Case Analysis:

Volkswagen Group
Bryan Pratt

Introduction
The modern Volkswagen Group, known in German as Volkswagen Aktiengesellschaft,
has grown from a single public automobile company in the 1930s to incorporate the Audi,
Bentley, Bugatti, Ducati, Lamborghini, MAN, Porsche, Scania, SEAT, Skoda, Volkswagen,
and Volkswagen Commercial Vehicles brands, selling motorcycles and passenger and
commercial vehicles. 1 With the Group’s Strategy 2018, Volkswagen is focused on
becoming “the global economic and environmental leader among automobile
manufacturers by 2018,” focusing on four goals:

- Volkswagen intends to deploy intelligent innovations and technologies to

become a world leader in customer satisfaction and quality. We see high
customer satisfaction as one of the key requirements for the Company's long-term
success.
- The goal is to generate unit sales of more than 10 million vehicles a year; in
particular, Volkswagen intends to capture an above-average share of growth in
the major growth markets.
- Volkswagen's aim is a long-term return on sales before tax of at least 8 percent so
as to ensure that the Group's solid financial position and ability to act are
guaranteed even in difficult market periods.
- Volkswagen aims to be the most attractive employer in the automotive industry
by 2018. To build the best vehicles, we need the best team in the sector; highly
qualified, fit and, above all, motivated.2

With Strategy 2018, Volkswagen has brought its values to the forefront – making itself “the
most successful, fascinating and sustainable automaker in the world” – and imposed an

1 This example case analysis draws heavily on the various pages of Volkswagen Group’s official
website. The majority of the information is contained within the company’s Annual Report 2014
website. The homepage can be found at the following address:
http://annualreport2014.volkswagenag.com/
2 Bullet points taken verbatim from: “Goals and Strategies.” Volkswagen Group Annual Report

2014. http://annualreport2014.volkswagenag.com/group-management-report/goals-and-
strategies.html
ambitious deadline of 2018 in its Annual Report 2014.3 Environmental considerations are
not simply a side note in the Volkswagen strategy; the very first sentence of Strategy 2018
discusses the environmentally-friendly orientation of their products. The Group is focused
on above-average performance in the near term and on setting up sustainable future
success through quality, innovation, customer satisfaction, and a high-quality and
motivated workforce. While managing cost and expenditures merit small mentions, the
company is focused on selectively expanding by appealing to customers with quality
products, rather than focusing on garnering market share through pricing strategies.
Furthermore, the strategy explicitly affirms that the specified measures to improve quality
and productivity must be taken regardless of macroeconomic circumstance. A final
noteworthy component of the strategy is the specificity of areas for improvement, such
as “standardizing processes in both the direct and indirect areas of the Group and
reducing production throughput times.”4

The Group builds on these specific, measurable, actionable, and time-oriented goals
with seven key performance indicators (KPIs), which include:

- Deliveries to customers,
- Sales revenue,
- Operating profit,
- Operating return on sales,
- Capex/sales revenue in the Automotive Division,
- Net cash flow in the Automotive Division, and
- Return on investment (ROI) in the Automotive Division.5

Analysis
Volkswagen Group faces a difficult, heavily competitive industry outlook, but it
approaches this situation as a strong company with diversified product lines and trusted
brands built over decades. The automobile industry is rebounding on a global level, with
heavy growth in China and recovering growth in North America.6 However, there are
several strong companies vying to capture this growth. Toyota has established a strong
presence globally, particularly with the combined reach of the Toyota and Lexus brands.
Furthermore, the Ford Motor Company, General Motors, and others have maintained

3 Ibid.
4 Ibid.
5 Bulleted points taken verbatim from: “Internal Management System and Key Performance

Indicators.” Volkswagen Group Annual Report 2014.

http://annualreport2014.volkswagenag.com/group-management-report/internal-management-
system-and-kpis.html
6 I am not citing actual documents because this is an example made on a short time constraint
solid positions. As many companies can attest, those carmakers that do not innovate
and excite ultimately relinquish market share and lose profits. With strong rivalry and
extensive spending on research and development, innovation and appealing to
customer desires are two key success factors for industry participants.

