Category: Volkswagen

Identification of Strategic Issues of The Volkswagen Group: Analytical Essay

Introduction

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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Evaluation of Historical Financial Performance of Volkswagen Group: Analytical Essay

Introduction

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

1. Berk, J., De Marzo, P. & Harford, J. (2015). Fundamentals of Corporate Finance. London: Pearson Education 3rd or 4th edition.
2. BMW AG annual reports 2013-2017 https://www.press.bmwgroup.com/global/article/detail/T0279390EN/bmw-group-annual report-2017?language=en
3. Daimler AG annual reports 2013-2017 https://www.daimler.com/investors/reports/annual-reports/
4. Toyta Motor Corporation annual reports 2013-2017 http://www.toyota-global.com/investors/ir_library/annual/
5. Volkswagen annual report, (2017) https://www.volkswagenag.com/presence/investorrelation/publications/annual-reports/2018/volkswagen/en/Y_2017_e.pdf
6. Volkswagen annual report, (2016) https://www.volkswagenag.com/presence/investorrelation/publications/annual-reports/2017/volkswagen/en/Y_2016_e.pdf
7. Volkswagen annual report, (2015) https://www.volkswagenag.com/presence/investorrelation/publications/annual-reports/2016/volkswagen/englisch/Y_2015_e.pdf
8. Volkswagen annual report, (2014) https://www.volkswagenag.com/presence/investorrelation/publications/annual-reports/2015/volkswagen/english/GB+2014_e.pdf
9. Volkswagen annual report, (2013) https://www.volkswagenag.com/presence/investorrelation/publications/annual-reports/2014/volkswagen/english/Y_2013_e.pdf

Effect of Volkswagen Scandal: Critical Analysis

Abstract

Volkswagen is one of the biggest vehicle makers on the planet. For quite a long time the organization has concentrated on delivering alluring and naturally well-disposed vehicles, and late activities have incorporated a task to diminish CO2 generation, alongside promotions asserting lower emanation of ozone harming substances. The world was stunned to hear that Volkswagen had been creating diesel motors for its vehicles that had the capacity to trap emanations testing hardware. The motors were creating commonly the EPA models for outflows, yet they breezed through discharge tests. This case gives nitty gritty data about the embarrassment just as data about the history, tasks, and expressed estimations of Volkswagen, just as a portion of the early activities of the organization to manage the outrage.

In the ongoing decades protection and feasible condition are of extraordinary worry to the countries. The characteristic wonder, for example, globalization and furthermore condition contaminations, for example, emanation have been considered by an extraordinary number of ecological assurance offices and joined country organizations. A perceptible consideration regarding preservation and sparing green have driven Ecological Insurance Office (EPA) fix outflow control on account of destructive and mortal impacts of nitrogen oxide which is a poison found in vehicle’s fumes (Klier, and Linn, 2016). Accordingly, since 1970s EPA has declared consistently more limitations on standard of outflow for light-obligation vehicles involving little pickup trucks, autos, and sport-utility vehicles. The most stringent necessities for discharge benchmarks were for vehicle models of year 2004 (Klier, and Linn, 2016). EPA as well as government organization made critical lessening (94%) in the measure of transmitted nitrogen oxide by vehicles tailpipe from 1.25 to 0.07 grams per mile (Klier, and Linn, 2016). The new emanation standard presented enormous hardship to automakers producing eco-friendly diesel vehicles to the US car showcase. One of the market players in vehicle industry is Volkswagen endeavoring to split the US diesel showcase; thus, Volkswagen turned into a considerable dealer in automaker advertising. Volkswagen contenders specifically Honda, Hyundai, Mazda, and Nissan found new outflow norms essentially testing; hence, they settled on choice to scrap their strategies (Davenport, and Hakim, 2016). Shockingly, in the years 2015, Volkswagen was declared as ‘diesel hoodwink’ in the excellence of gear outflow test to influence diesel vehicles to appear discharging less contamination than what they truly produce (Clothier, 2015). In September 2015 it was accounted for by EPA that in an abundant number of Volkswagen vehicles, sold in around the world, a thrashing gadget or programming was installed in diesel motor with the reason for changing vehicle execution to improve required outcome. Volkswagen went for imagining that its vehicles pursue outflow norms; in this way, directed emanation test in the lab rather than on the streets (Le Page, 2015). Volkswagen autos were modified to identify the circumstance where vehicles with TDI diesel motors experience emanation test and afterward take data from brakes, quickening agent, and guiding. In this way, the program rolled out slight improvements to motor settings with the reason for lessening the nitrogen oxide level produced by Volkswagen diesel autos.

