PESTLE and SWOT analysis of Volkswagen AG 2016-2017
Analyse the internal and external environment of Volkswagen using SWOT & PESTLE
...................updated 10 July 2018..................
Volkswagen AG is the world’s second largest automaker in the world after Toyota. According to Statista (2017), Volkswagen had a global market share of 7.2% in the global automobile industry behind leader Toyota (9.2%). Group revenue in 2017 was €230.7bn on operating profit of €17bn (Annual Report 2017). The German automobile group saw a 6.2% increase in 2017 revenue from 2016, thanks to a strong performance in BRIC nations especially China where it has been doing extremely well for the last 3-5 years (B).
Established in 1937, Volkswagen produces and sells passenger cars under various brands such as Audi, Bugatti, Porsche, Bentley, SEAT, Škoda Lamborghini, and Volkswagen as well as motorcycles under the Ducati brand (Annual Report 2017). For over two decades, it has established and maintained the largest market share in Europe reaching production output of 4.7 million vehicles in Europe in 2017 out of 10million sold globally.
However in 2018, the company was fined €1bn by public prosecutors in Germany for issues related to the 2015 diesel emissions scandal. This adds to other fines it has already paid in other countries including North America where it paid damages of more than $25bn and a $2.5bn fine in 2017. This even excludes the threat of more financial compensation from civil litigation (McGee 2018).
These are some of the macro factors that will be looked at in this report while internal factors include the emissions scandal in 2015. The report will use both PESTEL and SWOT to determine how Volkswagen can leverage its internal core competences like engineering, manufacturing and assembly to position itself better in the future despite adverse macro influences as well as take advantage of macro opportunities.
2.0 Pestle Analysis of Volkswagen
PESTLE is used in strategy to analyse the macro environment and identify how future trends in the political, economic, social, technological, environmental and legal environments might impact individual organisations within an industry. Firms then study the key drivers of change behind the PESTEL factors. This is only a starting point as often, other frameworks such as Porters Five Forces and BCG can be used in conjunction, to help Volkswagen utilise internal core competencies so as to take advantage of opportunities while neutralising threats.
2.1 Political environment
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).
The US imported more than $42bn in automobiles from the EU in 2017, half of which ($20bn) came from Germany. If Trump’s tariffs are imposed, they are most likely to impact Germany auto companies the most, as it is them that dominate the EU auto imports sector that Trump wants to impose tariffs on. If successfully implemented, it will become perhaps the most critical threat to Volkswagen since the emissions scandal (Fleming et al., 2018).
The second issue is the new UK government policy to end sales of diesel and petrol cars by 2040. Over 1.2 million Volkswagen diesel cars were banned in the wake of the VW ‘diesel scandal’, an issue that has contributed to a decrease in VW car sales in the UK, Volkswagen’s second biggest European market (Davies 2017). The UK government has now created a zero emissions framework known as “Road to Zero”. As part of the “Road to Zero” initiative, the UK government set a target of at least 50% of news cars sold in the UK should be ultra-low emissions (Hook et al 2018). Although the UK government has stopped short of a total ban of diesel and petrol cars by 2040, it is wants majority of new cars sold in UK by then to be either fully electric, hybrid or running on alternative fuels, as it fights air pollution from cars (Hook et al 2018).These political and legal measures reflect a general trend among the UK population as they begin to shift away from diesel and petrol cars, which led to an overall 20% decrease in diesel car sales in 2017 (Davies 2017).
A third political factor is 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).
Brexit, pending US tariffs on EU made cars as well anti-diesel trends and regulations in major markets like the UK, hence represent some of the major macro environmental threats to VW and the EU auto industry in general.
2.2 Economic environment
Volkswagen is the biggest automaker in the European Union with nearly 25% of the market. The EU is also VWs biggest market in volume sales with more than 4.7million cars sold in the EU ahead of both North America (1m) and Asia Pacific (4.5m). The biggest economic issues revolve around the economic impact of political turmoil such as Brexit, which 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).
2.3 Social environment
The social environment includes changes in socio-cultural trends which can include fluctuations in population demographics, social mobility, income and education, attitudes to work and leisure or changes in lifestyle (Johnson et al 2008). Some of the biggest trends in the automobile industry include the ubiquitous use of car sharing platforms such as Uber especially among millennials whose attitudes are shaping and driving demand for newer technologies that threaten car ownership. 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). Some analysts expect most people to cut back on car ownership in the years to come (Silver 2017).
