UNIVERSITY OF NEW YORK IN PRAGUE European Business Administration Effect of European Union’s Environmental Policies on Corporate Strategy of Audi AG by Ján Filipský 2016 Mentor: Kevan Lyons, MBA
UNIVERSITY OF NEW YORK IN PRAGUE
European Business Administration
Effect of European Union’s Environmental Policies
on Corporate Strategy of Audi AG
by
Ján Filipský
2016 Mentor: Kevan Lyons, MBA
Table of Contents
ABSTRACT...............................................................................................................................1
ACKNOWLEDGMENTS......................................................................................................... 3
I. INTRODUCTION....................................................................................................4
II. METHODOLOGY...................................................................................................7
III. OVERVIEW OF Audi AG………………………………………………………...8
IV. ENVIRONMENTAL LEGISLATION.....................................................................9
a. Background.........................................................................................................9
b. CO2 emissions...................................................................................................14
c. Monitoring CO2 emissions from passenger cars……………………………...15
d. Methods for monitoring emissions…………………………………………...16
e. Calculation of manufacturers’ performance…………………………………..17
f. Effect of the average fleet mass on the targets………………………………..18
V. THE ‘DIESELGATE’ EMISSIONS SCANDAL………………………………...18
VI. BUSINESS STRATEGY OF Audi AG………………………………………......20
a. The “volume and diversity” strategy……………………………………...….21
b. Quality strategy……………………………………………………………….23
c. Technologies developed to meet CO2 requirements………………………….23
i. Cylinder on demand ………………………………………………….25
ii. Improved aerodynamics………………………………………………25
iii. Weight reduction……………………………………………………...25
iv. Alternative drivetrains………………………………………………...26
v. Fuels of tomorrow…………………………………………………….26
VII. SUSTAINABILITY OF PRODUCTS AND PROCESSES……………………...29
VIII. STRATEGY FORMULATION…………………………………………………..30
a. Porter’s five forces analysis…………………………………………………..33
b. PESTLE analysis……………………………………………………………...35
c. Marketing and sales strategy………………………………………………….41
d. Production…………………………………………………………………….43
e. Competitive profile matrix (CPM)……………………………………………45
IX. CONCLUSION…………………………………………………………………...46
BIBLIOGRAPHY………………………………………………………………...50
APPENDICES……………………………………………………………………53
GLOSSARY………………………………………………………………………58
Statement of Originality
I, Ján Filipský, hereby declare that the material contained in this submission is original work
performed by me under the guidance and advice of my mentor, Kevan Lyons, MBA. Any
contribution made to the research by others is explicitly acknowledged in the thesis.
I also declare that this work has not previously been submitted in any form for a degree or
diploma in any university.
Ján Filipský, 27.04.2016 in Prague
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ABSTRACT
The issue of our environment and its preservation for future generations has never
been more valid and pressing at the same time. To be able to at least maintain the amount of
greenhouse gases, many institutions need to cooperate. In case of European Union, it is
necessary to employ reasonable environmental policy and set reasonable targets. ACEA
(European Automobile Manufacturer’s Association) which directly cooperates with European
Commission on issues of environmental policy making helps to set achievable goals both for
European Union and auto industry. However it is clear that sustaining the environment
depends on much more than policy and technological innovations. End user needs to take part
as well, for example aggressive driving style behavior negatively affects fuel consumption to
an extent that a vehicle could produce up to 200% of emissions claimed by the manufacturer.
In this paper I focus on interaction between European Union’s environmental policies and
contextual strategic approach of Audi AG to meet required standards and yet stay profitable.
My goal in this paper is to analyze business strategy approach of Audi AG in response to ever
stricter environmental policies. I am looking for and trying to pin-point particular adjustments
Audi makes to its strategy in response to environmental policy development.
I analyzed past, present and future trends in environmental policy in Europe. Generally,
main focus of policy is to reduce GHG (greenhouse gases), particularly CO2 and NOx, which
are the main contributors to increase in average temperature.
As I progress with research, it becomes clear that main indicator for car manufacturer of
whether their strategy is successful is cost management. Since the evermore stricter policy
makes the internal combustion engines, both diesel and petrol more complex, Audi has to
invest more into research & development. If Audi manages not to reflect the extra costs into
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the final cost of goods sold without sacrificing their margin, and at the same time meeting
policy requirements, they can say that the strategy is successful.
From EU’s perspective, when new regulation is put into action and the standards are not met,
as recent events concerning Volkswagen Group (Audi including) is a perfect example of
insufficient design and implementation of policy.
My hypothesis is:
European Commissions environmental policy making significantly affects every part
of corporate strategy of Audi AG and to comply with CO2 regulations, to stay
financially competitive and not to project increased costs which are consequential to
higher technological demands into cost of goods sold.
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ACKNOWLEDGEMENTS
I would like to dedicate a few words of gratitude to people without whom completion of this
work would not be possible. I thank Kevan Lyons, MBA who guided me throughout my
research all the way from beginning until the end, who was supportive and available at all
times to help. I would also like to thank my expert interviewees, Dr.h.c. mult. prof. Ing. Juraj
Sinay DrSc. and professor doc. Ing. Ján LEŠINSKÝ, CSc of Slovak Technical University in
Bratislava for providing me with their expert opinions and insider information.
I thank my girlfriend Erika who’s been supporting me all the way not only through writing
this thesis, but throughout my studies at UNYP.
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I. INTRODUCTION
The purpose of this work is to inform the reader of developing trends in the European
Union’s environmental policies aimed at auto industry, to show in this case how Audi AG
accounts for these regulations in their strategy.
In today’s world, the subject of the environment and its preservation is more important than
ever. According to ACEA, in 2013, EU28 (28 European Union member countries) produced
15 million passenger cars accounting for 21% of all passenger cars world-wide. (Acea.be,
2015) Therefore, it is important for the EU to be the leader and example in emission
reduction. And, therefore, I chose this topic, to dedicate my share of effort toward more
sustainable environment. At the same time I wanted to educate myself as a business student
and be able to use the knowledge I acquired throughout this research in my prospective future
career.
Until the recent scandal or “Diesel Gate” of Volkswagen Group, of which Audi is part as
well, everyone thought that we were on the right track. This event brought up a lot of
questions and doubts whether Volkswagen did what they did to maximize their profit or
whether the legislation was simply too strict and Volkswagen could not figure out a better
way to comply with emission limits. Also if Volkswagen was the only one to manipulate
software in their cars, or if more manufacturers are guilty as well. As it turns out, Mercedes-
Benz, BMW, Peugeot and Opel/Vauxhall took part as well, consuming 50% or more of the
claimed fuel consumption.
Interestingly enough, on April 22 BBC News published an article regarding Japanese
Mitsubishi manipulating emissions results as well. (Mitsubishi Motors Scandal Widens, 2016)
According to TopGear Magazine, Mitsubishi has admitted to falsifying fuel consumption test
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data since 1991. As a result, shares of Mitsubishi are now down 40% and according to
President Tetsuro Aikawa, only 6 models are affected, however since this has been going on
since 1991, we can expect that more models not meeting the emissions will arise. (Emissions
scandal latest: Mitsubishi admits cheating since 1991, 2016)
Since I have had already decided to investigate this topic before the Volkswagen “scandal”
surfaced, it only assured me that it is the right time for my paper and that I am going in the
right direction. Even though I chose Audi to be the target of my research, it is not a problem
since Audi is a part of Volkswagen Group and their motors were affected as well.
From the greater perspective, Audi is a great example of company driven by innovation. Not
only in sense making their product safer, more luxurious, but also making it efficient. This
year, Audi is celebrating 25 years of their trademark TDI diesel engines. Even after 25 years
of constant development and improvement of not only TDI (turbo diesel injection) engines,
but also FSI (fuel stratified injection) and TFSI (turbo fuel stratified injection) petrol engines
have great potential for further improvement of the combustion process and thus efficiency.
One of many great examples being cylinder on demand technology (COD), which deactivates
half of cylinders at low to intermediate loads, reduces fuel consumption during moderate
driving by up to 20%. (Audi-cr2014.de, 2016) Even though it is not product of Audi,
Start/Stop technology is definitely worth mentioning. It is relatively simple piece of
technology that shuts off the engine when automobile stops on an intersection for example, or
in traffic. According to Ford, “start stop system has potential to boost the real-world fuel
economy by up to 10%.” (Colwell, 2016) I argue however, that even though it is good when
cars shut off their engines in the city centers and traffic jams, this system also draws a
significant amounts of electricity from cars battery to start the engine, which needs to be
replenished by an alternator which is powered by the engine. So effectively, fuel is spent to
save fuel. Also engine’s cooling system is shut off together with the engine, which allows for
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heat to accumulate and hurts the engine in the long-run. It is very hard to quantify the damage
caused to the engine and amount of fuel saved over 200.000 kilometers for example.
