industry that develops and manufactures these advanced technologies here in America, and more importantly the jobs that come with them”.
Clearly this statement can lead to some reservations about the primary environmental concern behind support of electric vehicles.
2.6 U.S. Consumer Profile
The term “American dream” is used in many ways, but it is essentially an idea that suggests anyone in the United States can succeed through hard work and has the potential to lead a happy, successful life. Many people have refined the definition and included things such as freedom, fulfilment, meaningful relationships, status and being rich. In particular, “being rich” means having luxury assets including houses, cars, yachts, and other such items. Nevertheless, the concept of the “American dream” is subject to academic criticism because the structure of society in the United States and elsewhere, prevents such an idealistic goal for everyone.
Further, the United States has become accustomed to consuming in excess. There are some
“jokes” about sizes and Americans, stating that in the United States there are three size categories: big, huge and gigantic. An experiment performed by Morgan Spurlock 19 has revealed
19 Morgan Spurlock- American documentary film maker 13
apart from other facts that America has a voracious appetite, not only for food but for everything, from gas-devouring cars to climate-controlled condominiums. U.S. consumption levels far exceed its population, which is only 5% of the World population. The United States consumes 24 percent of the world’s energy. It is said that an average American consumes as much energy as
13 Chinese, 31 Indians, 128 Bangladeshis or 370 Ethiopians 20 .
Referring to the increasing size of the U.S. population, obesity has become a major health concern in the U.S. The prevalence of this obesity in the U.S. increased during the last decade of the 20 th century. In 2009-2010 according to the National Center for Health Statistics (NCHS), over 78 million U.S. adults and about 12.5 million U.S. children and adolescents were obese 21
(see Table 5 ).
20 Source: Directory Health Journal- Supersized America – The Bigger The Better? 21 Source: NCHS Data Brief. No.82. January 2012 14
Table 5: Trends in Overweight and Obesity among Adults, United States, 1962-2010
Source: WIN - Overweight and obesity statistics 22
Among various risks associated with obesity, Sheldon H. Jacobson and Laura A. Mc Lay 23 analyzed the economic impact of obesity on automobile fuel consumption. Working with data collected from 1960 to 2002 they concluded that since 1988 more than 272 million additional gallons of fuels were required annually due to the increasing trend in people size and weight.
Further, they established that more than 39 million gallons annually will be used for each additional pound of an average passenger weight.
22 WIN –Weight control Information Network 23 Jacobson and Mc Lay The Economic impact of obesity on Automobile fuel consumption 15
Ross A. Hammond and Ruth Levine 24 identified obesity as a major global epidemic issue. They support the claim made by S.H. Jacobson and L.A. Mc Lay, stating that increases in body weight among Americans mean that more fuel and potentially larger vehicles are needed to transport the same number of commuters and travelers each year.
24 Hammond and Levine – The economy impact of obesity in the United States 16
3 Volkswagen Group
3.1 Overview and Goals
Volkswagen AG is German based, and currently the largest automaker in Europe and belonging to the World‘s leading car manufacturers in general. The company is divided into two sectors, the automotive sector and financial sector. Volkswagen consists of several brands, manufacturing an extensive portfolio of vehicles starting from passenger low-consumption small cars to commercial vehicles, pick ups, busses, trucks, and luxury vehicles. Audi, Bentley,
Bugatti, Lamborghini, SEAT, Skoda, Scania and Volkswagen Commercial Vehicle all belong under the Volkswagen Group.
Volkswagen CEO Martin Winterkorn has the goal to increase Volkswagen brand deliveries to
6.6 million vehicles by 2018.
3.2 History of the Volkswagen Group
In the early 1930’s Ferdinand Porsche was manufacturing a car named Type 32, in the KdF
Wagen factory in Germany. The Type 32 was apparently very similar to the Czech Tatra V570 25 not only from external appearance, but also in many technical aspects. Later on KdF Wagen had to stop production of car Type 32 and compensate Tatra for unlawful activity.
In the mid-1930s Adolf Hitler made a proposal to Ferdinand Porsche to construct a “people’s car” with specific requirements, aiming to be accessible to the masses. The name Volkswagen
25 Czech type of car 17
was chosen purposely, as a connotation to be affordable for everyone, the exact translation of the label Volkswagen being the “people’s car”.
Ferdinand Porsche established a factory called Porsche Buro with innovative, sophisticated production which enabled him to produce these simple, cheaper cars. He saw a real opportunity and designed a car which was finally very similar to the Volkswagen Beetle which is currently still in production. Later misunderstandings between Hitler and Porsche over the name of this desired vehicle resulted in a decision made by Porsche not to use Hitler’s propaganda to advertise the car.
The KdF Wagen factory was largely destroyed during World War II. After the end of the war, the British army took over and renamed it to Volkswagen. In 1945 the British intended to hand it over to a relevant manufacturer; however neither of the parties approached (Ford or the French government) would accept it. Finally, in 1949, the British government was able to pass control of the company to the German government and Heinrich Nordhoff was elected to be CEO of the
Volkswagen.
Under Nordhoff’s leadership the production in the factory improved significantly and the car portfolio expanded. Around the 1950’s the Volkswagen Beetle started to be manufactured in a
South African subsidiary, at the same time the Beetle and other models were exported to neighboring countries including Luxembourg, Sweden, Denmark, Belgium and Switzerland. A few years later Volkswagen entered the UK and in 1970’s the U.S. market. The U.S. market proved to very difficult for Volkswagen in the beginning, but later turned to a great success.
The enormous success of the Beetle model reached its peak in the 1970’s, and then new models such as the Passat, Scirocco, Golf and Polo were progressively introduced. 18
The oil crisis in the early 1970’s affected all car manufacturers, but Volkswagen, due to production of small cars, had a better position than most of its competitors. Over all the company also had to implement cost–saving measures and reduced its workforce by 32 761 people 26 in
1975.
Between the years 1980-1990 the trend in the U.S. and Canadian market did not work very successfully for Volkswagen, showing a constant decrease in sales, which in the end influenced the direction of further expansion towards developing countries and closing the Pennsylvania subsidiary.
In the 1990’s Volkswagen experienced a slight recovery in the North American market encouraging the company to acquire luxury brands such as Lamborghini, Bugatti and Bentley.
26 Source- History of VW group web site 19
4 Toyota Motor Corporation
The Japanese Toyota Motor Corporation was founded on August 28 th 1937 by Koiichiro Toyoda, a few years later after his return from the United States, where he had visited several automobile plants. At that time General Motors and Ford Motor Corporation had already been operating their plants in Japan, but this did not discourage him from his idea.
