Team Maxxim presents Volkswagen AG Marketing Strategy Recommendation

Team Maxxim presents Volkswagen AG Marketing Strategy Recommendation EBA 605, Dr. J. Coleman Saturday, April 22, 2006

Agenda I. III. IV. V. VIII. IX. Current Situation & Trends Performance Review Key Issues Objectives Marketing Strategy Action Plan Projected Profit-and-Loss Statement Controls Contingency Plans Volkswagen AG

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 Volkswagen AG

Car Sales According to Groups, Worldwide Mil. Vehicles GM 8. 2 6. 8 Ford/Volvo Toyota/Daihatsu 6. 7 Volkswagen 5. 2 Daimler. Chrysler 4. 7 PSA 3. 4 3. 0 Honda 2. 9 Nissan 2. 5 Renault Fiat/Ferrari BM W 1. 9 1. 2 Source: manufacturer`s data, JAMA. Volkswagen AG

Global Competitive Overview Volkswagen AG *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 Volkswagen AG

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

Volkswagen Group Market Share - 2005 Volkswagen AG

Corporate Overview § § § HQ: Wolfsburg, Germany US Operations: Auburn Hills, MI Europe’s #1 automobile manufacturer Annual production: 5 M vehicles Annual sales: $121, 345/ 10. 9 YOY growth Employees: 342, 502 worldwide Volkswagen AG

Key Milestones 1930 s 1940 s 1950 s 1960 s § Factory opened in § Production of first § VW begin building Wolfsburg, Germany Volkswagen foreign plants § Company turned over § Launched “Beetle” in to German government US market § Developed Microbus § Sold stock to the German public § Purchased Auto Union (AUDI) § US Beetle sales took off 1970 s 1980 s 1990 s 2000 s §Built China’s largest auto plant §Integrate Skoda § Acquires Rolls-Royce and Bugatti § Launched New Beetle in US §Spent 3. 1 B to modernize factories §The final Beetle ended a 70 -year run §Invested 1. 7 B 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 Volkswagen AG

Volkswagen Global Marketing Mix § Brand portfolio § Development of § Volkswagen § Audi § Seat § Škoda § Bugatti § Bentley § Lamborghini § Commercial vehicles distribution partners § Separated 1 distribution channels for each brand Global § International Marketing Mix standardization of 4 dealers § Localized communication § Emphasis on the European market § Brand advertising 3 § Emotionalization § Unique brand identity for each nameplate § Complete product range § Mostly standardized products with minor adaptations § Setting prices with regard to 2 competitors § Price discrimination across regions § No price competition in emerging markets § Strict cost controlling Volkswagen AG

Volkswagen Group Automotive Division VW Brand Group VW P Cars *Passat *FOX *Jetta *Beetle *Golf Skoda Bentley Bugatti Audi Brand Group Commercial Vehicles Audi SEAT Lamborghini Buses and Vans Financial Services Division Other Companies Financial Services Europcar Financing Dealer & Customer Financing Rental Business Servicing Leasing Insurance Fleet business Volkswagen AG 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 Volkswagen AG

How do we tackle these issues? . . . Volkswagen AG

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, Ŝkoda Octavia, in India § Conduct financial feasibility study Volkswagen AG