“Vorsprung durch technik” – advance through technology is the motto of Audi and they stay
true to this statement. Audi thinks ahead and is already a leader in development of not only
alternative drivetrains, but also alternative fuels – Audi e-fuels. These fuels do not require
biomass, do not compete with food production and offer substantially higher potential than
conventional bio-fuels. The primary pillar of Audi e-fuel strategy is development of Audi e-
diesel, e-gasoline and e-ethanol.
ACEA – European Automobile Manufacturer’s Association claims that the downward trend
of emissions has been sustained without legislation, which would mean that European
Union’s policy making does not have any effect on strategy of Audi. On the other hand
however, European Commission has phased in targets of average CO2 emissions – from 2012
onward, all newly registered vehicles must comply with limit of 130g/km. “If the average
CO2 emissions of a manufacturer’s fleet exceeded its limit value in any year from 2012, the
manufacturer has to pay an excess emissions premium for each car
registered.” (Ec.europa.eu, 2016) The premium amounts 5€ for the first gram of exceedance,
15€ for the second gram, 25€ for the third gram and 95€ for each subsequent gram.
Thus I claim that European Commissions environmental policy making significantly affects
every part of corporate strategy of Audi AG and to comply with CO2 regulations, to stay
financially competitive and not to project increased costs which are consequential to higher
technological demands into cost of introducing the automobile to the market.
In Audi, research & development costs are recognized as an expense. Interestingly, between
2009 and 2014 investments in research & development almost doubled, from 2,050 million in
2009 to 3,685 million in 2014.
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II. METHODOLOGY
I strived to provide research as objective as possible. Therefore I researched sources of
academic standards, sources of policy making institutions and expertly journals. I reviewed
Audi corporate publications such as the Annual Reports, Strategy consumer report,
Environmental Declaration and Product consumer report mostly for quantitative data and
technical specifications and information, since these tend to be very subjective in their claims
and statistical results in favor of the publisher. Still, with some degree of reservation toward
them, I was able to extract interesting information.
I also conducted interviews with Prof. Doc. Ing. Jan Lesinsky of Slovak Technical University
in Bratislava, who actively participates in developing studies and technologies for automotive
industry and has more than 30 years of experience.
I was also very lucky to be able to personally speak with Dr.h.c.mult. Prof. Ing. Juraj. Sinay,
DrSc., who is currently the President of Slovak Automotive industry. Slovakia currently being
among the automotive industry, professor Sinay offered me insider perspective on how
manufacturers approach the pressure from European Union.
Further I drew information of reports from various consultation agencies that take part in
discussion forums with policy makers and auto industry representatives. Agencies such as
ACEA – European Automobile Manufacturer’s Association, in which also takes part
Professor Lesinsky, AEA – an energy and climate change consultancy firm, working by order
of European Commission, EEA agency which provided technical background for my
research.
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III. OVERVIEW OF Audi AG
Audi Group is historically one of the most successful car manufacturer in premium and
supercar segment.
Tradition of Audi goes back to 19th
century, when the company was established by an
engineer August Horch. The four rings in Audi logo represent four companies that joined
together to become Auto Union in 1932. In 1965 Auto Union was acquired by Volkswagen
and after launching Audi F103 model series, Volkswagen merged Auto Union with NSU
Motorenwerke in 1969 – creating the company we know today.
The name Audi is based on the translation of founder’s surname “Horch”, meaning “listen” in
German, into Latin, which becomes “Audi”.
Part of Audi Group are Italian motorbikes manufacturer Ducati and super sports cars
manufacturer Automobili Lamborghini.
Audi stands for: “Vorsprung durch Technik”, which in translation to German means: “ahead
through technology”.
In past fiscal year, Audi Group delivered 1,933,517 cars to customers, which is an increase of
10.5% comparing to year before last.
Audi is best known for its characteristic design features, innovative technologies and high
quality standards.
The brand values are “sportiness, progressiveness and sophistication.” (Audi.com, 2016)
The Group headquarters are in Ingolstadt, Germany and house a large proportion of
production, technical development, sales and administration.
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Audi also owns number of production and assembly facilities around the world, for example
in Győr (Hungary), Audi Hungaria Motor develops and manufactures engines, Audi Brussels
exclusively produces models of the A1 family, SUV models Q7 and Q3 are manufactured in
Bratislava (Slovakia) and Martorell (Spain). Two sites in Changchun and Foshan (China)
produce special long wheel-base A4 L, A6 L, A3, Q3 and Q5 specifically to local market
conditions.
In addition, in 2015 Audi started production of A3 and Q3 models in Curitiba (Brazil).
Currently, Audi is building a new plant in San Jose Chiapa (Mexico), where the next
generation of Q5 model will be built.
IV. ENVIRONMENTAL LEGISLATION
In this section I discuss the evolution of major European environmental regulations that affect
the auto industry from the first ever regulations introduced before 1980, Euro standards and
CO2 emissions. Further, I discuss how regulations are developed, whether and how they are
enforced and what potential impacts they may have on auto manufacturers, their
competitiveness and strategy.
a. Background
The first European vehicle emission standards were developed in mid-1980s by the Economic
Commission for Europe (EEC) and only then adopted by individual countries. However the
regulation was not implemented due to requirement of unanimous agreement, which was not
met. With Single European Act, which entered into force in 1987, consensus was replaced by
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majority voting, which allowed for establishment of common ground for future vehicle
emissions regulation. (Eur-lex.europa.eu, 2016)
The European Community issued its first directive (Directive 70/220/EEC) in 1970. The
directive limited emissions of carbon monoxide and hydrocarbons from gasoline engines and
for the first time introduced “type approval”. (Eur-lex.europa.eu, 2016) Type approval is a
process, where vehicles design attributes are tested against the requirements of the directive.
Type approval is required for every car to be sold within the European Union.
Tables 1-1 and 1-2 below, illustrate the development of EURO standards from EURO 1
introduced in 1992 to EURO 6 introduced in 2015 for category M1 - light commercial
vehicles. Table 1-1 illustrates requirements for compression ignition engines (diesel) and table
1-2 illustrates requirements for spark ignition engines (gasoline). EURO standards limit the
emissions of carbon monoxide (CO), nitrogen oxides (NOX), hydrocarbons (HC) and
particulate matter (PM) – only for diesel/compression ignition engines for all new cars sold in
the European Union.
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Table 1-1 Compression Ignition
Stage Directive Date CO
(g/km)
HC
(g/km)
HC+NOx
(g/km)
NOx
(g/km)
PM
(g/km)
EURO 1 91/441/EEC
(Eur-lex.europa.eu,
2016)
Jul.1992 2,72 - 0,97 - 0,14
EURO 2 94/12/EC
(Eur-lex.europa.eu,
2016)
Jan.1997 1,0 - 0,7 - 0,08
EURO 3 98/96/EC
(Eur-lex.europa.eu,
2016)
Jan.2000 0,64 - 0,56 0,5 0,05
EURO 4 2007/715/EC
(Eur-lex.europa.eu,
2016)
Jan.2005 0,5 - 0,3 0,25 0,025
EURO 5 Reg. 715/2007
(Eur-lex.europa.eu,
2016)
Sep.2009 0,5 - 0,23 0,08 0,005
EURO 6 Reg. 715/2007
(Eur-lex.europa.eu,
2016)
Sep.2014 0,5 - 0,17 0,08 0,005
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Table 1-2 Spark ignition
Stage Directive Date CO
(g/km)
HC
(g/km)
HC+NOx
(g/km)
NOx
(g/km)
PM
(g/km)
EURO 1 93/59/EEC
(Eur-lex.europa.eu,
2016)
Dec.1992 2,72 - 0,97 - -
EURO 2 96/69/EC
(Eur-lex.europa.eu,
2016)
Jan.1997 2,2 - 0,5 - -
EURO 3 2002/80/EC
(Eur-lex.europa.eu,
2016)
Jan.2001 2,3 0,2 - 0,15 -
EURO 4 2007/715/EC
(Eur-lex.europa.eu,
2016)
Jan.2006 1,0 0,1 - 0,08 -
EURO 5 Reg. 692/2008
(Eur-lex.europa.eu,
2016)
Jan.2011 1,0 0,1 - 0,06 0,005
EURO 6 Reg. 692/2008
(Eur-lex.europa.eu,
2016)
Sep.2015 1,0 0,1 - 0,06 0,005
When comparing both tables a few things are easily noticeable. First, that spark ignition
engines produce considerably lesser amounts of greenhouse gases than compression ignition
engines. We can also see in table 1-2 that development of both, policies and engines, was not
as vigorous as was development of compression ignition engines and regulation of those.
