In order to strengthen Volkswagen’s market share in the US auto market, an in-depth analysis of the major competitors in the US automotive

manufacturing industry is required. “It is the goal of the Group to offer attractive, safe and environmentally sound vehicles which are competitive on an increasingly tough market and which set world standards in their respective classes” ( Volkswagen’s market focus is on its passenger cars, for this reason, passenger cars will be the main focus in this industry analysis. Changes and Trends in the Environment One notorious economic factor that is affecting the automotive industry has been the steady increase in the price of crude oil. Over the last five years there has been a 20.6% average annual increase in prices (IBISworld: Crude Oil). As a result gasoline prices increased 10% in the last year alone (IBISworld: Aluminum). Despite the increase in price of oil, demand is expected to jump over the next few years, thus further pushing prices upward (IBISworld: Crude Oil). This places pressure on the automotive industry to manufacture cars that run more efficiently with improved fuel economy. Demand within the auto industry is also expected to increase. This is due to a rise in disposal income, coupled with a decrease in the price of cars. The per capita disposable income shows an increase of 2.07% in the last year alone (see exhibit a). This expansion is due to strong economic growth and a falling unemployment rate (IBISworld: Disposable Income). Although, historically, auto prices have been on an upward trend since 1996, prices have been slowly trending downward. Increasing income levels, falling interest rates, more affordable cars entering the market, strong competition, competitive pricing, and strong economic growth for most of the 1990s, all contributed to the increasing affordability of autos (IBISworld: Vehicle Affordability). 1

According to the CIA fact book. mainly interchanging the two types. due to the nature of the raw material. The aluminum industry is fairly concentrated with four companies holding a majority of the market share. The largest company is Alcoa with a 15% market share (Datamonitor: Global Aluminum). around 50%. a firm will encounter high unavoidable costs. When substituting these materials. the leader holding only 6% (Datamonitor: Global Steel). additional research toward fuel cell autos and other alternative fuel sources have all affected the direction the automotive industry is heading. Substituting one raw material for the other increases costs because the two metals require 2 . The steel industry is somewhat broader with the four top companies possessing 20% of the market share. The Bush Administration has begun to take steps in adjusting regulation standards in order to reduce gasoline consumption. the US is the largest single admitter of carbon dioxide. An introduction of hybrids into the market. There are minimal substitutions for these materials. Their goal is to lower consumption by 20% in the next ten years (Sissel). There have also been increases in low carbon emissions technologies and higher fuel efficiency rates. This trend can also be seen in the auto industry. Within both the steel and aluminum industries there is little differentiation of inputs. these inputs are critical to the success of vehicle production. Five Forces Industry Analysis The Bargaining Power of Suppliers The two main components in the supply chain for auto manufacturing are steel and aluminum. Throughout the US there has been a trend toward incorporating environmentally productive actions into daily life. However.

Last. In addition. Buyer knowledge also plays a role in increasing power due to the growth of widely available vehicle information. the bargaining power of buyers is relatively low due to the high number of dealers in the industry. The wholesalers value their relationship with dealers because the latter can influence the marketing of the product. backward integration is not possible because it is illegal in the US for a car manufacturer to own a dealership. 3 . regardless of their value to wholesalers and increased knowledge. All of these elements increase the bargaining power of suppliers.different handling techniques (Datamonitor: Global Aluminum). Overall. This factor significantly decreases supplier bargaining power. this puts limitations on the potential bargaining power of buyers. Again. This results in a stronger bargaining position of the buyers. It is difficult for buyers to purchase perfect substitutes from different companies. Auto manufacturers hold 15% of the iron and steel market and 40% of the aluminum market (IBISworld: Aluminum). Overall. Dealers can purchase different products within the same segment. In the US. This limits ability of buyers to incite bidding competitions between suppliers. but supply of specific models is limited to the manufacturing company. The Bargaining Power of Buyers Buyers in the automotive industry are new car dealers. we conclude that the suppliers have moderately high bargaining power in the auto manufacturing industry. the auto industry holds a significant portion of this raw material market. the top four new car dealers hold only 6% of market share (IBISworld: Vehicle Wholesalers). Autos are highly related to the buyer’s success and extremely price sensitive.