VW Background

The VW Group, headquartered in Wolfsburg, Germany, isn’t just a main producer of autos and business vehicles, yet additionally, the biggest carmaker in Europe Volkswagen works in excess of 100 processing plants worldwide and has more than 600,000 representatives. The gathering, regurgitated of post-World War II Germany, was established by Hitler in 1936 and later revamped under another administration structure. The organization protected by the British Army after the war moved toward becoming privatized in 1960(”Ferdinand Piech,2017). The German State of Lower Saxony and ahead of schedule in , the German Federal government, were given unique possession rights and board seats. The new framework was planned around profound associations between the executives, workers(union and work councils), and local lawmakers.

The gathering created, structured, produced, and showcased 12 brands of autos and trucks overall including Volkswagen Passenger Cars(50% of all Group Sales), Audi, SEAT, SKODA, Bentley, Bugatti, Lamborghini, Porsche, Ducati, Volkswagen Commercial(Truck ) Vehicles, Scania and MAN. In 2016, the organization outperformed Toyota, becoming the biggest automaker on the planet with offers of 10.3 million units. It has kept up the biggest piece of the overall industry in Europe for more than two decades and positioned seventh in the 2016 Fortune Global 500 rundown of the world’s biggest companies(”Ferdinand Piech, ” 2017). Before the finish of 2015, VW sold over 10.8 million diesel-controlled vehicles worldwide with 2.8 and 1.2 million sold in Germany and the Uk individually.

People Involved

The six administrators deal with indictments of intrigue to submit misrepresentation and infringement of the U.S. Clean Air Act. Those prosecuted were Heinz-Jakob Neusser, 56, Jens Hadler, 50, Richard Dorenkamp, 68, Bernd Gottweis, 69, Oliver Schmidt, 48, and Jürgen Peter, 59, all of Germany. Schmidt was captured and charged not long ago in Miami.

The majority of the denounced have connections to Volkswagen’s motor advancement and quality affirmation divisions, both in the U.S. furthermore, Germany. They guided workers to create and introduce innovation to avoid outflows testing, at that point erroneously showcased the vehicle motors as ‘spotless diesel,’ as indicated by the DOJ.

Another previous Volkswagen representative, engineer James Liang, concede to misrepresentation charges in September. A representative for Volkswagen declined to unveil the work status of the six arraigned people, referring to an arrangement not to examine continuous examinations or staff matters.

Hans Dieter Pötsch, who seats the organization’s supervisory board, said in an announcement: ‘When the diesel matter wound up open, we guaranteed that we would get to its base and discover how it occurred – completely and impartially. . . . We are never again a similar organization we were 16 months prior.’

Volkswagen shed a few top administrators and actualized other inside changes after the outflows outrage became known. The organization additionally apologized to U.S. legislators and swore to recapture the trust of American buyers. The DOJ said those activities helped the organization dodge much more extreme punishments.

A judge should now affirm the settlement before it’s made authority. That court date has not been set, a DOJ representative said.

College of Richmond law educator Carl W. Tobias said the Volkswagen settlement makes an impression on different organizations that illicit direct can accompany unforgiving punishments. In any case, the rest of the parts of the examination will currently rely upon president-elect Donald Trump’s approaching organization.

‘Various inquiries stay, for example, who else at VW may be indicted, regardless of whether the five [in Germany] can be conveyed to equity, whether VW’s conduct will improve, and so on.,’ Tobias said.

Volkswagen is accused of scheming to dupe the administration and damage natural guidelines from May 2006 to November 2015 by introducing gadgets in its diesel motor vehicles that darken the measure of nitrogen oxide they heave into the air. Those gadgets and going with programming permitted Volkswagen to sidestep controllers for quite a long time, the DOJ affirms.

Corporate governance

“We may define corporate governance as a blend of rules, regulations, laws and voluntary practices that enable companies to attract financial and human capital, perform efficiently and thereby maximize long term value for the shareholders besides respecting the aspirations of multiple stakeholders including that of the society” (Gopalsamy, 2008, p. 21)

Effect of Volkswagen Diesel Scandal

In the year 2014, Volkswagen was the world’s second biggest automaker in vehicle industry after Toyota Motor Corporation. In the year 2015, Volkswagen conceded fixing in diesel emanation test which made the organization experience the ill effects of tremendous measure of cost trouble. Volkswagen has acquired three (3) advertising firms situated in United States, Britain, and Germany to help the organization to adapt to the emergency. In addition, Volkswagen has utilized the previous interchanges of BMW as an advisor to work 60 hours per week with pay of $22,000 every month (Hakim, 2016). Also, since this case incorporates different nations over the world, Volkswagen is required to manage distinctive universal guidelines. The essential results of this dishonest tricky embarrassment are recorded as pursue (Hakim, 2016).