While other countries at that time concentrated on production of large, luxury cars, Toyota were somehow forced into taking a different approach. This was partly due to the limited natural resources in Japan, but also largely because of the political situation at that time, where during
World War II certain materials were needed, and indeed prioritised, for products related to the war, therefore causing a materials supply shortage for car production. As a consequence Toyota took a different approach and started developing and building small, fuel efficient cars using new technologies and materials. For example, in 1939 Toyota established a research centre to begin work on battery powered vehicles.
The Japanese car industry enjoyed government protection from foreign importers imposing high import duties until the end of World War II. In 1955 Japan joined the General Agreement on
Tariffs and Trade (GATT) 27 , and later on in 1965 legalized the import of foreign passenger cars which triggered the start of real competition between Japan and the United States.
Toyota faced severe difficulties; there were conflicts between management and the labour force, and also there were problems overall with the Japanese economic situation and rampant inflation,
27 GATT - a multilateral agreement regulating international trade 20
where the government subsequently took measures which reduced consumer purchasing power which finally led to worsen the already poor situation of the domestic car industry.
Toyota, which was on the verge of bankruptcy in the 1950’s, consequently agreed on a rebuilding program while reducing the workforce from 8000 to 6000 employees and implementing a new “suggestion system” which had previously been observed in the Ford Motor company by two newly appointed Toyota executives who went to the United States to gain new insight into car production. In line with the suggestion system every employee was encouraged to make suggestions for any kind of improvement, and also more importantly the executives applied a new policy of the continuing commitment to invest in only the most modern production facilities as the key to advances in productivity and quality. This policy had an immediate effect and Toyota benefited from increased efficiency almost instantly. Interestingly the policy remained valid through the 1990’s.
As it has been already mentioned Toyota Motor Sales, U.S., Inc., was formed on October 31 st ,
1957, located in Hollywood and started to sale its first cars in 1958. It took Toyota a few years to assimilate into the U.S. market. Consequently, Toyota managed to break into the U.S. market with the legendary Land Cruiser in 1961, which earned a reputation as a durable, all-terrain vehicle. The success of the Land Cruiser was surpassed in 1965 by the Toyota Corona, which was the first Toyota car specially designed for the American market. The continuous success and reputation of reliable Toyota cars resulted in the fact that Toyota, in 1967, became the third best- selling import brand in the United States.
This Toyota triumph continued along with the introduction of new models, subsequently surpassing Volkswagen by the end of 1975 and becoming the number one import brand in the
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United States. Moreover, in 1978 Toyota won the “Import Triple Crown” for leading all import brands in sales of cars, trucks and total vehicles.
Toyota’s success on the U.S. market continued. In 1986 the company sold more than one million vehicles during a single month which none of the other importing companies had ever accomplished before. In the same year another significant achievement was reached when the first Toyota car was built in entirety on American territory in the New United Motor
Manufacturing Inc. plant, a joint venture with General Motors. By the end of 2011 Toyota was running 14 plants across North America.
The company has been progressively strengthening its position in the United States taking an increasing role in communities, establishing the Toyota USA Foundation aiming to make Toyota a leading corporate citizen.
In 1991 Toyota also debuted in the luxury brand vehicle category surpassing BMW and
Mercedes Benz with the Toyota Lexus, and in the same year also winning awards for Customer satisfaction, Sales satisfaction and Initial quality.
Toyota has over the years gradually secured its leading position in the U.S. market through the introduction of new, innovative and revolutionary models such as the Toyota Prius, a first mass- produced gas/electric hybrid, later in 2002 presented its zero-emission, market ready hydrogen fuel cell vehicle and in 2004 introduced its hybrid synergy drive technology for the Prius model.
The economic recession starting in 2008 caused that Toyota’s sales dropped but still Toyota managed to outsell Chevrolet and become the number one selling automotive brand in the United
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States. In the same year Toyota also overtook General Motors and became the world’s largest automaker.
However, in 2009 Toyota had to address safety concerns of unsecured or multiple floor mats which could trap the accelerator pedal on particular Toyota models. 28 During 2010 Toyota opened a production plant in India but consequently had to suspend its eight models for other safety issues. Despite the swift correction of faulty parts, Toyota’s reputation was significantly damaged due to heavily broadcasted news in the media, which consequently led to a
Congressional hearing and the company had to pay three federal penalties.
Toyota was going through a recession with lower sales figures, but still maintaining its position on the U.S. market until the earthquake and tsunami hit Japan, including Toyota’s production plants. Another natural disaster occurred at the end of the same year, 2011, when flooding in
Thailand disabled production of another two of Toyota’s plants.
Toyota has proved its resiliency and efficiency while recovering from recent losses and in 2012 started to turn around sales figures positively. In fact, starting in March 2012 Toyota was once again the number one retail brand in the United States defending its primacy on the global scale. 29
28 Source: Toyota USA Newsroom 29 Source: Toyota USA Newsroom 23
5 BRIC Countries and Auto Industry
In the early 2000’s, due to stagnation in the U.S., Western European and Japanese markets, all major automakers have focused their attention mainly on China, India and Russia, sensing the opportunity at those emerging markets with fast growing economies.
As a striking difference from the Western European and U.S. market is the fact, for example, that in China until 1975 there was no passenger car production at all. The country under a communist regime was centrally planned and controlled, and it was not until late 1953, with assistance from the USSR 30 , that China introduced a non-passenger car production into the country. USSR and
First Automobile Work (FAW) 31 pioneered a collective project and started to produce trucks, and later in 1958 the “Red Flag” limousine.
After the death of Mao Zedong in 1976 China started to “open up” to the rest of the world on political and economic grounds. An auto industry was identified as one of the major areas for further development; and there were two directions in which to grow, namely volume (increasing production) and range (variety of vehicles). In the late 1980’s China was under pressure from a quickly growing market and an increasing number of foreign auto manufacturers positioning their subsidiaries in China. Consequently, the Chinese automobile industry started to develop significantly faster. At the same time existing plants were not able to satisfy the increased demand. From the beginning in the 1950’s and for the following 30 years there was no big progress in the Chinese automobile industry, neither in terms of production or technology.
Production capacity was low and technology was outdated. As a result some small factories also
30 USSR-Union of Soviet Socialist Republics-constitutionally socialist state run by single communist party existing between 1922-1991 31 FAW First Automotive Work- state owned enterprise 24
started to manufacture light trucks, mini vans and large passenger vehicles however under the supervision of Provincial and Municipal government bodies.
In 1991 the FAW consequently started a joint venture with Volkswagen and produced several models from the Volkswagen portfolio. By the end of 2005 joint ventures controlled about 90 per cent of China’s passenger car market. So far all of the major car producers such as General
Motors, Toyota, Ford, Daimler Chrysler, PSA Peugeot Citroen, Nissan- Renault, Honda and
BMW have established joint ventures in China.
