Audi operates a subsidiary of Volkswagen. Volkswagen is one of the leading global automotive companies engaged in the development of vehicles and engines, production and sale of passenger cars, commercial vehicles, trucks and buses, and genuine parts business. Volkswagen is the second largest automotive company in the world with a presence in more than 153 countries.
In FY2010, the company recorded revenues of E126,875 million ($168,325.1 million). Moreover, Volkswagen was ranked 13th in the Fortune Global 500 list of companies. Audi’s parent company’s strong position gives it significant competitive advantage and helps the company to register higher sales growth in domestic, as well as in international markets.
Effective allocation of resources as compares to peers
The company has high return on equity (ROE) and return on assets (ROA) compared to its peer companies. The company’s competitors such as BMW and Daimler have less ROE when compared to Audi. In FY2010, BMW’s ROE was 13.9% and Daimler’s ROE was 12.4%, significantly less than Audi. In contrast, Audi’s ROE was 23.1% in FY2010. This high ROE indicates that the company is using the shareholders’ money efficiently and that it is generating high returns for its shareholders compared to its peer companies.
Similarly, BMW and Daimler have less ROA when compared to Audi. In FY2010, BMW’s ROA was 2.9% and Daimler’s ROA was 3.3%, significantly less than Audi. The ROA of Audi was 8.4% in FY2010. High ROA indicates that the company has been deploying its assets in an efficient manner and indicates the efficient management of the company towards allocation of resources compared to its peer companies.
Weaknesses Concerning product recalls
Audi announced recalls that cover some of its most popular models due to manufacturing and design problems. For instance in August 2011, the company recalled 34,000 lemon Audi A4 and Audi A6 vehicles due to defective engine fuel pump. In May 2011, Audi recalled 5,992 units of 2001-2004 Audi A6, 2003 Audi RS6 and 2002-2003 Audi S6 models due to a fuel system flaw.
Similarly, in April 2011, the company recalled up to 10,200 Audi TTs from the 2010 model year to fix fuel tank ventilation system’s spring. Significant product recalls indicates decline in product quality which could negatively affect the consumer confidence in Audi’s products and could strain its sales.
Lack of scale compared to peers
The company lacks the scale to compete with large players in the markets in which it operates. Many of its competitors such as Daimler, Ford and Bayerische Motoren Werke (BMW) are larger in size. Daimler, for instance, recorded revenues of E97,761 million (approximately $129,777.7 million) in FY2010, while Ford recorded revenues of $128,954 million during the same period. BMW recorded revenues of E60,477 million (approximately $80,283.2 million) in FY2010.
In contrast, Audi recorded revenues of E35,441 million (approximately $47,047.9 million) which is much less than its competitors in FY2010. Lack of scale limits Audi’s ability to compete effectively with larger players.
Positive outlook for hybrid electric vehicles
Worldwide demand for light hybrid electric vehicles (HEVs) is expected to increase. Rising energy costs and increased emissions regulations are likely to increase demand for HEVs. By 2015, the US is expected to be the largest market for HEVs and plug-in hybrid electric vehicles, selling approximately 640,000 vehicles in these two categories combined.
China is expected to be the second-largest market with more than 560,000 hybrid vehicles sold that same year. Global problems that include the environmental challenges of global warming and the need to conserve resources and energy are the key drivers for the automotive companies to develop HEVs.
Audi has a strong focus on developing HEVs. The company is one of the premium manufacturers of electric vehicles. Audi launched many hybrid vehicles in 2010, which include Audi e-tron Spyder, e-tron Silvretta, and A1 e-tron. It is also into development of a plug-in hybrid, a drive system that combines a combustion engine with an electric motor, whose battery can also be charged through an electrical outlet. In addition, the company is currently working on full-hybrid versions of the Audi Q5 and A8.
Audi is also developing other electric concepts for plug-in hybrids, ranging from the fuel cell to the battery-only electric vehicle. Audi is expected launch its Q5 hybrid Quattro and R8 E-tron in 2011 and 2012, respectively.
Such strong focus and increasing demand for HEVs would boost demand for Audi’s products.
