Team Maxxim presents

Volkswagen AG

Marketing Strategy Recommendation EBA 605, Dr. J. Coleman Saturday, April 22, 2006

Agenda
I. II. III. IV. V. VI. VII. VIII. IX. Current Situation & Trends Performance Review Key Issues Objectives Marketing Strategy Action Plan Projected Profit-and-Loss Statement Controls Contingency Plans
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Market Situation
Mature passenger car market in North America and Europe Sales expected to rise 0.6% and 1.6% for North America and Europe, respectively, through 2009 Global passenger car sales are forecast to grow by around 7 million units through 2009, or just under 3% annually India and China is expected to account for more than half of this growth

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Car Sales According to Groups, Worldwide

Mil. Vehicles
GM Ford/Volvo Toyota/Daihatsu Volkswagen DaimlerChrysler PSA Honda Nissan Renault Fiat/Ferrari BM W

8.2 6.8 6.7 5.2 4.7 3.4 3.0 2.9

2.5
1.9 1.2

Source: manufacturer`s data, JAMA.

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Global Competitive Overview

Global Top Auto Companies

4% 3% 5% 7% 7%

18%

GM Ford Toyota Volkswagen DaimlerChrysler 14% PSA/Peugeot-Citroen Nissan Honda Renault Fait/Ferrai BMW

7%

10% 11%

14%

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*Numbers based on 2004 Marke tshare

WORLD CAR POPULATION

Developing World = 300% Increase Between 1995 & 2020

Greater Demand & Less Resources Accelerated Greenhouse Emissions Environmental & Energy Trends = Negative Economic Impacts

World Car Population 800000000 700000000 600000000 500000000 400000000 300000000 200000000 100000000 0 YEAR 1930

TREND IN WORLD CAR POPULATION

CARS IN REST OF WORLD

CARS IN U.S.
1940 1950 1960 1970 1980 1990 2000 2010 2020

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Competitive Situation
General Motors, Nissan and Toyota have cut into Volkswagens market share Volkswagen once held a 50% market share in China, its now around 20% China and India both serving as key manufacturing locations with major players

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Volkswagen Group Market Share - 2005

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Corporate Overview HQ: Wolfsburg, Germany US Operations: Auburn Hills, MI Europes #1 automobile manufacturer Annual production: 5M vehicles Annual sales: $121,345/ 10.9 YOY growth Employees: 342,502 worldwide

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Key Milestones
1930s
Factory opened in

1940s
Production of first

1950s
VW begin building

1960s
Sold stock to the German public Purchased Auto Union (AUDI) US Beetle sales took off

Wolfsburg, Germany

Volkswagen Company turned over to German government

foreign plants Launched Beetle in US market Developed Microbus

1970s

1980s

1990s
Built Chinas largest auto plant Integrate Skoda Acquires Rolls-Royce and Bugatti Launched New Beetle in US

2000s
Spent 3.1B to modernize factories The final Beetle ended a 70-year run Invested 1.7B in China (Asia/Pacific) Bernd Pischetsrieder joined company

Beetle discontinued Begin car venture in in every country except China Mexico Purchased SEAT Formed Autolatin in Brazil

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Volkswagen Global Marketing Mix

Brand portfolio
Volkswagen Audi Seat koda Bugatti Bentley Lamborghini Commercial vehicles

Unique brand identity for

Development of

each nameplate Complete product range Mostly standardized products with minor adaptations

distribution partners Separated distribution channels for each brand International standardization of dealers

Setting prices with regard to

Global Marketing Mix

4

Localized communication
Emphasis on the European

competitors Price discrimination across regions No price competition in emerging markets Strict cost controlling
3

market Brand advertising Emotionalization

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Volkswagen Group
Automotive Division
VW Brand Group
VW P Cars *Passat *FOX *Jetta *Beetle *Golf Skoda Bentley Bugatti

Financial Services Division

Financial Services
Dealer & Customer Financing Leasing Insurance Fleet business

Audi Brand Group

Audi SEAT Lamborghini

Commercial Vehicles

Other Companies
Financing

Europcar

Buses and Vans

Rental Business

Servicing

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Source: www.volkswagen-ir

Key Issues Extreme global competition, particularly from American and Asian manufacturers Slow revenue growth due to inflated cost of raw material and rising administrative costs Stagnant demand because of overcapacity and product proliferation in western markets Controlling cost while simultaneously generating revenue Rapid foreign investment in Chinese and Indian markets
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How do we tackle these issues?.....

