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AUTOFACTS Global Automotive Outlook VW Group Strategic Analysis:

A Company in Transition

2002 Q1 Quarterly Executive Briefing

VW Group Strategic Summary


Forecast Summary for the VW Group VWs assembly growth will be smaller relative to its immediate competitors, but it will be focused on profitable segments of the market.

Benchmark Areas
Emerging markets
VWs emerging market strategy has brought positive results. From its assembly base in East Europe to its top position in China, VW is well placed for stable emerging market growth. Few mass-market VBEs can claim VWs level of premium pricing. This should continue as VW moves its brands upmarket and enters new profitable segments of the market, such as SUVs. VWs reputation for product quality, especially in West Europe, has allowed VW to gain market share both in and outside of Germany. Skodas growth can also be attributed to this reputation. VW is the industry benchmark in terms of platform-sharing. As other VBEs rush to catch up, VW will focus on product differentiation within a platform-sharing strategy, thus staying out front.

Issue Areas
Brand image
Years of platform and component sharing have helped to blur the distinction between the VW Groups four core brands. This has hampered Audi and Seats success in small cars.

Pricing Power

C-segment The C-segment has been VWs bread and butter in West Europe. However, its competition

Product quality

Luxury brands

Platform sharing

Germany

primary competitors in the region, Ford, PSA, Renault and others will all take market share from VW in this segment. VW has spent a great deal of time and resources in developing their luxury brands. This will be scaled back as these luxury brands are integrated into VWs new brand groupings. VWs ties with the German government will ensure that they remain tied to their ultra-expensive assembly base in Germany. This will hinder necessary reforms within VWs assembly structure.

VWs upmarket shift will continue across all of its brands. This will come at a price, as VWs loses share in relation to its competitors. However, few VBEs can match VWs theoretical potential for profitability over the next decade.
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2002 PricewaterhouseCoopers LLP. All rights reserved. 2002 Q1 Release Data.

News: VWs Brand Restructuring


One of the first changes introduced by Chairman-elect Pischetrieder was a drastic reorganisation of VWs brands into two distinct groupings. The Classic brand group includes:

Volkswagen Skoda Bentley Bugatti

The Sporty brand group includes:


Audi Seat Lamborghini

This reorganisation will allow VWs brands to better attain the market images they have sought to create for each individual brand

Witness Seat which has been hampered in its quest to become the Spanish Alfa Romeo by its close relationship with Volkswagen and Skoda

2002 PricewaterhouseCoopers LLP. All rights reserved. 2002 Q1 Release Data.

VW Group Global Competitive Context

VW: Global Competitive Context


Global Light Vehicle Assembly
GM Group Ford Group Toyota Group DCX Group Renault-Nissan VW Group PSAGroup Honda Group Hyundai Group BMW Group
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000

The VW Group will be the smallest of the G6 by 2009 VW is looking to steady, profitable growth in emerging markets VW is consolidating its leading position in West Europe

2001

2009

all this will help ensure that VW remains one of the most profitable VBEs in the world

VWs size makes it a potential take-over target of one of the larger VBEs The Niedersachsen government (a 20% shareholder in VW) gives VW a degree of security against a takeover bid

Units (000)

VW remains committed to achieving profitable sales growth in North America and West Europe while increasing assembly in emerging markets.
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However, the European Union is considering legislation to outlaw these types of poison pills in the future

For a VBE looking to strengthen its long-term position in Europe, there is no more attractive target than VW

2002 PricewaterhouseCoopers LLP. All rights reserved. 2002 Q1 Release Data.

VW Group Structural Overview


VW Group Global Light Vehicle Assembly & Capacity
8 90%

VW Group Assembly Volume and Share of Global Assembly


6.00 11%

85%

10%

Units (millions)

Millions of Units

Excess Capacity

80%

4.00

9%
% Share

5
Utilization Rate

75%

8%

70%

2.00

7%

Capacity Assembly Utilization

65%

Assembly Assembly Share

6%

60%

0.00
1990 1993 1996 1999 2002 2005 2008

5%

1990

1992

1994

1996

1998

2000

2002

2004

2006

VW will improve their asset utilization through a small-scale rationalization in assembly facilities. What capacity expansion is undertaken will occur in areas where VW is already operating at near full capacity, such as Central Europe.
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2008

