Volkswagen in China Super Team F  Kiyomi Bernet-Yaegashi  Francisco Busco  Chris Byrne  Lisa Davenport  Jarod Haslinger  Thomas Himmel  Martin Winkelmann 30-March, 2006

2 Agenda  Entry Strategy and Accomplishments  VW’s Marketplace Position  Chinese Auto Industry Landscape  Alternative Strategies  Recommended Strategy  Implementation Tactics

3 China-VW Entry Strategy  Transfer obsolete models  Sell good quality and inexpensive vehicles  Coordinate closely with central and local governments  Develop markets with government and institutional segments  Absence of localized Chinese operations

4 VW’s Marketplace Position  VW cars dominate the roads of China  Production and sales volumes well aligned  Not faced with the overinvestment problems like competition  Downward market share trends  Revenue growth remains steady, yet market share declines are significant  Recognize strategic shift is necessary  Limited new product introductions  Confronted with fierce competition and new market entrants  Price wars have driven down margins

5 Market share declines from almost 70% in the mid-90s to 35% in 2003, and the trend has continued through 2005 Source: Mercer Management Consulting, A New Vroom in Beijing, Mercer Management Journal, Issue 19, May Market Share Degradation

6 China’s Auto Industry Landscape  Market Emergence  Western auto companies plagued with excess capacity  Significant forecasted demand in China  Market Structure  Migration from institutional purchases to private consumers  Limited financing opportunities  Government Policy and Regulations  Foreign investments are driven by joint ventures  Tax holidays on the decline, but some incentives will still exist  Increased governmental emphasis on environmentally sound cars  Competition

7 Alternative Strategies Strategy I Operational Excellence Value Discipline Strategy II Customer-Intimate Value Discipline Source: Discipline of Market Leaders (Treacy, Wiersema) Goal – Drive Profitable Growth in China

8 Strategy I – Operational Excellence Value Discipline Drive up profits in China through operations and manufacturing efficiencies Improve revenues through offering products that appeal to the wants and needs of the broad Chinese population Drive cost out of channel redundancies and implement a shared services strategy

9 Operational Excellence Value Discipline Low CostMainstreamPremium Target Market 22%14% CAGR 38% Mkt Size 54% Mkt Size 8% Mkt Size

10 Strategy II – Customer-Intimate Value Discipline Drive revenue and market share through identifying and meeting the needs of the market Allow the customer needs to direct the channel strategy - the current channel conflicts and redundancies are hurting the marketplace position

11 Customer-Intimate Value Discipline Low CostMainstreamPremium Target Markets 22%14% CAGR 38% Mkt Size 54% Mkt Size 8% Mkt Size

12 Recommended Strategy Enable profitable growth through the Customer-Intimate Discipline Strategy

13 Implementation Tactics (12-18 Months)  Fully understand and identify the Chinese consumer market segments  Implement transitional marketing plan to match the current product offerings with the identified strategic market segments  Develop a product introduction strategy commensurate with Chinese market demands  Develop a JV differentiation strategy and execute marketing communications to assuage market confusion  Explore joint venture integrating marketing opportunities and implement if appropriate  Outline a retail network strategy to coach and deliver a great point-of- sale customer experience; begin pilot implementation

14  Product Introduction Cycle to meet Chinese target segment needs  Full customer intimate marketing plan implemented  Drive continued JV efficiencies and market differentiation  Full implementation of retail network coaching process and point-of- sale customer experience training Implementation Tactics (2-5 Years)

15 Thank You