Chartered Postgraduate Diploma in Marketing (Level 7)

© The Chartered Institute of Marketing 2017

561 – Analysis and Decision

Case Study

April 2017

Volkswagen (VW) Group

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Analysis and Decision – Case Study Important guidance notes for candidates regarding the pre-prepared analysis The examination is designed to assess knowledge and understanding of the Analysis and Decision syllabus, in the context of the relevant case study. The examiners will be marking candidates’ scripts on the basis of the tasks set. Candidates are advised to pay particular attention to the mark allocation on the examination paper and plan their time accordingly. The role is outlined in the Candidate Brief, and candidates will be required to recommend clear courses of action. Candidates should acquaint themselves thoroughly with the case study and be prepared to follow closely the instructions given to them on the examination day. Candidates are advised not to waste valuable time collecting data outside of this case study. The cases are based upon real-life situations and all the necessary information about the chosen company is contained within the case study. No useful purpose will therefore be served by contacting companies in the industry, and candidates are strictly instructed not to do so as it may cause unnecessary confusion. As in real life, anomalies may be found in the information provided within this case study. Please state any assumptions, where necessary, when answering tasks. The Chartered Institute of Marketing is not in a position to answer queries on case data. Candidates are tested on their overall understanding of the case and its key issues, not on minor details. In preparation for the examination, candidates need to carry out a detailed strategic marketing audit of the case study. The audit allows candidates to demonstrate their ability to: • apply the appropriate models and techniques to analyse information on a

company/sector facing particular circumstances • interpret the results of this audit to provide insights into the current situation and the

conclusions they are able to draw • utilise their own ideas and create their own models for interpreting the data. When compiling their audit, candidates should only use the information found within the case study, supported by their knowledge and understanding of the syllabus. Candidates are expected to bring individuality to their audit and submit their own work. In doing so, they must not attach essay-style descriptive work that could be considered as an attempt to gain unfair advantage whilst responding to the examination tasks. The copying of pre-prepared ‘group’ answers, including those written by consultants/tutors, or by any third party, is strictly forbidden and will be penalised by failure. The tasks will demand analysis in the examination itself and individually composed answers are required in order to pass. Candidates will then need to condense their strategic marketing audit into a SIX-page summary (a maximum of six sides of A4, no smaller than font size 11. The content of tables, models or diagrams must be in a minimum of font size 9). The six sides must contain a summary of the audit only. It should not contain decisions, objectives or plans. The pages of the audit should be numbered for ease of reference when answering the examination tasks.

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Although no marks are awarded for the audit itself, candidates will be awarded marks for how the audit summary is used and referred to in answering the tasks set. Candidates are advised not to repeat or copy the audit summary when answering the exam tasks. It is important that candidates refer the examiner to the audit summary, where and when appropriate, when answering the tasks. Candidates must hole-punch and staple their summary audit in the top left hand corner. They should write their CIM membership number and examination centre name in the top right hand corner of each page of the audit. It should then be attached to the answer book on completion of their examination, using the treasury tag provided. Candidates must take their original copy of the case study (not a photocopy) and summary audit into the examination room. The case study may be annotated with ideas for possible decisions or courses of action. Candidates may not attach any other additional information in any format to their answer book. Any attempt to introduce such additional material will result in the candidate’s paper being declared null and void. The Chartered Institute of Marketing reserves the right not to mark any submission that does not comply with these guidelines.

Important Notice The following data has been based on real-life companies, but details have been changed for assessment purposes and do not necessarily reflect current management practices of the industries or the views and opinions of The Chartered Institute of Marketing. Candidates are strictly instructed NOT to contact individuals or companies mentioned in the case study or any other companies in the industry. Copies of the case study may be obtained from: The Chartered Institute of Marketing, Moor Hall, Cookham, Berkshire SL6 9QH, UK or may be downloaded from the CIM student website www.cimlearningzone.co.uk.

© The Chartered Institute of Marketing 2017. All rights reserved. This assignment, in full or in part, cannot be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of The Chartered Institute of Marketing.

