Key Issues U.S. Mexico Germany ??

NAFTA and Volkswagen U.S. Mexico Germany High-end production Suppliers Low-end Production Some supply Marketing Distribution

Challenges F New challenges brought by NAFTA? F Can VW compete from outside the U.S.? F What is impact of currency changes? F Should VW reconfigure the supplier network F Is the labor a symptom of a larger problem? F Is the Mexican market really that important?

What should VW do? F Suppliers F New models F Marketing F Location of production F Local content levels F Management of F/X risk F HR policies

NAFTA: Key Issues F Regional content F Over-reliance on German imports F Lack of US or Mexico supply network F Increased competition in Mexico and US F Instability of Peso F Labor instability

Changes in Currency DM per $ Peso per $ Peso per DM

Location and Flow U.S. Mexico Germany ??

Strong Dollar vs. Peso and DM Location and Flow: Strong Dollar vs. Peso and DM U.S. Mexico Germany Sales Components Mfg. Profit Lower labor costs High component costs Lower profits Low transfer price

Strong Dollar vs. Peso and DM Location and Flow: Strong Dollar vs. Peso and DM U.S. Mexico Germany Sales Mfg. Components Profit Constant labor costs Const. component costs Profits depend on P-C

Strong Dollar vs. Peso and DM Location and Flow: Strong Dollar vs. Peso and DM U.S. Mexico Germany Sales Mfg. Components Profit Lower labor costs Low component costs Highest profits Low transfer price

Weak Dollar vs. Peso and DM Location and Flow: Weak Dollar vs. Peso and DM U.S. Mexico Germany Sales Components Mfg. Profit Medium labor costs Low component costs Medium profits High transfer price

Currency and Location Strong Dollar F Mexico mfg. F Mexico components F Maximize $ profits Weak Dollar F Mexico mfg. F U.S. components F Maximize Peso profits

Mexico Policy Efforts F Mexican government lures German FDI in wake of German reunification F Strike at Puebla, August 1992 F Pact for Stability, Competitiveness and Employment limits union’s ability to gain wage raises to 9.9%

VW Changes F VW Mexico makes $1.0 bil investment: F Piech as new CEO January 1993 –Reversed Hahn’s growth strategy –Cut worldwide investment by 1/3 and German workforce by 10% F Jose Lopez cutting supply costs –Reducing VW suppliers from 1,000 to under 100 –VW suppliers shifting production to low wage countries (including Mexico) F Considering US plant if 10-15% growth achieved

VW’s U.S. Marketing Efforts F Cross-promotion of Irish folk/new age band “Clannad” (1993; music from commercials) F $45 million U.S. advertising campaign focuses on popularity of Golf /Jetta in Europe (1993) F J.D. Power ranks Golf as “best in class” (1995) F Pushes “test drive outings” vs. rivals’ cars (1995) F Major focus group effort vs. rivals’ cars (1995) F “Drivers Wanted” campaign signals VW’s focus on age group; $45 million (1995) F “Duh, Duh Duh” … $70 mil ad campaign (1997)

New Products

Missed Opportunities?

Product Evolution

The VW Family F Audi F Bentley F Bugatti F Rolls-Royce F Seat F Skoda F Volkswagen

VW’s North American Sales Number of Units