The budget for the IT initiatives was developed by the parent company. The branch in operation in the US had made a proposal for a total of forty projects which at estimation would require up amount to a tune of $210 million.
It was anticipated that the finances could be provided by the mother company in Germany. A mechanism was put in place and before the funds were released they had to be approved first.
This approving led some of the projects dropped and probably modification made to some. The process of approving which projects were to be dropped, modified and finally funded was quite detailed and involved a number of offices and several representatives from the various project units (Austin, Ritchie & Garrett, 2007).
Control of Budgeting
It is worth noting that the Next Round of Growth (NRG) was controlled by executive officers and representatives from the IT departments. The NRG was required to steer the VWoA to the next level of growth hence the need for close cooperation with various departments.
The presence of an IT representation in the NRG program was meant to assist in ensuring that the IT initiatives were accorded all the necessary support and that significant initiatives were not dropped unnecessarily. There was also the Program Management Office (PMO) which was meant to harmonize the projects and ensure that the prioritization was done in the correct way.
This was very significant as it was a step to ensure that funds were allocated in the right way and to the right projects such that the object of the NRG program could be achieved. Another element that played a significant role on the issue of funding was the Digital Business Council (DBC).
The DBC had representation from the various e-business units. In regard to who controlled the financing of the VWoA, it is clear that a number of people played significant roles in controlling process. All the teams that were involved had significant roles that they played in the funding process.
Who should control the Budget?
I believe that a corporate budget should take into consideration all the units within the corporate body. One way of ensuring that all the units are considered carefully is to carefully make a representation of all the units in the team that will oversee the drawing of the budget.
By having all the units represented in the budgetary control committee or team, it is possible to avoid overlooking aspects which may undermine the productivity of the company. It is worth noting that in times of financial constraints it will be very significance to have the representation of the various departments as it will be possible to practically come up with the lowest amount that a business unit can operate with.
The department unit representative will give the lowest budget estimation under which the department or unit being represented can operate without necessarily affecting the productivity of the whole firm. I believe that such estimations are very good especially during financial hard times when reductions in budget has to be carried out.
By consulting the various heads, it becomes possible for the reduction to be carried out in a manner that will not affect the business units as well as the whole company in general. Therefore, budget control should not be a reserve of the top executives but rather an activity that should be shared by the various heads of a company. Similar ideas have been proposed elsewhere (Blocher, 2005).
IT Budget
As pointed above, there is a need for collaboration when budgetary issues are discussed. In regard to that, it therefore will not be wise that the IT unit should have its own budget per se.
The IT unit should make its own estimation which at all times should be in line with the company objectives but again it should be noted that these estimation should be subjected to modifications under the directions of the IT unit heads in collaboration with the head departments (Budgeting, 2011).
References
Austin, R. D., Ritchie, W., & Garrett, G. (2007). Managing IT priorities. USA: Harvard Business School.
Blocher, E. (2005). Cost management: a strategic emphasis. New York, NY: Prentice Hall.
The Sustainable Competitive Advantage of Volkswagen
Rugraff (1) stated that the global automobile industry has been suffering from unsteady competitive advantage for the last three decades due to changing the choice of the customers, market rivalry, outsourcing technological development, a new division of labor and increasing oligopolies nature of global component suppliers that generated new business opportunity and welcomed new entries.
As a result, the automobile industry players looked for their competitive advantages on environmentally friendly technology and their internationalization through intensive investment in abroad while Volkswagen explored its competitive advantages through its expansion in the emerging market with 53% foreign employment and 76% of its revenue generated from foreign sales.
According to the Volkswagen Group (7) the companys green mobility, eco-friendly production processes, continuous effort to develop resource efficiency, 62 production facilities all over the world, characteristic global labor relations including its brand image and prolonged culture have provided the company with stability and a clear competitive advantage than its competitors.
The company added that the appropriate utilization of competitive advantages provided the company huge opportunity to uphold its ecological principles, brand image, introduction of attractive vehicle models with low emissions targets, strong position in the global market, low fuel consumption, responds to the customers needs, and to fulfill the cost target of the regional customers.
Das Auto (3) added that German-engineering, strong resale values, fuel-efficiency safety, clean technology, carefree maintenance program covered by the total cost of ownership have generated further competitive advantages that provided the customer excellence, operational excellence for all brands, product-excellence with a variety of models, location excellence through local distributors and the customers identified it as a symbol of their dignity.
Growth Strategies of Volkswagen
Volkswagen Group (11) added that its growth strategy has based on gorgeous vehicles that plead the customers all over the world meeting different regional requirements linked with their cost targets through it innovation, quick implication, and improved efficiency with huge brands that facilitated the company at an unparalleled position in the global market.
Here the paper analyzed its growth strategies.
Market Penetration Strategy
Wen (52) pointed out that the market penetration strategy of Volkswagen Group has organized with three different modes, such as, Acquisition and Greenfield, Joint Ventures & Strategic Alliances with the local companies and Foreign Direct Investment in the emerging markets and the company has long evidence to practice all three strategies where they feel appropriate.
At present, the company holds at least seven famous brands and all of the brands have experienced successful acquisition Volkswagen starting from 1964 to 1998, later on, the company has taken cautious measures for further investment and condensed its acquisition activities shifting to the foreign direct investment and strategic alliances through the joint venture.
Market Development Strategy
The Times of India (1) reported that the global giant of Automobile manufacturers Volkswagen is a multinational carmaker in Europe has aimed to turn itself at the top of all automaker by 2018, through its market development strategy to address such challenges.
The marketing team of Volkswagen has focused on the further innovative approach of market development through communications and advertising to all prospective markets.
For instance, Volkswagen in India has introduced itself as a landmark automaker by its digitalized marketing campaign and introduced first talking newspaper using light-sensitive chips, while the readers turned the pages of the newspaper that readers regarding the products of Volkswagen, such digitalization has provided the company huge brand awareness measured at 38% to connect with customers.
Product Development Strategy
The Alternative Mobility Department of the Volkswagen Group has engaged to develop the conceptual framework for strategic product development keeping its close observation to the international and regional market integrating with new technologies, research, market trend and competitors analysis that brings future success by meeting customers demand while the product diversification strategy acts as an integral part of this strategy.
Works Cited
Das Auto. Volkswagen of America Corporate Fleet Sales. 2010. Web.
Rugraff, Eric. The new competitive advantage of automobile manufacturers. 2011. Web.
The Times of India. Marketing Solutions: Volkswagen India Case Study. 2011. Web.
One of the most scandalous incidents in 2015 was the Volkswagen emissions case. In September 2015, it was revealed that the company purposefully rigged the diesel engines software. The latter ensured that emissions were always at the necessary level for the diesel car to pass the emissions test in the United States. Eventually, the company admitted that the software was supposed to recognize when the vehicle was being tested (Hotten para. 1).
Dieselgate
The incident leaked into the news on the 18th of September 2015 and was dubbed Dieselgate . This matter affected not only Volkswagen but also Audi, Skoda, and Seat, adding up to 11 million vehicles implicated in the scandal. According to Spence, the Volkswagen software allows for passing the laboratory tests, but while driving, the emissions controls are deactivated (Spence para. 2). This means that when on the road, Volkswagen-manufactured vehicles emit pollutant substances, such as nitrogen oxide, nearly forty times the legal limit. The software was developed explicitly for the purposes of regulating the emissions according to the situation.
The algorithms of the software determine the steering patterns, engine use, air pressure, and other key features that help identify whether a vehicle is being tested. The laboratory tests involve putting the vehicle on a stationary rig, which is detected by the software and a so-called safety mode is switched on, where the emissions are reduced to the legal limit. The software was dubbed a defeat device . In many countries, including European states, investigations are being carried out to determine the extent of the damage caused by the Volkswagens policy regarding the emissions of pollutants.
As a result, the company faces significant problems. First and foremost, Volkswagen betrayed their customers trust thereby losing their loyalty. The companys reputation is significantly damaged. It will be rather difficult to regain the clients loyalty and reestablish the company as trustworthy. Moreover, Volkswagen incurs significant losses that amount to 2.5bn euro, as well as 12bn euro of penalties. Multiple fines and lawsuits filed by certain civil groups exacerbate the companys position. The situation was aggravated when the public found out that the cheating software has been in use for six years. Now, many people are apprehensive of all manufacturers of diesel cars, as they fear that similar tricks could have been employed. It is a valid reason for concern, as such morally dubious practices as demonstrated by Volkswagen entail not only fines and penalties for the company but also major inconveniences for the owners of the cars in question. Spence emphasizes that the owners will eventually have to pay higher fuel bills because of this scandal (para. 6). Moreover, even though the company offered to make amends, the cars that are rewired will not run in the same way as it was promised prior to the purchase.
Ethics Parameters
The ethical decision model comprises several stages, the first of which, Determine the Facts , is outlined above. It was specified what the company has actually done to damage its reputation to such a great extent, as well as what repercussions will subsequently follow. In order to identify the ethical issues involved in the given context, it is necessary to specify which actions of the company should be under scrutiny. The main decision of the companys management that is ethically questionable is the decision to invest in the development of the described software. A clear dimension of right and wrong is visible in this case, as the company knowingly made such a decision, admitting their fault when the scandal was publicized. Moreover, the ethical dimension is multifaceted, as the unethical decision to rig the laboratory tests had a negative impact on many parties, including the customers, the stakeholders, the environment, and the company itself.
The stakeholders that were affected by Volkswagen unethical policies can be divided into several groups: customers and suppliers, financial market, employees, governmental agencies, NGOs, and research institutions. In the fourth stage of the ethical decision model, it is necessary to indicate what alternative courses of action could be taken. It is reasonable to suggest that the first alternative would be for the company to abandon the unethical practices before they became a public matter. It was already mentioned that Volkswagen continued falsifying the laboratory tests for six years.