2.4 Technological factors
The biggest technological trend facing VW is the development of self-driving (autonomous) cars. These cars are designed with advances in artificial intelligence, terrain sensors, mapping cameras, radar technology and big data analytics all fitted for easy navigation. Autonomous driving technology represents one of the biggest technological threats because it not only challenges how people drive (or driven) but also the very concept of vehicle ownership. According to a KPMG survey of car executives revealed almost 60% believed car ownership will likely decline by 2025 (Silver 2017).
The threat from autonomous driving technology is not only expected to drive down car ownership but it will transform urban mobility specifically as emphasis will shift to “mobility as a service” where consumers can summon car services in the same as an Uber service (minus the driver) but with a wide vehicle configuration to reflect different groups’ travel needs (Silver 2017).
So far, the Autonomous Vehicle space is becoming a serious battleground with players such as Tesla, Uber already launching plans to deploy electric self-driving vehicles for commercial use (Gibbs 2017).
2.5 Legal environment
In the wake of the ‘2015 Volkswagen emission Scandal’, a Detroit court in US ruled that Volkswagen should pay up to $4.3bn in criminal penalties, fines and restitution for their violation of environmental regulations in connection with the scandal (McGee and Lynch 2017). The scandal involved VW fitting their diesel cars with sophisticated defeat devices which ensured their diesel cars would meet emission standards in laboratory settings, but on the road, emissions went beyond legal limits. As a result, VW was forced to recall or repair over 11million cars containing the “infamous” devices. This has greatly ruined the reputation of Volkswagen, leading to a decrease in sales in subsequent years and fines and criminal damages of more than $25bn in North America alone, excluding the threat of future financial compensation from civil litigation (McGee 2018).
2.6 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 and other car makers who can innovate and dominate this trend (Silver 2017; Scarpinelli 2017).
The good thing is VW is very aware of the environmental sustainability of the shift from car ownership to “mobility as a service” where preference is towards car sharing (McGee 2018b). This is why Volkswagen has announced it will also launch its own “zero-emission” car-sharing service known as WE in 2019. With emphasis on sustainable mobility, WE represents VWs attempt at circumventing the threat posed by car-sharing and ride-hailing services which are predicted to replace individual car ownership by as early as 2025 (Silver 2017; McGee 2018b).
3.0 Volkswagen SWOT Analysis 2018
- Strong financial performance: The Volkswagen group experienced a robust turnover performance in 2017, despite the high compensation and litigation expenses related to the 2015 diesel scandal. The company’s revenue grew from €217.2bn in 2016 to €230.7bn in 2017 while its profits grew by €2.4 bn in comparison to previous year. The company’s strong finance is a great resource that can help it innovate and expand in high growth sectors (Annual Report 2017).
- Strong car volume sales: In 2017, Volkswagen AG increased its car deliveries globally by 4.3%, a year-on-year increase, achieving a new record of 10,741,455 cars sold (Annual Report 2017).
- Strong brand and innovative capabilities: Despite emissions scandal, the Volkswagen Group has remained the biggest car brand in Europe and has grown its market share ahead of rivals Renault and Ford thanks to a strong brand built on innovative capabilities, engineering, manufacturing and assembly (Bakker 2018).
- The Volkswagen scandal has created a bad reputation for the company (Zart 2018). The Volkswagen pollution scandal where 11 million cars were fitted with an emissions cheat device created a very bad reputation for the company among its customers which has resulted into a fall in its sales in countries like Germany (The Guardian 2018).
- Poor corporate governance and internal culture: VW has been criticized for allowing poor governance and an unethical corporate culture to thrive, factors that contributed to the worst scandal in Volkswagen’s corporate history
- While the increasing demand for vehicle sharing and ride hailing programs represents a threat for Volkswagen as many analysts expect most people to cut back on car ownership in the years to come (Silver 2017; Gibbs 2017), VW has decided to shift its auto strategy to reflect the environmental sustainability of these trends. Volkswagen has announced it will also launch its own “zero-emission” car-sharing service known as WE in 2019. With emphasis on sustainable mobility, WE represents VWs attempt at jumping on the new opportunities being pioneered by car-sharing and ride-hailing services which are predicted to replace individual car ownership by as early as 2025 (Silver 2017; McGee 2018b).