Overall, the progressive decreasing of emissions happened by improvements in engine
technology and combustion cycles. As an example, all vehicles produced after 2012 are fitted
with three-way catalysts, which remove up to 75% of CO, HC and NOx emissions. Diesel
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vehicles require substantially more technological advancements than gasoline engines. Diesel
fuel is a by-product of gasoline production and its combustion produces substantially more
greenhouse gases and solid particles than combustion of gasoline as is illustrated by tables 1-1
and 1-2.
Diesel engines are today fitted with electronic, electronic fuel injection that uses extreme
pressures to inject fuel into cylinders and oxidation catalysts rather than mechanical fuel
injection used in the past.
The worst product of diesel combustion process health and environment-wise is particulate
matter (“PM” in table 1-1). It is “the black smoke” that was observable coming out from
exhausts of cars with diesel engine in the past. This particulate matter is carcinogenic to
humans when inhaled and minimizing the amount of particulate matter from the exhaust was
the greatest improvement, again thanks to a combination of new technologies, but the most
important one after direct injection and turbo charging is diesel particulate filter or DPF. (See
picture 1.) The DPF is a constructional part of the exhaust system of the car. As you can see in
the picture 1, the filter is an extremely fine screen that captures microscopic particulate
matter. The particles are then combusted in secondary combustion cycle in filter itself.
“In 2013, diesel vehicles represented 52.5% of newly registered vehicles in the EU. The
average CO2 emissions of diesel and petrol engines dropped by 4.6g of CO2/km and 5.3 g of
CO2/km respectively compared to 2012.” (European Environment Agency, 2014, p.16)
According to EEA, the efficiency gap between petrol and diesel vehicles has continued to
decrease. “In 2013 an average diesel vehicle emitted 126.9g of CO2/km, only 1.55g of
CO2/km less than average petrol vehicle.” (European Environment Agency, 2014, p.16)
However, in my opinion based on my empirical observation, that may be true based on ‘type
approval’ testing. Emissions and consumption in real traffic tend to be higher than claimed,
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due to many factors that are affecting the consumption in real life which are not present in
laboratory when testing. One of the most important factors is driving behavior. Consumption
can reach numbers double the value of claimed consumption when driving aggressively. Also,
diesel engines’ consumption is not as sensitive to driving behavior as is petrol engine. So even
though petrol engines seem to be catching up with diesel engines, that is in most cases not
reality.
The New European Driving Cycle (NEDC), which is part of the ‘type approval’ testing
represents only very small part of the vehicle engine operation under both load and speed.
Type approval tests of fuel consumption are conducted on chassis dynamometer using
resistance settings provided by the manufacturer. It appears that the actual resistance values
are higher than the ones provided by manufacturers – manufacturers perform tests in ideal
conditions (tarmac condition, weather, vehicle run-in, tire dimensions, trained drivers, etc.)
Unfortunately, these settings are confidential. In their study, Mellios et al., revealed that using
real vehicle resistances instead of type approval alone, increased consumption by up to 17%.
(Mellios et al., 2011)
b. CO2 Emissions
In EU27, road transport accounts for 20% of total CO2 emissions. In 1995 European
Commission set out a target of reducing CO2 emissions from new cars to 120g/km by 2005.
(EUR-Lex - 52007DC0019 - EN - EUR-Lex, 2016) Due to delays in implementation, this
goal was met in 2012. (Public consultation on the implementation of the renewed strategy to
reduce CO2 emissions from passenger cars and light-commercial vehicles, 2009)
Since average emissions were decreased from186gCO2/km in 1995 to 161 gCO2/km in 2004.
To European Commission it seemed unlikely that target of 120gCO2/km would be met by
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2012, the Commission presented a new strategy to regulate CO2 emissions on 7 February
2007 called EC 443/2009. The strategy outlined legislative framework to meet the target
average of 120gCO2/km. (EUR-Lex - 52007DC0019 - EN - EUR-Lex, 2016)
In our interview I asked professor Lesinsky: How are these environmental policies
developed? Who comes up the final quotas? What ensures that the quotas on CO2 and other
greenhouse gases are reasonable? Are manufacturers present and do they have any say into
the policy formation?
Professor explained to me the whole process of policy making as he also takes part in the
process in name of ACEA. He ensured me that association of European car manufacturers is
present during proposals of policy, delivers its own proposals in name of all manufacturers
represented and takes part in negotiating acceptable compromise. I asked these questions in
relation to Volkswagens scandal to find out whether too strict a policy and inability to meet
the limits were the reasons for Volkswagen to manipulate the electronic management systems
of their cars.
As I only found out later, the reason was regulation, however not European but American,
which was at the time in 2005 6-fold stricter than European. The issue is discussed in more
detail further on in the writing.
c. Monitoring CO2 emissions from passenger cars
To duly understand the process of developing strategy, it is necessary to understand how
emissions and manufacturer’s performance is measured across Europe.
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“The European Environment Agency (EEA) supports the European Commission in the
monitoring of CO2 performance of passenger cars, in accordance with regulation (EC)
443/2009”. (European Environment Agency, 2014)
d. Methods for monitoring emissions
“Since 2010, the EEA has been collecting data from passenger cars registered in all EU
Member States.
Member States record information for each new passenger car registered in its territory and
transmit the information to European Commission by 28 February each year.” (European
Environment Agency, 2014)
The EEA performs several quality checks to evaluate the dataset and publishes preliminary
database.
At the same time, the EEA notifies the manufacturers of their provisional CO2 performances.
The manufacturers have 3 months to notify the commission of any errors in the data.
The EEA assesses the manufacturers’ corrections, and, where justified take them into account
for the calculation of manufacturer final average CO2 emissions and specific emission targets.
(European Environment Agency, 2014, p.7-8)
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e. Calculation of manufacturers’ performance
Average CO2 emissions are calculated as a weighted average of the manufacturer’s fleet in a
particular year. The average emissions also take into account the following modalities:
Phase-in
Super-credits
Eco-innovations
A phase-in schedule applies for calculating average specific emissions for 65% in 2012, 75%
in 2013, and 80% in 2014 of the best-performing registered cars to determine the performance
of manufacturers. For the period from 2015 to 2019, 100% of the new cars produced by each
manufacturer will be subject to measurement.
Super-credits are a motivation for manufacturers to develop ultra-efficient cars and include
them in their portfolio (even though the service station infrastructure, for example charging
stations for electric vehicles may not be adjusted). Each new passenger car that produces less
than 50g of CO2/km, is given greater weight in calculating the average specific emission.
Each new car producing less than 50g of CO2/km is considered to be equivalent to 3.5 cars in
2012 and 2013, 2.5 in 2014, 1.5 cars in 2015, and 1 car in 2016.
Eco-innovations – some of the innovative technologies cannot demonstrate their abilities to
reduce consumption under the current type approval test procedure, thus, to support technical
development, a manufacturer can apply to the Commission for approval of such innovative
technologies. If the manufacturer fits its car fleet with an approved eco-innovation, maximum
7g of CO2 will be subtracted from the actual emissions. An example of such eco-innovation is
Audi Matrix LED lights that are several fold times more efficient than xenon or halogen
lights. (European Environment Agency, 2014, p.9)
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f. Effect of the average fleet mass on the targets
Emission targets are set individually for each manufacturer according to average mass of the
fleet, using a limit value curve. The curve is set in such a way, that if a manufacturer fleet is
1372kg, the target for the manufacturer will be 130g CO2/km. (for illustration, see figure 3.)
In order to ensure that the target weight-to-emissions ratio is representative to the evolution, it
is appropriate to use only those mass values that have been verified and accepted by
manufacturers.
V. THE ‘DIESELGATE’ EMISSIONS SCANDAL
The recent scandal of the Volkswagen Group received a lot of attention around the world. It is
worth mentioning, since Audi was involved too.
The scandal dates all the way back to 2005 when Volkswagen launched an aggressive
campaign on selling diesel cars to United States of America, which at the time had extremely
strict regulations for diesel cars, allowing only 31mg/km of nitrogen oxides to be emitted, that
is six fold less than at the time active EURO 5 norm within the EU.
To meet the budget and approaching deadline, a group of engineers within the engine
development department of Volkswagen began to modify the engine management systems
software, so the cars would pass the tests in the U.S. In total, they modified 15.000 algorithms
in the ECU. (Saarinen, 2016)
In September 2015, US Environmental Agency (EPA) found out that Volkswagen had built
diesel cars with a ‘defeat device’ designed specifically to cheat emissions test. The device
would recognize that the vehicle is tested for emissions and modify air to fuel mixture ratio
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and other parameters to produce acceptable results. Tests conducted during standard driving
conditions revealed that cars produced more than 40 times of allowed nitrogen oxides (NOx).