Another factor is that automotive manufacturers are required to comply with increasing environmental regulations. requiring substantial investment in research and development. spending on R&D falls between $2 million and $4 million annually (see exhibit b). Public transportation can be more convenient than automobiles due to traffic constraints and/or limited parking. all of which are significantly lower in price. motorcycles and bicycles. Performance of these substitutes can be measured by convenience and reliability.Threat of Potential Entrants High barriers to entry discourage potential competitors from joining the automobile manufacturing industry. which in turn deters new entrants. so has the demand for automobiles. Switching costs of substitutes can be low but could pose inconveniences such as selling a car or other mode of transportation. while operations rely on high levels of capital investments. Threat of Substitute Products Some of the substitutes for automobiles include public transportation. Despite all of the benefits of substitutes. The industry continues to grow (2006 saw greatest revenue growth in nearly a decade). Even within a smaller competitor in the US market. In order to benefit from economies of scale there are elevated costs associated with developing high volume inventory. Motorcycles and bikes also offer this convenience due to increased maneuverability and their compact size. As usage of these substitutes has been increasing. Rivalry Among Existing Firms The automotive industry consists of fewer than ten major competitors. like Volkswagen. resulting in high fixed costs (IBISworld: Vehicle 4 . consumers continue to be loyal to the automotive industry. The combination of these factors results in a very low the threat of potential entrants. resulting in a very low category threat assessment.

forcing producers to compete largely on price. all of which increase rivalry among firms. Japanese models made up 35% of the total. they have lost almost 20% of the pie in the past decade. and threat of substitute products is low. the US auto market was led by the sale of light trucks. the bargaining power of suppliers. the Korean share has more than doubled. German brands carried 5.Wholesalers). Rivalry is increased again through low buyer switching costs. This means that producers continually compete for market share. which accounted for over half of the almost 16. SUV and light trucks saw a decline while cross utility vehicles (CUVs). Heavy investment in US factories by foreign firms has led to a closing of the market share gap. who controlled about 53. Exit costs and barriers are also high.6%. Overall Assessment In the automobile industry. threat of potential entrants.5 million passenger vehicles sold. all have announced company restructuring plans within the last two years. There is also little brand loyalty in the majority segments of the industry. Despite this increase. However. Existing Competitors In 2006.5% in 2006. In response to the sharp loss of profits from the Detroit 3. and rivalry is high in the automobile manufacturing industry. Korean 5 . with the Korean sector close behind at 4. and the Chrysler unit of Daimler-Chrysler). Ford. passenger cars and hybrid vehicles all rose in sales. These forces can be seen as opportunities for higher profits. The market share leaders in the US remain the Detroit 3 (GM. despite a slight drop from 2005. These threats are difficult to work around and reduce profits.6%. The major issues facing the industry are factors influencing the costs of raw material inputs and the economic environment. Supplier power is moderately high and rivalry among existing firms is high. In this century alone. This was the 7th consecutive year sales topped 16 million units.