- In June 2018, US president Trump threatened EU automakers with a 20% tariff on EU made cars unless the EU removes tariffs it implemented on certain US goods as a response to Trumps steel tariffs. If the 20% tariff is implemented, it will be a major blow to German automakers including Volkswagen as they dominate more than 50% of EU auto exports to the US.
- The “Road to Zero” initiative is a new UK government policy designed to end sales of diesel and petrol cars by 2040. If fully implemented, at least 50% of news cars sold in the UK should be ultra-low emissions (Hook et al 2018). For Volkswagen and other automakers, the threat is clear; move to electric or perish.
- A hard Brexit landing is also a major threat as it will worsen UK demand for cars, impacting consumer spending and demand for new cars due to potentially harmful economic consequences for automakers (Bolduc 2017).
- The increasing demand for vehicle sharing and ride hailing programs represents a threat for VW as it will eliminate the high cost of car ownership due to offering more convenience and cheaper transportation (Gibbs 2017). Many analysts expect most people to cut back on car ownership in the years to come (Silver 2017).
- While Volkswagen has already received fines and criminal damages of more than $25bn related to the 2015 emissions scandal, many EU governments are yet to fine it and it is still facing civil suits from the public, which could to more fines and financial compensation.
4.0 Porters five forces analysis
4.1 Bargaining power of the buyer
According to Grant (2016), the ability of buyers to drive down the prices they pay is dependent on two factors: their price sensitivity and their bargaining power relative to the firms within the industry. Price sensitivity is normally determined by factors like product differentiation, competition, and significance of the product to the consumer. However, consumer bargaining power is determined by factors like cost and ease of switching to purchase products from Volkswagen’s competitors like Toyota or Ford, as well as buyer information regarding prices cars in the market. Volkswagen customers have a low bargaining power because of high switching costs that are involved when switching to purchase other products. In addition, Volkswagen makes premium car products that attracts premium customers that are price insensitive due to its clearly differentiated car products. Its differentiated products have driven high customer loyalty as seen by the increase in its sales even after the Volkswagen emissions scandal (Boston 2017). High customer loyalty gives Volkswagen the power to increase the prices of its products.
4.2 Bargaining power of suppliers
The bargaining power of suppliers has similar determinants like the bargaining power of buyers in an industry, according to Grant (2016). The only difference is that it is now the firms in the industry that are the buyers and the producers of inputs that are the suppliers. The relevant factors are the ease with which the firms in the industry can switch between different input suppliers and the relative bargaining power of each party. By applying these factors, we can note that the bargaining power of Volkswagens suppliers is low because there are many available suppliers and given a large group like Volkswagen, existing suppliers dread losing their business contracts with the automobile to other suppliers. This gives Volkswagen power to get goods from suppliers at the lowest possible costs to increase their profits (Frankrijk 2017). For example, Volkswagen cut ties with its Bosnian supplier Prevent which supplied various car parts from gearbox components to seat covers because it suddenly stopped supply that led to delays in VW productions and resulted into losses ranging from $24.6m-$123m hence replacing it with other suppliers (Sullivan 2018).
4.3 Threat of new entry or barriers to entry
According to Grant (2016), if an industry earns a return on capital in exceeding its cost of capital, it will attract entry from new firms and firms diversifying from other industries which will increase competitiveness in the market and lower its profitability. However, the ease with which new entrants can access a market depends on barriers to entry and the effectiveness of barriers set my existing companies like Volkswagen, Ford, Chevrolet, among others. The major barriers to market entry across industries are capital requirements, economies of scale, absolute cost advantages, product differentiation, access to channels of distribution, government and legal barriers, retaliation and effectiveness of barriers to entry according to Grant (2016). Putting these factors into consideration, we can conclude that this is as low threat for Volkswagen because establishment, maintaining and growth of a new automobile group would require very 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). Also, Grant (2016) indicates that industries with high capital requirements for new entrants are also subject to economies of scale. The problem for new entrants is that they typically enter with a low market share and, hence, are forced to accept high unit costs. A major source of scale economies is new product development costs. Thus, 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 reducing on the cost of productivity. This would hinder the profit margins of a new entrant.