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Objectives Increase operating cash flow Increase sales and market share Expand targeted-market segment Maximize fuel efficiency Be first to market with new product Introduce hybrid vehicle, koda Octavia, in India Conduct financial feasibility study
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Financial Feasibility
KODA AUTO / KODA GROUP PROFIT BEFORE TAXATION
Millions of CZK
KODA AUTO a.s. according to S*

SIMPLYCLEVER

IFRS CZ, koda Group 10,073

4,815 2,875 163 0.3 3.2 4,175 3,702 3,814 2,674 2,489 2,517 3.5 3.5 3.1 1.7 1.7 1.7 3.2

4,843 5.4 3.0

Profit before taxation Rate of turnover return (%)

1996

1997 1998 1999 2000 2001 2002 2003 2004

2004

2005

* S Czech Accounting Standards

Financial Feasibility Labor Costs

Exhibit 4A Average annual base pay 2007 # of Employees 3 1 2 1 1 2 2 3 5 280 300 $ $ 2008 # of Employees 3 1 4 1 1 2 2 3 5 428 450 $ $ Position HR manager Marketing manager Project manager Software development engineer Financial analyst Accountant Senior customer service officer Sales representative Customer service assistant Production worker (skilled)

India $15,100.00 $14,300.00 $10,000.00 $10,300.00 $ 8,400.00 $ 5,700.00 $ 8,200.00 $ 4,700.00 $ 1,600.00 $ 1,900.00

Total Cost $ 45,300.00 $ 14,300.00 $ 20,000.00 $ 10,300.00 8,400.00 $ 11,400.00 $ 16,400.00 $ 14,100.00

Salary $15,855.00 $15,015.00 $10,500.00 $10,815.00 $ 8,820.00 $ 5,985.00 $ 8,610.00 $ 4,935.00 $ 1,680.00 $ 1,995.00

Total Cost $ 47,565.00 $ 15,015.00 $ 42,000.00 $ 10,815.00 8,820.00 $ 11,970.00 $ 17,220.00 $ 14,805.00

8,000.00 $ 532,000.00 $ 680,200.00

8,400.00 $ 853,860.00

$1,030,470.00

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Financial Feasibility Labor Costs

Exhibit 4B Average annual base pay 2009 # of Employees 3 1 6 1 1 2 2 3 5 576 600 $ $ 2010 # of Employees 3 1 6 1 1 2 2 3 5 576 600 $ $ Position HR manager Marketing manager Project manager Software development engineer Financial analyst Accountant Senior customer service officer Sales representative Customer service assistant Production worker (skilled)

Salary $16,647.75 $15,765.75 $11,025.00 $11,355.75 $ 9,261.00 $ 6,284.25 $ 9,040.50 $ 5,181.75 $ 1,764.00 $ 2,094.75

Total Cost $ 49,943.25 $ 15,765.75 $ 66,150.00 $ 11,355.75 9,261.00 $ 12,568.50 $ 18,081.00 $ 15,545.25 8,820.00

Salary $17,480.14 $16,554.04 $11,576.25 $11,923.54 $ 9,724.05 $ 6,598.46 $ 9,492.53 $ 5,440.84 $ 1,852.20 $ 2,199.49

Total Cost $ 52,440.41 $ 16,554.04 $ 69,457.50 $ 11,923.54 9,724.05 $ 13,196.93 $ 18,985.05 $ 16,322.51 9,261.00

$1,206,576.00 $1,414,066.50

$1,266,904.80 $1,484,769.83

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Financial Feasibility Labor Costs

Exhibit 4C Average annual base pay 2011 # of Employees 3 1 6 1 1 2 2 3 5 576 600 $ $ $ $ $ $ $ $ $ Position HR manager Marketing manager Project manager Software development engineer Financial analyst Accountant Senior customer service officer Sales representative Customer service assistant Production worker (skilled)

Salary $18,354.14 $17,381.74 $12,155.06 $12,519.71 $10,210.25 $ 6,928.39 $ 9,967.15 $ 5,712.88 $ 1,944.81 $ 2,309.46

Total Cost 55,062.43 17,381.74 72,930.38 12,519.71 10,210.25 13,856.77 19,934.30 17,138.64 9,724.05

$1,330,250.04 $1,559,008.32

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Financial Feasibility
Reported Annual Income Statement Currency Auditor Status Consolidated Scale Sales revenue Actual 2003 Dollars Yes Actual 2004 Dollars Yes Actual 2005 Dollars Yes Projected Projected Projected Projected Projected Projected 2006 Dollars Yes 2007 Dollars Yes 2008 Dollars Yes 2009 Dollars Yes 2010 Dollars Yes 2011 Dollars Yes

millions
109,394

millions
121,346

millions
112,826

millions
116,211

millions
119,697

millions
123,886

millions
128,842

millions
135,284

millions
142,048

Cost of sales 97,597 Gross profit automotive 11,798 division Gross profit financial services division
Depreciation & Amortization 10,541