Nevertheless, the Chinese government incorporated in its “Automobile Industry Policy” a clause stating that the foreign automobile producers can only make engines and finish cars in China together with Chinese local manufacturers, and the foreign companies are not allowed to own more than 50 per cent of share holdings in the joint ventures.
5.1 The Chinese Auto Industry today
China has currently a very strange mix of socialist, capitalist, and communist ideas for their economy. It is unique in the world, and often really defies categorization. However in 2002 and
2003 the Chinese automotive industry developed extremely fast. The overall production during those two years increased by 38.8% and 36.7% and passenger car production escalated by 55.2% and 84.9% 32 respectively, with almost no unsold stock at the end of these years. One of the reasons for such a significant increase was the growing disposable income of China’s urban middle-class population and the variety of cars to choose from.
32 Source China embassy official data 25
Nevertheless, within the last decade China has still been applying practices from the past era, such as car prices being determined by the government, which consequently creates an artificial market environment, preventing competition. Moreover, the Chinese market was still well protected by high tariffs on car imports ( see Table 6 ).
Table 6: Tariffs, Pre- and Post- WTO Membership
Source: The past, present and future of China’s automotive industry: A value chain perspective
With entrance to the World Trade Organization (WTO) the Chinese government had to change its “control” mechanism. It was necessary to react on the increased presence of foreign cars, manufacturers and competition. The government had to encourage a private car ownership,
26
which directly supported related industry sectors, and lastly attract and increase foreign investment to the country.
Until approximately 2004, cars were mainly obtained by governments and businesses for their activity. Since then, private car ownership has become the driving force for the Chinese auto industry. The Economic Research Institute of National Planning Committee in 2004 forecasted that approximately 5 million new private car ownerships would be created over the following 3 or 4 years.
The promising success in the automotive industry has subsequently attracted a number of investments and boosted production capacity, which actually started to be a concern for the government in terms of overheated competitiveness; therefore they introduced “cooling down” policies including discouraging banks on lending and slowing approval for investments. As a result many potential price-sensitive consumers have postponed or canceled their purchase.
5.2 Joint ventures in China
Shanghai Volkswagen, FAW Volkswagen, Shanghai GM, Beijing Hyundai, and Dongfeng
Nissan belong to the top five car manufacturers in China, and are all joint ventures with Chinese
State Owned Enterprises (SOEs). Those brands are also Chinese Top five bestsellers in recent years.
In 2010 GM sold more cars in China than in the U.S. market with 2.35 and 2.21 million units respectively. One year later the contribution of the Chinese market to the GM annual net income
27
reached 20 per cent. 33 According to a Chinese embassy official announcement, the official figures show that in 2010 China became the top auto maker surpassing the United States.
The Chinese market is a solid challenge for all auto manufacturers. In 2012, 47 people out of
1000 have owned a car in China in comparison to 808 people in the United States, 589 in Japan, and 379 in Korea. This statement is confirmed by Dong Yang, CAAM 34 deputy chairman saying that:
” China’s market still enjoys abundant potential, as living standards and the average auto ownership remained low.”
Dong Yang is also confident that the trend in China’s car industry will continue to grow rapidly in the next decade and become fundamental for Chinese national economy.
5.3 Volkswagen and the WTO
Following the Chinese entrance to the WTO Volkswagen experienced a considerable loss in market position. The joint venture between Volkswagen and an SOE signed in 1982 for 25 years, then extended until 2030, gave Volkswagen a substantial market advantage, consequently they became a major player in an inexperienced Chinese car manufacturing industry.
However, Volkswagen’s practice to supply the Chinese market with the last decade design models no longer salable in the West was starting to prove unsustainable. New auto producers had brought latest designs to the Chinese market and were challenging Volkswagen.
33 Source: Forbes journal 34 CAAM China Association of Automobile manufactures 28
As a reaction, in 2006 Volkswagen introduced an “Olympic program” with the aim to claw back its former position. For illustration, one point in this program was not to compete with similar types within the brand and introduce new models suitable for Chinese market.
5.4 The Indian Auto Industry
Volkswagen is strong in China, Europe and Brazil, while Toyota is a solid player in the U.S. market, Japan and the Asia Pacific. India is a virgin region for the two global players with enormous market potential.
The auto industry in India faced difficulties for more than four decades, in fact right from the beginning, dealing with the government’s policy imposing regulations on volume of output along with technology development and design. Until the 1980’s the productivity of vehicles including trucks, buses, and pick-ups, however out of date, had still been very low.
In 1981 Suzuki and the Indian government Marugi Udyog Ltd. 35 established a joint venture and increased productivity output rapidly and became the leader on the Indian market. This growing trend was sustained until 1996, at which time many international car producers established subsidiaries in India ( see Table 7 ).
35 Marugi Udyog state owned auto manufacturer in India 29
Table 7: New ventures in the Indian motor industry
Source: United Nations Industrial Development Organization: The Global Automotive Industrial Chain
In 2009 Volkswagen purchased a 19.9 % stake in Suzuki Motor Corporation for $2.5 billion with the aim to collectively co-operate on technology and develop hybrids and electric vehicles for 30
emerging markets, and further to challenge and attempt to overtake Toyota’s leadership in that field.
At that time Suzuki played a major role in Maruti Suzuki India Ltd. which produced half of the cars sold in India and Volkswagen was the second foreign automaker in China’s market. Suzuki invested 50 billion yen in Wolksburg, German based Volkswagen’s shares and likewise
Volkswagen became a significant shareholder in Hamamatsu, Japanese based Suzuki.
The CEO of Volkswagen Martin Winterkorn estimated that the combined sales per year would exceed 8 million units, hence challenging Toyota.
Martin Winterkorn said:
“The automobile industry is going through a fundamental shift. Alliances are at the top of the agenda and they are indispensable for competition. The global crisis has sped up this reorganization.” 36
Christopher Stuermer, an automotive analyst with HIS Global Insight 37 noted:
” This is clearly the next step in going head to head with Toyota. The cross shareholding is a very wise choice because it allows Suzuki to keep its face while opening the door to Volkswagen .”
The global decline in auto sales during the recession has also induced other carmakers to form alliances and refocus on emerging markets. PSA Peugeot Citroen, the second European car
36 Bloomberg Business Week, Eyeing India Market VW buys 20% of Suzuki. 37 HIS Global Insight- Country and Industry forecasting http://www.ihs.com/index.aspx 31
manufacturer and Japanese Mitsubishi Motor’s corporation were considering collective equity investment, while Fiat SpA, bought a 20% stake in Chrysler LLC Group.
