Situational Analysis- External

Below we have analyzed the macro environment through PESTEL to determine what the future
holds for Volkswagen-

Political environment- one of the major issues for VW is the tension surrounding the whole
tariffs laws between US and the European Union. There might be a 20% tax imposed on the cars
imported from Europe in future as Donald Trump said in June 2018. Currently the tax is around
2.5% which has remain the same since the 1960s. This will make the car prices go through the
roof in North America for European cars, and no one would be interested in buying them as
there would many other alternatives. U.S. in 2017, imported automobiles from Europe which
were worth over $42 billion, half of this amount came from Germany ($20 billion). Secondly,
there is new policy in place by the UK government which will put an end to diesel and petrol
cars by 2040. Also, the emission scandal of VW bought the ban on over 1.2 million diesel cars
produced by VW’s own factories, this majorly contributed to their declined sales in the UK
which is VW’s second largest market in Europe. In the wake of having zero emissions, UK also
created a new framework called “Road to Zero”. Through this UK wants to reduce their
emissions by 50% through cars that are sold new. UK wants most of its cars to be either
completely electric, hybrid, or should run on other alternative fuels by 2040 before gas and
diesel powered cars get banned anyways. This will put a lot of pressure on VW to invest heavily
on new technologies and new architecture. Third issue is Brexit which made a big impact on
consumer spending behavior in the UK. New cars sales had a decline in the country due to the
economic influence by Brexit. All these three factors make up for the three major macro issues
for Volkswagen (Kush, 2018).

Economic environment- Volkswagen has 25% market share in European Union, making it the
biggest automaker there. VW is the biggest by sales volume in Europe selling about 4.7 million
vehicles there, followed by Asia Pacific (4.5 million), and North America (1 million). The biggest
economic issue faced by VW is the Brexit. Brexit has impacted the economy there heavily by
creating inflation and reduction in spending done by the consumer. This has eventually led to
the demand for new car facing a sudden decline. Brexit was also responsible for car prices to go
up by 5% making it tough for the consumers to actually decide to buy a new vehicle. Another
economic factor courtesy of political factor are the tariffs if they get placed by the US. 20%
tariffs will make it impossible VW to sell cars in the US (Kush, 2018).

Social environment- this includes factors such as socio-cultural trends changing, which is
combined of fluctuations in income, demographics, education, social mobility, changes in
lifestyle, and attitudes towards work. One of the biggest trends automotive industry has
witnessed is the use of car sharing methods such as Uber and Lyft. This trend is especially
popular among millennials due to the fact that how their lifestyle and attitudes are forming and
pushing the demand for advancement in technologies threatening the whole model of car
ownership. This increase in demand for the car sharing trend and other ride hailing programs
create a threat for Volkswagen because of cheaper transportation methods as compared to
high cost of the whole car ownership experience. Few analysts also suggest that this trend will
only continue to grow in coming years (Kush, 2018).

Technological factors- one of the biggest technological factors Volkswagen has to face is self-
driving cars. This trend is pushing the limits of automotive technology and also forcing VW to
invest heavily in R&D of autonomous vehicles. These vehicles have very advanced technologies
such as artificial intelligence, different radars, mapping cameras, big data storage units, road
surface sensors, etc. for the fully integrated self-navigation system. it is a major threat it does
not just challenges people’s driving behavior, but also raises questions on the model of car-
ownership. According to a survey done by KPMG, it was discovered that 60% of the participants
believed that car ownership will see a drop by 2025. This threat from the concept of self-driving
vehicles will not only tank the sales of new cars to individuals consumers but will also shape
urban mobility. In coming years mobility will be seen as a service similar to Uber and Lyft but
eliminating the driver. The service will also be configurable depending on the different
segments and their travel needs. Tesla has already become a major player in selling vehicles
with fully self-driving features along with Uber, that has heavily invested in driverless cab
services (Kush, 2018).
Legal factors- Due to the whole emissions scandal, a court in Detroit ordered VW to pay $4.3
billion in damages. These damages included criminal penalties and fines for violating the
environmental regulations. This also forced Volkswagen to recall and repair 11 million cars that
had their devices to defeat the emission test systems. VW also had to buyback sold cars to the
consumers even after years of use were put on them. This really tarnished the Volkswagen
reputation which with no surprise, led to decline in the sales of their products and also ever
growing number of fines and other penalties of more than $25 billion, and this was in North
America alone. This does not include the threats from lawsuits in the future for VW (Kush,
2018).