In total around 11 million of vehicles are affected worldwide, Skoda and Audi admitted that
around 3.3 million of their cars are affected as well. Particularly, 1.2, 1.6 and 2.0-litre diesel
engines are affected. Surprisingly, specifically for two reasons, the CEO of Volkswagen
Martin Winterkorn admitted to have known about the device being installed into the engines
from fall 2014. First of all, how could he possibly not have known about it for the first 9 years
this was going on? And secondly, it is hard to understand why anyone would knowingly put
their company at such risk.
Winterkorn resigned immediately after the scandal surfaced and is now facing prosecution for
possible fraud in Germany. Volkswagen has until April 26. Of this year to come up with clear
plan of how to fix all the vehicles and is also facing a lawsuit for 20$ billion from US
Department of Justice which acts on behalf of the Environmental Protection Agency.
(Passary, 2016) To this day (May 1st), as I am finalizing this thesis, the decision has not been
made by the Department of Justice.
Information for vehicle owners about the affected vehicles are readily available at the
Volkswagen official website and all the owners of those affected vehicles will be offered a
voucher from 400$ to 1000$ to spend for OEM equipment or as a discount on new car.
Clearly Volkswagen did what they did for financial reasons. U.S. is the largest market in the
world and proportion of diesel to gasoline vehicles was very low. Therefore this was a great
opportunity for Volkswagen. The problem was however, that the deadlines for the project
were set by the management and engine development department did not have enough time in
2005 to develop technology that would allow their engines to comply with much stricter
regulation in the U.S., so they managed to pass the tests in their own way.
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Is this the perfect case of ever stricter environmental policy pushing the manufacturers in the
corner and not giving them another choice? I don’t think so. The policies are strict, but the
advancements in technology should easily allow manufacturers such as Volkswagen or Audi
to meet the requirements. Whether the policies are reasonable, to answer that question would
require another thesis.
VI. BUSINESS STRATEGY OF Audi AG
When we boil down all aspects of corporate strategy, we will be left with profitability. Every
strategy is created with success and profitability in mind.
In their book Car Firms’ Strategies and Practices in Europe, Michael Freyssenet and Yannick
Lung analyzed two essential conditions that are prerequisites for profitability. First, the
relevancy of the “profit strategy” to the “growth mode”. Second is the “company governance
compromise” between firm’s principal protagonists, a meeting of the minds that enables to
invent or to adapt a “productive model.”
There are six sources of profit: economies of scale, diverse offerings, guarantee of quality,
innovation, productive flexibility and permanent cost reduction. (Freyssenet and Lund, 2007)
Until today, no firms have been known to exploit all of these profit sources simultaneously. It
is due to contradictory nature of the sources’ pre-conditions and means of implementation and
therefore car manufacturers must choose amongst possible combinations of profit sources, or
to invent ways to overcome contradictions.
Today, we can observe four different strategies in the European automobile sector:
combination of economies of scale and diversity, quality, permanent cost reduction, and
innovation and production flexibility.
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Each profit strategy has certain requirements that the firm must satisfy by means of product
policy, productive organization and employment relationship. Creating coherence between
these instruments infers the building of a company government compromise between firms’
executives, shareholders, banks, employees, labor unions, suppliers, etc. (Freyssenet and
Lund, 2007)
a. The “volume and diversity” strategy
This strategy was invented by General Motors during the Inter-War period in the United
States.
Volume and diversity strategy means that an auto manufacturer designs different car models
on basis of utilizing the commonization of parts – using the same platform for different
models, even marques.
In Europe, 6 firms are pursuing the profit strategy called “volume and diversity”.
Volkswagen, PSA, Fiat, Opel, Ford and Nissan. Volkswagen has been only one to
successfully implement the strategy in durable and profitable way. (Freyssenet, Mair,
Shimizu, Volpato, 1998) The essence of this strategy is platform sharing. The ability to build
many different models, with different brands, designs and parameters on the same chassis
components that are adjustable length, width and height-wise. This communization of
components has significant advantages in contrast with individual approach to chassis design
of each model, such as lower cost for development and production since platform
development accounts for nearly 50% of total product development costs (EVALUESERVE,
2012) not mentioning that the cost of development and production will be proportionally
divided into individual parts for each brand and model that will use that particular platform
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for their model. In case of Volkswagen, the cost will be redistributed across Audi, Skoda,
Seat, Volkswagen, Bentley and Porsche.
For efficient platform consolidation, it is critical that manufacturer manages to achieve strong
intra-platform components commonality and global production flexibility (EVALUESERVE,
2012)
Possible challenges to platform sharing arise paradoxically from its greatest benefit: ability to
use one platform for many different models and possible lack of diversification between those
models. Two or more models that use same platform may cannibalize themselves or result in
lower “sale per model.” Good example directly from Volkswagen Group is Volkswagen Up!,
Seat Mii and Skoda CitiGo. Three different badges, three identical cars and three different
prices. The most interesting example however, comes from Aston Martin. Aston Martin only
produces high-CO2 emitting cars, so they needed at least one economical car to bring down
average fleet emissions, so Aston Martin adopted Toyota Aygo and rebadged it to Aston
Martin Cygnet. It is the same car, looks the same and has the same interior, engine and
gearbox and costs 3 times more than Toyota.
For future of platform sharing, manufacturers focus on emerging markets such as China,
South Asia and South America. These markets will continue to be the focus for
manufacturers’ strategies in coming future, influencing product development, marketing and
manufacturing strategies to achieve economies of scale.
Volkswagen Group has been using common platforms for the entire fleet of the group since
1974. Today, Volkswagen’s MQB platform is used for all front wheel drive vehicles from
VW Polo, across Audi, Seat and Skoda vehicles. It is the second highest volume platform in
production after Toyota’s MC platform at close to four million units. Volkswagen also uses
common platforms for its large SUV’s VW Touareg, Porsche Cayenne and Audi Q7. All three
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are being made in Bratislava. Three completely different cars, with price gap of around
150.000 euros between cheapest Touareg configuration and most expensive turbo
configuration of Cayenne. Yet, they share the same underpinnings.
b. Quality strategy
Quality strategy is implemented by defining the quality of processes and standards for
products.
One of the important characteristics of vehicles produced by Audi is quality. Quality not only
in sense of well-built and reliable, but also social distinctiveness, unique design and
technologies, utilization of luxury materials inside and out and brand-related prestige. This
strategy is very much relevant to time and space. Economic development globally and locally,
determines whether the strategy will succeed or fail. During recessions demand for high-end
luxury vehicles decreases, and on the other hand demand for more affordable vehicles
increases despite recession. Therefore it is crucial to have wide price range portfolio. In this
case, Volkswagen owns 99,5% of shares of Audi, so during recessions, higher demand for
cheaper Volkswagens, Skodas and Seats will compensate for possible decrease in demand for
Audi, Porsche or Lamborghini.
c. Technologies developed to meet CO2 requirements – the innovation strategy
Innovation strategy is most appropriate especially in auto industry, where competition is so
fierce. Innovation strategy is used and should provide the company with competitive
advantage by developing new technologies. This strategy is carried out by research &
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development department, which develops new technologies and finds ways to implement
them into new automobiles.
According to Audi CR report from 2014 three primary measures will enable Audi to reduce
the average consumption of its fleet to meet 95gCO2/km in 2020.
Roughly 50% of the desired CO2 reduction can be achieved by optimizing the
combustion engines, mainly by further developing the technologies for reducing fuel
consumption, making the drivetrains more efficient (decrease power loss in transition
from crank shaft to road) and engine rightsizing.
Alternative drive concepts, such as hybrid, plug-in hybrid and gas-powered vehicles
save an additional 30%
The remaining 20% needed will come from reduction in total vehicle weight by means
of Audi lightweight construction with an intelligent multi-material mix. (Audi AG,
2014)
Audi groups together its diverse technologies for reducing fuel consumption not only by
means of making individual components such as engine and transmission work more
efficiently, but also by using assistance systems. Since 80% of conventional vehicle’s
emissions occur during the usage phase, Audi developed assistance systems such as:
Economical route guidance, Dynamic congestion avoidance, Gear-change indicator, Adaptive
cruise control, predictive efficiency assistant (PEA) and many more to further improve fuel
consumption.