Koji Endo, managing director of advanced research Japan in Tokyo 38 commented on the partnership:
” Volkswagen is like a department store carrying everything from luxury brands to truck makers. What they are missing is any presence in India and Southeast Asia. The point of partnering Suzuki is to grab India.”
By the end of 2009 sales in India experienced, according to Bloomberg, the biggest growth over five years reaching 61%. Also the Chinese market displayed a 42% increase in sales during the previous 11 months in 2009.
However, reality differs from the idea of smooth cooperation between those two corporations.
Although they had a vision, they were not able to cooperate on any project.
In 2011 Suzuki proposed Volkswagen to sell its shares in the company and in return Suzuki would relieve its investment in Volkswagen. Suzuki was seeking an end of its partnership with
Volkswagen, after being accused of breach of contract, as a reaction to a purchase of diesel engines made by Suzuki from Fiat for their Hungarian subsidiary. Volkswagen insisted that this trade broke the agreement, an accusation Suzuki denied.
Different analysis had distinct opinion on the matter.
38 Advanced Research Japan Company Ltd is an independent equity research firm, specializes in research on Japanese equities. 32
Christopher Richter from CLSA Asia Pacific Markets 39 believed the reason for the fallout lay in an unclear specification of the planned cooperation between the parties, right from the beginning.
Koji Endo was concerned about differences in corporate cultures and ideas, pointing at
Volkswagen’s effort to become the biggest player in the world’s car market while Suzuki’s aim, reasonably smaller by size, was to focus on key regional markets.
Kim Bhasin from Business Insider 40 also highlighted cultural differences, arguing that “proper cooperation” might be understood differently in Japan and Germany. It seemed that Suzuki thought the partnership would not change anything related to its independence while
Volkswagen felt it had a right to intervene given the initial investment of $2.5 billion into the company.
The end result is that the Indian market seems to be so far the weakest point for Volkswagen in terms of market share, standing at only 5% 41 in comparison to other emerging markets such as
18% in China, 22% in Brazil and 9% in Russia. 42
In 2009 the Volkswagen Group introduced its Sedan Vento model specifically designed for emerging markets, as a first to the Indian market. Similarly, Skoda Auto, part of the Volkswagen family, launched a comparable sedan in 2010. Yet, according to Hindustan Times 43 , in 2010
Volkswagen Group sold 53 300 cars in India, contributing to Volkswagen’s global sales by a mere 0.75%.
39 CLSA Asia-Pacific Markets is Asia’s leading and longest-running independent brokerage and investment group 40 Business insider is a U.S. business news web side based in New York City 41 Calculation based on data excluding potential Suzuki-Maruti joint venture 42 Source: The Economist 43 Hindustan Times- an Indian English-language daily newspaper, which includes news coverage on Indian politics, business and economy 33
Nevertheless, John Chacko, president and managing director of Volkswagen India Pvt Ltd. is confident about the development of the Indian market saying that:
“With 55,091 cars sold by Volkswagen Group in India in the first half of 2011, we have already sold more than we did in the whole of last year. During this period we also increased our market share from 2.5% to 4.6%. Globally the Volkswagen Group had a market share of 11.4% last year and I see no reason why we should not reach similar numbers in India.”
However, the Volkswagen Group has to constantly face its biggest competitor. Toyota in 2010 sold 75 000 units on India’s market accounting also for only 0.9 % of its global share. On the other side Toyota India was the only subsidiary of Toyota which was able to sustain full production after the devastating earthquake and tsunami in Japan.
Hiroji Onishi a president of Asia-Pacific Toyota Motor says :
” India is a critical market for us and we lay a lot of importance to it. Our entry is late in the volume segment in India and our line-up is not sufficient in response to the growing demands of the market. But it is a market that cannot be ignored anymore, and we see a larger potential and market here.”
5.5 The Russian Auto Industry
Russia has a history of having a solely domestic car production where most of the 2 million cars produced in 1987, which apparently covered 45% of domestic demand, were produced in Avto
VAZ- Lada, once the largest auto plant in Europe in a city called Togliatti. 44 The plant was established in 1969 and started production of a single model Lada 2101, which was similar to the
44 Source: Lang, N., Mauerer S, Winning the BRIC Auto Market 34
Fiat 124. During the decade 1970-1980’s the demand for Ladas went beyond 1 million units, however this lasted just temporarily, with the demand decreasing to 600 000 to 1 million units at the beginning of the new millennium.
After the break-up of the Soviet Union and deregulation of its market, the Russian auto industry could not compete with the import of foreign car producers. Japanese Toyota replaced the economic brand model Lada and German Mercedes and BMW substituted the luxurious model
Volga. Ford, General Motors, Hyundai and Renault were the first car manufacturers to establish their subsidiaries and production in Russia, but they were soon followed by others.
The Russian international automobile market has a relatively short history, the market is therefore more unstable in comparison to other BRIC countries and future trends are rather difficult to predict. This assumption has been supported by the development in the Russian market in contrast to other BRIC countries during the recent economic downturn. In 2009 sales in China soared by 40%, sales in India and Brazil also rose strongly, but in Russia sales dropped by 50%. The recovery has been also slower in Russia than in other countries, where an increase in sales is not expected before 2014, as well as contraction of the market was expected but then a sharp increase is anticipated ( see Table 8 ).
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Table 8: The Russian Market’s contraction Will be Followed by a Strong Growth Surge
Source: Boston Consulting Group-Localizing the BRIC Market
The development in the current Russian market has shown that EOMs 45 significantly increased its market share, while the segment of imports considerably decreased due to devaluation of the
45 EOM- Original Equipment Manufacturer 36
Ruble making local production more attractive, and due to imposed import barriers and duties on new and used vehicles.
So far Russia has the lowest number of EOMs and foreign car producers localized out of the
BRIC countries. There are several reasons for it; one of them is a Russian consumer’s demand practically, requiring the same models that are sold in the United States, Japan and Western
Europe, meaning that customized models will not be accepted on the market. Another reason lies in the supply of raw materials, which despite the fact that Russia possesses one of the largest natural resources, EOM localized in Russia have to mostly rely on exports of raw material.
Nevertheless, the majority of global players have a dealer network located in Russia. Their sales have been focused on major cities such as Moscow, Saint Petersburg, Nizhny Novgorod which accounts for only 30% of the Russian population and 45% of the national income.
International suppliers have been cautious to enter Russia mainly due to lower production volume for each model; however Volkswagen opened its first production plant Volkswagen
Group Rus, in Russia, at Kaluga near Moscow in 2007, as part of Volkswagen’s international expansion strategy. Later in 2009 the plant started to produce the Volkswagen Tiguan and Skoda
Octavia.