Two additional sources of competitive pressure are suppliers and consumers. Automobile
manufacturing requires a wide variety of precious and in-demand materials, from
computer components to copper wiring and rubber. Furthermore, a growing and
increasingly industrial world is creating heavier demands on metals, sand, and silica,
leading to rising prices. Suppliers of certain materials determine prices on the basis of
demand from many industries, leaving automobile manufacturers subject to forces in
unrelated markets. On the other end of the value chain, consumers are increasingly
demanding more fuel-efficient vehicles with more advanced features, even in low-price
segments. As has been the case throughout the history of automobile manufacturing,
features that were once a luxury are increasingly demanded – and offered – at even
some of the lowest price points. Bluetooth connectivity, wi-fi, high-definition radio, and
increasingly autonomous driving capabilities, such as the ability to parallel park without
driver intervention, are demanded and offered in otherwise basic models.

Fortunately, current manufacturers in the industry face relatively low pressure from the
possibility of new entrants and from substitutes. Automobile manufacturing requires large
upfront costs and typically absorbing years of substantial losses before earning profits.
While Tesla Motors has shown that driven companies can insert themselves, the
company’s history also underscores the difficulty of new entrants obtaining sizable market
shares. Relatedly, substitutes do not pose a substantial competitive threat, as most
substitutes are operated publicly. These include public bus transportation, light rail, and
commuter rail operations. For many, a car serves to transport them farther than they
might wish to travel by bicycle but shorter than they might travel by airplane, long-
distance bus, or long-distance rail. The automobile is also notorious for providing a
freedom not available with most of these substitutes.

Despite this generally difficult outlook, Volkswagen Group is well-positioned to take

advantage of the opportunities in the industry and not only mitigate but also benefit from
some of the industry threats. With a great opportunity emerging in China and other East
Asian markets, the Volkswagen and, in particular, Audi brands have emerged as
prominent market leaders in the region. Furthermore, Volkswagen has traditionally
offered fuel-efficient vehicles with notable dependability, and as a result, their strengths
pair well with the primary threats to industry profits. These include an increase in
environmental consciousness, tightening regulation, increasing urbanization, and the
dependability of cars already on the road. Volkswagen Group is based within the
European Union, where automobile regulations are the tightest worldwide, and it has
long championed the use of small engines paired with turbochargers and, in higher-end
vehicles, superchargers. This drivetrain package allows the group to manufacture cars
that achieve high performance, especially in terms of power and acceleration, while
consuming minimal fuel. Another strength for the Group may be that its brands span
essentially every price point, and one of those brands, Porsche, has helped initiate the
new age of hybrid supercars. Volkswagen has shown incredible flexibility and breadth.
However, a related weakness may be the Group’s minimal presence at lower price points.
While the flagship Volkswagen brand offers very affordable options, Volkswagen’s
vehicles have become increasingly expensive as they tout steadily higher quality vehicles.
The company has made moves to combine their most successful model in the United
States by some metrics, the Jetta, with another one of their successful models. These
moves seem to demonstrate a move away from affordability, as they collapse their
options at the low price range. This stands in sharp contrast to their marketing just a few
years ago, which touted the affordability of their cars as competitive with the most
inexpensive models available.

Plans for the Jetta aside, the company has achieved remarkable success. In 2014, it
achieved its target of delivering at least 10 million vehicles for the first time in its history.
Furthermore, earnings, dividends, and the stock price have all risen despite outlays for
takeovers that have not been fully finalized.
 Table 1: Cash Flow Statement by Division, Volkswagen Group