2002 PricewaterhouseCoopers LLP. All rights reserved. 2002 Q1 Release Data.

VW Group: Globalisation Strategy

VW Group Globalisation Strategy


West Europe VW is aggressively gaining market share in West Europes main markets outside of Germany

Skoda and Seat are seen as key competitors for brands such as Peugeot, Renault and Fiat in France, Spain, Italy and the UK

East Europe VW will finally be tempted by the riskier markets of Russia and Ukraine

Central Europe, however, will remain a key facet of the groups European assembly plans

North America VW will continue to seek profitable growth through Audi and VW products such as the new Tuareg SUV South America The Seat brand will play an key role in VWs regional growth strategy Asia-Pacific VW will continue to focus on China

Their flirtation with India will remain little more than that over the near term.
2002 PricewaterhouseCoopers LLP. All rights reserved. 2002 Q1 Release Data.

VW Group Share by Region, 1990-2009


Share of Region Assembly
30%

Volume and Share Change


Share Points
-0.1 -0.05 0 0.05 0.1 0.15 0.2

25%

2009 1990

AP EE MEA NA

20%

15%

10%

SA
5%

Volume Change Share Change

WE
0%

-500
WE SA NA MEA EE AP

-250

250

500

750

1000

Units (000)

Since acquiring Skoda in 1991, VW has focused on East Europe as a centre of assembly for exports to West Europe.

2002 PricewaterhouseCoopers LLP. All rights reserved. 2002 Q1 Release Data.

VW Group: Brand/Partner Strategies

VW Group Brand Relationship Map

VW VBE
Brand Type: Low-Cost Mass-Market
900 800 700 5000
Units (000) Units (000)

20

Upscale

Luxury
N/A

600 500 400 300 200

0 2001 2008

= Primary target market for brand = Secondary target market


4000
Units (000)

Image, Pricing Power

600 3000 2000 500 400 300 200 100 0 2001 200 100 0 2001 2009 2009

Bugatti/Bentley/ Lamborghini
2001 2009

100 0

Units (000)

600 500 400 300

1000

Audi
2001 2009

Units (000)

VW SEAT
VW has a plethora of upmarket brands in the shape of Bugatti, Bentley and Lamborghini
All appeal to different market segments

Skoda

Having the brands in the stable intended to help VW in its strategy to increase pricing power for each of its mainstream brands
2002 PricewaterhouseCoopers LLP. All rights reserved. 2002 Q1 Release Data.

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VW Group Performance by Brand


Market Competitiveness 2001-2008
16%

The Volkswagen brand is still the prime driver within the group Despite all of the attention given to VWs other brands, it is the Volkswagen brand itself which will remain the primary driver of growth within the group Seat will likely rebound from a couple of poor years which a renewed focus on developing the brands image

Volkswagen
12%

Seat
8%
Change %

4% 0%

Skoda

plus, Seat will be used as a key brand in Latin America

Audi
-4% -8% -50%

Skodas growth will taper off as Skodas product portfolio is now full

In addition, Skodas upmarket push could drive away customers in its traditional Central European markets Audis comeback is complete and new near-luxury entrants have identified it as the turnaround benchmark

0%

50%

100%

150%

Audis total assembly figures will stagnate

Contribution to Growth

The Volkswagen brands global presence and expanding product line allow it to remain the dominant force within the VW Group

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2002 PricewaterhouseCoopers LLP. All rights reserved. 2002 Q1 Release Data.