Grant (2016) also explains that in an industry where products are differentiated, established firms possess the advantages of brand recognition and customer loyalty. And new entrants to such markets must spend disproportionately heavily on advertising and promotion to establish brand awareness. Therefore, high product differentiation by Volkswagen would hinder the profit margins of a new entrant and its chances of prosperity as it would have to spend heavily on advertisements (Cremer 2017).
In addition, new automobiles would suffer heavy taxation especially in the US where there has been an increase of 25% levy on steel and 10% increase on aluminum imports that would lead to high car prices and few sales (Campbell 2018). In Europe, new diesel cars are to face higher taxes such as increase on VAT or new levy in a bid to reduce air pollution (Pickard and Campbell 2017). This totally hinders the development of new automobiles.
4.4 Competitive Rivalry
According to Grant (2016), the major determinant of the state of competition and the general level of profitability is rivalry among the firms within an industry. In some industries, firms compete aggressively to the extent that prices are pushed below the level of costs and industry-wide losses are incurred. Whereas in other industries, price competition is muted, and rivalry focuses on advertising, innovation, and other non-price dimensions. Competition intensity is determined by factors such as seller concentration, diversity of competitors, product differentiation together with excess capacity and exit barriers according to Grant (2016). Considering these factors, we can conclude that Volkswagen faces intense but price muted competition because of other automobile companies like Toyota, Ford, Nissan, trying to grab its market share in the automobile industry. This has led to intense advertising and product innovations. For example, to oust competitors who use diesel Volkswagen group invested £ 30bn to start manufacturing electric cars to satisfy consumer needs (Attwood 2017).
In addition, Grant (2016) explains that barriers to exit are costs associated with capacity leaving an industry. Where resources are durable and specialized, and where employees are entitled to job protection, barriers to exit may be substantial. We can note that exit barriers for the automobile industry are very high and exiting the market would lead to extreme losses for the exiting company which has forced some of the automobile companies to stay in business and intensify the competition. For example, Toyota closing its manufacturing plant in Australia led to loss of approximately 2500 jobs, resources, and a potentially wide market (Castro 2017).
However, Volkswagen AG has loyal customers to purchase its cars as seen by the increase of its sales even after the Volkswagen emissions scandal (Boston 2017).
4.5 Threat of substitutes
According to Grant (2016), the price that consumers are willing to pay for a product depends on the availability of substitutes for the products. The absence of substitutes for a product means that consumers are comparatively insensitive to price. However, the existence of close substitutes means that customers will switch to substitutes in response to price increases for the product (demand is elastic with respect to price). The extent to which substitutes depress prices and profits depends on the propensity of buyers to substitute between alternatives. This, in turn, depends on their price-performance characteristics. Therefore, this can be perceived as a low threat by Volkswagen because there are few substitutes for its products such as trains, motorcycles, bicycles scooters, hoverboards, electric skateboards, walking for short distances among others. However, substitutes such as trains are associated with some problems like lack of flexibility where its routes and timings can not be adjusted to individual requirements and their failure to operate in rural areas. Also, bicycles are associated with increased risk of injury and can not be used as a means of transport during some weather conditions like during heavy rains (Crilly 2017).
The Volkswagens Pestel analysis for 2017 and 2018 has mostly revealed a significant flashpoint of threats facing the company as well as the automotive industry in general. For instance, the indirect ban of diesel and petrol cars in UK by 2040 is a major threat that will lead to Volkswagen and other automakers scaling back on production of petrol and diesel cars in favor of electric cars. Also, the analysis shows a wide range of issues that VW will have to deal with for example the threat of 20% tariffs on EU car imports to the US, as well as the rise of vehicle sharing and ride hailing services.
While these are predicted to slow down demand for car ownership, there are opportunities for Volkswagen and other innovative automakers as well. This is demonstrated by the fact that VW is also investing heavily in the shift from car ownership to “mobility as a service” with its own “zero-emission” car-sharing service known as WE to be launched in 2019. WE represents Volkswagen’s attempt at jumping on the new opportunities being pioneered by car-sharing and ride-hailing services which are predicted to replace individual car ownership by as early as 2025.
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