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10/6/2015

FixingVolkswagen:8StrategiesforRecoveryandFutureGrowth

FixingVolkswagen:8StrategiesforRecoveryand
FutureGrowth
Author:ArunChandranath|Published:6Oct2015
NoonewouldwanttobeinVolkswagen'sshoesthesedays.Fiveyearsago,though,BritishPetroleumwasinasimilarplace.TheGulfoilspillhadplungedthevenerableenergycompany
intoastateofcrisisunlikeanytheenergyindustryhadseensincetheExxonValdezincident.
ManypunditswereswifttowriteoffBPandWallStreetandBondStreetdiscussedBP'spossibledemise.BP'ssituationwasfurtherexacerbatedbyalackofaresoluteandswiftresponse
totheincidentbyitsCEO,whichultimatelyledtohisremoval.
However,thecompanymadeseveralstrategic,surgical,andculturalshiftsinthedaysthatfollowed,startingwithspendingmillionstodoallthatitcouldtocontainthedamageandmake
amends.
Volkswagen's(VW)concessionofcorporatemalfeasanceincircumventingEnvironmentalProtectionAgency(EPA)testingintheUShassenttheglobalautomotiveindustryintoatail
spinandhassubstantiallypushedbackdevelopmentsincleandieseltechnologyandinternalcombustionengines(ICE)byatleastafewyears.ButBritishPetroleumisanexamplethat
there'salwayslightattheendofthetunneliftherightstrategicmovesaremade.
NewlyappointedCEOofVW,MatthiasMller,iscooperatingwiththeinvestigatingauthoritiestoestablishclearlyallofthefactswithcompletetransparencyandutmosturgencytolimit
thedamageandrebuildtrust.
TherecentGeneralMotorsignitionswitchcrisisshowedthatfulltransparencyentailsopeninguprestrictedandconfidentialengineeringdocumentstoanoutsideagency,thousandsof
pagesofselfrevelationandintrospection,andansweringquestionssuchas"Whodidit?""Whenwasitdone?""Whoauthorizedit?"etc.Twofundamentalactionsarekeytoefficient
crisismanagement:constantcommunicationwiththepublicandrebuildingtrusttobuytimetoarriveatthemosteffectivesolution.
TheimmediateimpactofthiscrisisthreatenstogobeyondVWandtheUS.Tounderstandthebiggerperspectiveandlonglastingrepercussions,onemusttakeintoaccountthe
automotiveecosystemasawhole.BeyondOEMs,manycomponentsuppliers,dealerships,regulatoryauthorities,andtestingagencieswillbeimpacted.
Therealsowillbeanimpactonthetechnologyitself.Someofthemostpressingquestionsinthemindsofeveryautomotiveexecutivetodayare:Whatdoesthismeanfordieselpowered
vehiclesandtheirplaceintheautomotivemarketglobally?WhatwillbeVW'spositioninthefiercelycompetitiveautomotiveindustrynowthatitssalesmaydecrease?Forthepasttwo
decades,theautomotiveindustry,particularlyinEurope,hasbeenrallyingbehinddieseltechnology,lobbyingwithandtryingtoconvinceregulatorybodiesthatdieselisaclean
technologyforthefuture.Thiscrisisblowsthosenegotiationswideopenandanegativebacklashrecoilsondiesel.AutomobilemanufacturersandTier1suppliers,especiallyEuropean,
havestakedmuchondieseltechnology.Hence,thetransAtlanticimplicationofthiscrisiswillbeparamountindeterminingwhethertheyhavemadethewrongbet.
AsgovernmentinvestigationsinmultiplepartsoftheworldandpotentiallitigationsofVolkswagenunfold,theautomotiveindustryshouldfullycomprehendtheshortandlongterm
repercussionsofthecrisis.SpeculationisintenseregardingthefutureofdieselandtheICE.
SomeindustryanalystsopinethattheVWcrisiscouldhavefarreachingimplicationsforthedieselpowertrainandresultinevenmorestringentregulationsandhigherinvestmentcosts
tomeetthem.Costsforcarmakerstocomplywithemissionsrequirementscouldriseandconsumerscouldbeturnedoffbydieselcars.Untilnow,consumershavebeenencouragedby
varioustaxincentivestobuydieselcars,which,duetotheirlowCO2emissions,hadalowertax.Thecrisisbringsforththeinherentdisadvantageofbasicdieselchemistry:itishighon
localpollutantsbutcleanerwithregardstogreenhousegases.
Theautomotiveindustrywaswellpreparedforanantidieselsentimentwithaslewofnewtechnologiesandmodelsthatwouldbeevenmoreefficientandenvironmentallyfriendlythan
somegasolinevehicles.TheevolutionofdieselaftertreatmenttechnologyisastrongindicatorofthesuccessofdieselR&DendeavorsacrossOEMsNOxemissionsfordieselcarshave
fallenfrom0.97g/kmto0.08g/km,an84percentdecreaseinthepast15years.ParticulateMatter(PM)emissions,themostimportantofthesevenToxicAirContaminants(TACs)
identifiedbytheCaliforniaAirResourcesBoard(CARB),havegonedownbyover90percentinthesametimeframe.
Theonusisnowontheregulatoryauthoritiestoconsiderwhethertomaintainthedeltainfuelefficienciesbetweendieselandgasolinevehiclesbycompromisingonairqualityand
publichealth.
InordertounderstandVolkswagen'spresentsituationanditsoptionsforputtingthiscrisisbehindittoagainemergeasagloballeaderinautomotivesales,oneneedstounderstandthe
company'secosystem.Thisecosystemisgovernedbyrelationshipsandinteractionswithseveraldisparateandconnectedgroups,rangingfromgovernmentsandregulatorstosuppliers
andpartners,fromfinancialindustrytosalesandservicenetworks,andfrommediatocustomers.ExhibitAshowselementsofVW'scomplexecosystem.