Environmental factors- due to the ever increasing demand for car sharing services and electric
vehicles from the consumers, and the advancements in technologies for autonomous vehicles
has given opportunity to VW to grow and also to other automotive manufacturers who can
research and develop and lead this trend. Also, due to the push of more and more vehicles that
are produced to have less and less emissions almost every year, only solidifies this trend.
Fortunately, Volkswagen has acknowledged this shift of mobility turning into a service and have
launched their own car-sharing platform called WE. It is an attempt by Volkswagen to bypass
the threat created by ride-hailing and vehicle-sharing services, and also to give emphasis on
sustainable/ shared mobility. These services are predicted to cause a steep decline in car sales
and ultimately eliminating the car-ownership experience in coming years (Kush, 2018).

Porter’s five forces model-

Bargaining power of the buyers- there are two factors that affects the buyers ability to bring
down the prices they pay- the buyers bargaining power in relation to the firms within the
market and the buyer’s price sensitivity. Factors such as competition, product differentiation,
and importance of the product to the customer determines the price sensitivity. However, the
bargaining power of the of the consumer is influenced by factors such as face value and how
easily they can switch from buying a Volkswagen product to its competitors like Honda or GM,
and also consumer knowledge about car prices in the market. People who Volkswagens have
low bargaining power due to the switching being high when purchasing other brand’s products.
To add to this, VW produces more upmarket vehicles that pulls upmarket consumers that
insensitive to the price since the VW products are clearly differentiated. VW has managed to
demand high customer loyalty because of its differentiated products. This can clearly be seen
by their sales figures going up even the emissions scandal. This loyalty authorizes VW to charge
more premium prices for their products (Nanjekhe, 2018).

Bargaining power of the suppliers- this has similar determining factor like the bargaining power
of the buyer except it is the suppliers instead of the buyers and producers are the suppliers.
However, the important factor here would be how easily firms can switch between different
suppliers and the bargaining power of each business relatively. By looking at these
determinants we can conclude that the VW’s suppliers have low power since there many
suppliers out there who really appreciate doing business with VW given their size in the
industry and the existing suppliers would not want to lose their contracts. This gives VW a
strong dominance to control the prices at which it gets goods from its suppliers. For example,
VW cancelled the contract of its supplier from Bosnia- Prevent, because it unexpectedly
stopped the supplies to VW that led to losses from anywhere between $24.6 million to $123
million (Nanjekhe, 2018).

Threat from alternative products- The price a consumer is willing to pay for something
depends on the availability of the substitute products. If there is absence of alternative product,
the customers are usually relatively insensitive to the cost. But, if the similar substitutes exist in
the market, customer s will switch to those in response to the increased price of that product
(demand is relative to the price). The limit to which alternatives can dampen the costs and the
bottom line is relative to the tendency of the consumers to switch between the substitutes. This
although depends on their price/ performance traits. Therefore, it can be said that threats are
low for VW as there are few alternatives to replace its products like motorcycles, buses, trains
etc. Although these alternatives face issues like lack of comfort, safety, and flexibility. One
cannot just take a train anytime they want, ticket needs to be booked by checking a specified
departure time. Bikes can be dangerous as it can cause more injuries in case if an accident
specially during unfavorable weather conditions (Nanjekhe, 2018).
Competitive rivalry- Many corporations fight aggressively to the point where the prices at
which a product is sold for is sometimes below the cost to produce it, and as a result industry
wide loss is experienced. However, in some industries, war over price is subdued, and the
competition is done over factors like marketing, innovation, and other non-price related
aspects. How intense the rivalry gets depends on the factors like concentration of sellers,
diversification of the competitors, product differentiation with excess volume and barriers to
exit. Analyzing these factors, we can say that VW does face strong but price subdued
competition because other auto manufacturers like Nissan, Subaru, and Mazda are trying to
take its market share. This has given birth to extreme marketing and technological
advancements. For example, VW has invested 30 billion euros in production of electric cars to
fulfil the customer demand. To add to this, barriers to exit are cost linked with the capacity
exiting a market/ industry. Barriers to exit might be significant when resources are robust and
specialized, and also when workers are covered by job protection. We can say that barriers to
exit are high for automotive industry where exiting a market would result in significant job
losses for the shutting company, this forces other firms to keep doing business and make the
market more intense. For example, when GM shut down its subsidiary Holden in Australia, it
resulted in thousands of job losses and left the market wide open for others. However,
customers of VW are loyal which we can see the increase in there sales numbers even after the
dieselgate (Nanjekhe, 2018).