The immorality of their chosen policy should have been acknowledged before the scandal, and steps should have been taken to curtail the cheating mechanisms, as well as modify the software. Another alternative course of action could have entailed refraining from the discussed decision at the very beginning. The suggested alternatives would be beneficial for the stakeholders, as their losses would be reduced or eliminated and their trust would not have been lost. In the case of the first alternative scenario, a certain degree of harm would have been done nonetheless, but the damage would be minimized. Legal regulations stipulate a certain limit of emission of polluting substances in diesel cars. Thus, Volkswagens unethical decision-making led them to commit a crime, which is also affecting stakeholders.
Conclusion
The decisions made by Volkswagen were unethical and disrespectful to the customers and stakeholders of the company. Every person involved was negatively affected by the companys policies regarding emission levels. Moreover, a negative influence on the environment was exerted. When considering the phrase All solutions just create different problems , it is evident that in the case of Volkswagen emission test, adopting a different approach would clearly minimize or eliminate the losses incurred by the company and the stakeholders, as well as save the companys reputation.
Volkswagen India is one of the recent investments by Volkswagen to tap into the human resource and market available in India. The company employs more than 2500 employees. The main issue facing Volkswagen India is talent acquisition and retention. The worse hit category of human resource is engineers.
The number of engineers joining the automotive industry and remaining there is very small. Many of them go for MBA degrees or software engineering degrees after attaining their first degrees. In India, retaining engineers is becoming very difficult.
The companys plant in Pune has the capacity to assemble 110,000 units per year. The company does not manufacture the cars in India. Rather, it imports the parts and assembles them in India to derive benefits associated with labor costs, and tax reliefs.
There is a lot of debate in different quarters regarding whether HR is a strategic function. Some of the debaters go as far as to claim that it is possible to do away with the HR function without consequence. These views raise serious questions in relation to the role of HR in the corporate environment.
The role of HR has changed in the last two decades based on advances in the behavioral sciences and in the understanding of human motivation.
During the same period, strategic management has become the basis for the management the organizations. This is the environment behind the proposal to view HR as a strategic function.
For the purposes of this report, the definition of strategic HR is the activities undertaken to secure the future of a company or to give it competitive advantage.
This report seeks to examine three aspects of HR in the modern corporate environment to determine whether HR can make a strategic contribution to Volkswagen India.
The first aspect that is of interest to this report is change. The management of change remains one of the most challenging aspects of corporate governance. Organizations develop cultures that are difficult to break. The formation of organizational culture is not always voluntary.
In many cases, culture emerges from the accepted norms and practices. The acquired habits become entrenched without deliberate direction from the management of the organization. On the question of change, the fundamental question that every HR manager needs to ponder is do people dislike change?
The answer to this question provides the basis for planning for organization change at both strategic and operational levels. It is commonly accepted that people usually resist change. This is the basis of the numerous studies conducted in the field of change management.
Answering this question will make it possible to determine whether HR can play a strategic role in Volkswagen India, on the question of change management.
The second aspect that this report will deal with is organizational learning. Organizational learning is the ability of an organization to gain knowledge about its operations and to use that knowledge for a useful purpose.
Learning organizations that make the best use of the information generated in their ranks develop greater resilience to pressure.
At the same time, it consolidates its sources of competitive advantage. The main question that this report will deal with in this regard is whether HR can play a strategic role in organizational learning in Volkswagen India.
The third aspect of this report is employee engagement and commitment. Studies show that one of the key elements of talent management is whether high performing employees feel engaged and challenged by their work. Top performers tend to leave organizations that do not allow them to take on new responsibilities.
This is just one aspect of employee engagement and commitment. The main question that this aspect will answer is whether HR can play a strategic role in the engagement and commitment of employees in Volkswagen India.
Do People Dislike Change? Transition and Resistance
The causes of change in the corporate environment are varied. Change can result from the internal circumstances or from external environmental triggers affecting the operations of the organization. The internal causes of change include the adoption of a major plan or a new business strategy.
External triggers of change include changes in the regulatory environment, pressure from competitors or shifting consumer demands. Change can also result from a planned transition or from a forced process. When the change is planned such as the acquisition of a new facility, it is easier to prepare for it.
This is the nature if change that took place at Volkswagen when the company decided to build a facility in India. This was part of the efforts of Volkswagen to become the largest car manufacturer in the world.
One of the earliest models of change is Lewins three-step process that includes unfreezing, movement and freezing. Lewin went on to detail the events that take place during each of the three processes.
The second model of change is the Kulber-Ross model that is also useful in modeling how people deal with change. This model is used to describe how people deal with grief, especially after the loss of a loved one. The loss of a loved one represents one of the most significant changes that people go through.
Zell (2003) studied the process of change in the Physics Department of a major university and demonstrated that when change is not planned, then people handle it in the same manner as death. The department was at the risk of becoming irrelevant because of environmental changes affecting Physics as a discipline.
The Physics Department was receiving less funding for research, and was enrolling fewer students. Zell (2003) conducted a longitudinal study to map out the transition process from the time this trend became apparent to the time the faculty started taking proactive measures to adapt to the situation.
The study showed that the faculty members went through the five stages of grief as based on the Kulber-Ross Model.
The need for strategic planning usually stems from a recognition that change is inevitable. In fact, strategic planning is a facet of change management. When an organization realizes that change is inevitable, it sets out to influence the nature of change that it will undergo.
Volkswagen is working towards becoming the biggest carmaker in the world by 2018 through a strategic plan. The company needs a vibrant HR department to acquire and retain talent to achieve this goal. The point here is that there is a clear link between strategic planning and change management.
In the same respect, HR has a role to play in the way an organization adapts to change. For instance, succession planning is an application of change management to handle the transition of key employees.
HR is also responsible for talent management, which comes from the need to ensure that the organization does not lose top talent to competitors. Talent is one of the crucial success factors in organizations today. HR is also the best placed department in the organization to develop plans to deal with the unplanned loss of staff.
Organizational Learning
Another area that shows the importance of HR in any organization is organizational learning. Organizational learning refers to the ability of an organization to draw lessons from its operations as the basis for improvement.
Organizational learning requires the presence of a system that gathers data relating to the operations of the organization, processes the data, and produces useful information.
The information from the system then goes into programs and initiatives that help the organization to improve its operations. Organizational learning, just like change, may result from a disciplined process or from a crisis.
In a study of the nature of organizational learning in small firms in the high-tech industry, Therin (2002) uncovered several important issues relating to organizational learning.
The study was trying to find the correlation between organizational learning and innovation, and the relationship between organizational learning processes and financial performance, among other issues. Therin (2002) interviewed over one hundred CEOs of various small firms with less than 500 employees.
The results from the study showed a strong correlation between organizational learning and profitability.
The factors that determined the degree of benefits that an organization derived from specific organizational learning practices included the age of the organization, the strategic posture of the organization, and the environmental threats facing the organization.
Organizations with well-established systems for organizational learning tended to derive greater benefits from the processes. The strategic posture of the organization referred to the strategic position of the organization in relation to its wider industry.
Organizations with strong strategic postures benefitted more from organizational learning compared to the ones that did not have a strong strategic posture.
The role of HR in organizational learning is that HR is the custodian of talent development in the organization. Development of talent in an organization requires the consistent exposure of employees to information and knowledge that can help them to improve their work.
Many automakers in India retrain their newly recruited Engineers to enable them to fit in their corporate climate. In this sense, HR has the responsibility of ensuring that there are systems that enable all employees to learn about their work and how it affects the overall performance of the organization.
HR is also in charge of measuring the growth of the potential of each employee. Practices such as performance appraisals are critical points in the collection of data that can help organizations to learn about their progress.
Organizational learning is a strategic function in an organization. Organizations that learn find several opportunities to increase their effectiveness, and to strengthen their strategic position. Volkswagen India can improve its competitive advantage by making use of the lessons derived from organizational learning.
In this sense, HR plays a very important role in developing the learning mechanisms and translating the lessons into competitive advantage for the company.
Employee Engagement and Commitment
The third role that HR plays in the life of an organization is the development of structures for improving employee engagement and motivation.
Employee engagement refers to the ability of the organization to harness the potential of the employees to enable them to make a meaningful contribution to the operations of the organization. In addition to this, engagement refers to the ability of an organization to keep the employees interested in their work.
This may call for the application of employee motivation techniques. On the other hand, employee commitment refers to the ability of employees to dedicate themselves to the company. In recent times, employee turnover has become a big problem for many companies.
The problem is more pronounced in the high-tech industries because of the huge demand for very creative individuals. In some sectors, the rate of attrition is lower.
However, all the sectors of the economy in most parts of the world are dealing with a higher rate of employee turnover compared to the rates of turnover experienced before the nineties. This demonstrates the need to work towards achieving higher commitment rates from company employees.
Lewis, Donaldson-Feilder and Tharani (2012) conducted research into employee commitment by collecting data from employees and managers in different organizations, and made the following findings.
First, they found that employee commitment was high whenever an organization ensured that there was openness, fairness, and consistency in its HR policies and other business practices. Employee commitment was also high when the organization prioritized knowledge, clarity, and guidance when it came to job design.
This helped employees to feel better placed to handle their duties. Thirdly, employees showed greater commitment to organizations that supported their personal development.
The HR department in Volkswagen India already plays a critical role in the development of job descriptions and proposing changes to the critical functions of the firm. These basic elements constitute the factors influencing employee engagement and employee commitment.
The structure of a job can influence whether an employee remains in it for some time or whether the employee exits from it. For instance, an employee who reports to too many superiors soon becomes overwhelmed and is likely to plan to leave an organization.
In the same breath, the attainment of employee commitment will come from the ability of Volkswagen India to demonstrate the same commitment to the employee. This calls for the organization to ensure that the employees have the space and the time to pursue their own interests.
Google is well known for its policy of allowing engineers to spend up to thirty percent of their time on pet projects. Such engineers feel free to explore areas where they have a passion.
The role of HR in attaining employee high employee commitment is very clear. It is impossible to attain any meaningful development in an organization where there is a high rate of employee turnover. This means that reducing turnover is a strategic issue for every organization.
One of the main duties of HR is talent retention. This means then that HR has a primary interest in ensuring that the employees in the organization have high commitment to the organization.