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10/6/2015

FixingVolkswagen:8StrategiesforRecoveryandFutureGrowth
ExhibitA:Volkswagen'srelationshipecosystem

ImpactofVWCrisisonitsEcosystem
Germany'seconomythebiggestinEuropehasprovenitsresilience,havingenduredexternalpressurefromtheGreekdebtcrisisandtheslowingChineseeconomy.However,itnow
facesanevengreaterinternalcrisisfollowingtheVWfallout.NotonlyisVWGermany'sbiggestcarmaker,it'salsooneofGermany'sbiggestemployers,withmorethan270,000direct
workersemployedinthecountry.Inaddition,therearemillionsofEurosridingonsupplierstoVWandVWdealersworldwide.
Knownacrosstheautomotiveindustryasoneoftheforemostproponentsofthemodulardevelopmentandproductionstrategy,VWisfamousforitssourcingacumenincommoditizing
automotivecomponentsandsourcingthesamecomponentfrommultiplesuppliersinordertoachievehigherdegreesonlocalizationinitsproductionhubs,thecheapestcomponent
price,andeconomiesofscale.Asmoreinformationonthecrisisisuncovered,VWwillreassessandconsideramoretransparentandflexiblesourcingstrategy,whichwillnotnecessarily
favorthelowestbidder.
SalesofaffecteddieselcarshavebeenbannedintheUSandSwitzerland,withmorecountriesexpectedtofollowsuit.Adirectimpactofthecrisisondealersisnotlimitedtotheslumpin
sales,butalsodealingwithconcernedcustomers.Astheinvestigationprogresses,VWshouldtakeintoconfidencetheirsuppliersanddealers,andbetransparentwiththemaboutthe
longtermimpactthecrisismayhaveonthem.
Regulatorswillnowbeundergreaterpressuretoensurehigherstandardsandrestorecredibility.TheEPAhastoadmitthatthesystemofallowingautomakerstoselfcertifycarsand
lighttrucksforfueleconomyandemissionsstandardsnolongerworks.Regulatorybodieshavebeenmorefocusedonclimatechangeandgreenhouseemissions,ratherthanonpublic
healthandairquality,andthatbalancehastochange.CO2emissionsregulationmustbereconsidered,andestablishingabalancebetweenregulatingGHGandlocalpollutantsisneeded.
SohowcanVWsurvivethiscrisisandthrivethereafter?Weproposeafewoptionsthecompanycanconsidertoregainconsumertrust,stokesalesvolumes,anddevelopsustainable
revenuegrowthopportunitiesforthefuture.
1.Focusonemergingmarkets:IfonedissectsVW'ssalesvolumes,aninterestingfactemerges.Thecompanybecametheworld'slargestsellerofautomobilesgloballywithoutgaining
marketshareleadershipintheUS.Thiswillcomeasablessingforthecompanyasitworkstoregainitsglobalmarketshare.AspartofVolkswagen's2018corporatestrategytoposition
itselfastheworld'sleadingautomobilemanufacturer,VWfocusedonthetwolargestautomotivemarketsUSAandChina.Inthewakeofthedieselscandal,VWshouldswiftlyshiftfocus
towardtheemergingmarkets,whichhavelessstringentemissionregulationsandhavebeenrelativelyunaffectedbythelatestincidentsinAmericaandEurope.VWshouldactivelylook
atimprovingsalesinfrastructureinthesemarkets.Thiswillhelpthebrandimproveitsglobalfootprintandcustomerbase.ThiscouldbethetriggerthatwillletVWfocusmoreintensely
onNext11andAfrica,themarketsthatarenowatthefrontierofglobalizationandareposiedtoreturngrowthratesthatBRICmarketsdeliveredinthe2000s.
2.Hybridandelectricpowertrainarepriorities:VWwasoneofthefirstOEMstostartelectrifyingitsvehicles'propulsionsystems.Since1970,VWhasworkedonelectricdrivetrains.In
2013,Volkswagenembarkedonadecisivehybridandelectricpowertrainutilizationstrategy.VW'scurrentstrategyofHybridizing/Electrifyingallsegmentsisuniqueinthatitdoes
notrestrictexpensivehybridizationtechnologiestohighersegmentvehicles.VWisonthevergeofswitchingtoasinglebatterydesignphilosophyforelectricandhybridvehicles,
loweringbatteryexpensesby66percent.Thegrouprecentlyannounceditwillelectrifymorethaneightmodelsoverthenextthreeyears.Byutilizingitsmodularplatformstrategy,VW
