The Jetta Lifecycle Challenge

Q1: Analyze the product portfolio situation of Volkswagen of Mexico (VWM). Would you consider it a balanced or unbalanced portfolio?

Products are divided into five categories based on size, price and body style: A00, A0, A, B and C. With its different car brands, VW offers the products in all categories.

By analyzing the regular price range of the different categories and compare it to the actual pricing of the VWM Notchback models, we can conclude that the portfolio works against B category and in favor of A0 and A categories of vehicles. Having in mind the fact that A0 and A segments are holding majority of the market share, the decision to focus on 2 models (Polo and Jetta) in these segments could be seen as part of the company’s strategy.

Even though all these models belong to the same segment, the misbalance works mostly in favor of Jetta, which has four different models mentioned above. While the starting price of Passat (i.e., $23,782) is too expensive for the B category, the price of the most valuable model of Polo (i.e., $10,982) is low for the category A0.

This misbalance leaves some room for various models of Jetta, which manages to take 36,5% of the market share in segment A, but leaves the segment B market almost entirely to its competitors. Therefore the conclusion is that the Product Portfolio is unbalanced in favor of A0 and A segments, which are dominated by Jetta models.

Q2: What is the role played by the Jetta in the company? What is the role the new car could play in the company (Mexican market)? From 1979 until 2004 Jetta played an important role in the company and different “A” models were launched all over the world. During the years, each new generation of A model was in essence just an enhancement and improved, rebranded variation of previous generation. The Jetta A4 is marketed from 1999, after previously launched A3 in 1993, as almost a brand new car with a significant redesign, air-conditioning and automatic transmission comparing to the A3.

The model further improved in 2000 with more powerful engine followed by introduction of special edition car model. During time, Jetta managed to keep good ratio between cost and margin offered for a reasonable price. Mexico became an extremely dynamic market place in automotive industry with the signing of many free trade agreements, which caused the number of competitors to grow rapidly. This is why there was constant battle with the timing of new product launches to gain higher market share. The Jetta A4, with 50,000 units sold yearly is VWM’s best-selling car with generally steady sales, loyal users and satisfied car dealers.

It represents VWM’s A segment with variety of models, covering optimized price portfolio. In Mexico there is a high brand awareness and loyalty among consumers, car dealers and other local stakeholders for Jetta A4. Jetta family was planning to introduce the fifth generation of A platform vehicle by the end of 2005, after being present on the market for 25 years. Company plans to use this car as a tool which will help achieve company’s main goal – upgrade the VW’s image and reputation and challenge the higher segment, which hasn’t been tapped yet.

By analyzing the current situation, company listed several possible problems for launching the new A5 model: 1.A4 model is strongly established and sells well. The new model will be more expensive and there is a high risk of losing loyal customers and endangering the minimum annual sales quantity of local car dealers 2.A5 might cannibalize the sales of A4

Despite these two problems, the company identified 4 main advantages, which A5 Jetta could play in the company (Mexican market): 1.A5 could decrease the risk of VWM losing race with competitors 2.A5 is more sophisticated than A4 in terms of technology, which VWM recognized an opportunity to further upgrade overall VW brand image and reputation 3.A5 could target B segment many competitors were already active 4.

A5 could be very competitive in the A segment, offering good characteristics for the price paid by final consumer and make dealers happy with the new kind of car in their portfolio Q3. Analyze the competitive situation of the Jetta as regards to its competitors? (How well is the car performing currently, how well could the car perform in the future vis a vis its competitors)

In terms of the overall A4 market acceptance, we can see that there has been a positive growth in sales from 2000 to 2004. Jetta’s sales have been growing by 7%, while the overall market growth was at 2% (Fig.6). However, A4 sales have dropped drastically world-wide with only few exceptions such as Turkey, Mexico, Finland, Africa and Argentina (Fig.7). It can be interpreted that A4 has come to the end of its life cycle and market is demanding a new model. Accumulative sales on these five countries represent 28.5% of the worldwide sales, Mexico being the largest individual growing market with 22.5% share worldwide. The Mexican market