On the issue of employee commitment, HR also has a role to play. HR is the only department that asks questions relating to the performance of an employee.
The other departments usually worry about performance when there is a problem. On the other hand, HR focuses on performance proactively giving it the unique position to generate employee commitment.
Recommendations
The main recommendations that follow from the literature review are as follows. In the issues of change, Volkswagen India needs to develop strong systems that will anticipate and direct change rather than deal with change in a reactive manner.
The proactive management of change can result in competitive advantage for the business.
Secondly, the organization can use the HR department to plan for how to handle the human side of change. While it is easy to prepare for change from a strategic level, it is more difficult to handle the people who undergo change because of the natural tendency to resist change.
On the issue of organizational learning, the two main recommendations are as follows.
First, Volkswagen India stands to benefit more from a strong culture of learning than from a weak one. In addition, deliberate learning is better that crisis driven learning. In this sense, the organization will benefit if it empowers HR to coordinate learning.
It should do this by allowing HR to provide leadership in the acquisition of new knowledge and in the collection of learning opportunities internally. Secondly, it is recommended that learning be infused in all the departments within the organization to improve the overall benefits of the process.
On the issue of employee commitment and engagement, it is clear that HR is the only department with the presence of mind to deal with organizational commitment to the employees. This makes HR the best department to handle employee engagement and commitment.
Volkswagen India should empower the HR department to make it possible for the department to develop programs and reward systems that will improve employee engagement. Similarly, the company should support the efforts of the HR department to create a working environment the employees find stimulating and challenging.
Conclusion
In conclusion, HR plays a very important role in the life of any organization. Its role in talent management is a strategic role. If the HR department in Volkswagen India is empowered, it will be able to make a strategic contribution to the organization.
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Volkswagen has diverse partners around the globe, which help to handle inbound and outbound logistics as well as outside projects. Volkswagen group consists of several brands, including Volkswagen Passenger Cars, Audi, `KODA, Bentley, Porsche Automotive, Volkswagen Commercial Vehicles, Scania Vehicles and Services, MAN Commercial Vehicles, and many other companies that provide financial services (Volkswagen AG 2019a).
All the logistics is provided by Volkswagen Group Services, including logistics planning, material logistics, and automobile logistics (Volkswagen Group Services n.d.). The company has also partnered with RIO, the digital brand of the TRATON GROUP, to digitise logistics services (Volkswagen AG 2019b). Volkswagen has also recently partnered with Ford and Amazon to build a charging network for electric cars (Roshan 2019). The company is considered a valued partner for any organization all over the world.
Key Activities
The principal activity of the company is automobile production and distribution. According to the annual report, the companys business can be divided into two spheres: automobile services and financial services (Volkswagen AG 2019a). Volkswagen Group produces and sells passenger cars, commercial vehicles, and power engendering machines (Volkswagen AG 2019a). The financial services include leasing, dealer and customer financing, insurance, fleet management, and mobility offering (Volkswagen AG 2019a). The company also invests in research and development (R&D) that has a positive impact on the companys growth.
Key Resources
The company has an extensive production infrastructure that utilizes the latest research findings from the R&D department. According to 2018 annual report, the company has 120 production locations that produce around 11 million vehicles (Volkswagen AG 2019a). The company also utilizes to level human resources to deliver value to its customers since one of its aims to be among the best employers worldwide. By the end of 2018, the company employed 664,496 people, which is 3.5% more than in 2017 (Volkswagen AG 2019a). Volkswagen is strict to its employees to avoid internal misconduct, which cost the company 30 billion euros in 2015 (Rauwald 2019). The company also uses top quality materials and equipment as well as financial resources for providing various services.
Customer Relations
The customer relationships are still in the recovering stage after the diesel scandal in 2015. That year the Environmental Protection Agency (EPA) found that Volkswagens cars sold in the US had software that could detect when the engine is being tested to demonstrate improved results on carbon dioxide emission levels (Hotten 2015). The scandal had a tremendous impact on trust from customer, which resulted in considerable sales drops, the results of which were felt even in 2017 (Boudette 2017). However, today, the company had reached the level of sales before the scandal and regained the trust of customers (Volkswagen AG 2019a). Apart from minor complaints about aftersales service (Brignall 2019), the review of recent press and reports showed no sign of problems with customer relations.
Channels
The company uses all available marketing channels to keep a strong brand portfolio (Bhasin 2017). The company sells the products using an extensive dealership network worldwide, which helps to keep operation costs down (Bhasin 2017). In short, the marketing and sales channels adhere to the top quality standards.
Customer Segments
Volkswagen operates in 12 different brands, which allows efficient segmentation and individual targeting. Volkswagen assesses the need of its clients and caters for all the customer segments according to demographic, psychographic, geographic segmentation variables (Bhasin 2017). Since the mission of the company is mobility of everyone (Bhasin 2017, para. 8), it tries to make products for all the people.
Cost and Revenue Structure
The cost structure of the company is diverse depending on the brand. Even though some of the cheaper brands, like Volkswagen Passenger Cars, are more cost-driven than others, overall, the cost structure is value-driven (Volkswagen AG 2019a). The revenue structure is non-recurring since the primary income source is selling automobiles; however, the analysis of income last three years statements demonstrates that the company tries to put a greater emphasis on recurring revenue, such as aftersales services (Volkswagen AG 2017; Volkswagen AG 2018; Volkswagen AG 2019).
Value Proposition
The success of the company is a result of a well-balanced value proposition canvas described above since the company outperforms the majority of its competitors in all the fields. The key to success is customer-centricity because, after the diesel scandal in 2015, the company realized the economic impact of negative public relations (Boudette 2017). Volkswagen also does not leave the buyer after selling a car; they offer a wide variety of aftersales services that aim to increase customer satisfaction (Volkswagen AG 2019). The company caters for all segments of potential clients, which has a positive influence on the companys image (Bhasin 2017).
The careful choice of partners and using a subsidiary company, Volkswagen Group Services, for logistics help to cut the cost of production and sales (Brown 2012). Moreover, Volkswagen offers financial services, such as loans and leases, to provide diverse purchase alternatives for the clients (Brown 2012). In short, the secret of the companys success is in addressing the needs of all segments of customers with the best value for money.
Value Chain Analysis
Framework
Value chain analysis is one of the most important tools to detect the strengths and weaknesses of an organization. Porters value chain is a concept described in 1985, which is still relevant today (MindTools n.d.). The framework describes the economic logic through primary and secondary activities demonstrated in Figure 1. The framework seems acceptable for performing Volkswagens value chain analysis.
Figure 1. Porters Value Chain Analysis (MindTools n.d.).
Primary Activities
Inbound logistics of the company is well organized primarily using the services of Volkswagen Group Services. Suppliers deliver the parts to the manufacturing plants where they are stored in large hubs (Volkswagen Group Services n.d.). All the deliveries are made on Just In Time (JIT) bases, meaning that suppliers are penalised for early or late deliveries. Additionally, Volkswagen Group Services utilizes the MTM (Methods-Time Measurement) method for planning deliveries. Outbound logistics is also well-organized, which helps a steady increase in the number of deliveries annually. Figure 2 demonstrates the number of shipments worldwide, which includes delivery to dealerships, distributors and clients. Outbound and inbound logistics structure help to save money on deliveries and storing parts, which, in turn, helps to offer the best value for price to customers.
Figure 2. Outbound Logistics (Volkswagen AG 2019a).
As for operations, the production lines also work on JIT bases. The internal transport carries all the needed parts to the production lines to optimize the cost and time of manufacturing. The slogan of the sales and marketing team is customer delight which means that the company aims at exciting customers on a new level (Volkswagen AG 2019a). Moreover, the marketing strategy sees publicity as its top priority to regain the trust of the customers after the diesel scandal in the US (Volkswagen AG 2019a). The company also provides high-quality services in all divisions using an advanced customer relations management system, that keeps all the clients satisfied with purchases and provided service. In conclusion, the primary activities emphasise customer centricity, which helps the company to increase sales by delivering just the right products and services.
Secondary Activities
Volkswagen is one of the leaders among its competitors in terms of infrastructure. The company has more 130 warehouses, 120 production locations, and a sizeable fleet that can respond to any changes in demand (Volkswagen AG 2019a). The company supports human resource strategy empower to transform, which includes the principle of long service, excellent training opportunities, and prioritizing employee rights (Volkswagen AG 2019a).
Volkswagen aims to be an attractive employer, which has highly competent and dedicated employees (Volkswagen AG 2019a). The company provides the best working conditions, maintains an exemplary corporate culture, and orients on employees while emphasising operational excellence. The procurement strategy, TOGETHER-2025 aims at safeguarding the supplies, helping create competitive and innovative products, and optimize cost structures. It involves using all the strengths to deliver products with high customer value and optimum cost structures that meet the needs of the market (Volkswagen AG 2019a). As for technology development, the company invests significant amounts in promoting innovation at all levels. In conclusion, Volkswagen uses its infrastructure, human resources, and technology to anticipate and address customer needs.
The electric vehicle (EV) industry is a rapidly growing market that attracts many automobile manufacturers around the globe. According to Virta (2019), the EV fleet grew by 2 million cars in 2018. While the all passenger car market is trailing at 3.5 million sales per month for the last 12 months, EV sales are growing steadily from 125,000 to 162,000 a month (Bullard 2019). Figure 4 provides a better understanding of the EV market by juxtaposing it to global passenger vehicle sales.
Experts forecast further growth of the market from $129,671.56 million in 2018 to $359,854.56 million by the end of 2025 at a Compound Annual Growth Rate of 15.69% (Valuates Reports 2019). LG Chem, a South Korean battery maker, expects EV sales grow from 3% to 15% of all passenger vehicle sales by 2024 (Paul 2019). In other words, the EV market is booming, providing start-ups and well-known vehicle manufacturers to find new ways of serving customers.
Figure 4. EV Sales VS All Passenger Vehicles Sales (Bullard 2019).