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i. Cylinder on demand technology
Cylinder deactivation technology allows the engine to shut down half of its cylinders at low to
intermediate loads, which allows a V8 engine to run as a 4 cylinder. This allows for reduction
of 20% in average fuel consumption. In 2014, the technology was available in 19 models.
ii. Improved aerodynamics
“By linking aerodynamics, body development, vehicle design and vehicle concept, it is
possible to save six to seven grams of CO2/km.” (Audi AG, 2014)
iii. Weight reduction
As it is explained further in my paper that average fleet weight plays a crucial role in
assigning CO2 limits for each manufacturer individually, weight reduction is among the most
important factors in Audi’ research and development department’s strategy.
Using lightweight construction materials is costly, but has many benefits as well. It makes car
lighter, thus more efficient, aluminum space frame allows for use of less material and allows
the extra space to be used more sensibly for safety, or practicality in form of larger storage
space, more room for the passengers. For purposes of demonstrating how new technologies
allow for overall a better car, I like using the Q7 as a reference model, since it has only been
recently launched and demonstrates all the technological advancements Audi can offer. For
example, in relation to using aluminum space frame construction, the designers have been
able to make the new Q7 smaller in the exterior in all dimensions, yet increase space in the
interior in all dimensions and at the same time reduce weight of up to 325 kilograms. That is
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10% weight reduction, which makes for not only significant increase in fuel economy, but
also more usable, better handling automobile.
iv. Alternative drivetrains
In fall 2014 Audi launched the A3 Sportback e-tron, a plug-in hybrid of the latest generation.
It features a 1.4 TFSI engine with output of 110kw (kilo-watts) coupled with 75kw electric
motor. According to New European Driving Cycle (NEDC), this vehicle emits only 35grams
of CO2/km, which corresponds to a consumption rate of 1.5liters/100km. The electric motor is
powered by lithium-ion batteries and it takes approximately 3.5hours to charge from
conventional outlet. (Audi AG, 2014)
Audi assesses its processes holistically: from the daily challenges of electric-powered
vehicles, such as battery range and charging infrastructure, to the upstream fuel chain. This is
because the cars draw their energy from the public power grid and because of the ways
electricity is still produced. Most of the time it is both fire - and emissions connected to
burning oil, coal or waste; or it is nuclear waste from nuclear power plants. Audi as a
responsible manufacturer accounts for that fact when investing into helping the energy
transition. Very small portion of electricity is produced from wind, sun or water. Not that if all
energy was produced from renewable sources, it wouldn’t have any footprint on the
environment, but it would be considerably lower.
v. Fuels of tomorrow
Electricity and electric vehicles are becoming popular as never before. Elon Musk with his
Tesla electric cars is currently the leader in utilizing battery and electric motor technology.
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Electric vehicles have some serious advantages over traditional gasoline or diesel-powered
cars. Yet, the greatest issues with electric cars are (not necessarily in that order): range per
one charge, consumer’s mindset – simply refueling the car and moving on, rather than waiting
for their car to charge for at least 30 minutes and origin of electricity. Today, range of Tesla
P95D is approximately 500km/charge. I am confident that within next 5 years, the range per
one charge will be over 1000km, charging stations infrastructure will be much more
developed and charging process will be much more efficient.
Audi is not far behind Tesla though, it’s top of the line electric supercar R8 e-tron, manages
460km/charge.
The most important issue environment and logic wise, is origin of electricity which powers
the car. Even though the car produces zero emissions locally, if the electricity was produced
in a coal power-plant, it would be worse than if the car ran on diesel. In his article: “Is The
Tesla Model S Green?” Nathan Weiss explains that to produce 1kWh (kilo-Watt-hour) of
electricity from natural gas-fired generation produces 1021g of CO2. (Weiss, 2013)
Considering that Tesla carries an 85kWh battery and ranges 500 kilometers per one charge.
When we do the math, it would produce 173,57g of CO2/km which is slightly better than Audi
Q7s 3.0TDI V6 engine that produces 193 CO2/km.
That means, unless we will manage to produce electricity from renewable sources, that truly
produce “zero” emissions, battery powered electric cars are not justifiable, however they
provide solid foundation for future mobility. By that I mean that unless all electric vehicles
take their electricity from renewable energy sources such as sun, water or wind, they won’t be
more ecological than standard vehicles. Also, unless the companies develop batteries that
work on different principles than exchange of toxic chemicals, electric vehicles, again, won’t
be more ecological overall. However, if we want to move forward, we have to start
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somewhere. That is why I see current technology of electric vehicles as a solid foundation for
future research & development.
Audi stays true to its slogan “Vorsprung durch technik” in every aspect of their activity. Fuels
of tomorrow that Audi is experimenting with, will most probably be “necessary” 50 -70 years
from now. In their TFSI and FSI engines Audi already utilized technology for burning CNG
(compressed natural gas) and LPG (liquefied propane gas) – this approach helps to reduce
emissions, since gas combustion is substantially “cleaner” compare to gasoline combustion
and helps to reduce emissions, however it is also only temporary solution, since earth may
once run out of natural gas, just like it will eventually run out of oil.
Therefore Audi in November 2014 joined with company Sunfire, to launch a power-to-liquid
plant for producing diesel fuel from water, carbon dioxide and green electricity, called Audi
e-diesel.
The process of producing the e-diesel is truly fascinating: “The carbon dioxide is extracted
from ambient air. In a separate process, an electrolysis unit powered by green electricity splits
water into hydrogen and oxygen. The hydrogen is then reacted with carbon dioxide in two
chemical processes conducted at 220 degrees Celsius and pressure of 25 bar to produce Blue
Crude, which is made up of hydrocarbon compounds.” (Audi AG, 2014) For illustration, see
figure 2.
To my question: “How do you see future of auto-mobility in regard to fuels”, Prof. Dr-Ing.
Ján Lešinský answered that he sees great potential in hydrogen fuel. Audi has already utilized
hydrogen production by means of electrolysis of water for its Audi e-gas project. So hydrogen
could one day power fuel-cell vehicles, the problem today is however, the absence of
infrastructure of hydrogen “gas stations.”
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VII. “SUSTAINABILITY OF PRODUCTS AND PROCESSES”
“A company can develop sustainably only if economic, ecological and social interests are
assigned equal importance.” (Audi, 2015) (Latest report available is from year 2014,
published in 2015.) That is why sustainability of products and processes are anchored as
corporate goal in Audi’s corporate strategy.
Audi in its corporate responsibility report recognizes 5 main areas of focus, or KPI’s (key
performance indicators) – operations, product, environment, employees and society, to which
it clearly assigns very specific goals that can be measured or to be subject of continuous
development, together making up for 55 goals. Each goal is assigned a measure which is to be
taken to successfully meet the goal, date by which that is to be accomplished and a degree of
completion.
All goals presented in the corporate responsibility report are connected to sustainability.
However, for purposes of this work I chose a number of product and emissions related goals.
1. “To reduce CO2 emissions from the Audi new car fleet by 25% (base year 2008) was
to be achieved by 2016 by reducing fuel consumption by the use of modular efficiency
platform, but mainly by expanding availability of vehicles with emission figures
below 120g of CO2/km, which in 2014 was completed to 60%.
2. Expand range of electric drive concepts offered under the e-tron umbrella brand by
starting the production of Audi A3 e-tron as a plug-in hybrid with value of CO2/km
produced equaling to 37g which significantly contributes to the decrease of average
fleet emissions. This goal was to be achieved by 2014 and according to the report, this
goal was completed to 100%.
3. Develop and manufacture carbon-neutral fuels from renewable energy sources by
2014 and by means of implementing an e-gas solution across Germany through
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existing service station infrastructure. This goal was also successfully completed and
the e-gas project is functional in Germany.
4. Expand the range of CNG (compressed natural gas) drive concepts under the g-tron
umbrella brand by developing further engines and vehicle concepts with CNG drive,
to be completed by 2017. In 2014 this project was completed to 50%.
5. Market introduction of further Audi e-fuels by 2019. In 2014 this project was only
taking off and was completed to 10%. It will be a great challenge to scale up the
project from laboratory to industry size, but if the project succeeds, it will be the
greatest accomplishment for Audi.” (Audi, 2015)
These objectives are agreed upon on the corporate level and are managed at brand and Group
level by central functions, committees and work groups.
VIII. STRATEGY FORMULATION
In every case of strategy formulation, 3 essential ingredients are required: Vision, Mission and
Goals for the company.
Vision is the most general of the three and states what the ultimate goal is for the company, or
what the company should ultimately become in the future. Audi’s vision is to become number
1 premium brand.
Mission defines the actions through which the company can achieve its mission. Audi’s
mission is: “We delight customers worldwide.” In order to delight customers worldwide, Audi
defined four areas of activity for their brand that are continually reviewed, substantiated and
refined: defining innovation, creating experiences, shaping Audi and living responsibility.
