Fixing Volkswagen 8 Strategies for Recovery and Future Growth

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Fixing Volkswagen: 8 Strategies for Recovery and Future Growth
Fixing Volkswagen
8 Strategies for Recovery and Future Growth
A Market Insight by Frost & Sullivan
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Fixing Volkswagen: 8 Strategies for Recovery and Future Growth
No one would want to be in Volkswagen’s shoes these days. Five years ago, though, British Petroleum was in a similar place.
The Gulf oil spill had plunged the venerable energy company into a state of crisis unlike any the energy industry had seen since
the Exxon Valdez incident.
Many pundits were swift to write off BP and Wall Street and Bond Street discussed BP’s possible demise. BP’s situation was
further exacerbated by a lack of a resolute and swift response to the incident by its CEO, which ultimately led to his removal.
However, the company made several strategic, surgical, and cultural shifts in the days that followed, starting with spending
millions to do all that it could to contain the damage and make amends.
Volkswagen’s (VW) concession of corporate malfeasance in circumventing Environmental Protection Agency (EPA) testing in
the US has sent the global automotive industry into a tail spin and has substantially pushed back developments in clean diesel
technology and internal combustion engines (ICE) by at least a few years. But British Petroleum is an example that there’s
always light at the end of the tunnel if the right strategic moves are made.
Newly appointed CEO of VW, Matthias Müller, is cooperating with the investigating authorities to establish clearly all of the
facts with complete transparency and utmost urgency to limit the damage and rebuild trust.
The recent General Motors ignition switch crisis showed that full transparency entails opening up restricted and confidential
engineering documents to an outside agency, thousands of pages of self-revelation and introspection, and answering questions
such as “Who did it?”; “When was it done?”; “Who authorized it?”; etc. Two fundamental actions are key to efficient crisis
management: constant communication with the public and rebuilding trust to buy time to arrive at the most effective solution.
The immediate impact of this crisis threatens to go beyond VW and the US. To understand the bigger perspective and longlasting repercussions, one must take into account the automotive ecosystem as a whole. Beyond OEMs, many component
suppliers, dealerships, regulatory authorities, and testing agencies will be impacted.
There also will be an impact on the technology itself. Some of the most pressing questions in the minds of every automotive
executive today are: What does this mean for diesel-powered vehicles and their place in the automotive market globally?
What will be VW’s position in the fiercely competitive automotive industry now that its sales may decrease? For the past two
decades, the automotive industry, particularly in Europe, has been rallying behind diesel technology, lobbying with and trying to
convince regulatory bodies that diesel is a clean technology for the future. This crisis blows those negotiations wide open and
a negative backlash recoils on diesel. Automobile manufacturers and Tier-1 suppliers, especially European, have staked much
on diesel technology. Hence, the trans-Atlantic implication of this crisis will be paramount in determining whether they have
made the wrong bet.
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Fixing Volkswagen: 8 Strategies for Recovery and Future Growth
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As government investigations in multiple parts of the world and potential litigations of Volkswagen unfold, the automotive
industry should fully comprehend the short- and long-term repercussions of the crisis. Speculation is intense regarding the
future of diesel and the ICE.
Some industry analysts opine that the VW crisis could have far-reaching implications for the diesel powertrain and result in
even more stringent regulations and higher investment costs to meet them. Costs for carmakers to comply with emissions
requirements could rise and consumers could be turned off by diesel cars. Until now, consumers have been encouraged by
various tax incentives to buy diesel cars, which, due to their low CO2 emissions, had a lower tax. The crisis brings forth the
inherent disadvantage of basic diesel chemistry: it is high on local pollutants but cleaner with regards to greenhouse gases.
The automotive industry was well prepared for an anti-diesel sentiment with a slew of new technologies and models that
would be even more efficient and environmentally friendly than some gasoline vehicles. The evolution of diesel after-treatment
technology is a strong indicator of the success of diesel R&D endeavors across OEMs; NOx emissions for diesel cars have
fallen from 0.97g/km to 0.08 g/km, an 84 percent decrease in the past 15 years. Particulate Matter (PM) emissions, the most
important of the seven Toxic Air Contaminants (TACs) identified by the California Air Resources Board (CARB), have gone
down by over 90 percent in the same timeframe.
The onus is now on the regulatory authorities to consider whether to maintain the delta in fuel efficiencies between diesel and
gasoline vehicles by compromising on air quality and public health.
In order to understand Volkswagen’s present situation and its options for putting this crisis behind it to again emerge as a global
leader in automotive sales, one needs to understand the company’s ecosystem. This ecosystem is governed by relationships
and interactions with several disparate and connected groups, ranging from governments and regulators to suppliers and
partners, from financial industry to sales and service networks, and from media to customers. Exhibit A shows elements of
VW’s complex ecosystem.