There are many factors that can both facilitate and slow down the growth of the EV industry. The primary driving force of the market is growing environmental concerns among communities and governments. People want to stay environment-friendly and reduce carbon dioxide emissions to the atmosphere (Valuates Reports 2019). At the same time, governments apply stringent laws and regulations on vehicle emissions, which are going to increase in the future (Valuates Reports 2019). Moreover, due to the growth of oil prices, many people turn to renewable energy sources to improve financial sustainability. However, the primary barriers to the development of the market are the need for considerable R&D investments and the lack of infrastructure, such as charging stations. The attractiveness of the market identified by Gissler et al. (2016) is visualised in Figure 5 below.
Figure 5. Factors for EV Market Attractiveness Study (Gissler et al. 2016).
German and Chinese manufacturers are competing for being the leaders of the industry, and China is currently winning the race. Figure 6 provides a list of companies competing in the sphere according to their revenues from electric passenger vehicle sales published by Bloomberg (Bullard 2019). The figure demonstrates that BMW is closely followed by BYD, a Chinese manufacturer. However, BYD receives up to 40% of its revenues from selling EVs, while BMW and other German car manufacturers continue to make money out of vehicles running on gasoline and diesel (Bullard 2019). The champion in the industry remains Tesla Inc., as it has sold more than 250,000 cars in 2018, which exceeds the sales of BMW by more than 100% (Wagner 2019). However, the situation may change if the EV market continues growing.
Figure 6. EV Sales Revenues by Company (Bullard 2019).
EV Market and Volkswagen
Volkswagen realises the current trend of the EV market and plans to adapt its business model to the new realities approaching. According to Figure 6, Volkswagen takes fourth place in the world in revenues from EV sales (Tesla Inc. is not included in the diagram). However, the company plans to dominate the market in the nearest future by investing more than $30 billion in EV R&D and production, which equals to its combined profits for the last three years (Matousek 2019). In China alone, it aims at producing 600,000 units a year by 2022, while Tesla plans to build only 150,000 vehicles (Hanley 2019).
China is one of the most promising markets, so Volkswagen partnered with FAW for a joint venture in Foshan, China (Dixon 2019) and built a factory in Anting (Volkswagen AG n.d.) to achieve the set goal. Additionally, the company has strengthened its brand design and introduced several new models in China (Volkswagen AG 2019e). Considering the news, that Volkswagen has finished a conversion of a factory in Zwickau (Volkswagen AG 2019c), and plans to build new factories in Chattanooga, TN (Roberson 2019; Volkswagen AG n.d.), and Rwanda (Volkswagen AG 2019d), it will have factories on four continents.
Potential Risks
There are two significant risks the company may face while trying to achieve superiority on the market. On the one hand, the demand for EV vehicles may drop for one of two reasons. First, there is not enough infrastructure for EVs, since the charging stations are rare.
Even though the EV charging market is growing fast due to a steady increase in demand, there is a possibility that the companies will not be able to deliver enough charging stations for continuous growth. Volkswagen understands the problem and actively invests in building relevant infrastructure (Roshan 2019). Second, there is a possibility of the emergence of new types of fuels that can lead to EVs being less cost-efficient and environment-friendly (Science Daily 2019). Even though the chances of such a turn of events seem to be slim, Volkswagen needs to control for all the possible risks.
On the other hand, the company may fail to deliver value to their customers due to fierce competition. As stated above, BMW, Tesla, and BYD forestall Volkswagen in terms of revenues from EV sales. However, Volkswagen seems to have controlled for such risks since it invested in the improvement of its presence in China. Moreover, BMWs ambitions are not as far-reaching as Volkswagens, since the BMW Group expects electrified vehicles to account for between 15-25% of sales (BMW Group n.d.), while Volkswagen intends for electric vehicles to comprise 40% of its global sales (Matousek 2019). If the company is not able to fight the competition or the demand will stop growing, it will make the company rethink its strategy while suffering from considerable financial losses and damaged reputation.
Changes in Business Model
If EVs assimilate, Volkswagen will be among a few European companies that will not have to make drastic changes in its business model. The companys business model is to build vehicles, sell them, provide aftersales service, and offer financial services. The only difference would be that Volkswagen would need to produce and sell more electric cars and less fossil fuel-run vehicles. Therefore, the company would have to partner with battery producers to make sure to get the best price, as batteries are 30% of the EVs costs (Volkswagen AG 2019a).
After the diesel conflict, the company identified being environment-friendly as its top priority (Matousek 2019). As a result, it has already made all the necessary preparations for the alteration of its business model to embrace the changes (Volkswagen AG 2019a). In order to build more EVs and decrease the production of traditional cars, the company will have to convert some of its plants to building EVs. Volkswagen, however, has a vast experience in the matter, since the Zwickau plant has successfully been converted to building EVs. In short, while Volkswagen will have to make several changes in its business model, the analysis shows that the company is ready for them.
Damages in Case of Adverse Events
While the company is ready to face the rise of the EV market, its preparedness to the failure of EVs is limited. In case of such events, the company will lose the invested $30 billion, and most of the money it is planning to invest in EVs. While this seems to be unbearable cost, the company will lose even more from other adverse events. Decreased demand will lead to fewer sales, which, in turn, will cause increased spending on warehousing of inventory and vehicles.
Due to the abundance of made cars, the company will have to halt production, which may lead to mass employee layoffs. The dismissals will negatively influence the companys image and employee satisfaction. Since the company relies on the loyalty of its employees and customers, the companys value chain will suffer from significant changes and the company will have to control for all the adverse events. However, in the past, the company has demonstrated tremendous potential from recovering after reputation damages (Boudette 2017); therefore, it may be able to control for all the possible adverse events.
As for value proposition, the decline in EV demand would mean that the company failed its central task of being customer-centric. While the company will continue offering all the services, it will not be able to serve all segments since 40% of the production capacity will produce EVs by 2030 (Matousek 2019). The company will have to spend money to conversion from EV production or sell the unneeded equipment and release the employees to make sure that the company is still profitable. However, such changes will have a definite negative impact on Volkswagens value proposition.
Reference List
Berkelmans, G, Berkelmans, W, Piersma, N, van der Mei, R & Dugundji, E 2018, Predicting electric vehicle charging demand using mixed generalized extreme value models with panel effects, Procedia Computer Science, vol.130, pp. 549556.
The case of Volkswagens cheating draws peoples attention to such major corporate social responsibility (CSR) issues as the efficacy of self-reporting by companies and the responsibility of customers owning compromised products.
First Concept: Self-Reporting
The way the German carmaker reported some basic features of its products shows that the public cannot rely on companies self-reporting because this practice leads to violations and the focus on financial gain. It is clear that the company focused on becoming a leading company in the U.S. market, which made the management less attentive to CSR aspects (Dans, 2015). Top managers, including CSR leaders. were aware of the fact of cheating but chose not to reveal the truth (Neil, 2015). The Volkswagen example should not be seen as an exception because it is a rather common practice.
Numerous scandals involving other carmakers or other companies show that top managers try to conceal some facts and are reluctant to admit their unethical or illegal behavior. For example, Hyundai Motor Co., and another Korean carmaker, Kia Motors Corp., were to pay millions as the penalty for the violation of certain norms (Boston et al., 2015).
Companies provide reports that contain untruthful information to achieve financial gains and create a favorable image (Uvkoff, 2015). Top managers appear to focus on concealing some unpleasant facts rather than try to ensure that their organization uses only responsible practices. Obviously, the reliance on companies self-reporting has been compromised as organizations tend to provide reports that include data favorable to their image as well as performance.
Second Concept: Customers Responsibility
Another important aspect to take into account is the fact that customers share the companies responsibility, which is often forgotten or neglected. Clearly, corporate social responsibility is all about ways companies choose to run their business. At the same time, companies would be likely to avoid any violations if they knew that customers could never buy from them.
Therefore, responsibility has two facets. Customers are often eager to make sure they will not have any legal issues but are reluctant to restrain from buying or giving away products that are associated with some ethical (environmental, social) concern (Gorzelany, 2015). Of course, the company has several ways to regain customers trust through paying penalties, repairing affected cars, and so on (Cremer, 2015).
In this way, Volkswagen will show its commitment to the principles of CSR. However, people are likely to use those cars emitting hazardous elements and contaminating the environment. These people will still criticize the carmaker and talk about Volkswagens deceit. However, the situation will not change. Companies will provide their self-reports (containing unreliable data), and people will try to avoid paying much attention to details as long as they are satisfied with the product. Therefore, it is clear that customers behavior is a critical aspect of CSR, and people should be more responsible when it comes to such controversial issues as environmental pollution, efficiency, and so on.
Conclusion
In sum, it is possible to note that the example of Volkswagens irresponsible CSR practices unveils some of the most pertinent issues related to corporate social responsibility because it is critical to reconsider the efficacy of self-reporting and pay more attention to customers responsibility. These two aspects can be regarded as two important facets of CSR that are aimed at creating sustainable business practices.
Works Cited
Boston, William, Amy Harder, & Mike Spector. Volkswagen Halts U.S. Sales of Certain Diesel Cars. Wall Street Journal.
Cremer, Andreas. Volkswagen to refit cars affected by the emissions scandal. Reuters Business News.
Dans, Enrique. Volkswagen and the Failure of Corporate Social Responsibility. Forbes.
Gorzelany, Jim. Dieselgate: What VW TDI Owners Should Know. Forbes.
Neil, Dan. VW Lost Its Moral Compass in Quest for Growth. The New York Times.
Uvkoff, Liane. 2008: The Year that Drove Volkswagen over the Ethical Cliff. Forbes.
Fraud is a serious unethical and illegal problem that some individuals or companies have propagated to acquire an edging advantage in the market by avoiding the set legal standards and regulations. In the United States (US), the Clean Air Act empowers the Environmental Protection Agency (EPA) to regulate and set standards for vehicle emissions (Beene, 2016). The regulations and standards are tough for many vehicle manufacturers to comply with. Beenes (2016) article provides a good case of the violation of the legislation due to the fraud scandal involving an automotive Germany manufacturer. Volkswagen (VW) engineers manipulated vehicle engines to cheat the US on the emission levels of the company vehicles, a move that was revealed, and proper legal action taken to impact the stakeholders and the company as a whole.