106,992
14,353 9,251

97,576
15,250 8,352

100,503
15,708 7,517

103,518
16,179 7,211

106,624
17,263 6,920

109,822
19,020 6,644

113,117
22,167 6,382

116,510
25,538 6,133

Distribution costs
Administrative expense Selling & distribution expenses General administration expenses Other operating income Other operating expenses Operating profit Net Cash Flow 11,798 22,339

9,880
2,800 5,393 3,477 3,589 12,840

10,291
2,852 5,602 3,162 4,548 12,900

10,718
2,904 5,819 2,875 5,029 12,546

11,255
3,021 6,052 2,990 4,965 12,175

11,845
3,141 6,294 3,109 5,461 12,381

12,467
3,267 6,545 3,234 6,598 13,242

13,152
3,398 6,807 3,363 9,061 15,443

13,876
3,53 4 7,080 3,498 11,710 17,843

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Financial Feasibility Break Even Point

Break Even Point - Volkswagen India
$900.00 $800.00 $700.00 $600.00 $500.00 $400.00 $300.00 $200.00 $100.00 $Year 1 Year 2 Year 3 Year 4 Year 5

Break Even Point

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Financial Feasibility Sales Per Year

Sales per Year Volkswagen
Exhibit 2

125,000

Dollars in millions

120,000 115,000 110,000 105,000 100,000 95,000 90,000 2000 2001 2002 2003 Year Scale Sales revenue

12 1, 34 6 10 9, 39 4 11 2, 82 6

10 4, 18 6

10 7, 04 6

10 5, 12 1

2004

2005

Log. (Scale Sales revenue)

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Financial Feasibility Sales Per Year

Cost of Sales Volkswagen
Exhibit 3

Dollars in millions

110,000 105,000 100,000 95,000 90,000 85,000 80,000 2000 2001 2002 2003 91,018 91,384 89,694 97,597

106,992 97,576

2004

2005

Years Cost of sales Log. (Cost of sales)

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Weighted Average Cost of Capital

Cost of Capital
Component Weight Cost Weighted Cost

Common Equity Debt Preferred Stock

0.75 0.15 0.1

$125,000,000 $125,000,000 $125,000,000 $125,000,000

$97,750,000 $18,750,000 $12,500,000 $16,137,500

WACC 0.1291

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Financial Feasibility Profit/Loss Statement

Projected Net Cash Flow for India Investment Outlays: Long Term Assets Equipment Additional Net Working Capital Operating Cash Flows over Project's Life Units sold Sales Costs (from cost sheet) Net Revenue Depreciation (from depreciation - input sheet) Before-tax-income Taxes (40%) Net Income Add Depreciation Net Operating Cash Flow Salvage Cash flows After Tax Salvage Cash Flows from equipment Return of NOWC Net Cash Flows $ 76,275,000.00 0 2006 $ (125,000,000.00) 1 2007 2 2008 3 2009 4 2010 5 2011

2500 $ 75,500,000.00 $ 2,130,200.00 $ 73,369,800.00 $ 25,000,000 $ 48,369,800 $ (30,200,000.00) $ 18,169,800 $ 25,000,000 $ 43,169,800

3750 $ 113,250,000.00 $ 3,242,970.00 $ 110,007,030.00 $ 25,000,000 $ 85,007,030 $ (45,300,000.00) $ 39,707,030 $ 40,000,000 $ 79,707,030

5000 $ 151,000,000.00 $ 3,000,000.00 $ 148,000,000.00 $ 25,000,000 $ 123,000,000 $ (60,400,000.00) $ 62,600,000 $ 23,750,000 $ 86,350,000

5000 $ 151,000,000.00 $ 3,050,000.00 $ 147,950,000.00 $ 25,000,000 $ 122,950,000 $ (60,400,000.00) $ 62,550,000 $ 15,000,000 $ 77,550,000

$ $ $ $ $ $ $ $ $

5000 151,000,000.00 3,075,000.00 147,925,000.00 25,000,000 122,925,000 (60,400,000.00) 62,525,000 13,750,000 76,275,000

Net Terminal Cash flows at Year 4 Salvage Value Tax on Salvage Value Recovery on NWC Net Terminal Cash Flow $100,000,000 $40,000,000 $24,000,000 $60,000,000 $24,000,000 $14,400,000 $36,250,000 $14,500,000 $8,700,000 $21,250,000 $8,500,000 $5,100,000 $7,500,000 $3,000,000 $1,800,000