1. Threatening People’s Health

By end of 2016, Volkswagen autos with thrashing gadget will have delivered extra dangerous contamination to straightforwardly trigger unexpected passing of approximately sixty (60) people only in the United States. From the year 2008 to 2015, 428,000 Volkswagen and Audi diesel vehicles siphoned out nitrogen oxide forty (40) times more than it was permitted by the Clean Air Act. It is evaluated by the analysts that with six (6) years Volkswagen and Audi diesel delivered an overabundance of 36.7 million kg nitrogen oxide to the earth (Selin, 2015b). Nitrogen oxide is an essential component of particulate and exhaust cloud matter which clears the ground for different sickness in particular coronary illness, unexpected passing, bronchitis, and respiratory and cardiovascular malady. Specialists have assessed that critical effects of nitrogen oxide created by Volkswagen vehicles imperil 60 human lives from 10 to 20 years rashly (Selin, 2015a). It is noticed that abundance of contamination from Volkswagen vehicles took part straightforwardly in thirty-one (31) and thirty-four (34) constant bronchitis and affirmation of respiratory and hearth cases separately in the United States. Extra contamination to nature will results in 120,000 minor confined action day and around 210,000 days of less respiratory signs. The affliction of individuals more than six (6) years from 2008 to 2015 will cost United States $450 million (Kalaugher, 2015). In the event that Volkswagen decreases to review vehicles with annihilation gadget, from 2015 onwards 140 unexpected losses will occur. What’s more, wellbeing cost of $840 million will be brought about by the Volkswagen diesel vehicles (Chue, 2015). Furthermore, an overabundance of nitrogen oxide to the indigenous habitat by Volkswagen diesel vehicles results in corrosive rains (The Editorial Board, 2016). The corrosive downpours not just have urgent effect on human wellbeing bot additionally have indispensable obliteration on nature and regular asset.

2. Droop in Workforce’s Bonus

When fixing in diesel discharge test was uncovered to people in general, offers of Volkswagen was influenced. In this manner, Volkswagen so as to adapt to emergency, has reported that reward of boss administration will be diminished significantly (Moulson, 2016). Volkswagen said an explanation that different models which build up reasonable and normal answer for all taken an interest parties are being thought. Thus, this prompts an extensive reduction of variable compensation. The decrease in reward will incorporate administration board and furthermore a gathering of official positions helping CEO to work the organization’s day by day schedule. It is said that the reward of German likeness directorate, which is the supervisory of Volkswagen, would not be decreased aside from Volkswagen executive Hans Dieter Poetsch (Moulson, 2016).

3. Drop in Volkswagen Sale

Although Volkswagen diesel outrage has brought about critical effect on Volkswagen bunch marks in particular Audi and Skoda, droop in offers of Volkswagen vehicles are far considerable than gathering brands. The terrible notoriety of Volkswagen has influenced its client dependability; in this way, costumers change from Volkswagen to its rivals which lead to a perceptible drop in deals (Kottasova, 2015). Since 2002, out of the blue, in 2015 offers of Volkswagen dove worldwide considerably in ethicalness of misleading embarrassment. The accompanying figure speaks to that Volkswagen’s deals is consistently diving in the United States (BBC, 2016; Sky UK, 2016; Waecsh, 2016).

4. Dive in Volkswagen Shares

A deceptive routine with regards to Volkswagen prompted a sensational droop in offer esteem. Quickly once Volkswagen outrage was uncovered, advertise demonstrated response in this manner share estimation of the organization dropped by 33%. At the end of the day, the emanation of embarrassment cleaned billion dollars from Volkswagen esteem (Gomez, 2016)

5. Making Hassel for Volkswagen Dealers

At the point when tricky outflow occurred, a bundle of explicit projects with the reason for helping retailers to adapt to Volkswagen fixing in diesel discharge test was given to Volkswagen vendors (Ausick, 2016). The program incorporates explicit measure of cash in type of offers extra, impetuses, or appropriation infused to business organize battling with lower deals and benefit. The clearance of Volkswagen diesel autos, which incorporates simply over 20 rates of all out deals, was ceased. Hence, sellers are as yet experiencing slender benefit and drowsy deals (Beene, 2016). The CEO of Volkswagen America expressed that further projects will be considered for vendors with income, yet at the same time explicit date isn’t announced for projects (LaReau and Ryan, 2015). An extraordinary number of workers are worry about their employer stability and they are disappointed to experience with clients suspending them whether they knew about organization’s outrage or not (LaReau and Ryan, 2015). Another Volkswagen dealer in east coast said that dealers of Volkswagen in the United States are not making money or merely breaking even. Moreover, the dealer adds that the given fund assists to break even or present thin profit. The other dealer of Volkswagen Bill Wallace in Stuart said that overall customer traffic has reduced significantly and also it is critical to convert shoppers to sales. Therefore, the discretionary fund assists to him to close the deals (LaReau & Ryan, 2015). General Manager of Volkswagen Tom Backer in New York said that some amount of the given fund will be utilized primarily to close deals with the owner of diesels cars who are unwilling to get into Volkswagen gasoline cars, whilst the rest of discretionary fund will be given to sales workforces with the purpose of improving their satisfaction and motivation (LaReau & Ryan, 2015).

