It hasn't been an excellent year
for the Volkswagen Group. Sales have either dropped or stayed stagnant,
forcing the carmaker to drastically rethink its car making ways, says
Nargess Shahmanesh-Banks.
The spring of 2004 saw the launch of what company chiefs termed
as 'ForMotion', a performance improvement programme aimed at maintaining
VAG's position as number-one in Europe. The programme's aim is to boost
earnings by at least €3 bn ($3.6 bn) by 2005 involving all the brands
within the family as well as the manufacturing facilities that cater for
the Group's existence. The focus primarily was and is to achieve sustainable
cost cuts, reducing capital investment and enhancing efficiency in sales.
In short, ForMotion aims to be tough on all projects, past and present.
VAG will continue
to hit all markets from the cheapest brand Skoda and its utilitarian
Fabia right the way to the high end Bentley Continental GT |
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VAG boss, Dr. Bernd Pischetsrieder, speaking at the annual general meeting
in April stressed that ForMotion is not only cost saving programme. "Our
goals are to increase revenue and earnings, cut costs and further reduce
tied-up capital in the Group," he said. The target by the end of
this year is to gain a further savings potential of €1 bn ($1.2 bn)
increasing to a further €2 bn ($2.5 bn) stated by the end of 2005.
The company interim report for the first-half of 2004 confirms that so
far the programme has been running on schedule. It suggests that potential
earnings improvements amounting to around 75 per cent of the target for
2005 have been identified and almost half of the measures to be undertaken
have also been decided upon. The carmaker boasts that the effects of ForMotion
have been so grand that it has contributed to over €400 mn ($492
mn) to the 2004 first-half earnings, and that by January this sum is expected
to reach the set target of €1 bn ($1.2 bn).
"In order to win market share we must continue to offer competitive
prices," said the VAG boss. "If competitors lower the prices
of their vehicles we have to respond even if we could still continue to
position our comparatively more valuable vehicles at a higher price level.
That means we must lower our product costs," he said firmly at the
meeting.
The mathematics is simple. Reduce manufacturing costs in order to achieve
target low prices. One solution is to further evolve the current platform
strategy into a modular strategy that encourages the sharing of modules
and technology across the group. "Improved development and planning
processes will reduce start-up costs further, releasing resources allowing
us to achieve consistently high segment shares in increasingly differentiated
markets," argued Pischetsrieder. These two approaches -- to cut product
costs and lower one-off expenditure -- are key components to ForMotion.
Diminishing sales
Altogether sales picked up remarkably in the second quarter of the year
with VAG worldwide deliveries to its customers witnessing an increase
in the first six months of 2004 by 1.7 per cent to 2,519,068 vehicles.
In Europe, vehicle deliveries were up 2.3 per cent in the first-half of
2004, compared to the previous year, though the German market suffered
with a decline of 1.3 per cent. Overall though, VAG delivered 0.5 per
cent more vehicles to customers, retaining its lead over competitor PSA
Peugeot Citroën in Europe.
VAG had a weak start in its American market in the first-half of 2004.
Deliveries of the Group's vehicles came to 280,304 units, down by as much
as 8.6 per cent against the same period the previous year.
While models like the Touareg, Phaeton and Audi A8 met with an excellent
reception from the US market, sales of the volume models Jetta and Passat,
both of which are in the final year of their model life cycle, fell sharply.
Both models will be replaced by a new generation during 2005. The problem
there is that US competitors grant discounts of up to $4,500 per (€3,600)
per vehicle. VW's policy, however, is not to preserve market share at
any price.
In Canada too deliveries were down by 19.3 per cent, whereas in Mexico
there was a rise of 5.7 per cent in new car registration. Following the
recession in recent years, the Brazilian economy has finally picked-up,
reflecting in an increase in VAG car deliveries by 12.4 per cent. Asia
Pacific saw a decline with a total of only 323,699 vehicles delivered
to the region in the first-half of 2004, down 4 per cent from the previous
year.
Forward planning
According to the CEO, the main goal of VAG is to hold a top position in
all relevant vehicle segments, from the value-for-money entry level models
right the way through to the premium segment. The aspiration for the VW
brand itself is to successfully defend its price position relative to
competitors despite tougher price competition, as well as to play an influential
role as a full-range supplier in all segments. Plans to produce an executive
saloon that bridges the gap between the Passat and the luxury Phaeton
model have been frozen. Insiders within the Group had said that a new
model called the Sfero would take the shape of a crossover between an
estate and SUV. However, with VW needing to cut expenditure, it now seems
that such a development is at least five-years away.