The Russian market still remains volatile and immature because the later entrance of foreign car producers, yet offers a considerable potential for expansion, which has been proven in the recent history.
In 2010 Russia has become, according to Forbes, the fifth largest European automaker behind
Germany, the UK, France and Italy. The Russian government also signed in 2010 an agreement
37
worth $6.3 billion with foreign car producers on investment in expansion of local automobile production including $1.1 billion from Fiat, $1 billion from General Motors and approximately
$900 million from the Volkswagen Group.
The current General Motors’ CEO Daniel Akerson commented on the agreement and investment in Russia:
"General Motors are embarking on a new era in Russia, one of the world's fastest-growing vehicle markets, as part of our strategy to build where we sell." "The global vehicles that we produce and the manufacturing systems that we are putting in place are creating long-term benefits for Russia's automotive industry, its supply base and its economy." 46
The year 2011 was a year of recovery for the Russian car market. In 2011 more than 1.7 million light vehicles were manufactured in Russia, which was an increase of 45% compared to the previous year, 2010 .
This positive demand was driven by consumer confidence, lower unemployment, a government scrap programme, the availability of car loans, growth of the national economy and aggressive growth in domestic production of foreign brands following the OEM investments made.
According to Ernst &Young 47 there will be a steady increase in demand for light vehicles in the short term. This is in part due to the age of the Russian vehicle fleet, where the average age is close to twelve years, which is significantly higher than the European average. Also it is part due to the relatively low density of light vehicles in Russia (measured as a density per 1000), which is also low in comparison to other European countries. The ability to fulfil this increased
46 Source: Detroit free press Business 47 Ernst &Young- world’s leading professional services organization 38
demand will mainly be dependent on the creation of new production capacity, and on Russian accession to the WTO which will be followed by a reduction in custom duties.
Table 9: Russian light vehicle production forecast, thousand of units
Source: Ernst &Young, An overview of the Russian and CIS automotive industry
Skoda, the subsidiary of Volkswagen has started, in 2012, to produce a specially designed light vehicle for the Russian market called Yeti (SUV), out of the production facility in Nizhny
Novgorod. For Skoda it is their second facility in the country, but the first producing under
39
partnership with Volkswagen Rus and the GAZ Group 48 . Skoda is planning further expansion in
Nizhny Novgorod and to start production of the Skoda Octavia in 2013.
Skoda CEO Winfried Vahland said:
"Russia is our third-strongest sales market worldwide and our number two in Europe as it is, and we intend to grow further in years to come, which is why we are resolutely extending our model offensive in this country and expanding local capacity further."
Expansion within Russia is a part of Skoda and Volkswagen 2018 growth strategy.
48 GAZ- automotive plant based in Nizhny Novgorod, leading manufacturer in commercial vehicles in Russia 40
6 Global Battle
Toyota and Volkswagen are locked in a battle for global supremacy.
Toyota in the past had conquered the U.S. market with its Lexus brand cars and lately with the so-called environmentally friendly (we will discuss this later) Toyota Prius. Since then the company became to be a respected global player. However in 2009 and 2010 during financial crisis Toyota made gigantic losses in the North American market.
In just three months between January 1 st and 31 st March 2009, the company made losses of US $
7.3 billion leading to a worse operating profit than GM, who at that time was filing for Chapter
11. 49 Amazingly, a company which was once producing more cars than any other company in the world turned within just three months into the company who lost more money than any other in the world.
Moreover, starting in 2009 Toyota had to recall roughly 11 million cars, mostly from the United
States, for faulty gas pedals, floor mats and other defective components, which seriously damaged Toyota’s reputation for quality.
The latest safety incident has occurred in December 2012 when Toyota has been fined $17.4 million, the maximum penalty allowed by US law, for taking too long to report safety issues to the U.S. authorities.
Nevertheless, within two years of the 2009 incident Toyota managed to improve its position and challenged for some time Ford, becoming the number two player in the U.S. market.
49 Chapter 11: The process of the reorganization of a bankrupt company under the supervision of a court or the appropriate regulator. 41
Unfortunately on the 11 th of March 2011 the Japanese earthquake and massive tsunami hit the country cruelly, followed by the Fukushima nuclear power catastrophe, which had paralyzed the whole country. Apart from the overall loss, the Japanese auto industry underwent enormous losses and difficulties as a consequence of the natural disaster.
Toyota could not restart production for months because its supply chains were disrupted, even in the United States and European assembly lines had to stop production. Volkswagen’s reaction was modest and respectful. Volkswagen did not want to become global number one by taking advantage from the terrible natural disaster. Volkswagen’s executive Martin Winterkorn said:
" As far as 2011 is concerned, Toyota has fallen behind. The giant took a full broadside and will need time to lick its wounds, but the Japanese car maker is down, not out.” In fact, most industry experts and commentators readily observed that only a giant with the strength of Toyota would be able to digest such a sequence of catastrophic events.
Toyota is currently number one in the world, but has been challenged not from Detroit’s Big
Three but by Volkswagen. The Wolfsburg based manufacturer ambitions are clear, to became
World’s number one by 2018.
Volkswagen’s advantage is the ability to be able to react on customer demand and to launch innovation that consumers require or desire, regardless of sizeable effort and possible risk. They have introduced technology innovation like four-wheel drive, lightweight construction, low consumption motors with direct fuel injection (TFSI) and direct shift gearboxes (DSG) with seven speeds.
Volkswagen’s parts and platform sharing strategy has been implemented already during the
1990’s and paid off. The Volkswagen Group’s new strategy is to use a standardized set of
42
components mainly for the Volkswagen, Audi, Skoda and Seat brands. Volkswagen expects to achieve improved economies of scale and as such they have estimated an annual cost saving of
US $6.5 billion, reducing production costs by 20 per cent and speeding up the assembly line 30 per cent by 2016. 50
Jurgen Pieper, an analyst at Frankfurt-based Bankhaus Metzler said:
“The parts-sharing program is a very big lever to improve profitability that other companies don’t make use of because of the complexity”.
Toyota on the other hand, “helps” strengthen Volkswagen’s competitive advantage, where their traditional philosophies cause “constraints” in terms of flexibility. Toyota has difficulty in changing long term strategy, notwithstanding recent quality issues and public demand.
Then again, Volkswagen has to be careful with its sharing platform strategy in terms of cannibalization, which the group could already have experienced between Volkswagen and
Skoda. The CEO Martin Winterkorn relies on an internal product strategy commission, to control the level of healthy crossover between the organizations which is beneficial to the group.