Financial impact and lessons learned

Volkswagen took an expansive money-related blow after the embarrassment. As recently referenced, their stock was at that point in decrease because of inward issues and the Chinese market. In any case, their stock dropped an extra 30% after the outrage. This drop is about a half drop since its record high a couple of months sooner (Appendix B) As of February 24, arrangements for the embarrassment rose to $23.9 billion. In 2015, VW saw a total deficit of $6.2 billion, its first misfortune since 1993, and a 2% decrease in vehicle sales.VW is moreover eliminating 30,000 positions to recuperate costs just as cutting variable pay and rewards for its top officials for quite a long while (Kottasova, 2016).

There are three lessons learnt-

1. Suspend and additionally survey present and up and coming advertising

Gravely planned promotion crusades, which for VW’s situation ended up being deceiving, can accomplish more damage than anything else. After updates on the outrage broke, VW naturally suspended all their live advertisement battles to keep away from further harm to the organization’s notoriety. This was especially difficult for VW’s battles in the US, where their vehicles are situated as ‘perfect diesel’.

2. Take a position

There are three alternatives with regards to reacting to an emergency – they can acknowledge fault and energetically apologize (like VW has done), they can effectively guard yourself and their organization, or they can endeavour to redirect consideration far from an issue and expectation it will blur away. Every strategy can work, however poor decisions made at the beginning can blowback.

3. Brief your kin

In the event that your organization’s emergency starts to pull in media consideration, you have to guarantee that your organization talks with one voice and conveys a reasonable, steady message. To this end, any staff expected to draw in with the media should be informed appropriately. Volkswagen fell at this obstacle when they sent Paul Willis, the overseeing chief of VW’s UK task, to address the vehicle select advisory group about the outrage.

Recommendation

It is obvious that the foundation of this deceptive outrage returns to business culture and structure of the organization. The present business rehearses are far not the same as the past practices. The consistence-based business morals like Volkswagen approach decreases to treat representatives morally and furthermore workers face situation of free employment or make exploitative move; along these lines, the organization gets switch result. The activities of workers have significant job in progress or disappointment of the organization in this way it is essential to esteem representatives and improve their good to achieve errands morally. In esteem base practices chain of importance does not exist rather the representatives work in groups to accomplish anticipated outcomes. Also, esteem based business morals advance vote based system in the organization which implies officials have the opportunity to voice their grumblings to seniors or offer their thoughts inside the organization which may result in more noteworthy profitability. What’s more, clearly outflows and contaminations are of critical worry to EPA. Accordingly it is obvious that EPA new and exacting discharge norms forced outrageous strain to car industry. EPA has a basic job to lighten the extraordinary weight on automakers by giving and offering innovation and innovative work (R&D) helps. Instance of Volkswagen uncovers that stringent emanation gauges brought about inverse anticipated result with a progression of destroying occasions. Accordingly, it is noteworthy to get ready for achievable emanation principles and furthermore give mechanical and R&D backing to automakers to forbid such case to occur. All things considered, so as to avoid such embarrassment to happen in future, it is prescribed to the organizations to esteem their representatives through esteem based methodology. Moreover, EPA is prescribed to give strong projects to automakers to guarantee dimension of contaminations and discharges are leveled out.

Conclusion

As per discoveries and examination under past segments, Volkswagen tricky embarrassment is a staggering entangled case having made sensational issues for its immediate and backhanded partners. Yet Volkswagen swindling in diesel emanation test was an unscrupulous activity bringing about arrangement of tragic outcomes, the proposition of green discipline is a reasonable answer for settle this case. Electronic autos empower condition insurance offices to spare expense and time for discovering new frameworks for controlling outflow tests. Besides, along these lines, Volkswagen isn’t just punished yet in addition repays its embarrassment suitably. All in all, since this is a continuous case, there is an opportunity to stop the proposition of green discipline to make a decision to tackle the issue in a success win technique.

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