There are over 37 companies competing in the Mexican market as the country is more open to the US market and therefore there is more import of used cars from the US. There are 14 direct competitors to Jetta (Fig.9). Jetta holds the number one spot in the market with 18,062 units sold in 2004, an increase of 18.6% from the previous year (Fig.9). It holds a 36.5% market share in the A segment and 7.5% of the overall industry. The first below Jetta is Sentra with only 18.7% of the market share and a sales increase of 2.4% from 2003.

The one that poses a threat to Jetta is Astra4D with a growth of 36.3% and a market share of 8.6%. Other competitors include: Stratus (11,8% market share) and Civic (5,9%) while rest have an insignificant market share, each holding less than 5%. The others that made significant growth are Malibu and Sunfire, with growth of 125% and 797.7% respectively. However, these two have an insignificant share of the market, with 5.1% and 0.8%. Here we can conclude that Jetta’s market share has grown from 2001 to 2004, while most of its competitors’ market share has shrank over that same period, besides Astra that had and still has a small market share in comparison to Jetta (Fig.14). Brand loyalty

Jetta’s brand loyalty is a little below the average of 2.71 with 2.75 average (1 – is not willing to change the brand). It puts Jetta in the 9th place out 14 among its competitors (fig. 18). This is something that Jetta should keep in mind when introducing a new car. Also, research indicates that drivers of B segment cars did not intend to take a step backwards and purchase an A4 car that belongs to a less sophisticated segment, which represents an opportunity for the new A5 to acquire these customers with a more sophisticated design and performance.

Customers most definitely willing to change brand are current owners of Jetta, Stratus, Civic and Corolla from A-segment and Accord from B-segment. Market share in 2004 of these five models in Mexico is 56.2 % in A-segment (9373 cars), and 25.5 % in B-segment (5153 cars). Q4:What recommendations would you make to Volkswagen of Mexico concerning the potential launch of the product? Should the company launch it at all? If yes, how to position the car? At which price point? Under which brand name? Before we make any recommendations for the VWM, it is important to conduct further analysis for Jetta – the SWOT analysis: Strengths

•Production line ready to be implemented •Strong brand image and reputation •Market leader of its’ segment for years •One of the best selling modelsWeaknesses •Increasing production costs, cost/margin ratio •Possible profit margin reduction •A4’s production quantity dropped drastically in 2004 due to decreased demand worldwide •Out of date model Opportunities •Price/value ratio very competitive •72% of other brand owners and 65% of A4 owners would definitely buy A5 (scale 8-10) •Predicted sales from migrating customers promising (8800 cars) •48% of current customers are ready to pay higher price (over 16 000 USD) and believe that A5 would represent them Threats •Price may be too high and it may target higher segment where quantitative sales are a fraction of A-segment •High price may result to a loss to other brands

•A4 has been in the market already 6 years unchanged, customers may get bored and swap to other brand •Dealers may not accept lower profit margin •Competitors are launching new models, risk of losing market with old model •Other market research

Recommendation: Given the above-mentioned reasons, our suggestions to VWM is to take a risk and introduce the new A5 model. The old A4 model can remain on the market until the end of the year (2005) and allow loyal customers with a lower income an opportunity to purchase the old model. Because there is a reduced production quantity in the factory, VWM plant could continue to produce A4 model simultaneously with A5 for some limited time to satisfy those customers who would like to stick with the A4 and satisfy those who want a new, upgraded model.

A4 has been on the market already for six years, which actually has been the average life cycle of each Jetta model in the past, so we can assume that the A4 model’s lifecycle is coming to an end. This poses a threat for VWM as buyers are losing interest due to tightening competition and rival models which are launched frequently and are much technologically advanced compared to out-of-date Jetta.