Financial Feasibility

Financial Feasibility – Labor Costs Volkswagen AG

Financial Feasibility – Labor Costs Volkswagen AG

Financial Feasibility – Labor Costs Volkswagen AG

Financial Feasibility Reported Annual Income Statement Actual 2003 2004 2005 2006 2007 2008 2009 2010 2011 Auditor Status Dollars Dollars Dollars Consolidated Yes Yes Yes Scale millions millions millions Sales revenue 109, 394 121, 346 112, 826 116, 211 119, 697 123, 886 128, 842 135, 284 142, 048 Cost of sales 97, 597 Gross profit automotive 11, 798 division Gross profit financial services division 106, 992 97, 576 100, 503 103, 518 106, 624 109, 822 113, 117 116, 510 14, 353 15, 250 15, 708 16, 179 17, 263 19, 020 22, 167 25, 538 - - - - 9, 251 8, 352 7, 517 7, 211 6, 920 6, 644 6, 382 6, 133 Distribution costs 9, 880 10, 291 10, 718 11, 255 11, 845 12, 467 13, 152 13, 876 Administrative expense Selling & distribution expenses General administration expenses 2, 800 2, 852 2, 904 3, 021 3, 141 3, 267 3, 398 3, 534 - - - - Other operating income 5, 393 5, 602 5, 819 6, 052 6, 294 6, 545 6, 807 7, 080 Other operating expenses 3, 477 3, 162 2, 875 2, 990 3, 109 3, 234 3, 363 3, 498 11, 798 3, 589 4, 548 5, 029 4, 965 5, 461 6, 598 9, 061 11, 710 22, 339 12, 840 12, 900 12, 546 12, 175 12, 381 13, 242 15, 443 17, 843 Currency Depreciation & Amortization Operating profit Net Cash Flow 10, 541 Projected Projected Volkswagen AG

Financial Feasibility – Break Even Point Volkswagen AG

Financial Feasibility – Sales Per Year Volkswagen AG

Financial Feasibility – Sales Per Year Volkswagen AG

Weighted Average Cost of Capital Component Weight Cost Weighted Cost Common Equity 0. 75 $125, 000 $97, 750, 000 Debt 0. 15 $125, 000 $18, 750, 000 0. 1 $125, 000 $12, 500, 000 0. 1291 $125, 000 $16, 137, 500 Preferred Stock WACC Volkswagen AG

Financial Feasibility – Profit/Loss Statement Volkswagen AG

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

Action Plan § Select “premier” dealerships to carry the Ŝkoda hybrid § Develop dealer training programs § Project and sales managers collaborate to acquire new customers and increase customer loyalty § Build awareness of Ŝkoda hybrid through sales promotions and easy financing § Use Volkswagen Group’s brands to increase customer awareness Volkswagen AG

Volkswagen Group Brand Portfolio Sophistication Zones of Low Demand Functionality Emotion Volkswagen AG

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 Volkswagen AG

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 Volkswagen AG

The Golden Steering Wheel to the New Škoda Octavia The new Škoda Octavia won the Bild am Sonntag‘s prestigious Golden Steering Wheel award during a ceremony in Berlin. Volkswagen AG

Look how roomy…. Volkswagen AG

Look at that automatic console! Volkswagen AG

Ŝkoda Octavia Hybrid Volkswagen AG

Ŝkoda Octavia Hybrid Volkswagen AG

§ § § § § References Brodrick, Sean. Set Your Sights On Asia’s 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 “people’s car” company. The. Car. Connection <http: //www. thecarconnection. com/Auto_News/Profiles_QA/QA_VW_CEO_Bernd_Pischetsrieder. s 193. A 7952 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. “For. Motion 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) > Hoover’s 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, =757&type=2. html 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 A 8 Racanelli, Vito J. , “Turn Around Ahead at Volkswagen”, Barron’s, May 2005, Volume 85, Issue 20, pg 26. “Škoda Reaches Record Sales in March and the First Quarter of 2006. ” Škoda Auto <http: //www. volkswagen-ir. de/fileadmin/vwir 2/dokumente/inv_news/2006/Q 2/20060410_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/gpnwp 7. 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/AUTO 02/603140345/-1/ARCHIVE (March 14, 2006)> <http: //detnews. com/apps/pbcs. dll/article? AID=/20060314/AUTO 02/603140345/-1/ARCHIVE Thomas, Chad & Archey, Sheenagh, “Porsche Buys 20% in VW’s Shares to Prevent Takeover”, Bloomberg News, http: //quote. bloomberg. com /apps/news, , September 2005 http: //quote. bloomberg. com/apps/news “Volkswagen announces worldwide sales record in first quarter. ” Volkswagen AG: Investor Relations <http: //www. volkswagenir. de/fileadmin/vw-ir 2/dokumente/inv_news/2006/Q 2/20060405_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)> Volkswagen AG