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Goals for Audi are available in previous chapter, on pages 29-30. I selected 5 goals, which I
think are of the highest importance and relevance for meeting the EURO standards.
Strategy formulation for company the company size of Audi requires comprehensive
understanding of the “big picture”, internal and external factors that influence the not only the
company, but also the market in which Audi operates. Even though Audi publishes Strategist
Fred David recognizes four levels of strategies in large companies such as Audi, starting from
the corporate level and chief executive officer, division level and president or executive vice
president, functional level consisting of finance, marketing, research & development,
manufacturing, information systems, human resource department and finally, operational
level consisting of plant managers, sales, production and department managers. For
illustration, see figure 4 in appendices section.
In his 13th
edition of Strategic Management: Concepts & Cases, Fred David explains that
strategy formulation is a set of subjective decisions based on objective information, to achieve
long-term goals, or the vision of the company. The final strategy should be derived from the
vision, mission and goals, external and internal audits in the first stage, followed by
SWOT/TOWS, SPACE, BCG, IE and Grand Strategy matrices in the second, or matching
stage.
SWOT analysis is essential for building strong strategy. Acronym SWOT stands for
Strengths, Weaknesses, Opportunities and Threats that company is faced with.
SPACE matrix can be used as basis for SWOT analysis. SPACE matrix helps the company to
decide which strategic approach to use. Each matrix is composed of four quadrants, each
representing one approach. Approaches are: Aggressive, Defensive, Conservative and
Competitive. By evaluating firm’s internal and external factors, SPACE matrix will show
which approach is most suitable. (Netmba.com, 2016)
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BCG matrix is a tool for identifying potential competitive advantage within firm’s portfolio of
products. Portfolio is divided into four parts in this matrix 1. Dogs – products with low market
share and low growth rate. They neither consume nor generate significant cash flow. 2.
Question mark – products referred to as a question mark in BCG matrix have low market
share and consume a lot of cash. However, they also have potential to become Stars. Due to
unpredictability of market, these are referred to as question marks. 3. Stars – products with
large market share and large cash consumption. If the star can maintain its market share, it has
potential to become a Cash Cow as the market growth rate starts to decline. 4. Cash Cows –
products with return on investment larger than the market growth rate. Cash Cows bring in the
cash needed to turn Question marks into stars.
IE matrix (Internal/External) – helps the company to make decision whether to: “grow and
build”, “hold and maintain”, or “harvest or divest” according to Internal and External factors
evaluation. (Maxi-pedia.com, 2016)
Grand Strategy matrix is a tool for evaluating different strategic approaches similarly to other
matrices mentioned above. This matrix however uses specific factors, according to which,
decision will be made. The factors are: Market growth (Rapid/Slow) and Competitive position
(Strong/Weak)
For purposes of this work I conducted Porter’s five forces and PESTLE analyses, which point
out and analyze the main factors and forces acting on the company and which should be taken
into account when formulating the final strategy.
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a. Porter’s five forces
This analysis illustrates competitive advantage or disadvantage of Audi.
- Power of suppliers: Low
Audi or Volkswagen Group in general employ thousands of suppliers. These suppliers
are highly horizontally integrated into manufacturing process, which means they are
highly specialized for that particular manufacturer. Audi also helps to finance its
suppliers and brings their production facilities into their own production area. That
means that suppliers have very low bargaining power. On the other hand, if a supplier
collapses, the whole production of Audi would stall due to missing components.
Therefore it is a two-way street, where Audi has to have clear communication
channels established between itself and suppliers.
- Power of consumers:
Business or government customers – Medium/High
Traditional customers – Medium/Low
As firms or governments usually purchase whole fleets of cars, they are able to create
larger pressure on the manufacturer than traditional buyer who buys 1 car.
- Threat of substitutes: Medium/Low
Even though European Union and governments around the world are promoting
environmentally friendly transportation, I see threat for Automobiles to be substituted
by public transport for example as rather low, at least for next 15 years within the EU.
However, in large cities like New York, London, Paris, Tokyo, where public transport
is much more efficient, the threat of substituting automobiles is considerably higher.
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In case of Czech Republic and Prague in particular, the threat of substitute is rather
low. Even though the public transport in Prague is among the best in the world, the
status of owning and driving a car outweighs the benefits of public transport.
- Threat of new entrants: Low
Automobile industry today has large barriers that prevent new firms from entering the
market. Entering automobile market would require immense production start-up costs,
setting up dealership and maintenance networks, licenses, trust in the brand and many
other components. To illustrate how much it costs to enter an automobile market
today, Tesla will serve as a great example. Tesla started as Elon Musk’s ow project,
into which he invested 8.5 million of his own dollars. To start producing the latest
Model S, Tesla needed financial injection of roughly 650$ million. (The Making of
Tesla: Invention, Betrayal, And The Birth Of The Roadster, 2014)
- Competitive rivalry: High
Direct competitors for Audi in Europe are: Mercedes – Benz, BMW and Porsche.
The competition is as fierce as it has ever been. These four manufacturers are on the
same technological level, even releasing new models and technologies within few
weeks or a few months from each other.
Based on this analysis, my preliminary conclusion is that Audi’s position in the market
place and automobile industry is relatively safe as long as Audi stays true to its motto:
“Ahead through technology”.
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b. PESTLE Analysis
I conducted this PESTLE analysis to illustrate and briefly discuss opportunities and/or
threats directly connected to Political, Economic, Social, Technological, Legal and
Ecological factors. Many times it happens that factors are interconnected and
dependent on each other. I conducted this analysis according to information I learned
over the course of my research on this topic to view and understand issues
manufacturers face from their perspective and to be able to better understand strategic
approaches or solutions for particular problems, respectively to be able to see what
issue was being solved by each particular change in strategy. According to strategist
Fred David, PESTLE analysis is among the most appropriate tools for conducting
strategy analysis.
Political
Introduction and enforcement of new law and regulation related to safety and
emissions.
Changes in EU legislation in relation to product life cycle, recyclability of
materials.
Stability/Instability in developing countries and markets for both sales and
production purposes.
Instability in the EU, situations such as ‘Brexit’
Economic
Volatility of exchange rates in regard to derivatives trading – mainly EUR-
USD, JPY, CNY
Volatility in costs of crude materials, such as aluminum, steel, copper, platina.
Recessions in markets where Audi operates – sells and/or produces
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ECB interventions
Taxes (vehicle registration tax, road tax)
Social
Changes in attitude of consumers toward more affordable brands
Ageing population in European market
Changes in family patterns (number of children) – customers prefer more
affordable, mostly MPV of SUV configurations. (Audi does not offer MPV
category automobiles)
Rising life expectancy in EU
Technological
Increasing demand for “green” automobiles and technology
Technological advancements in manufacturing, such as human-robot
interaction, automatized paint shops and assembly facilities.
Technological advancements in vehicles – piloted driving, internet-enabled
technology and driver assistance systems.
Rising demand for alternative fuels and propulsion systems
Legal
Changes in law, regulation and directives related to automobile industry
Intellectual property, patents, copyright related to inventions of new devices,
processes and technologies (Patents of Audi: http://stks.freshpatents.com/Audi-
Ag-nm1.php)
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Changes in employee health and safety regulations
Changes in standard European test cycle
Ecological
Consumer awareness – increasing demand for “green” cars.
Changes in standard European test cycle
Pressure from environmental NGOs.
Improvements in waste management – water treatment from production plants,
recycling of metals, e.g.
New, ecological fuels
Political
Introduction of new regulation related to greenhouse gases emissions is one of the greatest
concerns not only for Audi, but for all manufacturers. Recyclability and product life cycle are
also among major political factors that influence strategy and manufacturing processes of
Audi.
Political stability in developing markets such as Russia, China, India or Brazil is crucial
because these markets can offer considerably cheaper labor force than Germany and new-
untapped customer base. However, if the political situation is unpredictable, the investment to
build new assembly line or manufacturing unit and training the labor force would be too risky.
In regard to possible ‘Brexit’, no one really knows what would happen. Without too much
speculation, I believe that even if Britain exited European Union, the trade would continue
without establishing new barriers to trade, since the economies are today interconnected to
such degree, it would hurt both sides.
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Economic
Performance of Audi is subject to a number of economic factors of which it has limited, or no
control over. For example recent GDP fluctuations in European Union’s countries could
severely impact buying power or customer’s decision making process when buying a car –
potentially look for cheaper, economically safer alternatives.
Social
Social factors affecting strategy and performance of Audi are among the most crucial and
Audi approaches these factors pro-actively and with great amount of respect - publishing
consumer reports, informing stakeholders about the achievements in reducing emissions,
plans for the future to make stakeholders and customers feel involved in the process.