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Contents

Introduction 8

Market position

8-9

Market trends, opportunities and threats facing the industry

9-10

Customer behaviour, preferences within the sector

10-11

VW’s vision, mission, organisational culture and strategic direction

11-12

Current and past business and marketing strategies

12-14

Market performance and issues affecting VW’s value proposition

14-16

VW’s major competitors in the UK

16-18

Innovation and opportunity influencing future growth and profitability of the company and industry

18-20

Global issues

20-21

Future outlook

21-22

Appendices 23-31

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Appendices

1 Insight into customer preferences in auto industry (three graphs) 23-25

2 State of the auto market (two graphs) 26-27

3 Current and forecast strength of various global auto markets 28

4 ‘Running on fumes: how car ads lost their swagger

29

5 Volkswagen sets course for a long journey back 29

6 How personal stories can be used to fight public apathy on Volkswagen

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7 Volkswagen: the scandal explained 29

8 The emissions scandal: basic data 30-31

9 A road map to the future for the auto industry 31

10 The greatest print campaigns of all time: Volkswagen think small 31

11 VW 'dieselgate' payout offer outrageously low, says Sadiq Khan 31

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ANALYSIS AND DECISION

CASE STUDY Candidate brief Scenario You are a Marketing Consulting working in the automobile sector. Volkswagen (VW) Group has asked you to undertake a strategic marketing audit to analyse both internal and external factors (including the recent scandal and associated risks) that are impacting its corporate reputation and the future of the organisation. You have been given a particular remit to consider Volkswagen (VW) Group’s strategic position and the potential for strategic uncertainty, taking into account its strengths and weakness in relation to organisational culture, resource capabilities, competitive position and the value of the corporate brand. You have also been asked to consider how Volkswagen (VW) Group can remain competitive and successful in the context of challenges and risks facing the automobile sector, including developments in technology, rising competition and changing consumer behaviour. Consideration should be given to the organisation’s financial position, organisational constraints, strategic risks and mitigating strategies to overcome these constraints and risks.

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Volkswagen (VW) Group Introduction The Volkswagen Group is one of the world's leading automobile manufacturers and the largest carmaker in Europe, with control of twelve brands: Volkswagen Passenger Cars, Audi, SEAT, ŠKODA, Bentley, Bugatti, Lamborghini, Porsche, Ducati, VW Commercial Vehicles, Scania and MAN. Volkswagen Group UK manages the VW, Audi, ŠKODA and SEAT brands. VW’s headquarters are in Wolfsburg, Germany, and the group employed 610,076 people as of 31 December 2015. The group recorded revenues of €213,292 million ($236,766.9 million in 2015 prices) during the financial year ended December 2015, an increase of 5.4% over 2014. The operating loss of the group was €4,069 million ($4,516.8 million) in 2015, as compared to an operating profit of €12,697 million ($14,094.4 million) in 2014. Volkswagen was founded in January 1937 by the German Labour Front, the trade union controlled by the National Socialist Party. In the early 1930s, the average German could rarely afford anything more than a motorcycle. Hitler became personally involved, ordering the production of a basic vehicle capable of transporting a family at 100 km/h (62 mph) and sponsoring an all-new, state-owned factory using Ferdinand Porsche's design. Volkswagen translates as ‘people’s car’ in English, and the company’s efforts to empower common people by enabling them to own and drive a car resonated well with the general public. From 1948, VW became an important element, symbolically and economically, of West German regeneration, and it has grown strongly ever since. Benefiting hugely from a rich legacy as a brand made for the people, Volkswagen became a globally recognised brand known for its down-to-earth approach, making it a household name. In 2010, VW posted record sales of 6.29 million vehicles, with its global market share at 11.4%. By 2012 Volkswagen had become the second largest auto manufacturer in the world. VW aimed to double its US market share from 2% to 4% in 2014, and aims to become, sustainably, the world's largest carmaker by 2018. VW Group's core markets include Germany and China. Market position VW has a strong brand portfolio, covering almost all segments, from motorcycles through cars to heavy trucks and buses. With all its brands, VW has a presence in all relevant automotive markets around the world. Western Europe, China, Brazil, the US, Russia, Argentina, and Mexico are the key sales markets for the group. Moreover, the group's steadily growing presence in all major markets in the world, along with its wide range of financial services, gives the group decisive competitive advantages. During 2015, the group sold 9,320,681 vehicles, including 5,823,408 units of VW passenger vehicles, 1,803,246 Audi, 1,055,501 ŠKODA, 400,037 SEAT, 10,100 Bentley, 3,245 Lamborghini, 225,121 Porsche, and 23 Bugatti. The broad product range assists the group in further enhancing its market share in key markets globally. In addition, it helps the group to leverage its brand strength to drive top-line growth. VW maintains a strong focus on research and development (R&D). The group concentrates on expanding its product portfolio and improving the functionality, quality, safety and environmental compatibility of group vehicle products. VW has also focused on electrification of the group's vehicle range to create an efficient range of engines and lightweight