VW Group: Economies of Scale Strategy

VW High Volume Platform Snapshot


HVPs in 2001
10

2001

Millions of Units

VW is the leading proponent of the high volume platform strategy


VW

A4

B5

5
GM Toyota Renault DCX Ford Honda PSA

0 0%

VW has one of the industries most coordinated multibrand strategies


100%

AO3

Assembly Excess Capacity

50%
% of Total Capacity

10

2009
GM

5
Toyota Honda DCX

Ford

VW

Renault PSA

0 0% 50%
% of Total Capacity

11 key modules is a well-developed platform strategy by any other name - separation into A5 Sporty and Classic key tool in argument AO4 against cannibalisation and the next stage in B5 VWs competitive advantage

1,000

2,000

3,000

Units (000)

HVPs in 2009

Millions of Units

Assembly Excess Capacity

100%

1000

2000

3000

Units (000)

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2002 PricewaterhouseCoopers LLP. All rights reserved. 2002 Q1 Release Data.

VW Portfolio Performance High-Volume Platforms

Flexibility
High-Volume Platforms, 2009
12
3

Effectiveness
High-Volume Platforms, 2009
Millions of Units of Capacity
A5

Number of Bodystyle Variants

A5 AO4 9 B5

1.5

AO4

B5

6 4 7 Number of Nameplates 10

0 60%

80% Utilization Rate

100%

VWs global strategy of using three main platforms for the majority of their assembly volume will continue. The only deviations will continue to be for niche products and older models for emerging markets.
2002 PricewaterhouseCoopers LLP. All rights reserved. 2002 Q1 Release Data.

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VW Use of High-Volume Engine Families -- Competitive State


2001 VWs Use of High-Volume Engine Families
10
VW was the early adopter of this strategy
GM Millions of Units

2009 VBE Use of High-Volume Engine Families


10
Another diminishing structural competitive advantage for VW
GM

Millions of Units

Ford Toyota VW Renault PSA Honda

5
Toyota Ford DCX Honda

VW PSA

5
DCX

Renault BMW

0 50%
Installation Rate

BMW

0%

100%

0%

50%
Installation Rate

100%

VWs engine strategy is as simplified as its platform strategy: EA111 (82mm bore centre 3- and 4-cylinder gasoline engines), EA827/113 (88mm bore centre 4-, 6- and 8-cylinder gas engines), VR (65mm bore centre 4-, 5-, 6-, 8, 12 and 16-cylinder gas engines) and the EA086/188 diesel engines

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2002 PricewaterhouseCoopers LLP. All rights reserved. 2002 Q1 Release Data.

VW Group: Product Strategies

VW Portfolio Analysis -- Volume and Growth by Segment


Segment Share of Assembly, 20012009 Average
100 90 80 70

VW Assembly by Segment 1990-2009


100% 75% 50% 25% 0% 1990

% output

60 50 40 30 20 10

1992

1994

1996

1998

2000

Car
0

SUV

Van

Pickup

Car

Van
VBE

SUV
Industry

Pickup

VWs reliance on West Europe is highlighted by their dependence upon car assembly. As VW expands in Asia and the Americas, this will change, albeit slowly, as seen in Volkswagens upcoming SUV.
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2002 PricewaterhouseCoopers LLP. All rights reserved. 2002 Q1 Release Data.

VW Portfolio Analysis -- Volume and Growth by Segment


Segment Share of Assembly, 20012009 Average
45 40 35 30

VW Assembly by Segment 1990-2009


100%

75%

% output

25

50%
20 15 10 5 0

25%

1990

1992

1994

1996

1998

2000

2002

2004

2006

A/B

C
VW

C/D
Industry

D/E

A/B

C/D

D/E

Others

Again, VWs reliance on West Europe is highlighted in the pre-eminent position of Band C-segment vehicles. However, they will, for the most part, avoid the unprofitable A- and A/B-segments as their brands attempt to shift upmarket.
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2002 PricewaterhouseCoopers LLP. All rights reserved. 2002 Q1 Release Data.

2008

0%

VW Group Product Map, 2005


A5 Platform AO4 Platform B5 Platform Other Platforms

A-A/B B-B/C C C/D D-D/E E


A3 A2 Polo

Lupo

Arosa

Gol

Ibiza

Tango

1,264,112
TT Golf New Beetle Leon Cordoba Fabia

2,760,448
A4 Bora Jetta Toledo Octavia

1,118,480
A6 Passat Tuareg Superb

116,768
A8 Phaeton

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2002 PricewaterhouseCoopers LLP. All rights reserved. 2002 Q1 Release Data.