50 Source: Bloomberg News 43
7 Business Strategy Analytical Tools
7.1 PESTEL Analysis
PESTEL analysis is used to scan and analyze environmental factors or the macro environment of an organization operating within its influence.
PESTEL refers to:
P- Political factors - the degree of government integration into business, politics, regulation, legislation, watchdogs, taxation policy, privatization, deregulation policy, public expenditure controls and central authority directives
E- Economic factors – the national growth rate, interest rates, inflation rates, exchange rates, unemployment, level of consumerism, labor cost, infrastructure cost and disposable incomes
S- Socio -cultural factors - demographics, income distribution, social values, green agenda, health, education, work and leisure attitude and changes in social trends
T- Technological factors – research and development (R&D) expenditure, horizontal and vertical integration, rate of technology uptake or transfer, changing communications technology and social networks
E- Environmental factors - including water resources, energy supplies, weather and climate change, where the major climate change factors are global warming and greater environmental awareness resulting in environmental factors playing an increasingly significant role in strategic analysis.
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L- Legal factors - these are related to the legal environment in which firms operate, for example introduction of age discrimination and disability discrimination legislation, setting minimum wage rates, maximum working hours , health and safety legislation and business regulation
Political factors in an auto market
The most recent political factor which car producers in the U.S. have to face is the final version of new rules that require automakers to nearly double the average fuel economy of new cars and trucks by 2025. Current rules for the Corporate Average Fuel Economy, or CAFE, program mandate an average of about 29 miles per gallon, with gradual increases to 35.5 miles per gallon by 2016.
This CAFE regulation has been heavily criticized by Mitt Romney 51 amongst others, arguing that it will be too costly for consumers; on the other hand Mr. Obama sees these measures as
“historical” in terms of diminishing the U.S. dependence on foreign oil producers by reducing oil consumption.
Nevertheless, in the Asian market the political forces are more significant in terms of protecting its domestic production by imposing duties and quotas on foreign car production. Russia for example has not yet joined the WTO agreement. China, regardless its WTO membership, is still imposing 25% duties on foreign car producers. India, meanwhile, has an Automotive Mission
Plan (AMP) 52 from 2006-2016 which is a collaborative effort between the government and the
51 Mitt Romney- Republican president nominee 52 AMP Automotive Mission Plan aims to double the contribution of the automotive sector in GDP by taking the turnover to 145 billion USD in 2016 with special emphasis on export of small cars, MUVs, two wheelers and auto components. 45
auto industry aiming to significantly contribute to India’s GDP by increased export of small cars by 2016.
Economic factors
Table 10: Economic development overview BRIC and U.S. 2012
GDP average PPP (US$) Inflation rate Unemployment Country Growth rate (%) rate (%) (%)
United States 3.22 29 709 3.36 5.8
China 9.25 2414 4.23 4.15
India 5.87 1446 7.75 7.57
Russia 3.91 10299 156.65 8.25
Source: Trading Economics 53 , NY City
The U.S. market is recovering from recent financial crisis, whereas Asia seems to have learnt a lesson from its own financial crisis it underwent one decade before the U.S. financial crisis started, and has managed to stabilize its economy. There is also substantial room for growth in terms of GDP of emerging markets, whereas the western and Japanese markets are reaching or have reached a “ceiling”, meaning there is not much “space” to grow.
53 Trading Economics-http://www.tradingeconomics.com/ 46
Socio-cultural factors
There is a striking difference in PPP between U.S. and Asia. However, the density of population of emerging markets offers an enormous growth potential, especially given the trend of a growing middle class and their adoption of a western life style in rapidly developing Asia.
Technological factors
The internet has a colossal influence on industry in general including the auto industry. Poor network coverage, access to a network at all, or a censored access to the internet is the main drawback in most Asian countries. The U.S. is, on the other hand, implementing the newest technologies into production and heavily supporting R&D expenditure. Insufficient infrastructure is another barrier for car producers in Asia, where without improvement; it will not be possible to satisfy the current and future demand.
Environmental factors
As it has been mentioned the U.S. introduced even stronger regulations to car production with respect to global warming and climate change, whilst China and most BRIC countries have not paid such close attention to this, or environmental regulation has been ignored, most notably in
China in the mining industry.
Legal factors
The U.S. is utilizing its vast pool of skilled work force, while on the other hand having to deal with extensive legislation protecting workers, including a minimum wage, maximum working hours and discrimination legislation. However, in BRIC countries there is still a more lenient approach to most of the above mentioned concerns. Even though in the BRIC countries they are 47
enjoying a large pool of low cost work force they are also lacking skilled labour, especially engineers. Further, bureaucratic red tape in BRIC countries makes it difficult to make changes and implement new economic policies and programs.
External factor Evaluation (EFE)
Taking into account the external political factors for Volkswagen group, and the newest version of CAFE, we can assume that Volkswagen with its approach to R&D and innovation is able to meet the required criteria. For example, with the latest Volkswagen Eco Up model, which returns the CO2 performance of an electric vehicle because it is powered by compressed natural gas
(CNG), or with the Skoda Fabia Estate Green Line II, the brand’s most efficient model ever.
However, the focus should remain on emerging markets, where political restrictions might have more significant impact, but Volkswagen can benefit from its long term relationship and joint venture with Chinese State Owned Enterprise for negotiation. The same method can be applied in India, where Skoda Auto has a long history and considerable market power.
Economic factors are giving further incentives to focus on the Asian market, despite the fact that the PPP in the U.S. is exceeding that in Asia, and also the inflation rate is lower in the U.S. than in Asia, but as a major macroeconomic indicator, the GDP growth rate scores much higher in
Asia, and with further potential to grow, therefore attention should focus on Asia.
Demographic factors, such as the density of population and changes in lifestyle indicate additional motivation for Volkswagen and its expansion activities towards the East.
Technological factors could be a challenge for Volkswagen in BRIC countries, where there is a
48
striking difference compared to the West in levels of technology, infrastructure and R&D.
However, China is approaching western standards in some areas and it will likely be a question of time until the technology sector belongs to the fastest developing sector there.
Environmental factors are rather moderate in BRIC countries compared to the U.S. and do not create barriers for Volkswagen today in those countries, nevertheless they will do so in the foreseeable future, when standards and regulations will be introduced, however this should not put a strain on Volkswagen since the group has been already operating in more environmentally stricter settings.
From the perspective of legal factors, the group could benefit from a large pool of skilled labour in the U.S., however along with excessive legal regulation, the production might be pricey, rather than production in emerging markets, where the current shortage of skilled workforce could be overcome by intensive trainings and HR management.
7.2 SWOT and TOWS Analysis
SWOT and TOWS analysis are further tools used to analyze business strategy, focusing on internal and external factors and categorizing them as strengths, weaknesses, threats and opportunities.