Threat from new entrants- an industry will attract new entrants to itself when it earns higher
return on its capital that exceeds its cost of capital, this will also increase the rivalry in the
market and lower the overall profit. However, the entry of the new firms depends on barriers
to entry that are set up by current manufacturers like VW, GM, Toyota etc. These barriers
include the following- capital needed, economies of scale, product differentiation, distribution
channels, and legal barriers etc. Looking at Volkswagen, and given its size, its already well
established and well know in industry. Also, now there is an increase in tax imposed by the US
government of 25% on steel and 10% on aluminum imports. This will result on new entrants car
prices being high and low sales. In Europe there are extremely high taxes on diesel cars and
new law to end production of gas and diesel cars in UK. This will prevent many new entrants to
even think of coming to the market. Considering these factors, we can conclude that this a low
threat for VW as new entrant would need huge capital, and other resources and also time/
patience to be able to at least come close to the existing auto manufacturers (Nanjekhe, 2018).

Question 1: How did changes in technology and globalization lead to the Volkswagen
scandal?

Back in 2005 when EPA imposed one of the strictest emission standards for the automobile
industry, VW decided to manipulate the testing results of their vehicles (Mansouri, 2016). Due
to lack of technology shortcomings at that time, VW opted to use a defeat device to beat the
emissions standards of the US during testing by EPA. The device was used to control the
nitrogen oxides particles from the small diesel engines. The engineers were able to create a
computer program that altered the cars emissions during the controlled testing and normal
driving. The software could detect if only the two were spinning or al all four and changed the
emissions based on that. The smaller diesel engines in the vehicles used device called lean NOx
trap. This was a cheaper way to meet the emission standards and also took up less space in the
vehicles to install compared to other solutions. It canceled the need to put a sperate tank that
contains urea, it is a chemical used to breakdown nitrogen oxide particles. However, this device
had some disadvantages; when in operation, it severely affects the vehicle mileage and
acceleration. Therefore, it only used to com on during the EPA emissions testing and during the
normal road driving the system would reduce its effectiveness and will nitrogen oxides particles
40 times of EPA limit in the atmosphere. I believe the company culture is to be blamed here.
Karl Brauer an analyst from Kelly Blue Book said that the engineers at Volkswagen must be
trying to keep a balance between the US emissions standards and the VW’s targets (Wright &
Bryant, 2015). VW’s company’s culture almost forces their employees to oblige by the rules.
This led to a lot of pressure on the engineers to come up with a solution in a very short time. It
was back in 2005 that not only EPA, but the federal agency decided to cut the amount of NOx
that the vehicles emit per mile from 1.25 to 0.07. This is because NOx particles causes dieses
like cardiovascular, asthma, bronchitis, and even premature death. The decision not only was
taken because this but also due to the rise of the topics such as conservation and sustaining the
planet and its atmosphere. It is topic that got a huge exposure during that time all around the
world specially because of globalization where the world had become a global economy
(Mansouri, 2016). It was in 2013, when a nonprofit organization called the International
Council on Clean Transportation observed that for some reason diesel technology in Europe
was cleaner than the United States. Therefore, to uncover the reality they partnered with West
Virginia University and vehicles such as VW Jetta, BMW X5, and VW Passat to the test. The
researchers compared both the controlled lab and on road tests. Right away, the Volkswagen
cars stood out. Both the VW cars did great in the lab tests, but as soon as they performed road
tests on them, they emitted higher levels of emissions. What researchers discovered was truly
shocking. They concluded that it was a result of some trickery done with the emission systems
in the cars and in 2014, the researchers handed the results to the EPA. After denial from VW
that they did not manipulate anything regarding the emissions, they eventually admitted to the
rigging. It was reveled that almost 11 million vehicles were affected by this NOx trap device that
altered the results during testing (Lynch, Coleman & Bird, 2016)

References:

Kush, J. (2018). PESTLE AND SWOT ANALYSIS OF VOLKSWAGEN AG 2016-2017. Retrieved from
https://www.123writing.com/sample/pestle-and-swot-analysis-of-volkswagen-ag-2016-2017

Nanjekhe, P. (2018). VOLKSWAGEN PORTERS FIVE FORCES ANALYSIS 2018. Retrieved from
https://www.123writing.com/sample/volkswagen-porters-five-forces-analysis-2018

Mansouri, N. (2016). A Case Study of Volkswagen Unethical Practice in Diesel Emission Test.
International Journal of Science and Engineering Applications, 5(4), 211-216.
doi:10.7753/ijsea0504.1004

Bryant, C., & Wright, R. (2015, October 15). Volkswagen scandal is rooted in technology
shortcomings. Retrieved July 10, 2020, from https://www.ft.com/content/58975016-720f-11e5-
9b9e-690fdae72044
Lynch,L., Coleman, A., & Bird, E. (2016) The Volkswagen Emissions Scandal. University of
Virginia Darden School Foundation. (Mindtap)