Exhibit A: Volkswagen’s relationship ecosystem
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Fixing Volkswagen: 8 Strategies for Recovery and Future Growth
Impact of VW Crisis on its Ecosystem
Germany’s economy—the biggest in Europe—has proven its resilience, having endured external pressure from the Greek debt
crisis and the slowing Chinese economy. However, it now faces an even greater internal crisis following the VW fallout. Not
only is VW Germany’s biggest carmaker, it’s also one of Germany’s biggest employers, with more than 270,000 direct workers
employed in the country. In addition, there are millions of Euros riding on suppliers to VW and VW dealers worldwide.
Known across the automotive industry as one of the foremost proponents of the modular development and production
strategy, VW is famous for its sourcing acumen in commoditizing automotive components and sourcing the same component
from multiple suppliers in order to achieve higher degrees on localization in its production hubs, the cheapest component price,
and economies of scale. As more information on the crisis is uncovered, VW will reassess and consider a more transparent and
flexible sourcing strategy, which will not necessarily favor the lowest bidder.
Sales of affected diesel cars have been banned in the US and Switzerland, with more countries expected to follow suit. A
direct impact of the crisis on dealers is not limited to the slump in sales, but also dealing with concerned customers. As the
investigation progresses, VW should take into confidence their suppliers and dealers, and be transparent with them about the
long-term impact the crisis may have on them.
Regulators will now be under greater pressure to ensure higher standards and restore credibility. The EPA has to admit that
the system of allowing automakers to self-certify cars and light trucks for fuel economy and emissions standards no longer
works. Regulatory bodies have been more focused on climate change and greenhouse emissions, rather than on public health
and air quality, and that balance has to change. CO2 emissions regulation must be reconsidered, and establishing a balance
between regulating GHG and local pollutants is needed.
So how can VW survive this crisis and thrive thereafter? We propose a few options the company can consider to regain
consumer trust, stoke sales volumes, and develop sustainable revenue growth opportunities for the future.
1. Focus on emerging markets: If one dissects VW’s sales volumes, an interesting fact emerges. The company became
the world’s largest seller of automobiles globally without gaining market share leadership in the US. This will come as a
blessing for the company as it works to regain its global market share. As part of Volkswagen’s 2018 corporate strategy
to position itself as the world’s leading automobile manufacturer, VW focused on the two largest automotive markets—
USA and China. In the wake of the diesel scandal, VW should swiftly shift focus toward the emerging markets, which have
less stringent emission regulations and have been relatively unaffected by the latest incidents in America and Europe.
VW should actively look at improving sales infrastructure in these markets. This will help the brand improve its global
footprint and customer base. This could be the trigger that will let VW focus more intensely on Next 11 and Africa, the
markets that are now at the frontier of globalization and are posied to return growth rates that BRIC markets delivered
in the 2000s.
2. Hybrid and electric powertrain are priorities: VW was one of the first OEMs to start electrifying its vehicles’
propulsion systems. Since 1970, VW has worked on electric drivetrains. In 2013, Volkswagen embarked on a decisive
hybrid and electric powertrain utilization strategy. VW’s current strategy of “Hybridizing/Electrifying” all segments is
unique in that it does not restrict expensive hybridization technologies to higher segment vehicles. VW is on the verge of
switching to a single battery design philosophy for electric and hybrid vehicles, lowering battery expenses by 66 percent.
The group recently announced it will electrify more than eight models over the next three years. By utilizing its modular
platform strategy, VW can electrify more than 40 existing models in the shortest time with no major additional R&D
effort. Building on its intellectual property and activities in the hybrid and electric vehicle space, VW will be able to take
off some heat from the diesel crisis and reposition itself as a leading proponent of low-emission vehicles. As a reminder
of the basic principles of crisis management, action and movement in this space should be rapid and communication
enabled.
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Fixing Volkswagen: 8 Strategies for Recovery and Future Growth
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3. Focus on passenger safety: Passenger and pedestrian safety has always been at the core of Volkswagen’s research
and development and product promotion activities. In the US, Golf four-door variants and Jetta sedan are part of the
2015 Top Safety Pick Plus rating from the Insurance Institute for Highway Safety (IIHS), underlining the importance of
safety systems at Volkswagen. Beyond Automated Emergency Braking (AEB) and Forward Colission Warning (FCW),
VW provides a wide suite of driver safety systems on select premium models on the Audi and Porsche stable. The
decision to pursue extensive modularity among models can enable VW to provide this technology as a standard across
its global portfolios. This will better position its products as safety-focused offerings, which is currently the top consumer
priority. This will also help build trust among VW’s customers since safety and environmental friendliness are two key
attributes vehicle buyers are increasingly demanding from their automobiles—be it in the United States or Uganda.
4. Position itself as a pioneer in sustainable mobility and synthetic fuels: VW, through Audi, has been the
vanguard in the development of synthetic fuels, which are identical to fossil fuels in all respects and can be used
as a drop-in fuel. The e-fuel suite, as Audi calls it, consists of third generation synthetic fuels of every conceivable
present fuel type—e-gasoline, e-diesel, e-ethanol and e-gas. e-diesel is synthesised from captured atmoshperic CO2 and
renewable electricity, hence ensuring a “well-to-wheel” emission comparable to that of a battery electric vehicle running
on renewable electricity. The great potential of e-fuels for reducing emissions is evident in a comprehensive life cycle
assessment. These synthetic fuels are truly an enabler for carbon-neutral sustainable mobility. Combined with the fact
that these e-fuels are 100 percent drop-in, the possibilities in transportation are practically limitless. However, this will
require strong partnerships with energy infrastructure providers, and any benefits the company can gain from this will
likely emerge in the medium to long term.