VOLKSWAGEN GROUP AUTOMOTIVE1 FINANCIAL SERVICES

€ million 2014 2013 2014 2013 2014 2013

Cash and cash equivalents at

beginning of period 22,009 17,794 19,285 14,788 2,724 3,005
Profit before tax 14,794 12,428 12,829 10,462 1,965 1,966
Income taxes paid -4,040 -3,107 -3,489 -2,622 -552 -486
Depreciation and amortization expense2 16,964 14,686 12,320 10,786 4,644 3,900
Change in pension provisions 148 179 137 168 12 11
Other noncash income/expense and
reclassifications3 -1,317 218 -1,631 -107 313 325
Gross cash flow 26,549 24,404 20,166 18,688 6,383 5,716
Change in working capital -15,764 -11,809 1,427 1,925 -17,191 -13,733
Change in inventories -2,214 -1,021 -2,111 -729 -103 -292
Change in receivables -1,433 -1,651 983 -1,163 -2,416 -489
Change in liabilities 4,764 2,363 3,228 2,118 1,536 245
Change in other provisions 413 2,300 514 2,241 -101 59
Change in lease assets
(excluding depreciation) -8,487 -7,112 -749 -465 -7,738 -6,647
Change in financial services
receivables -8,807 -6,688 -438 -77 -8,370 -6,611
Cash flows from operating activities 10,784 12,595 21,5934 20,6124 -10,809 -8,017
Cash flows from investing activities
attributable to operating activities -16,452 -14,936 -15,476 -16,199 -976 1,263
Net cash flow5 -5,668 -2,341 6,117 4,413 -11,784 -6,754
Change in investments in securities
and loans -2,647 -1,954 -1,694 -1,298 -953 -656
Cash flows from investing activities -19,099 -16,890 -17,170 -17,497 -1,928 607
Cash flows from financing activities 4,645 8,973 -7,945 1,734 12,590 7,239
Net change in cash and cash
equivalents -3,375 4,216 -3,275 4,497 -100 -281

Cash and cash equivalents at Dec. 316 18,634 22,009 16,010 19,285 2,624 2,724
Securities, loans and time deposits 18,893 17,177 11,424 9,515 7,468 7,661
Gross liquidity 37,527 39,186 27,435 28,800 10,092 10,386
Total third-party borrowings -133,980 -121,504 -9,795 -11,932 -124,184 -109,572
Net liquidity -96,453 -82,318 17,639 16,869 -114,092 -99,186
1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions.
2 Net of impairment reversals.
3 These relate mainly to the fair value measurement of financial instruments, application of the equity method and reclassification of gains/losses on
disposal of noncurrent assets to investing activities.
4 Before consolidation of intragroup transactions: €22,217 million (€21,270 million).
5 Net cash flow: cash flows from operating activities, net of cash flows from investing activities attributable to operating activities.
6 Cash and cash equivalents comprise cash at banks, checks, cash-in-hand and call deposits.
Source: Volkswagen Group Annual Report 20147

Table 2: Income Statement, Volkswagen Group

€ million Note 2014 2013*

Sales revenue 1 202,458 197,007

Cost of sales 2 -165,934 -161,407
Gross profit 36,524 35,600
Distribution expenses 3 -20,292 -19,655
Administrative expenses 4 -6,841 -6,888
Other operating income 5 10,298 9,956
Other operating expenses 6 -6,992 -7,343
Operating profit 12,697 11,671
Share of profits and losses of equity-accounted
investments 7 3,988 3,588
Finance costs 8 -2,658 -2,366
Other financial result 9 767 -465
Financial result 2,097 757
Profit before tax 14,794 12,428
Income tax income/expense 10 -3,726 -3,283
Current -3,632 -3,733
Deferred -94 449
Profit after tax 11,068 9,145
of which attributable to
Noncontrolling interests 84 52
Volkswagen AG hybrid capital investors 138 27
Volkswagen AG shareholders 10,847 9,066

Basic earnings per ordinary share in € 11 21.84 18.61

Diluted earnings per ordinary share in € 11 21.84 18.61
Basic earnings per preferred share in € 11 21.90 18.67
Diluted earnings per preferred share in € 11 21.90 18.67
* Earnings per share adjusted to reflect application of IAS 33.26.
Source: Volkswagen Group Annual Report 20148

7 “Financial Position.” Volkswagen Group Annual Report 2014.

http://annualreport2014.volkswagenag.com/group-management-report/financial-position.html
8 “Income Statement.” Volkswagen Group Annual Report 2014.
http://annualreport2014.volkswagenag.com/consolidated-financial-statements/income-
statement.html
Recommendations
The Volkswagen Group is in a solid position strategically and financially. The company
has achieved not only financial success but also strategic victories that set it up well for
future success. However, there are certain areas for concrete action to improve.

1. Re-engage with the low price point and re-establish a presence in the most
affordable segment of the passenger vehicle market. While coverage of the full
spectrum of price points has served the company well, there is a high demand for
affordable vehicles, and Volkswagen would benefit from leveraging its
experience with this segment to maintain a high market share at low price points.
2. Leverage research conducted under the Audi brand to increasingly bring driving
automation and other high-end technologies to other brands within the group.
The potential spillover effects from this vanguard technology in Audi could benefit
the Porsche business line, while Porsche could offer Lamborghini and other Group
members valuable high-performance hybrid technology.