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construction. In addition, it has worked on increasing its ‘alternative drive’ technology. In 2015, VW's R&D costs in the automotive division were €13,612 million ($15,110.1 million) compared to €13,120 million ($14,564 million) in the previous year. VW’s strong focus on R&D facilitates development of new products and enhancements to existing products, which further helps the group in maintaining a strong market position. VW’s market-leading positions across the world give it an overall 12.3% market share, and this is spread across many important regional markets. For instance, VW has currently captured 24.4% of the Western Europe market. Furthermore, the group also had a strong market position in the Americas, Asia, and Africa regions. It operates 119 production plants in 20 European countries and a further 11 countries in the Americas, Asia, and Africa. This enhances VW's brand image and provides competitive edge by helping it in when launching new products and services into new markets. However, the 2015 diesel emissions scandal has the potential to significantly impact VW’s brand image and profitability. The scandal broke when VW had to admit that 11 million of its diesel cars were equipped with software that could be used to cheat on emissions tests. Eventual fines could reach about $18 billion. The scandal further affected the group's share prices, which fell by 20% on the Frankfurt stock exchange during 2015 and early 2016. Such scandals would impact the brand image and the reputation of the group, causing it to lose customers, which in turn would cause losses to the group. Furthermore, and in the recent past, VW has had to recall a number of vehicles to its factories and alter them due to various technical and safety issues. For example, in October 2015, VW recalled approximately 8.5 million vehicles in Europe, including 2.4 million vehicles in Germany, due to the emissions scandal. In 2014 the group recalled more than a million cars in the US, China and Germany to inspect their rear suspension systems, due to safety issues. In China, VW and its partner, FAW Group, recalled 563,605 locally made Sagitar sedans, and 17,485 imported Beetle sedans, most of which were made between 2011 and 2014. Such significant product recalls negatively affect consumer confidence in VW's products and its brand image. Market trends, opportunities and threats facing the industry The global automotive manufacturing industry has grown relatively consistently over the past few years, and is expected to continue to grow positively until 2018. The global automotive manufacturing industry generated total revenues of $1,252.6 billion in 2015, an increase of 3.1% over 2014, and is expected to reach a value of approximately $1,577.1 billion in 2019. VW is well positioned to benefit from the growing demand for hybrid electric and alternative fuel vehicles. The group has been focusing on developing cars running on hybrid and alternative technologies. The demand for hybrid electric vehicles (HEVs) across the world is rising steadily, mainly due to global concerns about reducing carbon emissions coupled with the highly volatile prices of vehicle fuel. According to industry estimates, electric vehicle sales are anticipated to reach approximately 7.5 million units by the end of 2020, a growth rate of around 19% for the 2014–20 period. The key markets for HEVs include the US, Western Europe, and Japan, although the rapidly growing Chinese market is also expected to experience relatively strong demand for these fuel efficient and environmentally friendly vehicles. VW is keen to capitalise on the growing demand for HEVs. The group has made significant investment in the development of hybrid vehicles over the years, as well as placing an appropriate focus on alternative fuels, hybrids and electric vehicles. Further, the

