1

Volkswagen China Analysis

Team K

Ken Anderson Sascha Hümbeli

Brad Braddon René Nef

Michael Cutaia Elena Semeshina

Shanghai, March 29, 2006

Slide 2

Rochester Bern Executive M.B.A.

Team K

“It’s the journey, stupid.”

Slide 3

Rochester Bern Executive M.B.A.

Team K

Analytical Foundations

5 year Strategy

2000 – 2004Pre 2000 2005 2006 - 2011

Competitive Analysis through 2005

SWOT

Gap Analysis

Industry Growth

…post 2005

Slide 4

Rochester Bern Executive M.B.A.

Team K

Setting the stage – industry growth

Automobile Production 1980 – 2010, actual through ’04

• Command to Managed Market Economy

• Interplay of•Government institution•Foreign Investment & Technology•Regulations•Chinese culture•WTO

• Tremendous forward looking opportunity

Slide 5

Rochester Bern Executive M.B.A.

Team K

Competitive Analysis through 2005

Prior to the mid-1990:

- First mover advantage, insulated by SAIC relationship

- Cost-intensive operations, inefficient distribution channels, out-dated car

models 1990’s:

- High profit margins, continued by weakening insulation

- Gradual relaxation of barriers

- Buyers were primarily public organizations

- Many new entrants 2000-2005:

- VW’s first mover advantage is retaliated by competitive drawback

- Market share shrinks heavily, negative operating return

Slide 6

Rochester Bern Executive M.B.A.

Team K

Competitive Analysis post 2005

Internal rivalry:• Large foreign investments

leading to overcapacity• Elimination of the techno-

logy gap• WTO impact

Supplier Power:• Reduced tariffs

forcing suppliersto reduce costs

• VW‘s disadvantagedue to its verticalintegration withsingle sourcesuppliers ownedby SAIC

Buyer Power:• Market shift to

private individualbuyers looking fora good price-performance ratio

Threat of Substitution:• Imported cars from outside

China putting pricepressure on domesticmanufacturers

Threat of new entrants:• Chinese manufacturers

are learning quickly

Slide 7

Rochester Bern Executive M.B.A.

Team K

SWOT Analysis

Strength Strong brand presence due to first mover advantage Deep knowledge about the Chinese market Existing production facilities and capacity levels

Weak-nesses

Cost-intensive operations Inefficient distribution channels Out-dated car models, little flexibility for catering to local consumer

preferences Chinese operations are controlled at distance by its German

headquaters

Opportu-nities

Growth trend for passenger car demand Olympic Game as a marketing platform Cooperation with University Shanghai to explore hybrid technologies Elimination of barriers

Threats New entrants with cheap cars SAIC has won government permission to build its own brand Regulations remain strong Non-existent intellectual property protectionism

Slide 8

Rochester Bern Executive M.B.A.

Team K

Gap Analysis

CorporateStrategy

BusinessStrategy

Market Structure

Operational Activities

• Institutional to Institutional to consumer consumer demanddemand

• FAW vs. SAIC VWFAW vs. SAIC VW

• Strategic Strategic direction direction controlled at controlled at distancedistance

• Transferring best Transferring best practices – sales, practices – sales, service, financingservice, financing

• Brand / Brand / Technology Technology re-alignmentre-alignment

Slide 9

Rochester Bern Executive M.B.A.

Team K

Strategic AlternativesB

ran

d P

osi

tio

n

Volumesmall large

Premium

Low Cost

Mainstream

2. Alternative

RecommendedAlternative

Reliable German engineered high performance cars at an affordable prices.

Slide 10

Rochester Bern Executive M.B.A.

Team K

Implementation

Ensure that the product being offered matches the brand positioning Request high quality from domestic suppliers Offer imported and domestically produced cars within the same dealership, if

possible Increase the number of dealerships and train the staff in brand awareness

and best practices Enhance co-operation between the joint venture partners (e.g. sharing the

same parts, best practices) Share knowledge with joint venture partners Create flexible assembly processes to adapt quickly to market changes

Critical success factor: Winning back the hearts and minds of the

customers; Achieve the same positive image in China as in the rest of the

world

Slide 11

Rochester Bern Executive M.B.A.

Team K

End of Journey –

Discussion