VAG acknowledges that the premium segment in which the Audi brand is positioned
is not as hard hit by economic conditions and price battles. Pischetsrieder
spoke of Audi's new design language and said that he is convinced it will
strengthen its competitive position in this key segment with the vehicle.
The price position of the Spanish arm, Seat, will move up slightly with
the new models whereas the Skoda brand with its high utility value will
remain an attractive alternative in the lower price range.
Holding onto old markets
For the next ten years, China will be the world's strongest growth market
– the total market will increase from 2 million vehicles in 2003
to more than 7 million in 2013. Pischetsrieder said that VAG aims to gain
systematic re-investment of profits in the country and to focus expansion
of expertise. For this reason it has restructured its business there,
whereby in the future all VAG operations will be managed by Volkswagen
Group China, based in Beijing. The aim is to concentrate on expansion
and modernisation of the joint venture companies' locally produced model
range and to further exploit potential for cost cuts through these joint
ventures.
To guard against surplus capacity and yet still participate in this enormous
growth, VAG has opted for moderate capacity expansion. Within the next
five years, it will double sales volumes from the 700,000 units that it
sold in 2003 to a 1,678,000 target for 2008, with the goal of maintaining
a market share of approximately 30 per cent. Investment will be exclusively
generated from the cash flow of the joint ventures. Based on the present
exchange rate, investment amounts to some €5.3 bn ($6.5 bn) and is
targeted, taking its orientation from market developments and testifying
to our clear growth strategy.
VW celebrated its 20th anniversary in China this year. "Our early
presence on the Chinese market is paying off," boasted Pischetsrieder
said at the annual general meeting. However
The vast land is imposing an interesting dilemma for the VW Group, particularly
Audi. A year or so ago the carmaker boasted loudly of its long history
there, yet now it faces a new challenge as 'newer' luxury marques enter
the market. The problem with the Chinese customer is that they are hungry
for brand new objects, in fact the newer the better. Audi has not lost
its prestigious hold, but what has ironically happened is that because
it had been to a degree available to governmental officials and the few
rich in the past, it has simply lost its virginity, its allure.
The Chinese have just begun getting mobilised. The ones who save and borrow
to purchase a car want one that represents something profound. "They
want something that looks good and prestigious, even if it isn't,"
says head of design management at Audi, Martin Ertl. "The young successful
group are heavily influenced by the US as most of these guys studied there,"
he says. They have a picture in their head of what constitutes a prestigious
car and this is often based on American values that are then imported
backwards into China.
Ertl points out that the Chinese society has been isolated for a long
time so that they were not able to develop their own taste in many ways.
They missed the rock & role 50s, the psychedelic 60s, they haven't
even have the Miami Vice style 80s or even the 90s, so right now they
are much more brand oriented than design oriented. "They are looking
at certain brands and making associations like this," says Ertl.
People see the VW Group as a good brand which gives it a head start, but
the downside to this is that the Chinese want what they couldn't have
had up till now, like BMW and Mercedes-Benz models, admits the design
manager. "There is a place in Shanghai called plaza 66. The cheapest
store there is Hugo Boss. They only have flagship stores for the likes
of Versace and Gucci's, with complete seasonal fashion in there. It is
incredible," he says smiling.
Other 'Asian' ventures include talks with the Malaysian carmaker Proton
to form a strategic partnership that could give VAG a foothold in the
region's fast-growing car market. It would also give the German carmaker
access to Proton's extensive production capacity which could be used to
make cars for sale in the 10 member countries of the Association of Southeast
Asian Nations (ASEAN) - Indonesia, Malaysia, Thailand, Singapore, the
Philippines, Brunei, Cambodia, Laos, Vietnam, and Myanmar (Burma).
The creation of the ASEAN free trade area (AFTA) next year, which has
a combined passenger car market estimated at more than 800,000 units a
year, will see sharp cuts on tariffs on cars and components for vehicles
built in the region. VAG currently lags far behind Japanese, South Korean
and European competitors in the area.
It seems as though Europe's number-one car group has its ears to the ground
and fingers on the pulse. If ForMotion goes according to plan then there
are hopes for keeping its position stable not only in Europe, but worldwide.
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