The Fraud Scandal, its Cause, and the Culprits
The Violated Law and Underlying Cause of the Scandal
The fraud scandal was done intentionally to violate the EPA regulations and American environmental law. According to Beene (2016), engineer James Robert Liang together with his team deliberately planned to violate the American Clean Air Act. The fraudulent actions further violated the EPA vehicle fuel emission standards and regulations since the authority and the country as a whole were deceived.
The strict and harsh American laws and regulations together with the uncompromising EPA compelled the engineers to think of and implement this illegal and unethical strategy. Liang and his team of engineers realized that the company would not meet the strict US limits on the emission of nitrogen oxide that were implemented since 2007 while increasing the customer demand for the vehicles (Beene, 2016). Consequently, they developed and installed software that could cheat on the emission tests so as to comply with the environmental laws. Mouawad and Jensen (2015) explain that upon testing the car engine emission levels, this software could sense and activate installed equipment to reduce emissions. However, the software could turn the installed equipment down when driving, resulting in high emission rates that surpass the legal limits (Mouawad & Jensen, 2015). This strategy was the only feasible way to complying with the strict laws in the mind of Liang and his engineer colleagues.
The Culprits
Liang, who had worked with the automotive company begun the fraudulent process years early before it was noticed. From the beginning of 2006 to September 2009, this engineer and his colleagues deliberately agreed to defraud the American government, the company customers, and most importantly, violate the Clean Air Act together with deceiving the agencies that enhance its implementation (Beene, 2016). All the victims were deceived about the vehicle complies with the US emission standards. The EA189 2.0-liter diesel was at the center of this case, and Liang was in the team that manufactured it at the diesel engine department in Wolfsburg, the company headquarters (Beene, 2016). This shows that Liang and the team he led were responsible for the fraud involving the EA189 engine.
Liang then moved to the US to launch and start selling the faulty cars with the manipulated engine. Beene (2016) reports that this engineer moved to the US in 2008 to launch the clean diesel engine. He attended meetings that comprised personnel from the automotive company, officials from the EPA among others to sell the engine in the US market. In these meetings, the company personnel claimed that the engine complied with the American emission standards and hid the presence of the defeat software that could cheat on emission tests. In fact, Liang and other company personnel met EPA officials in March 2007 and explained the software functions of the engine that affected emission controls without revealing the cheat software (Beene, 2016). These actions defrauded the US because the cheat device was never noticed at this moment.
Scandal Revelation
The cheat device software and its functions were revealed by researchers before EPA confirmed the crisis. In 2015, West Virginia University researchers tested fuel emission from two of the university cars from VW and found that when tested on the road, the cars emitted around 40 times more than the EPA set limits (Mouawad & Jensen, 2015). The research prompted EPA to start investigations for justifying the study findings. The authority found the truth before announcing that VW had cheated the entire nation by distorting emission test results (Mouawad & Jensen, 2015). The revelation put the company into problems.
Consequences of the Scandal
The revelation of the scandal led to legal authorities taking action to punish the offense. Liang was named in a jury indictment in the American District Court of Detroit where he pleaded guilty to have defrauded the US by violating the Clean Air Act (Beene, 2016). Some of the evidence to reveal the deliberate actions to violate the law came from the narration of the engineer and mail communications among the company engineers (Beene, 2016). The court allowed Liang to cooperate with the US government in the ongoing investigation of the scandal involving VW. This would put pressure on company management.
This scandal further affected the company management, customers, and company sales. The scandal made customers lose trust in the company vehicles, which was associated with reduced sales both in the US and other parts of the country. In South America, the sales dropped by 27.6% while Russia experienced a 16.3% decline (Saarinen, 2016). The sales in the US dropped by 5.7% while North America registered a decrease of 2.1% (Saarinen, 2016). The management further committed itself to find a solution through its suggestions. For instance, the company decided to buy back all of its cars from US customers or fix the software problems and offer some compensation (Mouawad & Jensen, 2015). Many engineer suspects were suspended, and the company chief executive officer resigned (Mouawad & Jensen, 2015). Therefore, the scandal affected many stakeholders in different ways.
Conclusion
The unethical and illegal VWs fuel emission scandal had substantial repercussions to the company, the American judicial and environmental regulatory agencies, the company management and engineers, and most importantly, the customers. The engineering department led by Liang deliberately planned to cheat on the US emission tests by installing a defeat device software. The revelation of the scandal compelled the company to respond by addressing the problem. Furthermore, the losses were incurred mainly because of the poor reputation in customers. The culprit was taken to court and pleaded guilty of the offense in addition to promising cooperation with the US investigative agencies.
Volkswagen (VW) is a German-based automobile company, which manufactures and sells cars in over 153 countries across the globe. Ferdinand Porsche founded the firm in the 1930s with the objective of manufacturing and selling cars in Germany (Buiga, 2012). In its initial period, the company manufactured cars in small scale, which it sold in the local German market. However, following its high quality branding, the company grew rapidly and added trucks and public vehicles to its product list. Before 2015, the company was among the market leaders in the automobile industry despite the high competition in the market. In the mentioned period, the company supplied over 9.7 million vehicles annually to different countries across the globe (Boston & Houston-Waesch, 2015).
VW profits were also high owing to the premium pricing it charged to its customers that matched the quality of its vehicles. For instance, Passat, which was launched in 2010, pushed the company ahead of the competitors owing to its innovative features. However, the companys turnover took a downward trend in 2015 following the exposure of the emission scandal (Boston & Houston-Waesch, 2015). This paper seeks to establish the impacts of the mentioned scandal on the firms brand equity and its overall profits. To achieve the stated objective, the paper shall give a brief overview of the emissions scandal, its effect on the companys reputation and brand equity, and then explore the ethical issues applicable to the case.
Overview of the VW emission scandal
The infamous VW emission scandal is a controversy revolving around a kind of software fixed in the companys vehicles with an aim of fraudulently misleading the Environmental Protection Agency (EPA). The software, which was popularly known as the defeat device , was fitted in about 11 million vehicles that had already been distributed globally (Lane, 2015). The fixing of the software in the vehicles followed a requirement by the EPA for the automobile industry to regulate the amount of carbon emissions. Under the requirement, EPA would conduct carbon emissions tests before approving any newly designed vehicle (Boston & Houston-Waesch, 2015).
To pass the test, Volkswagen fraudulently fixed a defeat device that would reduce the amount of carbon emissions during such tests. The software could automatically detect when such tests were being carried out and adjust the running of the engine accordingly to minimize the carbon emissions. The fraud was unearthed in 2015 by an independent investigator causing the company great losses in term of brand equity and loss of customers.
Effects of the scandal on VWs brand equity
Brand equity refers to the perceptions of the customers about a certain product or service. Strong brand equity, therefore, implies that the customers perceive a companys product as superior to that of the rivals (Helm & Tolsdorf, 2013). Weak brand equity, on the other hand, implies that a companys product is less superior compared to that of the competitors. Helm and Tolsdorf (2013) argue that strong brand equity could be a great source of a sustainable competitive advantage for the concerned firm.
The assertion is informed by the view that customers tend to procure goods and services from firms with strong brand equity. Besides, a firm with a strong brand name can invoke the premium pricing strategy to maximize the profits.
Before the emissions scandal, VW was among the global leaders in the automobile industry as evidenced by the high profits realized by the firm in the period before the scandal (see Appendix 1). However, following the publicity of the scandal, the firm started recording diminished returns apparently due to the bad public image painted amongst the customers (Farrell, 2015). Typically, the quality of a companys products and the overall customer satisfaction were the key determinants of brand equity.
However, in the contemporary world, customers are also considering the environmental impact of the products and services when making purchase decisions. The confirmation of the negative impacts VWs automobiles had on the environment severely damaged its brand equity causing the rivals to outsmart it regarding the turnover (Lane, 2015). The profitability of the company was greatly impacted by the revelation of the scandal, and the company recorded the first ever losses in the first quarter of 2016.
The loss of profits may be attributed in part to the loss of customers loyalty due to the confirmation of the pollution allegations. The other possible reason for the loss is the diminished ability of the company to charge a premium price for its products. Before the scandal, the company manufactured different types of vehicles and priced them according to the individual features. The company, for example, charged a premium price for Passat, one of the most selling brands.
Ethical issues surrounding the scandal
De Bettignies and De Cremer (2013) argue that companies are ethically bound to ensure that the environment in which they operate is free of pollution by manufacturing products that minimize the environmental pollution. Most countries across the globe have strict legislations requiring firms to be socially responsible as regards environmental conservation. In the US, the EPA is the body mandated to ensure compliance with the environmental laws. VW failed to observe its environmental conservation corporate philanthropic role by manufacturing vehicles with high nitrogen oxide emissions.
The other ethical issue relevant to this case revolves around fraudulent advertisement. The companys marketing team colluded with the engineers to paint a picture of environmentally friendly vehicles among the customers (Farrell, 2015). Consequently, the customers purchased more of the products until it was revealed that they were harmful to the environment. The marketing ethics requires companies to give correct and factual information to the customers and refrain from giving wrongful information to increase the turnover. The companys directors cultivated a corporate culture that promoted fraudulent marketing by failing to assess the suitability of its products before introducing them into the market.
Lastly, the companys managers violated their fiduciary duty they owed to the companys shareholders. Buiga (2012) claims that managers are in a principal-agent relationship with the company, and they should, therefore, act in the best interest of their employer. The managers owe the company duty of care, and they are bound to act with due diligence and professionalism to maximize the shareholders earnings and avoid losses for the shareholders.
The action by the managers to fix the emissions controllers was shortsighted and ill advised since the risk managers did not consider the long-term effects the exposure of such endeavor would have on the companys balance sheet. When the scandal became public, the company lost its brand equity resulting in the loss of customers. Additionally, the firm incurred losses in the form of the money spent recalling the vehicles. Therefore, the shareholders interests were overlooked when making the decision to fix the defeat tools.
