1. 1 Volkswagen China Analysis Team K Ken AndersonSascha Hümbeli Brad BraddonRené Nef Michael CutaiaElena Semeshina Shanghai, March 29, 2006

2. Slide 2 Rochester Bern Executive M.B.A. Team K “It’s the journey, stupid.”

3. Slide 3 Rochester Bern Executive M.B.A. Team K Analytical Foundations 5 year Strategy 2000 – 2004Pre 200020052006 - 2011 Competitive Analysis through 2005 SWOT Gap Analysis Industry Growth …post 2005

4. Slide 4 Rochester Bern Executive M.B.A. Team K Setting the stage – industry growth Automobile Production 1980 – 2010, actual through ’04 Command to Managed Market Economy Interplay of Government institution Foreign Investment & Technology Regulations Chinese culture WTO Tremendous forward looking opportunity

5. Slide 5 Rochester Bern Executive M.B.A. Team K Competitive Analysis through 2005 n Prior to the mid-1990: - First mover advantage, insulated by SAIC relationship - Cost-intensive operations, inefficient distribution channels, out-dated car models n 1990’s: - High profit margins, continued by weakening insulation - Gradual relaxation of barriers - Buyers were primarily public organizations - Many new entrants n 2000-2005: - VW’s first mover advantage is retaliated by competitive drawback - Market share shrinks heavily, negative operating return

6. Slide 6 Rochester Bern Executive M.B.A. Team K Competitive Analysis post 2005 Internal rivalry: Large foreign investments leading to overcapacity Elimination of the techno- logy gap WTO impact Supplier Power: Reduced tariffs forcing suppliers to reduce costs VW‘s disadvantage due to its vertical integration with single source suppliers owned by SAIC Buyer Power: Market shift to private individual buyers looking for a good price- performance ratio Threat of Substitution: Imported cars from outside China putting price pressure on domestic manufacturers Threat of new entrants: Chinese manufacturers are learning quickly

7. Slide 7 Rochester Bern Executive M.B.A. Team K SWOT Analysis Strength n Strong brand presence due to first mover advantage n Deep knowledge about the Chinese market n Existing production facilities and capacity levels Weak- nesses n Cost-intensive operations n Inefficient distribution channels n Out-dated car models, little flexibility for catering to local consumer preferences n Chinese operations are controlled at distance by its German headquaters Opportu- nities n Growth trend for passenger car demand n Olympic Game as a marketing platform n Cooperation with University Shanghai to explore hybrid technologies n Elimination of barriers Threats n New entrants with cheap cars n SAIC has won government permission to build its own brand n Regulations remain strong n Non-existent intellectual property protectionism

8. Slide 8 Rochester Bern Executive M.B.A. Team K Gap Analysis Corporate Strategy Business Strategy Market Structure Operational Activities Institutional to consumer demandInstitutional to consumer demand FAW vs. SAIC VWFAW vs. SAIC VW Strategic direction controlled at distanceStrategic direction controlled at distance Transferring best practices – sales, service, financingTransferring best practices – sales, service, financing Brand / Technology re-alignmentBrand / Technology re-alignment

9. Slide 9 Rochester Bern Executive M.B.A. Team K Strategic Alternatives Brand Position Volume small large Premium Low Cost Mainstream 2. Alternative Recommended Alternative Reliable German engineered high performance cars at an affordable prices.

10. Slide 10 Rochester Bern Executive M.B.A. Team K Implementation n Ensure that the product being offered matches the brand positioning n Request high quality from domestic suppliers n Offer imported and domestically produced cars within the same dealership, if possible n Increase the number of dealerships and train the staff in brand awareness and best practices n Enhance co-operation between the joint venture partners (e.g. sharing the same parts, best practices) n Share knowledge with joint venture partners n Create flexible assembly processes to adapt quickly to market changes n Critical success factor: Winning back the hearts and minds of the customers; Achieve the same positive image in China as in the rest of the world

11. Slide 11 Rochester Bern Executive M.B.A. Team K End of Journey – Discussion