Audi with its size affects lives of millions of stakeholders world-wide and must care for these
people as for their customers, to be able to maintain reputation for reliable, trustworthy and
concerned manufacturer and employer – especially after “diesel gate” scandal.
There are however externalities such as changes in consumer behavior, namely purchasing
habits, or changes in family patterns which are hard to anticipate and the company in its
structure and strategy needs to be flexible, to be able to quickly react and adapt production to
changes in demand.
Technological
Technological factors are probably of the highest importance among other factors. Without
the advancements in technology and design Audi would not be able to develop cars that
would comply with strict regulations. Thanks to advancements in technology cars are better,
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lighter, safer and more efficient than ever before. It will be crucial for Audi during following
years to remain at the top of the game, since the greatest challenges like implementing full
electric vehicles, or connecting cars to the infrastructure still lay ahead. Audi is using the
advancements in technology not only to make cars consume less fuel, but also to minimize the
carbon foot-print of their production processes and to develop synthetic fuels, the Audi e-
fuels.
Legal
“Audi is confronted with a highly complex, country-specific regulatory framework. The
regulations include tougher CO2 legislation, accreditation systems and safety-relevant
standards.
Legislative changes bring a risk of legal uncertainty.” (Audi AG, 2016) If the regulation
changes too often, Audi may not be able to adapt to those changes and the result would be
either leaving the market, or pay resulting fines from not meeting the legal requirements.
Change of Standard European Test Cycle for measuring emissions was to change or changed
unexpectedly, it would cause great problems for all manufacturers. Current Test Cycle is
relatively benevolent and provides a lot of lee-way for manufacturers, so the reality is such,
that on paper (according to the test cycle conducted in laboratory) all cars being sold in the
EU comply with the regulation, but in real driving conditions except for electric cars it is
virtually impossible to achieve claimed fuel consumption or CO2 emissions.
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Ecological
Besides ecological factors such as fuel consumption and greenhouse gas emissions which I
mention above, the most important issue is product life cycle – how long should the car last
and what should happen when the life cycle ends. Again, it is issue of minimizing the natural
resources needed to build a new car and thus recyclability of the old car. Audi should
incentivize recycling of old cars – essentially disassembling them and recycling plastics,
metals and glass. There is a great potential for savings in decreased need for purchasing raw
materials and at the same time the company is being responsible by safely disposing of waste
and reusing it.
And that leads me to one of the greatest issue with petrol/electric hybrids or electric vehicles.
They all need batteries. Batteries today have limited life span and need to be replaced at some
stage of cars life. Lithium-Ion batteries most commonly used in EVs has extremely high
electrical potential. However, lithium is not only flammable and highly reactive, but the EPA
also linked the use of extremely powerful solvents in the creation of lithium batteries to
diseases such as cancer and neurological diseases. Specifically, cobalt, which is used in the
creation of the most potent batteries is poisonous and extremely carcinogenic. So the batteries
are extremely toxic and virtually unrecyclable at this point of time. (Braun, 2013)
As I mentioned before, Audi is pioneering a project called Audi e-fuel, where they are able to
extract CO2 from atmosphere and hydrogen from water to create synthetic diesel which can be
produced limitlessly and at the same time removing CO2 from atmosphere. Before officially
releasing this fuel, Audi now only needs to find solutions to scale up the project to be able to
at least partially supply the demand.
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Even though Audi publishes information regarding strategy in their CR report, the
information is vague and it is clearly published as a part of being transparent, responsible
company and to satisfy stakeholders.
Still, I was able to find and identify key trends in areas of development such as marketing,
production, sales and financial statements that indicate the direction in which Audi is going.
Audi is entering into partnerships with organizations that support the environment through
variety of projects. For example, recently Audi announced that by the end of 2016, it will
introduce the A3 e-tron model into the United States. Along with each car sold Audi will
purchase carbon credits equivalent of 50,000 kilometers of driving. (3degreesinc.com, 2016)
c. Marketing and Sales Strategy
In 2014 Audi delivered 1,933,517 cars to customers, setting new record. (Audi, 2014) First
quarter of this year, the 2016, has been the strongest in Audi history and it’s expected to set
another record by the end of the year.
Concept of electric hybrid vehicles has been around for some time now and people are slowly
starting to trust cars using this technology. Hybrids have proven themselves to be reliable just
as standard petrol engine equipped cars, yet to be much more efficient. For example, 2016
Audi Q7 e-tron claims to consume only 1,8l/100km of diesel. However hybrid vehicles have
their disadvantages too. For example price – the Q7 e-tron costs 20,000 euros more than
standard model and the return on such investments is too far in the future to persuade the
buyer into choosing hybrid over standard gasoline or diesel.
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It is marketing department’s role to show people that hybrid cars are a reasonable choice by
highlighting the positive attributes of hybrid electric vehicles (HEVs), showcasing the cars
and their capabilities.
Audi has been successfully utilizing petrol or diesel/electric hybrid concepts in their 24H
LeMans racing vehicles, winning for eight times in a row.
One of my hypotheses was that marketing would be among the key strategic tools that Audi
uses to promote and sell hybrid cars. Surprisingly, this hypothesis turned out to be false. Even
though Audi invested 6 billion euros into advertising in 2015 globally, only a very small
portion must have been invested into advertising of Audi e-tron lineup. Furthermore, in the
sales figures and deliveries section of the 2014 Annual Report, Audi does not differentiate by
any means standard combustion engine equipped cars from hybrids. Therefore, it is
impossible to find out whether Audi sold any hybrids at all. The three best sellers in 2014
were Audi Q5, A6 sedan and A4 sedan, none of which offer e-tron configuration. Only model
that was offered as e-tron in 2014 was the A3 sportback, of which Audi sold 176,211 units,
however, the numbers regarding types of engine configurations are not published.
To even greater surprise, in 2016 Audi is still offering only two models available in e-tron
configuration. The A3 and recently launched Q7. I expected that by 2015 Audi would have
had covered at least the three best-selling models, which would in my opinion naturally boost
sales of hybrids.
This leads me to think of two possible conclusions regarding sales and marketing, or rather
lack thereof.
1. Audi has been popular for pioneering the TDI technology for over 30 years and
brought it almost to perfection. Models equipped with TDI engines are also the most
popular among European customers and bring in the highest portion of revenue and
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therefore these models are of highest priority to Audi and at least for now, Audi offers
hybrid models mainly for purpose of reducing the average fleet CO2 emissions.
It seems that diesel/petrol technology is climbing toward its maturity in the product
life cycle and sooner or later we will see a decline. At the same time we can see
growth in the Hybrid/Electric technology. I estimate that in horizon of next 7 years we
will start seeing decline of diesel/petrol engines and hybrid/electric automobiles will
be reaching their maturity.
2. Another possibility I see would be that Audi never planned to focus on electric
mobility. It rather appears from the 2014 Annual Report that Audi will again go its
own direction and develop synthetic fuels for existing combustion engines. These
fuels will be produced only by using renewable sources, also the energy needed for
production of these fuels will be provided from renewable sources. This way Audi will
be able to “close the loop” and theoretically provide fuel for everyone without creating
any pollution forever. Audi has already achieved to produce first liters of synthetic
diesel in cooperation with Sunfire Company. Now they need to find a way to produce
this fuel on industrial level.
Only future will show if my theory is reasonable, but I still think it would be the
easier, more logical way to go.
d. Production
Production of cars has experienced drastic change over past decade or so.
Manufacturers strive to make the process as efficient and effective as possible, using
as little workers as possible on as little land as possible, using as little time as possible.
This mindset has basically eliminated production as such from Audi and other
manufacturers. More suitable name would be assemblers rather than manufacturers,
44
since they barely manufacture anything anymore, except for some parts in Audi R8
supercar.
Audi has created a vast supplier chain, which gives them great flexibility for growth
and significantly reduces costs, since Audi does not have to employ, train and pay
workers to manufacture every single part of the car. Each part, for example seats,
multi-media systems, wheels of the car and electronic control units are made by
companies specializing in production of those parts and they often produce parts for
more than one manufacturer.
By bringing these suppliers as close as possible, Audi is able to use just-in-time
inventory which again reduces costs for transporting the parts and by being able to
have less inventory, since supplier gets notified via unified information infrastructure
that assembly line is running out of parts.
Along with just-in-time inventory Audi of course uses TQM or Total Quality
Management, also known as Six-Sigma approach. It is vital that in combination with
JIT, TQM is used. It is because if supplier fabricated batch of faulty parts, these would
be installed into hundreds if not thousands new vehicles, which could have terrible
consequences if the faulty part was vital to vehicle safety or structure. There is simply
no room for mistakes.