Lessons Learned: The VW Groups Emerging Markets Strategy as a Benchmark

VW - The Automotive Worlds Leader in Utilising Emerging Markets

VW will continue to expand their presence in East Europe, hoping to lessen their dependence on German labour

VWs use of Mexico as an assembly centre for the affluent North American market emulates their strategy in East Europe

Thus far, VW has only set up major build where you sell facilities in two emerging markets, China and Brazil. Russia looks to be next.
2002 PricewaterhouseCoopers LLP. All rights reserved. 2002 Q1 Release Data.

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VW - The Automotive Worlds Leader in Avoiding Recent Troubles in Emerging Markets


VW has avoided the on-again/offagain joint venture negotiations which most other major VMs have suffered through in Russia. Only now are they exploring possibilities for a Russian assembly plant

In Asia, VW has avoided the troubles of the past five years by focusing their activities on highgrowth China

VWs focus on Brazil in South America has helped them to avoid most of the troubles in Argentina in late 2001

In the Middle East and Africa region, VW has focused their efforts on establishing South Africa as a centre of export assembly to West Europe

VW has shown foresight and constraint in their emerging markets strategy over the past decade. By focusing on low-risk markets with either a probable market expansion or a high export potential, VW is well positioned to avoid future shocks.
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2002 PricewaterhouseCoopers LLP. All rights reserved. 2002 Q1 Release Data.

Key Takeaways

Key Takeaways

VBE Name Key Success Factors


Brand Brand Management Management
VWs VWs reorganisation reorganisation of of their their brand brand structure structure highlights highlights the the precarious situation they face precarious situation they face in in differentiating differentiating their their core core brands brands

How to Compete with VW


Brand Brand Image Image
VWs VWs brands brands risk risk a a blurring blurring of of differentiation differentiation between between them them Exploit Exploit the the brands brands in in your your portfolio with real weight portfolio with real weight

Key Supplier Opportunities


HVPs HVPs and and Modular Modular Assembly Assembly
VW VW has has been been an an industry industry leader in this field leader in this field Nearly Nearly 80% 80% of of VWs VWs vehicles vehicles will will come come off off of of its three main platforms its three main platforms VWs VWs modular modular assembly assembly strategy is designed strategy is designed to to share share eleven eleven components components across across most most products products

Upmarket Upmarket Push Push


VW VW proposes proposes to to move move not not one, one, but but three three core core brands brands upmarket upmarket in in the the coming coming years years while maintaining while maintaining Audis Audis current current position position

Before Before pseudo pseudo Alfa Alfa Romeo Romeo succeeds succeeds

Pricing Pricing
Weak Weak at at bottom bottom end end as as Skoda Skoda moves up moves up

Labour Labour Flexibility Flexibility


VWs VWs leading leading shareholder, shareholder, the the government of Niedersachsen, government of Niedersachsen, makes makes it it difficult difficult for for VW VW management management to to enact enact necessary necessary assembly assembly reforms reforms

Product Product
VW VW slow slow to to react react to to any any developing niches. developing niches.

Key Key Lesson Lesson


Despite Despite plethora plethora of of me-too me-too VW-like VW-like products products in in West West Europe in recent years Europe in recent years only only one one company company has has really really succeeded, succeeded, thats thats Skoda. Skoda. Recent success stories Recent success stories have have been been Peugeot Peugeot and and Citroen Citroen -simply simply right right price price and and the the right right product, product, with with interiors interiors that that are are functional functional and and utilitarian utilitarian

Expansion Expansion into into nonnonEuropean European markets markets


VW VW is is counting counting on on significant significant growth growth in in North North America, America, Brazil Brazil and China throughout this and China throughout this decade decade VW VW is is exploring exploring sites sites in in Russia, Russia, Ukraine, Ukraine, India, India, US US and and Mexico Mexico

too too much much of of VWs VWs assembly assembly is is tied tied to to the the expensive expensive and and inflexible inflexible German German labour labour market market

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2002 PricewaterhouseCoopers LLP. All rights reserved. 2002 Q1 Release Data.