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Marketing Strategy Enhance regional presence and geographical spread Increase customer orientation Leapfrog approach Niche penetration Technological differentiation More efficient use of resources

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Action Plan
Select premier dealerships to carry the koda hybrid Develop dealer training programs Project and sales managers collaborate to acquire new customers and increase customer loyalty Build awareness of koda hybrid through sales promotions and easy financing Use Volkswagen Groups brands to increase customer awareness

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Volkswagen Group Brand Portfolio

Sophistication

Zones of Low Demand

Zones of Low Demand

Functionality

Emotion

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The VW Customer Positioning Statement: For the cost conscience buyer, Volkswagen offers reliability and value. Value Proposition: Target Market: Cost conscience buyer (parents, females, young adults) Benefits offered: German technology Relative price: Affordable, reliable

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Controls & Contingency Plan

Design service programs that address potential concerns Continued research and development aimed at product improvements or modifications that appeal to target segment Increase penetration with market segments and/or distribution intensity

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The Golden Steering Wheel to the New koda Octavia

The new koda Octavia won the Bild am Sonntags prestigious Golden Steering Wheel award during a ceremony in Berlin. Volkswagen AG

Look how roomy.

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Look at that automatic console!

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koda Octavia Hybrid

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koda Octavia Hybrid

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References

Brodrick, Sean. Set Your Sights On Asias Sleeping Elephant. http://www.escapeartist.com/efam/70/Invest_In_India.html Culp, Eric, VW in Fresh Trouble as it Withdraws US Model, Knight Ridder Tribune Business News, November 2005, pg. 1. Datamonitor. Volkswagen AG: Company Profile <http://www.datamonitor.com (October 2004)> Datamonitor. Volkswagen AG: Company Profile <http://www.datamonitor.com (October 2005)> Eisenstein, Paul A. Putting things right at the peoples car company. TheCarConnection <http://www.thecarconnection.com/Auto_News/Profiles_QA/QA_VW_CEO_Bernd_Pischetsrieder.s193.A7952 January 10, 2005)> Flint, Jerry, The Fast and the Furious, www.forbesauto.com, January 2006. Fondon, Daren, A Pitch to the Rich, Time Online, November 2003. ForMotion Program and New Model Initiative Generate Significant Increase in Volkswagen's Earnings. The VWGazette <http://vwgazette.blogspot.com/2006/03/formotion-program-and-new-model.html (March 7, 2006) > Hoovers Company Information, Hoovers, Inc. 2006. Landler, Mark, Volkswagen Chairman Step Down, New York Times, January 2006. Landler, Mark, Porsche to Build a 20% Stake in VW, The Detroit News Auto Insider/New York Times News Service, September 2005. Pischetsrieder, Bernd. Letter To Our Shareholders. Annual Report 2005 <http://gb.volkswagen.de/index.php@id=757&type=2.html (March 7, 2006)> Power, Stephen, Once Hot Volkswagen Attempts to Reverse U.S. Sales Decline, Wallstreet Journal (Eastern Edition), New York, NY, September 2005, pg A8 Racanelli, Vito J., Turn Around Ahead at Volkswagen, Barrons, May 2005, Volume 85, Issue 20, pg 26. koda Reaches Record Sales in March and the First Quarter of 2006. koda Auto <http://www.volkswagen-ir.de/fileadmin/vwir2/dokumente/inv_news/2006/Q2/20060410_Skoda_e.pdf (October 4, 2006)> Source: adapted from P. Dicken (2003) Global Production Networks In Europe And East Asia: The Automobile Components Industries, GPN Working Paper 7, University of Manchester, http://www.sed.manchester.ac.uk/geography/research/gpn/gpnwp7.pdf Tierney, Christine. Teutonic infighting tests VW's resolve to revive operations. The Detroit News Auto Insider/The Insiders <http://detnews.com/apps/pbcs.dll/article?AID=/20060314/AUTO02/603140345/-1/ARCHIVE (March 14, 2006)> Thomas, Chad & Archey, Sheenagh, Porsche Buys 20% in VWs Shares to Prevent Takeover, Bloomberg News, http://quote.bloomberg.com/apps/news, September 2005 Volkswagen announces worldwide sales record in first quarter. Volkswagen AG: Investor Relations <http://www.volkswagenir.de/fileadmin/vw-ir2/dokumente/inv_news/2006/Q2/20060405_VW_e.pdf (April 5, 2006)> Xinhuanet, Volkswagen sales in China hit record. New Age Business <http://www.newagebd.com/2005/oct/13/busi.html (October 13, 2005)>

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