Ethical remedies for VW
To handle the problem effectively, VW needs to accept full responsibility as a company and avoid blame game. The company should apologize to its customers, as an organization, and publicize the measures in place to remedy the situation. Accepting liability as an organization will portray the company as ethical, which may help restore its brand equity (Boston & Houston-Waesch, 2015). The company should set aside funds to facilitate the recalling of the vehicles sold to the customers across the globe. The owners of such vehicles should be compensated monetarily for the loss suffered due to the fraudulent marketing. Alternatively, the company should replace all the vehicles with the compliant ones to facilitate the restoration of its brand reputation.
Lessons and recommendations
Lesson 1: Internal controls are important aspects of business
One of the lessons that firms can learn from the VWs case is that strong internal controls are inevitable for the success of business. When the emissions scandal was brought to light in 2015, it was blamed on a few irresponsible engineers who were advancing their personal interests at the expense of the companys shareholders (Farrell, 2015). The successful installation of the device by a few engineers without being detected illustrates the failure of internal controls within the company. If there were a strong internal control system, such irresponsible action would be detected in time and the appropriate measures taken to avert the undesirable consequences.
To remedy the shortfalls in the internal control systems, the firm needs to establish a strong internal risk management department and list all the issues that may substantially affect its balance sheet as potential risks. The risk management department should work closely with the internal quality control auditors to avert the recurrence of a similar problem in the future (Lane, 2015).
Lesson 2: A strong code of ethics is inevitable
The problem that currently befalls VW may be attributed in part to the lack of a strong internal code of conduct coupled with shortfalls in communication. The assertion is informed by the view that the engineers responsible for the defeat device acted outside the scope of the business ethics. If there were a strong ethical code within the company, outlining the scope of the employees conduct and the personal liability for deviance, the engineers would consider the repercussions before fixing the devices.
To shield the company from similar problems in the future, the firm managers should formulate a strong code of ethics and communicate the same to the entire workforce. De Bettignies and De Cremer (2013) argue that involving employees in devising the ethical code promotes compliance. Therefore, the employees should be involved in the formulation process and allowed to propose the penalties for non-compliance.
Conclusion
The VW emissions scandal is one of the latest controversies to hit the automobile industry in the past few decades. The scandal became known in 2015 when an independent investigation body found that the companys vehicles emitted a huge volume of the toxic nitrogen oxide gas into the environment. The investigations that followed the allegations found out that about 11 million vehicles from the company had been fitted with a defeat device that would reduce the running of the engine during environment compliance tests. Since its publicity, the controversy has cost the company huge losses in terms of loss of brand equity and the recall fees.
The company has since accepted liability and offered to recall all the non-compliant vehicles distributed across the world. This paper offers recommendations for the company that may help restore its brand equity. Among the recommendations is the establishment of a strong internal control system coupled with the formulation of an actionable code of ethics. The cited recommendations have been discussed in details in this paper.
Buiga, A. (2012). Investigating the role of MQB platform in Volkswagen Groups strategy and automobile industry. International Journal of Academic Research in Business and Social Sciences, 9(2), 391-399.
De Bettignies, C., & De Cremer, D. (2013). Pragmatic Business Ethics. Business Strategy Review, 24(2), 64-67.
Helm, S., & Tolsdorf, J. (2013). How does corporate reputation affect customer loyalty in a corporate crisis? Journal of Contingencies and Crisis Management, 21(3), 144-152.
Lane, C. (2015). Emissions scandal is hurting VW owners trying to Resell. Web.
Appendices
Appendix 1: A breakdown of the financial performance of VW.
The Volkswagen Group, with its headquarters in Wolfsburg, is one of the world’s leading automobile manufacturers and the largest carmaker in Europe.
The Group comprises twelve brands from seven European countries: Volkswagen Passenger Cars, Audi, SEAT, ŠKODA, Bentley, Bugatti, Lamborghini, Porsche, Ducati, Volkswagen Commercial Vehicles, Scania and MAN. In the commercial vehicle sector, the products include ranges from pick-ups, buses and heavy trucks.
Key Facts:
Global market share in 2017 – 12.1%
Sales Revenue in 2017 – 231 billion euros (217 billion Euros in 2016)
Earnings after tax – 11.6 billion euros
Production plants – 123 worldwide
Employees – 642,292
In addition, the Volkswagen Group offers a wide range of financial services, including dealer and customer financing, leasing, banking and insurance activities, and fleet management.
1.2 Purpose
The purpose of this strategic report is to address the current issues faced by the Volkswagen company and to discuss the strategies that the company implemented after the Diesel emissions scandal in 2015 to attain its goal of becoming the world’s largest automobile manufacturer.
1.3 Scope
The scope of this report is confined to current issues faced by Volkswagen and the strategies for overcoming these challenges. The focus of the report is on R&D to invest on new technologies and innovation for electric and self-driving cars which contributes to the future of Automobile industry and regaining customer trust after the emission scandal.
1.4 Method of investigation
The secondary data presented in this report is from the Volkswagen Annual Reports, Journals and trusted sources. We have used PESTLE and Porter’s 5 forces to analyse the strategic issues. We look at the competencies of Volkswagen and analyse different strategies that the Organization implemented to overcome the strategic issues.
2. Identification of strategic issues
2.1 PESTLE Analysis
2.1.1 Political Factors
The biggest current issue arising from Volkswagen’s political environment is the current political tensions around trade tariffs between the US and the EU. US president Donald Trump in June 2018 threatened to impose a 20% tariff on all imported cars from the EU, which would raise tariffs from the current 2.5% tariff duty which has been place since the 1960s (Fleming et al., 2018).
UK Government policy to end the petrol and diesel cars by 2040 (“Road to zero”). The trend among the UK population began to shift away from diesel and petrol cars, which led to an overall 20% decrease in diesel car sales in 2017 (Davies 2017).
Brexit which has already had an impact on consumer spending as demand for new cars in the UK is scaled back due to the economic impact of Brexit (Bolduc 2017).
The Volkswagen Group sells its vehicles in 153 countries and it must deal with as many as 153 different political scenarios.
2.1.2 Economic Factors
Political turmoil such as Brexit are often followed by economic impacts. Brexit has already created high inflation and a decline in consumer spending, leading to a decline in demand for new cars (Bolduc 2017). Brexit-led inflation resulted to increase in car prices by 5% making it hard for consumers to purchase new cars (Mulligan 2017).
However, Volkswagen has a decent chance of increasing its market share in growing economies like China and India where the cost of production is comparatively less
2.1.3 Social Factors
The biggest trend in the automobile industry is the increasing use of car sharing platforms such as Uber.The increasing demand for vehicle sharing and ride hailing programs represents a threat for VW due to offering more convenience and cheaper transportation compared to the high cost of car ownership (Gibbs 2017).
2.1.4 Technological Factors
The success of an Automobile company depends upon its technological advancement. VW acquired a stake in German Research Centre for Artificial Intelligence (DFKI). It is investing in technology to bring more eco-friendly and safer cars to the market which is the changing trend of the customers. It has invested a lot in making its manufacturing and distribution processes technologically more efficient than the rivals.
2.1.5 Legal Factors
‘2015 Volkswagen emission Scandal’, Volkswagen paid up to $4.3bn in penalties and fines for violating the environmental regulations in connection with the scandal (McGee and Lynch 2017).
Volkswagen fit their diesel cars with ‘defeat devices’ which ensured their diesel cars would meet emission standards in laboratory settings, but on the road, emissions went more than 40 times of legal standards for NO. Subsequently, VW was forced to recall over 11million vehicles. This ruined the reputation of Volkswagen resulting in decreased sales in the subsequent years.
2.1.6 Environmental Factors
The increasing public demand for electric vehicles, car sharing services and the continued development of self-driving vehicles has created a growth opportunity for Volkswagen. (Silver 2017; Scarpinelli 2017).
That is why Volkswagen has announced it will also launch its own “zero-emission” car-sharing service known as WE in 2019.
2.2 Porter Five Force Analysis
2.2.1 Bargaining Power of Suppliers: LOW
Volkswagen is a large and financially strong company which has a global supply chain and distribution system. Volkswagen has suppliers throughout the world scattered in various regions.
The bargaining power of the suppliers is low because it always has an opportunity to switch to new suppliers.
However, what gives the suppliers slight bargaining power is the company’s requirement for quality raw materials and its dependence on long term partnerships with suppliers.
2.2.2 Bargaining Power of Customers: HIGH
The customers now a days are well informed. There are several options before the customers as there are several brands in the market. Companies are investing vastly on their marketing and advertising strategies to attract every customer and hence the bargaining power of customer is high.
In the case of Volkswagen’s premium cars segment, the customers are insensitive to the prices insensitive because of the differentiated and customised products.
In 2017, VW invested 4.8 Billion Euros in research and development
2.2.3 Threat of Substitute Products: MODERATE
Due to high competition from several brands in the automotive industry, the threat of substitute products for Volkswagen is high. Public transportation such as trains and buses also act as substitutes for Volkswagen products.
The things that mitigate this threat for Volkswagen are its financial strength and brand image. The overall threat of substitute products is moderate.
2.2.4 Threat of New Entrants: LOW/NEGLIGIBLE
Volkswagen group is operating majorly in the Automobile industry. A new market entrant would require huge capital investments, resources and considerably large amounts of time to be able compete with already existing automobiles and market its brand (Parkin et al 2017).
A new entrant in the automobile would have to spend extra to produce few units compared to established companies like Volkswagen that produce in large volumes.
2.2.5 Intensity of Rivalry in Industry: HIGH
Competition intensity is determined by factors such as seller concentration, diversity of competitors and product differentiation.
Volkswagen faces intense but price muted competition because the competitors are trying to grab its market share in the automobile industry. This has led to intense advertising and product innovations.
Example: To oust competitors who use diesel, Volkswagen group invested £ 30bn to start manufacturing electric cars to satisfy consumer needs (Attwood 2017).
3 SWOT Analysis:
3.1 Strength
Strong international presence in more than 150 countries.