Volkswagen has never been vocally supportive of mobility services as a future strategy. It launched a carsharing pilot in
2011 in Hanover and expanded into one-way, two-way and corporate carsharing. However, as a group, mobility services
were not a key focus area. VW needs to rethink its strategy in this space and swiftly reposition itself. To achieve this, VW
will have to expand its carsharing programs rapidly and consider offering integrated mobility offerings.
5. Connected cars as a basic and major focal point: With connected car technologies proliferating in both developed
and developing markets, VW needs to prioritize its connected car strategies, since this is an area where its competitors
have made significant progress. So far, VW group has led from the front in capacitive touchscreen technology and
modular infotainment, both of which have served it well. From a US market perspective, although VW did announce
publicly that car-net is a trial technology, it is still a very late reaction to technologies like the OnStar suite of connected
services. The hybrid and electric vehicle strategy can also benefit from its connected car focus since it will need to
mimic a complete suite of connected services tailored to electric range anxiety, safety, security, navigation, vehicle
health services, etc. The other area of focus can be over-the-air updates (OTA). OTA can essentially enable a first-hand
customer relationship post-sale. It is important for VW to adopt this strategy over the vehicle life cycle, as it will allow a
longer period of customer engagement and associated opportunities, which will catalyze trust building.
6. Bring Audi, Porsche, and other brands to the fore: Up until now in the US, Volkswagen’s “Clean Diesel”
initiative was led by the VW brand. VW brand models showcased the group’s latest technologies in diesel. Audi and
Porsche brands were more focussed on gasoline models. For VW’s brand revival, it is imperative that these two brands,
that are relatively untarnished by the recent crisis, come to the fore and become the face of Volkswagen technologies in
the US, specifically diesel technologies. These technologies will then trickle down to the Volkswagen brand models. It is
necessary that consumers see these technologies as proven on Audi and Porsche, and now available on VW. A similar
strategy can be envisioned for cost-sensitive developing markets with an affinity toward lower-priced cars by portraying
Seat and Skoda as the face of VW technological prowess.
7. Greater focus on commercial vehicle business: VW owns two major commercial vehicle brands—MAN and
Scania—and holds strong market share positions in Europe and Latin America. It must now focus on taking these two
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Fixing Volkswagen: 8 Strategies for Recovery and Future Growth
brands global with greater force. The VW-MAN-Scania triad must receive renewed focus, strategic alignment, and global
growth focus. Frost & Sullivan research indicates that the value truck market (as compared to low-cost and premium
truck markets) is now the fastest growing medium-heavy-duty truck segment globally. This provides OEMS such as VW
a unique opportunity to benefit from global commercial vehicles’ primary demand pattern of moving from low-cost to
value trucks. A more coordinated push for MAN and Scania products in growth-driving regions using value and premium
trucks will serve VW well and offer it upside potential in the global commercial vehicle industry.
8. Rigorous voluntary testing and certification: To truly recover from the current crisis, it is important that VW
opens up its entire portfolio to rigorous and impartial independent testing and certifying organizations with complete
cooperation. The results obtained through testing under standard conditions and real-world emissions should be published
publicly and made available to anyone. Learnings and revelations from these tests should then lead to priortized focus
on adressing any and all issues that impede the establishment of VW as having the cleanest, greenest, safest, and most
connected automobiles globally.
Recovery won’t be easy for the world’s biggest auto manufacturer. There will be corporate bloodletting and profitability drain
in the short term. VW should reconsider its short-term objective of mass market dominance to reposition itself as a smaller
yet nimble manufacturer, more receptive and reactive to industry fluctuations. But whatever strategic direction the company
takes, transparency and communication are necessary. If VW cannot win back market and consumer trust, then its strategies
won’t add up to much.
In the end, Volkswagen’s recovery will be critical to the overall health of the automotive industry. Today, it might be VW
standing trial, but everyone’s future is at stake.
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Fixing Volkswagen: 8 Strategies for Recovery and Future Growth
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About Frost & Sullivan
Frost & Sullivan, the Growth Partnership Company, works in collaboration with clients to leverage visionary innovation that
addresses the global challenges and related growth opportunities that will make or break today’s market participants. For
more than 50 years, we have been developing growth strategies for the Global 1000, emerging businesses, the public sector
and the investment community. Is your organization prepared for the next profound wave of industry convergence, disruptive
technologies, increasing competitive intensity, Mega Trends, breakthrough best practices, changing customer dynamics and
emerging economies? Contact us: Start the discussion
Arun Chandranath
Senior Research Analyst, Frost & Sullivan
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