49
This study includes below a SWOT analysis ( see Table 11 ) and TOWS matrix ( see Table 12 ) for
Volkswagen’s strategy of future growth to increase its market share.
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Table 11: SWOT Analysis Volkswagen
STRENGTHS WEAKNESSES
Broad portfolio of products Part of the production based in Germany (costly) Efficiency, sharing parts, economies of scale Slightly damaged reputation in China Implemented innovation Possible cannibalization within the organization Flexibility related to customer demand SEAT (loss-making) Reputation
Geographic diversification of assembly lines Early entrance to Chinese market and joint ventures Especially customized models for emerging markets, e.g. Skoda
OPPORTUNITIES THREATS
Expansion to BRIC markets Competitors
Opening new assembly lines Regulations and restrictions in emerging markets Maintaining position in U.S. market
Become World number one in car Shortage of natural resources production Unfavourable exchange rate
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Table 12: Volkswagen TOWS Matrix
Strengths / Opportunities Weaknesses / Opportunities
1. Expand to emerging markets 1. Relocate production from with customized products, e.g. Germany to other countries Skoda 2. Restore reputation in China with 2. Utilizing the position of early new customized products entrance to BRIC markets 3. Avoid cannibalization within 3. Open new assembly lines with the organization by utilizing its innovation broad product portfolio 4. Utilize its reputation to maintain market share in the U.S.
Strengths / Threats Weaknesses / Threats
1. Utilize economies of scale to 1. Deal with the SEAT issue defeat competitors 2. Reduce the threat of competitors 2. Use efficiency and innovation especially in China by to overcome possible shortages improving its reputation. in natural resources 3. Utilize its long term standing in China in order to negotiate against restrictions 4. Utilize the diversity of assembly lines in case of unfavourable exchange rates
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7.3 Competitive Profile Matrix (CPM)
A Competitive Profile Matrix (CPM) measures and scores competitors against certain success criteria, using assigned weightings based on perceived relevance and importance.
Table 13: Competitive Profile Matrix CPM
Critical Success Factors Volkswagen Toyota Weight Rating Weight score Rating Weight score Product Quality 0.10 4 0.40 2 0.20 Competitiveness 0.20 4 0.80 4 0.80 Price 0.15 3 0.45 2 0.30 Management 0.05 3 0.15 3 0.15 Reputation 0.10 3 0.30 2 0.20 Advertisement 0.10 3 0.30 3 0.30 Customer Loyalty 0.05 3 0.15 3 0.15 Global expansion 0.10 3 0.30 3 0.30 Market share 0.15 3 0.45 4 0.60 Total 1.00 3.30 3.00
Legend: Rating: 1-poor. 4-excellent
According to business strategy theory, organizations scoring a total weight score greater than 2.5 are in a “good” position. Both Volkswagen and Toyota are strong competitors; however Toyota scored less than Volkswagen mainly due to its recent damaged reputation over safety of its vehicles and also an unsuccessful launch of the Toyota Yaris in China which was criticized for its high price.
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8 The US Auto Industry Today
The U.S. market is the largest in the world. Some experts advocate that, regardless challenges within the industry over recent years, the U.S. auto market is in a good position 54 to be successful in the near future taking into consideration export of U.S. auto market products, an open investment policy, a large consumer market and government incentives.
Despite the rise in gas prices, there was also growth in sales of cars in the 2 nd Quarter of 2012.
Analysis explains this situation by concurrence of a few factors: traditionally an increase in oil price coerces U.S. consumers, however temporarily, to switch to smaller cars. Another supporting factor is a current wide portfolio of those cars on the market, especially new models from Detroit along with Japanese Toyota and Honda automakers, back in the market after the devastating natural tsunami disaster, offering an extensive number of fuel-efficient cars, which all together might encourage customers to expedite their decision on a purchase.
Jesse Toprak an analyst of an auto research website states:
“The choices for fuel efficiency are so plentiful it’s harder for a consumer to walk away because of gas prices,” 55
Another factor which helps to explain the recent increase in car sales is the timing and the actual age of American vehicles. An average car or truck is more than 11 years old and needs replacement.
54 http://selectusa.commerce.gov/industry-snapshots/automotive-industry-united-states 55 TrueCar.com. auto research site 54
However, looking from a broad perspective, if Volkswagen wishes to fulfill its ambition and become world number one by 2018, then analysis of several experts concludes that China, India and Russia are crucial for its positioning. They are estimating sales in China exceeding 200 million units by 2020, with a further expectation this will be surpassed in India by 2050, and on top of that a real growth potential of the Russian market compared to much of Europe, where so far none of the international players has a dominant position. The conclusion is that these countries should be incorporated in the company strategy.
KPMG 56 conducted a Global Automotive Executive survey in 2012 and concluded that:
“overcapacity and excess production are unresolved issues, stating that:
57 • 42 per cent of selected respondents see the United States as the most overbuilt mature market which does not reflect reality followed by Germany and Japan
• 51 percent think China will be the most overbuilt BRIC market in 2016, followed by Brazil
• The global automotive market is predicted to be overbuilt by 20-30 percent by 2016.
• 75 percent expect mature and emerging markets to converge by 2025
• Estimated sales in the BRICs: 29-39 million vehicles in 2016
• 32 percent see China exporting 1 million vehicles or more by 2014” 58
56 KPMG- world’s leading provider of audit, tax and advisory 57 200 automotive executive participated in the survey, respondents come from all parts of the automotive value chain including vehicle manufactures, Tier 1,2 and 3 suppliers, dealers, and financial service providers 58 Source: KPMG 2012 Global Automotive Executive survey 55
The key issues for the next 15 years could be divided into three major areas: Environmental,
Urbanization and Change in a customer behavior.
Fuel efficiency and environmental friendliness are very often ranked as the top product issues.
The current trend focuses on expanding awareness of eco-friendly vehicles such as hybrids, lightweight vehicles or electro-mobiles. However building a hybrid car involves almost the same high-tech assembly lines and sometimes requires even more energy inputs.
According to Paula Moon 59 lightweight vehicles can sometimes be more energy-intensive to build than heavier cars because lighter metals like aluminum are harder to forge than stainless steel.
Experts from California Energy Commission estimate that 10-20 per cent of a vehicle’s total lifespan greenhouse emissions are released during the manufacturing stage. Stephen Williams 60 in his article for New York Times states that Toyota admits that production of lightweight
Toyota Prius consume more energy and release more carbon than a production of its gas-only models.