canelectrifymorethan40existingmodelsintheshortesttimewithnomajoradditionalR&Deffort.Buildingonitsintellectualpropertyandactivitiesinthehybridandelectricvehicle
space,VWwillbeabletotakeoffsomeheatfromthedieselcrisisandrepositionitselfasaleadingproponentoflowemissionvehicles.Asareminderofthebasicprinciplesofcrisis
management,actionandmovementinthisspaceshouldberapidandcommunicationenabled.
3.Focusonpassengersafety:PassengerandpedestriansafetyhasalwaysbeenatthecoreofVolkswagen'sresearchanddevelopmentandproductpromotionactivities.IntheUS,Golf
fourdoorvariantsandJettasedanarepartofthe2015TopSafetyPickPlusratingfromtheInsuranceInstituteforHighwaySafety(IIHS),underliningtheimportanceofsafetysystems
atVolkswagen.BeyondAutomatedEmergencyBraking(AEB)andForwardColissionWarning(FCW),VWprovidesawidesuiteofdriversafetysystemsonselectpremiummodelson
theAudiandPorschestable.ThedecisiontopursueextensivemodularityamongmodelscanenableVWtoprovidethistechnologyasastandardacrossitsglobalportfolios.Thiswill
betterpositionitsproductsassafetyfocusedofferings,whichiscurrentlythetopconsumerpriority.ThiswillalsohelpbuildtrustamongVW'scustomerssincesafetyandenvironmental
friendlinessaretwokeyattributesvehiclebuyersareincreasinglydemandingfromtheirautomobilesbeitintheUnitedStatesorUganda.
4.Positionitselfasapioneerinsustainablemobilityandsyntheticfuels:VW,throughAudi,hasbeenthevanguardinthedevelopmentofsyntheticfuels,whichareidenticaltofossil
fuelsinallrespectsandcanbeusedasadropinfuel.Theefuelsuite,asAudicallsit,consistsofthirdgenerationsyntheticfuelsofeveryconceivablepresentfueltypeegasoline,e
diesel,eethanolandegas.edieselissynthesisedfromcapturedatmoshpericCO2andrenewableelectricity,henceensuringa"welltowheel"emissioncomparabletothatofabattery
electricvehiclerunningonrenewableelectricity.Thegreatpotentialofefuelsforreducingemissionsisevidentinacomprehensivelifecycleassessment.Thesesyntheticfuelsaretruly
anenablerforcarbonneutralsustainablemobility.Combinedwiththefactthattheseefuelsare100percentdropin,thepossibilitiesintransportationarepracticallylimitless.However,
thiswillrequirestrongpartnershipswithenergyinfrastructureproviders,andanybenefitsthecompanycangainfromthiswilllikelyemergeinthemediumtolongterm.
Volkswagenhasneverbeenvocallysupportiveofmobilityservicesasafuturestrategy.Itlaunchedacarsharingpilotin2011inHanoverandexpandedintooneway,twowayand
corporatecarsharing.However,asagroup,mobilityserviceswerenotakeyfocusarea.VWneedstorethinkitsstrategyinthisspaceandswiftlyrepositionitself.Toachievethis,VWwill
havetoexpanditscarsharingprogramsrapidlyandconsiderofferingintegratedmobilityofferings.
5.Connectedcarsasabasicandmajorfocalpoint:Withconnectedcartechnologiesproliferatinginbothdevelopedanddevelopingmarkets,VWneedstoprioritizeitsconnectedcar
strategies,sincethisisanareawhereitscompetitorshavemadesignificantprogress.Sofar,VWgrouphasledfromthefrontincapacitivetouchscreentechnologyandmodular
infotainment,bothofwhichhaveserveditwell.FromaUSmarketperspective,althoughVWdidannouncepubliclythatcarnetisatrialtechnology,itisstillaverylatereactionto
technologiesliketheOnStarsuiteofconnectedservices.Thehybridandelectricvehiclestrategycanalsobenefitfromitsconnectedcarfocussinceitwillneedtomimicacompletesuite
ofconnectedservicestailoredtoelectricrangeanxiety,safety,security,navigation,vehiclehealthservices,etc.Theotherareaoffocuscanbeovertheairupdates(OTA).OTAcan
essentiallyenableafirsthandcustomerrelationshippostsale.ItisimportantforVWtoadoptthisstrategyoverthevehiclelifecycle,asitwillallowalongerperiodofcustomer
engagementandassociatedopportunities,whichwillcatalyzetrustbuilding.