Strong brand image which is the sole reason that the company recovered from the “emission scandal” and reported growth in the following year.
Large product portfolio. Volkswagen’s product portfolio is made of 12 automotive brands include Volkswagen, Volkswagen commercial vehicles, Audi, Seat, Skoda, Bentley, Bugatti, Lamborghini, Porsche, Scania, Man and Ducati vehicles. The world’s largest automobile manufacturer, Toyota offers its products under only 4 brands.
Strong R&D working on continuous innovation and future trends such as auto driving and electric cars.
3.2 Weakness
Brand reputation of Volkswagen dented by the Emission scandal. The scandal costed VW billions of dollars. This has tarnished the brand’s image inside and outside US.
Volkswagen has paid around 25 billion in fines due to increased compliance issues in US, which decreased the operating profits of the company.
3.3 Opportunities
Increasing demand for passenger cars in Asia -Pacific region.
Volkswagen is successful in increasing its sales in this market, still China and India are offering vast markets.
· Sustainable technology
Globally, customers are interested in sustainable vehicles and sustainable technology. Apart from sustainable vehicles and supply chain, Volkswagen has an opportunity of research and investment on sustainable innovation.
· Acquisitions and partnerships:
Partnerships in China have turned out to be successful for Volkswagen. More partnerships across the world and in the Asia pacific regions especially can help the brand grow faster. Moreover, the company has been successfully acquiring other companies. The experience and knowledge from the past can be utilized in the future.
3.4 Threats
Heavy competition from rival brands forcing the company to invest heavily on R&D and marketing.
Economic fluctuations such as recession and economic instability in developing countries.
Legal and compliance.
4 Strategic responses
After the broke out of massive “Emission scandal” Volkswagen just did not lose billions but also invaluable customer trust. In 2016 Volkswagen announced, “Together- Strategy 2025” for the lead in Technology, Sustainability and Innovation.
4.1 Corporate Strategy
Restoring customer Trust
“We’re Working to Make Things Right”, Volkswagen launched a website www.vwdieselinfo.com to keep their customers updated about the diesel scandal.
Announcement of “Good will Package” which includes two 500$ gift cards to those who owned or leased an affected diesel car as of November 8, 2015.
Corporate culture Transformation
The reorganization strategy aims for
1.agility.
2.stronger entrepreneurial spirit.
3.more transparent discussion culture.
4.flatter hierarchies and more flexible working models.
Lead in Connectivity
Volkswagen to develop its own digital platform. By 2025, it is expected to have about 80million active users throughout the world.
Closer customer relationship
Wide range of services
Potential increase in its sales revenue from services related to networked vehicles. (Volkswagen estimates that it will reach about EUR1bn per year by 2025)
4.2 Business Strategy
· Achieving “top of volume” position globally
Volkswagen already achieved its “top of volume” position in Europe and China and aims to expand throughout the world with these strategies. Volkswagen AG sold 6.2 million passenger cars in year 2017. With the increase of customer demand for electric mobility and SUV, VW will launch electric SUV’s by 2020. It has already launched 6 SUV models including T-cross, T-roc and Tiguan in 2018 and expects a 50% SUV share by 2025.
· High Profits, Lower Cost and high sales revenue
The sales revenue of Volkswagen AG went down by 24.3% in 2017 mainly due to the reclassification of other companies in the group but, in the first three months of 2018, the sales revenue rose by 5.6% mainly due to lower production costs and higher volumes which resulted from lowering complexity of production and development to use synergies efficiently. As a result, the operating profits to double from 2% to 4% between 2015-20.
Volkswagen have increased the production capacity and will continue to do so to improve further sales and sales revenue.
4.3 Operational Strategy
Development of Strategic Capabilities.
In-house development of self-driving system and artificial intelligence of autonomous vehicles.
To provide best-in-class user experience across all the brands to customers.
To develop battery technology as core competency.
E-mobility
Volkswagen Group is investing heavily in the mobility of the future: over €34 billion have been budgeted up to the end of 2022 for e-mobility, autonomous driving, digital connectivity and new mobility services.
Volkswagen decided to convert its plants in Emden and Hannover to produce electric vehicles form the year 2022.
Production of the Volkswagen I.D., the world’s first series vehicle based on the MEB, will begin in Zwickau at the end of 2019.
Volkswagen aims to produce electric versions of all 300 models by the year 2030.
5 Results
5.1 Critical Success factors (CSF’s) – Volkswagen AG
· Large production infrastructure:
Volkswagen has nearly 123 production plants throughout the world producing around 11 million units each year. Volkswagen’s global production network is its huge strength.
· Brand image and global presence:
The Volkswagen group sells its vehicles in as many as 153 countries. It has a very strong global presence and good brand image. The “Emission scandal” in 2015 dented the company’s reputation but the company returned strongly with the improvement in its revenues. Volkswagen has the largest portfolio in the Automobile industry with 12 brands. It is serving all the segments of the customers such as premium customers and middle-class customers.
· Research and development capabilities:
Volkswagen’s Research and development capacity is strong. It is continuously investing on R and D for innovation and sustainability. In 2017, the R&D costs for VW are 13.3 billion euros.
· Large and extensive supply chain:
Volkswagen established a special network of FAST (Future Automotive Supplier Tracks) Suppliers to implement innovation and globalisation in Supply chain. The Group business platform “ONE”, ONE links more than 300,000 users from the business units of the Volkswagen Group and suppliers, making it one of the largest platforms within the Group.
5.2 VRIO Analysis of CSFs
Resources
Valuable
Rarity
Inimitable
Organized to capture value
Competitive Advantage
Production Infrastructure
Yes
Yes
Yes
Yes
Permanent
Brand image and global presence
Yes
Yes
No
Yes
Temporary
Research & Development capabilities
Yes
Yes
No
Yes
Temporary
Large Supply chain
Yes
Yes
No
Yes
Temporary
6 Recommendations:
Since Volkswagen is operating globally, the focus should be on compliance with the operating countries. The company should treat the “Emission scandal” as an eye-opener and should thrive to avoid such scandals in future.
There is an increase in demand for passenger cars in Asia-Pacific market. Since the partnerships in China turned out to be successful for Volkswagen, it can look for similar strategies in countries like India where the market share of the company is low.
Volkswagen shifted its gears to E-mobility. Though the electric cars have a market potential in the future, Volkswagen should also consider the risks involved in it. For example, the company should adopt strong marketing and advertising strategies to outperform the competitors.
Automobile industry is often operated in conditions of immense competition. Although Volkswagen has a very strong R&D it is often required to improve the R&D capabilities to maintain the pace with the competitors.
(We found from VRIO analysis that R&D of Volkswagen gives only a temporary competitive advantage)
7 Conclusions
“Necessity is the mother of invention.”
Despite of the strong production facilities and R&D capabilities of Volkswagen, it always trailed behind its competitors like BMW and Tesla in the areas of electric and self-driven cars.
However, the Diesel scandal opened the gates of Volkswagen towards innovation and sustainability. The company is forced to reorganize the culture and the Organization.
“A company of this size cannot be guided by the principles of yesterday. The environment in which people and goods move from A to B has significantly changed.” Matthias Müller, Volkswagen CEO
2017
2016
Operating profit
13.8 billion euros
Operating profit
6.7 billion euros
Operating return on sales
6%
Operating return on sales
3.3%
It is evident from the annual report of Volkswagen that the company recovered from the adverse effects of Emission scandal in 2015.
The company is moving close towards “Strategy-Together 2025” with effective utilization of the resources and the critical success factors.
8 Bibliography
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The study evaluate the historical financial performance of Volkswagen Group through income statement and financial statement. Several financial ratios are vertical compared with competitors like Daimler AG, Toyota Motor Corporation and BMW AG. The research period is from 2013 to 2017 because 2018 annual data is not completed for whole four companies.
Background
Since owning a car has become a commodity rather than a luxury product reserved for the wealthy, the industry has been growing steadily and is expected to continue to do so in the future. Advanced technology, globalization, and increased industry competition have led to a sharp drop in car prices relative to the economy. From 2009 to 2017, annual auto production has steadily increased by about 3 percent (Berk, J., De Marzo, P. & Harford, J. 2015). Auto sales are expected to continue to grow 3-4% in 2018
Table 1. Global Cars Production in Million. Source: Statista.com
Car Brand Introduction
The Volkswagen group is a German company, composed of 12 brands including Volkswagen passenger car, Audi, Said,Bentley, Bugatti and Lamborghini, which, Ducati, Volkswagen commercial vehicles, Scania and MAN (Volkswagen). With operations in 153 countries and regions, Volkswagen group is the largest automobile company, selling 10.78 million new cars. By the end of 2017, Volkswagen group had 642,300 employees. Daimler is also a German company, including Mercedes Benz, Daimler trucks, Daimler buses and Mercedes Benz vans (Daimler’s 2017 annual report). Daimler sold 3.3 million vehicles in 2017 and had 289, 300 employees at the end of 2017. BMW group is the third German car company, it includes the BMW, mini and Rolls-Royce car brands. In 2017, BMW group’s total vehicle sales reached 2.46 million, with 129,932 employees by the end of 2017. Toyota Motor Corporation is the world’s second largest automaker studied in this paper. Toyota motor corp. owns five brands, including the Toyota brand, Lexus, Lands. In 2017, Toyota produced 10.5 million vehicles in 2017.
Financial Analysis
Analysis Income Statement from 2013 to 2017
Table 2. Volkswagen Group Income statement. Source: Morningstar Volkswagen Group, Author’s Calculations
The revenue of Volkswagen from 2013 to 2017 is 197 billion to 230 billion. Volkswagen group increased gross profit in 2016 because the decrease cost of revenue. 2017 is a good year for Volkswagen since the gross profit increased from 40998 million to 42545 million. The reason is that the Volkswagen increased its business performance in both US and Canada market. Volkswagen group had a good business performance in South America where sales revenue increased 25.3 percent due to higher import volumes effect (Volkswagen annual report 2017). The Asian market sale value rose by 9,4 percent because of higher import volumes too. (Volkswagen annual report 2017). Volkswagen group has moderately sales, general & administration costs of around 30 billion from 2015 to 2017. The research is part of sales, general & administration costs, for example, Daimler AG’s research development cost is 4 billion while the Volkswagen group research development cost is 13 billion. It shows that Volkswagen had done a good job in the research and development. Volkswagen Group is planning to invest more than 34 billion to future technologies by the end of 2022 (Volkswagen annual report 2017). (Data source in text: Volkswagen annual reports 2013-2017).