Another environmental concern is tied to rare earth metals such as lithium needed for hybrid batteries, which are essential for hybrids. Eliza Strickland 61 in her article for Discover
Magazine 62 argues that 99 per cent of world’s supply of those rare materials is being currently mined in China. So far China has been able to sell lithium arguably cheaply, mainly due to
59 P. Moon, Centre for Transportation Research, Argonne National Laboratory , Vehicle cycle energy and emission effect of conventional and advanced vehicles 60 Stephen Williams, The New York Time, Toyota Engineers Flowers to Offset Production Pollution 61 Eliza Strickland- editor at Discovery Magazine 62 Discovery Magazine-the magazine of science, technology and the future 56
monopolization of the Chinese industry and also largely due to the fact that China has been ignoring environmental safeguards during the mining process. The sustainability of this current situation should be taken into account while considering the future use of hybrid vehicles.
Volkswagen bet on China nearly 30 years ago, nowadays China is becoming the world’s biggest car market and Volkswagen has 18% of it. On the contrary, the weakest point, ironically with the biggest potential is still the Indian market. This situation however could be changed in the near future due to the favorable position of Skoda Auto, a part of the Volkswagen Group, in the
Indian market.
Skoda CEO Prof. Dr. Winfried Vahland said:
“SKODA is on track for growth worldwide. In our view, the largest potential is mainly in growth markets such as India, Russia and China. Our plans are definitely focussed on the Indian market. We are putting our gas foot down in India and are set to keep on raising our sales here.“
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9 Skoda Auto Privatization and the Volkswagen group
In 1991 Volkswagen group bought 30% of Skoda’s shares, and in 1999 acquired 100% ownership. Since then ŠKODA AUTO a.s. is a subsidiary included in the consolidation group of its ultimate parent company, VOLKSWAGEN AG, with a registered office in Wolfsburg, the
Federal Republic of Germany. 63 The Czech government paid to Skoda Plzen more than $8 million for the right for Volkswagen to use the company winged arrow logo, which they in 1993 updated with black, white and green colours, the first two referring to its long heritage and green showing the current concern for environmental issues.
Volkswagen initially planned to invest around $5 billion into modernization of Skoda Auto. The new owner brought western standards of efficiency and quality into Skoda’s plants, which had an immediate measurable effect on the company’s productivity within one year since the acquisition.
In the mid 1990’s more than 50% of cars were exported to Germany, more of which to the former Eastern part of the country. In 1996 sales rose by 25% on the global scale according to
Skoda’s annual report 64 , with its highest increases in central Europe, especially in Slovakia and
Poland, rising by an astonishing 90% and 102% respectively.
9.1 Financial turmoil in 2008 and Skoda
Skoda as a part of the Volkswagen group has managed to overcome difficult market conditions during the global financial crisis and moreover increased its sales by 1.4% in 2009 compare to
63 Skoda annual report 64 Skoda annual report 58
the previous year. German market sales rose by 44.3%, most likely due to a government scrap incentive package, while the Chinese market contributed by an astonishing 106.7% year to year increase including deliveries to China.
9.2 Skoda Auto today
Skoda’s major goal is to reach sales of 1.5 million vehicles annually by 2018. In 2011 the brand increased its shares in the Indian market by 1.3 per cent, which accounts for an increase in sales of 50 per cent to 30.005 units.
Skoda this year also successfully introduced a Skoda Rapid model, specially designed for an
Indian market, fully manufactured in Pune, India, where Skoda has had assembly plants since
2001. The brand had already launched models such as Fabia, Laura, Yeti, and Superb. Skoda is now trying to penetrate Indian’s market largest segment with its Rapid model, a spacious but still compact car.
Jürgen Stackmann, Skoda’s board member in charge of sales and marketing said:
“We are convinced that the new Rapid corresponds well to meet the customers’ needs in India, and the car will adopt a prominent role in its segment.”
The bet on the Rapid paid off since the car has been chosen as the “Family car of the year” by the respected car magazine “Top Gear India”.
59
10 Conclusion
To conclude, according to a global economic research conducted by Scotibank Economic 65 in
November 2012, North America is currently world’s number one in profitability per vehicle quoting:
” U.S. passenger vehicle sales remained healthy in October. Moreover, volumes are likely to strengthen above an annualized 15 million units in the final months of 2012 — the best performance since early 2008 — as households begins replacing many of the vehicles destroyed by Hurricane Sandy.”
The stabilization on the U.S. housing market which helped to ease household’s savings behaviour, therefore enhancing U.S. car sales, is just a short term episode. The U.S. market is programmed for large, heavy, sturdy transportation means. History proves that this aspect is deeply rooted, associated with geographical characteristics and general perception of status, lastly with the alarming trend in increasing size of U.S. population.
It is questionable if the continuously rising trend in price of gasoline could ever convince U.S. consumers to switch permanently to smaller energy efficient cars. Looking back to the U.S. car history, this switch has always been just temporary.
Despite the profitability of more than US $2.000 per car, the U.S. market has shown stagnation in an earnings growth per unit across the whole zone. In contrast, in Asia unit profitability has increased radically by 40% year on year, now reaching US $1.300 per vehicle.
65 Scotibank is a leading multinational financial services provider and Canada's most international bank. 60
A view of the current condition of the U.S. market for car makers can be taken considering the exit of Suzuki Motor Corp. after almost three decades of production, following SAAB
Automobile and Isuzu Motors Ltd in leaving the market, unable to make any profit.
In general, the preceding importance of the region of Northern America and Western Europe for a car market has been now surpassed by the current development in emerging markets.
Interestingly, within just one decade, car sales in BRIC countries have doubled the sales in
Western Europe, whereas ten years previously the same statistic showed the exact opposite. In detail, car producers are now making higher profit in BRIC countries regardless of the lower profit per unit than in western markets.
According to the Global Report 2012 66 , the five top auto makers are at present losing almost US
$1.000 for each vehicle sold in Western Europe. The striking fact is that this phenomenon has an upwards trend in comparison to a previous year where the average loss for each vehicle sold in a western market was “only” US $600.
Markets are converging faster than it might have been thought just a decade ago. Experts expect that emerging and mature markets will converge by 2025. For Volkswagen and its brands it is crucial to gain significant market share in emerging markets to secure its position.
Regardless of the recent revival in the U.S. car market, Volkswagen with the ambition to become the World’s number one car producer by 2018 should continue focusing on emerging markets along with shifting and building its vehicle production there.
66 Global report conducted by Scotibank released in November 2012 61
The strategy of manufacturing products such as Skoda’s recent Rapid, Yeti and Laura models, particularly customized for the Indian and Chinese and Russian markets, while Volkswagen’s other models designed for the U.S. market to maintain and improve the Volkswagen position there, are proving to be the right strategic move.
62
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