Sales remain strong in the US in spite of these challenges. which presents an opportunity for 6 .000 vehicles in the US. which accounted for Industry Segmentation and Demand Issues The automobile industry is segmented primarily into four main categories. VW is still fighting for position in the US and they admit the market “remains fiercely competitive. while Japanese increased and German imports decreased (Road Ahead). Volkswagen.9% in the US (marketwatch. There are several outside sources that will have undetermined effects on the auto industry. the world’s largest single-nation car market. saw its 2006 sales increase 9. Overall sales in the automotive market declined slightly in 2006 and industry analysts are saying 2007 could signal another year of decline (Road Ahead). China (marketwatch. which were less than half their sales from smaller market. The largest segment of the market is midsize vehicles. both are becoming low-cost options for parts production as well as engineering services (Road Ahead).3% of US sales in 2006 (IBISworld: US Automobile Manufacturing).3% from the previous year. and of course. government (state and local) regulations. low-cost production in emerging markets. including: fuel prices. China and India-based automakers have shown interest in expanding their business into the United States. including 5.imports in 2006 were level. consumer tastes. midsize.” The company has their work cut out for them as they sold 330. German automaker. luxury and sport (see exhibit c). On the emerging market front. Each must still overcome quite a few barriers such as complying with US standards and safety requirements and meeting US consumers’ quality expectations. international standards and trade policies. However. Other analysts are predicting that 2007 will be the year that the Detroit 3’s market share falls under 50% (The Road Ahead).

Volkswagen sales have been partially limited in the US by maintenance and reliability issues. They own the largest share of this region at nearly 20%. their strong brand identity could help them gain more market share in the US if these problems can be mitigated and new customer segments reached. Internal Resources One of Volkswagen's main strengths lies in its presence in the Western European market. VW is also the market leader in Brazil (24%). They project a strong brand image of a distinctive.4% of the U. but has yet to take hold of a significant market share in the US. corporations and government. (IBISworld: US Automobile Manufacturing). fun to drive.3%) and Ford (10. VW held 1.Volkswagen to appeal to the shrinking market demand for domestic vehicles and increase their market share.1%) and South 7 . with a majority of sales coming from sedans (Datamonitor . Households make up about 63%. with the US government purchasing 10% of vehicles sold (see exhibit d).S. However. Marketing at VW is focused on younger generations. In 2006. The market for automobiles is segmented into three purchasing groups: households. Demand from this group tends to vary with economic fluctuations more than the corporate and government market segments. Through their image development they have managed to appeal to younger customers more so than many of their European competitors. The majority of discretionary vehicle purchases come from households. Argentina (27. surpassing the idea that European comfort is only for the wealthy. import vehicle. passenger car market. followed by French-based PSA (13.8%). The price range of Volkswagens is also more suited to younger individuals and families. Volkswagen is the leading car manufacturer in Western Europe. corporations represent about 27%.Volkswagen AG).

Volkswagen's glaring weakness resides in the United States. trailing General Motors. SUVs and pickups. In the light vehicle and passenger car category.1%). whereas Honda.5% respectively. Lamborghini. The flexibility of these plants is a major asset.4% of the US market. Another disadvantage of VW is their less-than-stellar profit margins. well behind their Japanese counterparts Honda (8%). Bentley and Bugatti. allowing them to produce products from multiple brands in one location. Golf and Jetta are also highly recognizable names among consumers. Their average margins for the 2002-06 periods stood at 2.7%. which includes high-end automotive names Audi. Toyota and Nissan were at 4. A global production network will help reduce costs while making it easier to respond to fluctuations in demand and dynamic market trends. In addition. Their market share in the US pales in comparison to their performance in the rest of the world. Net profit margins were also lower than the competition during the same period.9%. Volkswagen does business mainly in the sedan sector. Volkswagen stood at 1.Volkswagen AG). Within the US. This unimpressive figure brings their portion of the global market down to 9. Toyota and Ford. The VW brand also gains strength from its impressive portfolio. VW holds about 1. and Nissan (9.3%.1%). These impressive numbers help enhance the brand image while also bolstering confidence among investors. as mentioned earlier. the company had to recently recall some of their vehicles due to defective ignition coils. and is almost nonexistent in minivans. Toyota (9. and 4. This diverse group provides VW with stable revenues while presenting opportunities to move into new markets (Datamonitor .7%. These weak operating margins are due largely to high labor costs and operating inefficiencies (Datamonitor – VW AG).6%. 5. 8 . Specific Volkswagen models such as the Beetle. Volkswagen also operates 32 production plants across the globe.Africa (22%).