Audi is among first manufacturers to use human-robot interaction on assembly lines.
Of course, robots are used by most manufacturers, but they are always separated from
people for safety reasons.
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e. Competitive profile matrix Audi vs. Mercedes-Benz and BMW
I conducted this CPM Matrix with focus on competitiveness of Audi, BMW and
Mercedes-Benz, who are considered to be main competitors among German luxury car
makers. The matrix illustrates which manufacturer’s fleet has achieved lowest
emissions, highest revenue/profit ratio, number of hybrid, or other ‘green concept’
models.
The results of this analysis will show the effectivity of Audi’s strategy in context of
competitiveness among its two main rivals.
Sources: (Hoovers.com, 2016); (finance.google.com, 2016); (Finance.yahoo.com,
2016); (Audi.de, 2016); (Mercedes-benz.de, 2016); (Bmw.de, 2016);
Results and comments:
Totals of weighted score indicate the ‘winner’ of the three competitors, which is
BMW. I conducted this matrix purely on objective data acquired from manufacturer’s
websites and annual reports. I rated each key success factor and each manufacturer’s
performance related to the factor on a scale from 1 (poor) to 5 (outstanding).
Surprisingly, none of the manufacturers meets the 120g of CO2/km according to my
calculation done according to available data on main website of each manufacturer. I
calculated average fleet emissions based on information published on each of the
Key Success Factors (KSF) W(eight) R(ating)
Weighted
Score(W*R) R(ating)
Weighted
Score(W*R) R(ating)
Weighted
Score(W*R)
Research & Development 15,00 4 0,6 3 0,45 4 0,6
Number of Hybrid/Electric Models offered 5,00 1 0,05 3 0,15 5 0,25
Average fleet CO2 emissions 30,00 1 0,3 1 0,3 1 0,3
Revenue/Profit ratio 20,00 3 0,6 1 0,2 5 1
Average fleet mass (kg) 5,00 5 0,25 1 0,05 3 0,15
Market penetration 10,00 3 0,3 4 0,4 3 0,3
Range of models offered 5,00 4 0,2 5 0,25 4 0,2
Number of recalls (high rating = little recalls) 7,00 4 0,28 4 0,28 4 0,28
Marketing 5,00 3 0,15 2 0,1 4 0,2
TOTALS 1,0 --------------- 2,7 --------------- 2,2 --------------- 3,3
Audi Mercedes-Benz BMW
46
manufacturer’s website and received: 160,4g of CO2/km for Audi, 152g of CO2/km for
Mercedes-Benz and 163g of CO2/km for BMW.
IX. CONCLUSION
Over the course of my research I learned that most of the time nothing is as it seems if
you look closer.
I found out that the regulations for emissions are strict, but easily by-passable. It is
clear to me now, that if the car manufacturers in Europe didn’t participate, it would be
probably much worse. Yes, there are limits over which manufacturer should not go,
today it is 95g of CO2/km. That however does not mean that each car must produce
less than 95g of CO2. The whole fleet, or portfolio if you will, must not produce over
95g of CO2 on average. That means that Audi can still produce and sell cars that
produce 300g of CO2/km, like the Q7 or R8, it only needs to also offer a car that
produces significantly less than 95g of CO2/km to get the average right.
Interesting is that no one controls or cares for average fleet emissions of sold cars. I
think that would be a much better indicator of how policy does not work at all since
the best sellers for Audi are SUVs, crossovers and large limousines that emit the
highest numbers of CO2, and sales of low or zero emission cars are still a drop in the
ocean.
I realize that it’s easy to criticize from my position, especially considering lack of my
insider information that would require personally interviewing policy makers and Prof.
Rupert Stadler, the CEO of Audi AG, which unfortunately was not in my power.
Yet, through my research I was able to find sufficient information to answer my
question: How do the environmental policies and regulation affect strategy of Audi
47
AG. At the beginning of my research I thought I would find so many different
adjustments to strategy and overall behavior of the company as new regulation
emerged over time. From the outside the process of implementing new policies and
regulation seems so dynamic, yet in reality you can barely find any evidence that
something has changed due to introduction of particular policy or regulation. The
simplest, most stripped down answer would be that: To comply with environmental
policies and regulations set by the European Union, specifically the CO2 emissions
target of 95g/km, Audi introduced e-tron, petrol/electric hybrid models that on paper,
according to standard European test cycle produce only 35g of CO2/km (Audi A3 e-
tron), which is significantly below the required average.
This strategy should be sufficient to allow Audi to fit within the limit for shorter term,
Audi is however looking further ahead and working on overall sustainability of their
business. Audi has to try to foresee the trends in transportation for the future and
manage to keep ownership of a car attractive for people to sustain their business.
Therefore Audi is not only trying to make their cars as environmentally friendly as
necessary, but they are also working with representatives of largest cities in the world
and designers to find space for cars in cities in the future.
From higher perspective though, the answer is much more complex. Strategy of
company with such complex structure as Audi, requires complex strategic approach.
To my surprise at the beginning, I realized how complex of a thing strategy is. Since
Audi closely guards the key secrets of their strategy, they publish enough information
to be able to find elements of different approaches. Each department needs to have
very carefully and clearly defined strategy, since all the departments are
interconnected and dependent on each other.
48
Even though the outcome of the strategy is essentially only two new models, the
process of making and developing those two models required changes in all
departments of the company.
Starting with department of corporate strategy. First of all, the department had to
identify the obstacle and find a way to get around it without affecting
investment/revenue ratio too much. Logically, the development of new models and
technology supporting the cars cost money. Here we arrive at financial department,
which had to allocate funds for the research and development.
Research and development department has the toughest assignment, to think up the
concept and develop technology that will make it work, meet the goal that was set,
which may be and probably is, outstanding performance, with low consumption, that
is not too costly and can be up-scaled to industrial level and at the same time maintain
the occupants safety regulations. Converting an existing car into hybrid requires
intervention into chassis components. Batteries and electric engines are heavy, need to
sit as low in the chassis as possible not to increase the center of gravity which could
severely impact the roll over stability of the car and need to be protected to highest
possible degree. If lithium-ion battery is punctured and the chemicals react with
oxygen, battery bursts into extremely high temperature fire.
Once these conditions are met, production department’s role in the process is to
modify existing, or develop brand new assembly line facility and find the most time
and cost effective way of assembling the final product.
Marketing and sales would be the key departments, if the legislation required not only
to offer these cars, but also to sell them, to achieve determined average emissions of
sold cars. In this case, Audi can account for the expenditures related to development of
49
e-tron technology as business expense, to be able to continue in the business and
forget about it. I am not saying they have done it, however there is no evidence that
Audi would put much effort into marketing and selling these cars in larger numbers.
Without going too deep into speculation, maybe Audi is waiting for the charging
infrastructure to be more developed and only then these cars will gain attractiveness.
For now I only see them as a strategy tool for Audi and other manufacturers as well, to
be able to continue in business. Another possibility I find very realistic for future is
that Audi is mainly focusing its efforts and funds toward scaling up the production of
e-fuels. By utilizing this technology, Audi would not have to focus on hybrid/electric
vehicles at all. Eventually we will see decline in life cycle of hybrids too and the e-
fuels seem like a solution that would outlast both hybrid and electric vehicles.
50
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Figure 3.
(European Environment Agency p.13, 2014)
Figure 4.
Operational Level
Functional Level
Division Level
Corporate Level
CEO
Executive vice president
Finance Marketing
Plan Managers
Sales Production Department
Managers
R&D
58
GLOSSARY
ACEA – European Automobile Manufacturer’s Association
BCG – Boston Consulting Group (BCG matrix)
CEO – Chief Executive Officer
CNG – Compressed natural gas
COD – Cylinder on demand
CO – Carbon Monoxide
CO2 – Carbon dioxide
CR – Consumer Report
CPM – Competitive profile matrix
DPF – Diesel particle filter
FSI – Fuel Stratified Injection
EC – European Commission
EU 28 – 28 European Union member states
ECB – European Central Bank
EEA – European Environment Agency
EPA – U.S. Environment Protection Agency
EU – European Union
EV – Electric vehicle
GDP – Gross Domestic Product
HC - Hydrocarbons
HEV – Hybrid-Electric Vehicle
IE – Internal-External matrix
LPG – Liquefied Petroleum Gas
MC – Toyota front wheel-drive automobile platform
MQB - Modularer Baukasten (GER) / Modular Transversal Platform (ENG)
NEDC – New European Driving Cycle
NGO – non-governmental organization
NOx – Nitrous Monoxide