The global automotive industry is highly competitive. Audi faces strong competitors, some of which are larger and may have greater resources in a given business area. Some of its key competitors are Bayerische Motoren Werke, Daimler, Fiat, Ford Motor, GM Daewoo Auto & Technology, General Motors, Honda Motor, Hyundai Motor, Nissan Motor, PSA Peugeot Citroen, Porsche Automobil Holding, Renault and Toyota Motor. Due to current economic conditions, demand for automobiles has fallen sharply, both in Europe and in other parts of the world.
Many manufacturers, including Audi, have relatively high fixed labor costs as well as significant limitations on their ability to close facilities and reduce fixed costs. To offset these high fixed costs, some of the company’s competitors have responded to recent deteriorations in economic conditions and vehicle sales by attempting to sell more vehicles by adding vehicle enhancements, providing subsidized financing or leasing programs.
They are also offering option package discounts, other marketing incentives and are reducing vehicle prices in certain markets. These actions may have a significant negative effect on Audi’s vehicle pricing, market share and operating results. It also impacts Audi’s ability to enhance its revenue per vehicle and maintain the company’s market share during difficult economic times.
Environment protection regulations
The company is subject to a number of environment protection regulations. The EU Regulation decided on a wide range of stricter requirements, primarily impacting diesel technology. In the case of heavy passenger vehicles the rules, as they currently stand, require that an after-treatment system for nitrogen oxide be introduced.
The cost difference compared with petrol engines will increase further. In future, petrol and diesel engines will also have to reposition themselves with regard to the obligation to add biofuels to fossil fuels. The existing diesel particulate filter technology does not permit any significant increase in the amount of biofuels added.
In addition, the EU Regulation sets targets for carmakers selling passenger cars in the European market (the EU 27). The aim is to reduce average carbon dioxide (CO2) emissions in European fleets to 130 grams per kilometer (g/km) for all new vehicles by 2015 by means of drive train and other vehicle technology.
A further reduction of 10 g/km is to be achieved by flanking measures such as gear-change indicators, low-resistance tires, and the use of biofuels. There are risks involved in the amount of the penalties, which may be up to E95 ($139.8) per g/km, to be imposed if the manufacturer fails to meet the target for its vehicles sold by an average of more than 3 g/km.
Similarly, a uniform consumption and CO2 regulation will apply for the model years 2012 to 2016 in the US. Starting with a step-by-step reduction in model year 2012, the new vehicle fleets of all manufacturers are expected to come down to an average value of 250g of CO2 per mile in model year 2016. The Japanese government has also set ambitious targets to reduce consumption, including statutory regulations for 2010 and 2015.
The government in China is currently discussing the introduction of fuel consumption requirements (more stringent than current ones) planned to come into force in 2012. These regulations would impose additional costs and obligations on Audi, which may adversely impact its margins.
Weak economic outlook for the US and Europe
The global economic recession of 2008 has done a significant damage to Europe and the US economies. According to IMF, the output of these two regions is expected remain well below potential. The risk of a double-dip recession in the US has receded, but Europe remains vulnerable and new risks have emerged. The US economy expanded by an above-trend growth of 2.8% in 2010. In the US, the tentative signs of a stronger and more self-sustaining recovery at end-2010 have since been followed by certain setbacks and new risks.
In particular, the surge in oil prices, if sustained, could significantly slow the recovery. In addition, the recent down grade by S&P could further increase the borrowing costs of the US, resulting in further slow down. The recent macroeconomic data, state-level regional data, and the increased volatility in the financial markets in the US shows significant downside risks to economic growth over the near term. It is forecasted that the US would have a GDP growth rate of 1.6% in 2011 and 1.1% in 2012.
Similarly, in Europe, the economy is expected to recover at a rate of 2.4% and 2.6% for 2011 and 2012, respectively. Moreover, according to the European Commission, the economic recovery in the European Union is expected to be sluggish due to significant headwinds that are set to restrain domestic demand. In addition the recovery is being challenged by relatively high consumer-price inflation.
Though, France and Germany are forecasted to grow at a rate of 1.6% and 2.5%, respectively, in 2011, Greece and Portugal are forecasted to stay in recession for the next two years. Audi has a strong presence in the US and Europe. It derives more than 70% of its revenues from these two regions. Such weak economic outlook for the US and Europe could further put pressure on the company’s revenues and growth prospects.