Daimler-Chrysler and Toyota. GM. showing that VW is indeed investing in producing new lines and improving existing ones (Company Report: VW AG).3). introducing the first mainstream hybrid vehicle in the US. Volkswagen could likely match the marketing budgets. After calculating these weighted factors. Research and development (R&D) spending also grew each year. they saw a 40% increase in spending over that time. The hybrid market in the US is extremely lucrative right now as sales have grown tremendously. These four competitors are Ford.2). with weighted importance included. ahead of only Hyundai. In order to determine what Volkswagen’s competitive advantage is. in the US auto manufacturer market we created a key success factor grid and rated VW and their top four competitors in the market. This grid used characteristics based on an industry company’s likely view of what is important for a successful firm to possess in their industry. Volkswagen did not separate itself from the pack in any category in the 9 . However. Each company was rated in each category on a 1-5 scale (5 being the highest).2).05). of their competitors by designating resources to a new hybrid division. The five success factors are. if any.000 units sold in May of 2007 (see exhibit e).Volkswagen ranked 7th in US media spending among major car companies in 2000 and 2001. Toyota was the clear leader in every category. with ratings based on research and basic company knowledge (see exhibit f). brand perception (. both monetarily and in breadth of scope. plant locations (. Each company ahead of VW has at least one hybrid model on the market in the US. marketing (. research and development (. 2001-2005. 13 North American factories.25) and overall product value (. peaking at 45. with high quality brand perception. and innovative marketing techniques used in their Scion line. This lack of marketing by VW and the high demand of hybrid vehicles suggest that the company is missing out on a very profitable opportunity in the industry.

25). it will require much more than a chic look to build VW’s US customer base. Opportunities in the Industry After a thorough review of the automobile industry. according the company. almost an entire point ahead of the nearest competitor. Their popular Prius has been on the market for ten years and has set the benchmark for future hybrid vehicles: 10 . Volkswagen. For example. These factors include. even though it was not the leader among their competitors. Once again.25).2). Toyota exceeded the one million mark for hybrid vehicle sales in 2007. Their success in Western Europe and the rest of the world clearly has not translated to the United States. quality of vehicles (. it is apparent that each company has its own lines of cars that fit a particular segment in the industry. Another success factor grid was done using characteristics that consumers (drivers) look for in a car company. though. Such a rich history in Europe is a major contributing factor to VW’s market share in the region. cost of ownership (. and style/look of vehicles (. vehicle safety (. while Chevy makes the Corvette that targets middle-aged men. along with their weighted value.US market. price of vehicles (. Toyota came out on top as the overall leader.25). once more. Obviously. giving them the opportunity to possibly gain ground in the US market with continued innovative designs. Volkswagen did rate high in overall style of their vehicles. passenger car prices and a small survey of car owners. What might not be as apparent is that Volkswagen is the last large automobile manufacturer that does not have a hybrid vehicle on the US market.05). Our ratings for each category were based on company safety ratings. was not able to separate itself as a clear leader in any category (see exhibit g). Honda makes the Odyssey that caters to soccer moms. Hybrid vehicles are becoming increasingly popular with the growing concern for the environment.

“Sales of Toyota hybrids climbed from just 18.mintel. As they are one of the last brands to utilize the popular Volkswagen can use their already formidable global market share and integrate hybrids to bolster their lagging US share. Developing a hybrid model is in Volkswagen’s best interest because consumers are changing their opinions on vehicle feature necessities. consumers are buying more efficient cars that fit their everyday needs.500 last year (’06). despite holding eight different brands under their corporation producing virtually every type of car imaginable. With ever increasing gas prices. 11 . in terms of customer base. VW will find themselves losing more and more ground with each passing year.000 in 1998 to 312. except for a hybrid. according to the company” (academic. Volkswagen is in the lower tier of car producers in the US. The future is alternative power and if Volkswagen does not join the revolution the company will be the left only crumbs as the hybrid pie is split up.