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FixingVolkswagen:8StrategiesforRecoveryandFutureGrowth

6.BringAudi,Porsche,andotherbrandstothefore:UpuntilnowintheUS,Volkswagen's"CleanDiesel"initiativewasledbytheVWbrand.VWbrandmodelsshowcasedthegroup's
latesttechnologiesindiesel.AudiandPorschebrandsweremorefocussedongasolinemodels.ForVW'sbrandrevival,itisimperativethatthesetwobrands,thatarerelatively
untarnishedbytherecentcrisis,cometotheforeandbecomethefaceofVolkswagentechnologiesintheUS,specificallydieseltechnologies.Thesetechnologieswillthentrickledownto
theVolkswagenbrandmodels.ItisnecessarythatconsumersseethesetechnologiesasprovenonAudiandPorsche,andnowavailableonVW.Asimilarstrategycanbeenvisionedfor
costsensitivedevelopingmarketswithanaffinitytowardlowerpricedcarsbyportrayingSeatandSkodaasthefaceofVWtechnologicalprowess.
7.Greaterfocusoncommercialvehiclebusiness:VWownstwomajorcommercialvehiclebrandsMANandScaniaandholdsstrongmarketsharepositionsinEuropeandLatin
America.Itmustnowfocusontakingthesetwobrandsglobalwithgreaterforce.TheVWMANScaniatriadmustreceiverenewedfocus,strategicalignment,andglobalgrowthfocus.
Frost&Sullivanresearchindicatesthatthevaluetruckmarket(ascomparedtolowcostandpremiumtruckmarkets)isnowthefastestgrowingmediumheavydutytrucksegment
globally.ThisprovidesOEMSsuchasVWauniqueopportunitytobenefitfromglobalcommercialvehicles'primarydemandpatternofmovingfromlowcosttovaluetrucks.Amore
coordinatedpushforMANandScaniaproductsingrowthdrivingregionsusingvalueandpremiumtruckswillserveVWwellandofferitupsidepotentialintheglobalcommercial
vehicleindustry.
8.Rigorousvoluntarytestingandcertification:Totrulyrecoverfromthecurrentcrisis,itisimportantthatVWopensupitsentireportfoliotorigorousandimpartialindependenttesting
andcertifyingorganizationswithcompletecooperation.Theresultsobtainedthroughtestingunderstandardconditionsandrealworldemissionsshouldbepublishedpubliclyandmade
availabletoanyone.LearningsandrevelationsfromthesetestsshouldthenleadtopriortizedfocusonadressinganyandallissuesthatimpedetheestablishmentofVWashavingthe
cleanest,greenest,safest,andmostconnectedautomobilesglobally.
Recoverywon'tbeeasyfortheworld'sbiggestautomanufacturer.Therewillbecorporatebloodlettingandprofitabilitydrainintheshortterm.VWshouldreconsideritsshortterm
objectiveofmassmarketdominancetorepositionitselfasasmalleryetnimblemanufacturer,morereceptiveandreactivetoindustryfluctuations.Butwhateverstrategicdirectionthe
companytakes,transparencyandcommunicationarenecessary.IfVWcannotwinbackmarketandconsumertrust,thenitsstrategieswon'tadduptomuch.
Intheend,Volkswagen'srecoverywillbecriticaltotheoverallhealthoftheautomotiveindustry.Today,itmightbeVWstandingtrial,buteveryone'sfutureisatstake.

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