Analysis of Balance Sheet from 2013 to 2017
Based on the balance sheet, Volkswagen increased its asset and decreased its liability from 2016 to 2017, which is a good trend for the company financial health. Both current and non-current assets increased by 3 percent, bringing Volkswagen total assets to $422 billion. Current liabilities fell 10 percent in 2017 from a year earlier, but non-current liabilities rose 9 percent over the same period. Non-current debt is mainly the strengthen of debt operations to recover from the emissions scandal. Total debt fell 1% to 313 billion. Volkswagen succeeded in cutting short-term debt by 9% from 2016 to 2017. Its long-term debt rose 25% in 2016-2017. Volkswagen Group is financing future operating to reduce costs with emissions scandals.
Table 3. Volkswagen Group Balance Sheet from2013 to 2017. Source: Morningstar Volkswagen Group, Authors Calculations
From Manager Point of View
Current Ratio
Table 4. Current ratio. Data source: Morningstar.com
The current ratio of Volkswagen Group is close to 1 in the whole period from 2013 to 2017, which means that it can cover its current or short-term liabilities. Current ratio close to 2 is generally considered a good current ratio value, but this does not mean that these entities are in financial distress. A liquidity ratio close to 1 is a common and stable value for large automotive entities because all of these entities have strong operating cash flow. Low liquidity ratios are more common for large car companies, which have strong long-term revenue streams. This allows car companies to have larger current liabilities and finance the debt if necessary.
Quick Ratio
Table 5. Quick ratio. Data source: Morningstar.com
The quick ratio does not account for inventory in current assets. The average quick ratio of Volkswagen is about 0.70, and the change trend of quick ratio in 2013-2017 is more stable. That means Volkswagen can take on 70% of its debt immediately. High inventory levels in the automotive industry are part of the industry, so the speed ratio is often lower than 1. Daimler and BMW have quick ratios close to Volkswagen group. Toyota has a slightly better liquidity performance based on the quick ratio. A quick ratio of 0.70 for Volkswagen Group is considered tolerable because its results are close to those of its competitors.
From the Investor’s Point of View
Return on Asset
Figure 1. Return on assets. Data source: Morningstar.com
Volkswagen Group’s return on assets follows the trend of return on equity. The component analysis comes into the return on asset, the results show that the sales income is much lower than the competitors. Volkswagen’s asset turnover is close to its competitors. This means a lower return on assets due to the lower returns on sales, especially when Volkswagen group net income turned negative in 2015. Volkswagen has managed to boost its return on sales, increasing its return on assets from negative levels in 2015 to nearly three times that in 2017. Volkswagen still lags far behind its rivals in return on assets, but with high sales and strong expectations for future sales, it is showing signs of growth.
Debt to Equity Ratio
Figure 2. Debt to equity ratio. Data source: Morningstar.com
From a investor perspective, the Volkswagen group’s debt-to-equity ratio is at an average of 0.74, which is preferable to that of Daimler AG and BMW AG. Toyota has an average debt ratio of around 0.60, significantly lower than the other three companies. The debt-to-equity ratio of Volkswagen group increased from 0.75 to 0.82 in 2014-2015 because other current liabilities increased by 19% and other long-term liabilities increased by 49%. In 2014-2015 the debt incurred by Volkswagen to cover the costs of the emissions scandal and to maintain its financial efficiency. The group’s debt to equity ratio is good, although its debt-to-equity ratio edged up from 0.69 to 0.73 in 2016-17. Financing assets with equity is less profitable but less risky for Volkswagen long-term financial health.
Price Earning ratio and Price Sales Ratio
Figure 3. Valuation ratio. Data source: Morningstar.com
Volkswagen group’s price-to-earnings ratio is 7.1, slightly higher than Daimler AG’s 6.6 and BMW AG’s 6.9. On a price-to-earnings basis, it would be best to invest in Daimler’s BMW, but Volkswagen is not far from its German rival. Volkswagen Group AG and Daimler AG also have lower price to sales of 0.4, suggesting that both companies are trading at more attractive prices relative to revenue for BMW and Toyota Motor Corporation.
The Du Pont Formula
Return on equity can be divided into component analysis as DuPont analysis. DuPont analysis equals to profit margin times asset turnover rate times equity multiplier.
Net Profit Margin
Net profit margin is a ratio that compares how a company converts its net income into profit after expenses, including taxes. Volkswagen group’s net profit margin fell to -0.74 from 5.36 in 2015. The steep decline is due to the rising financial costs of the emissions cheating scandal. Volkswagen’s net profit margin rose to 2.37 in 2016 and 4.92 in 2017, close to 2014 levels. BMW has the most impressive net margin schedule, with net margins of nearly 7 percent in 2013-16 and 8 percent in 2017. Toyota’s ADR and Daimler AG posted net profit margins of just over 6 percent in 2017. Compared with its competitors, Volkswagen group has the lowest net profit margin, but Volkswagen has significantly improved its net profit margin in the past two years, and it will continue to increase in the beginning of 2018.
Figure 4. Net profit Margin. Data source: Morningstar.com
Asset Turnover
The asset turnover ratio of Volkswagen group dropped from 0.62 to 0.55 in 2013-2017, which was a significant decrease of adverse changes of Volkswagen. The asset turnover of BMW (0.52) and Toyota (0.57) is close to that of Volkswagen group. Daimler has the highest asset turnover ratio, at 0.66 in 2017, which means it can generate more sales per dollar of assets.
Figure 5. Asset Turnover. Data source: Morningstar.com
Equity Multiplier
Volkswagen group’s equity multiplier was same as Daimler AG in 2017 around 4. BMW AG’s equity multiplier is just under 3.6, while Toyota Motor Corporation’s market capitalization in 2017 was significantly less than 2.8. It shows that Toyota use more shareholder equity instead of debt. [image: ]
Figure 6. Equity multiplier. Data source: Morningstar.com
Return on Equity
The average return on equity of the Volkswagen Group in 2013-2017 is 7.67% while the average return on equity of German competitors exceeds Volkswagen 15%. In 2015 huge financial costs are reduced Volkswagen AG’s net profit and reduced shareholders’ equity because of emission scandal.
As the financial costs of the emissions scandal reduced Volkswagen’s net income, the consequences of the emissions cheating scandal in 2015 had a huge impact on its profitability. Despite the negative publicity from the emissions scandal, Volkswagen managed to increase its sales from 202 billion in 2014-15 to 213 billion and 217 billion in 2015-16. In 2017, Volkswagen’s sales rose 6 percent to 230 billion vehicles. It seems that Volkswagen is relatively easy to get rid of the emissions scandal because of loyal customers.
Figure 7. Return on Equity. Data source: Morningstar.com
Conclusion
Daimler AG and BMW AG are more profitable than Volkswagen AG. BMW AG has the highest net profit margin 874% above Volkswagen Group’s 2017 net profit margin of 492%. Daimler has the highest gross margin, return on equity and return on assets, which means it has a high efficient asset turnover and equity multiplier, but its operating expenses are higher than BMW.
The Volkswagen group follows an emissions scandal in September 2015. The operating expenses have increased since 2015, net profit margins have been significantly lower than competitors because of the emissions scandal. Volkswagen managed to significantly increase its negative margin for 2015, mainly by reducing operating expenses by 17 percent and increasing its sales by 8.2 percent during the 2015-2017 period. In 2015-17, net profit margin rose from 0.74 to 4.92. Volkswagen group’s net profit margin is still the lowest, but there are signs of rapid growth in the coming future.
The group’s liquidity ratio has reached a sufficient level. Its current ratio is stable and in 2017 is around one, which means that the current assets of Volkswagen group make up its current liabilities. The quick ratio is also at the full level of 0.70, which is in high inventory in car manufacturing. The Volkswagen group has a quick ratio between BMW (0,67) and Daimler (0,77).
This paper analyzes the solvency of Volkswagen group and makes an empirical analysis of other companies. Volkswagen’s average debt-to-equity ratio is 0.74 below BMW AG and Daimler AG. This ratio suggests that the Volkswagen group has a lower risk of future bankruptcy, but since these assets are more externally financed, it may not be able to generate earnings efficiently. Volkswagen’s balance sheet also shows that it has a strong financial fund and is not at risk, even though the emissions scandal has added to the debt.
Volkswagen group’s valuation is evaluated by price-to-earnings ratio and price-to-sales ratio. Volkswagen’s shares are the most undervalued of the four entities. Volkswagen group has the highest market value relative to book value and the lowest share price relative to revenues. Daimler AG is also an attractive entity on a price-to-earnings basis because of its high earnings relative to the industry’s share price.
In conclusion, from the manager and investor perspective, Volkswagen group is at an adequate level. Profitability has not yet risen to the level of BMW and Daimler, but it shows positive signs of growth in the future. Operational efficiency is considered long-term and should be reduced through management decisions. Compared with BMW and Toyota, the cash conversion cycle is inefficient because of the long inventory turnover time. Management should manage inventory levels more carefully to reduce the time and cost. The assessment shows that Volkswagen group’s current performance and market value are undervalued.
Reference
Berk, J., De Marzo, P. & Harford, J. (2015). Fundamentals of Corporate Finance. London: Pearson Education 3rd or 4th edition.
BMW AG annual reports 2013-2017 https://www.press.bmwgroup.com/global/article/detail/T0279390EN/bmw-group-annual report-2017?language=en
Daimler AG annual reports 2013-2017 https://www.daimler.com/investors/reports/annual-reports/
Toyta Motor Corporation annual reports 2013-2017 http://www.toyota-global.com/investors/ir_library/annual/