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group's emphasis on hybrid technology will enable it to capitalise on the positive market trends, thus boosting revenues and market share. The worldwide automotive market is highly competitive. VW faces strong competition from automotive manufacturers in its various markets, which is likely to intensify in light of continuing globalisation and consolidation within the industry. Sample factors influencing competition include product quality and features, the amount of time required for innovation and development, safety, and customer service. Increased competition may lead to lower vehicle unit sales and increased inventory, resulting in further downward price pressures. VW uses many commodities to produce its automotive products, such as steel and iron ore. The prices of commodities are constantly fluctuating. For instance, the global composite carbon steel price in February 2016 was $462 per tonne, as compared to a price of $568 per tonne in March 2015. Similarly, the average iron ore price in November 2015 was $46.2 per dry metric tonne unit (dmtu), which further increased to $54.8 per dmtu in May 2016. Volatility in raw material prices could ultimately affect margins if these costs cannot be passed onto VW’s customers in the form of higher prices. The automobile industry worldwide is influenced by a broad spectrum of regulations governing the emission levels of exhaust fumes, carbon dioxide/fuel economy guidelines, noise level limitations, recycling-related restrictions, and safety standards. These regulations have become increasingly stringent. For instance, in the US, the Federal Clean Air Act imposes stringent limits on the amount of regulated pollutants that lawfully may be emitted by new vehicles and engines. In the European Union (EU), directives and related legislation limit the amount of regulated pollutants that may be emitted by new motor vehicles and engines sold. Also, many countries, in an effort to address air quality concerns, are adopting more advanced regulations based on the most recent version of European or US regulations. For example, China adopted emission regulations for large cities based on European emissions standards. Korea and Taiwan have adopted stringent US-based standards for gasoline vehicles, and European-based standards for diesel vehicles. Brazil, Argentina, and Chile have also introduced more stringent emissions standards. Thus, any significant change in regulation structures may have a serious impact on VW’s business operations. Customer behaviour, preferences within the sector As demonstrated in the UK, but also in other mature markets, customers are showing increasing preference for driving small and medium-sized cars. Small saloons/hatchbacks account for 32% of cars owned, while medium saloons/hatchbacks account for a further 28%, giving them a total share of 60%. Young adults are more likely to own a small car. In contrast, older adults are more likely to have broader tastes and own a greater variety of cars, with interest in larger models and more specialist designs. As with car ownership, individual factors – such as family status and location – can have a major impact on the type of car owned. Two thirds of adults in the UK own a car, with many factors impacting on the type of car owned, such as income, age, location and the presence of children. Used cars are more likely to be owned than cars purchased from new, with over half (53 %) of owners having purchased a car used, while 45% have purchased a car from new (a further 2% of owners received their car as a gift). The likelihood of owning a car increases with age. Whereas only 49% of those aged 17-24 own a car, this rises to 76% for those aged 55+. Further, the likelihood of owning a car is

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lower in urban than suburban and rural areas. Whereas 62% of adults living in urban areas own a car, this stands at 71% for those living in suburban areas and 72% for those living in rural areas. Currently car hire and car sharing, both established ways of accessing a car without owning one, are the most popular. For those without a car, interest in alternatives to ownership is more limited. Only a few would consider car hire, although a much higher proportion, would consider car sharing. Men and young adults are most interested in buying new cars, especially within the last two years. Some 24% of men bought a new car in the last two years, while 27% brought a new car more than two years ago. By age, 26-27% of new car buyers in the last two years were aged between 17-34. Women, in contrast, are more likely to own a car purchased second-hand, with 32% of women currently owning a car more than two years old. Older adults are another important owner group for second-hand cars, with 36% of those aged 45-54 owning a secondhand car purchased more than two years ago. Commuting is one of the main primary uses for a car, with around eight out of ten consumers asked placing it as the most important use. Less important, but still notable, primary uses for car use/ownership relate to education and shopping. Beyond such primary uses, cars are often put to a much wider range of uses by their owners, including visiting friends/family and various leisure purposes. Features to improve driving, such as reverse assistance and in-built satellite navigation, are both widely sought after by consumers. Different owners look for different features. Men appear to have a focus on technology while women show greater interest in driving enhancements. Some 45% of owners believe that cars should match their lifestyle needs. Many also express interest in environmental factors, changing the model of their existing car and seeing greater use of technology. Yet interest in what could be viewed as emerging developments in the market is more limited. Only 16% want a car that can drive itself, 15% are interested in a fully electric vehicle, and 10% want to switch to a more luxurious make when they next change their vehicle. VW’s vision, mission, organisational culture and strategic direction VW’s vision and strategic direction have been best captured in its ten-year ‘Strategy 2018’ document, first published in 2008. Unsurprisingly for one of the world’s biggest carmakers, Volkswagen’s strategy is rooted in the clear aim to increase unit sales and profitability for the long term. Put simply, VW intends:

‘to become the global economic and environmental leader among automobile manufacturers by 2018’

The company defines four goals it says will make it ‘the most successful, fascinating and sustainable carmaker in the world by 2018’. In summary, these cover:

deploying intelligent innovations and technologies to become a world leader in customer satisfaction and quality. VW says it sees high customer satisfaction as one of the key requirements for its long-term success.

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generating unit sales of more than 10 million vehicles a year – and, in particular, to capture an above-average share of growth in the major growth markets.

aiming for a long-term return on sales before tax of at least 8%, to ensure a solid financial position and ability to act even in difficult market periods.

being the most attractive employer in the automotive industry by 2018, building the best team in the sector; highly qualified, fit and motivated.

Supporting this strategic intent, VW – describing itself as ‘more than an employer’ – claims three overarching values that permeate all aspects of its operations, namely:

Social responsibility – sponsoring social projects, devising innovative employment models and investing in its employees’ employability and job security. In Wolfsburg, VW’s home city and global base, VW supports businesses starting up or moving to the area, establishes knowledge networks, supports scientific and public facilities and develops leisure projects. All employees are encouraged to volunteer in their communities. VW also positions itself as a ‘partner’ for its locations and regions across the world, supporting diverse projects such as the ‘One hour for the future’ initiative for street children in Central and South America.

Sustainability – conducting business activities on a responsible and long-term basis. VW says it wants everyone to profit from its growth – customers and investors, society and employees. In this way, good jobs and careful treatment of resources and the environment form the basis for generating lasting values. Regarding corporate social responsibility (CSR), VW says it sees itself as a source of economic impetus for local structural development and equal opportunities. It supports some 200 projects worldwide designed to enhance economic and social structures, placing special emphasis on continuity and sustainability. VW also has an environmental strategy with specific targets and measures to improve environmental protection within the Group. This binds VW’s brands and business units at every stage of the value chain, from product planning and development, to supplier management, logistics and production, through to sales, marketing and recycling.

A spirit of partnership – for VW, this value champions a good workplace atmosphere, based on fairness and respect, as an essential component of economic success. VW says that disharmony in the workplace is bad for the health and wellbeing of the individual and thus bad for the company itself. Through a works agreement first signed in 1996, VW committed itself to maintaining a spirit of partnership in the workplace, since brought into line with Germany's General Equal Treatment Act (AGG). Offences result in disciplinary action, and VW has set up a training programme for various target groups.

Current and past business and marketing strategies VW’s origins lie in the 1930s, its infamous connections with Nazi Germany and the rise of Adolf Hitler. Founded by the German Labour Front (a National Socialist-dominated trade union), Volkswagen’s mission at the time was to provide an affordable driving experience for the mass population, in an industry still composed largely of luxury models. The original car design for construction in this factory was recognisably the ‘Beetle’ known today. Despite extensive testing, only a handful of cars had been produced by the time World War 2 started in 1939. None were actually delivered, though one Type 1 Cabriolet was presented to Hitler in 1944 on his 55th birthday. From 1948, Volkswagen became a cultural icon and an important element, symbolically and economically, of West German regeneration. The VW Type 2 commercial vehicle (van, pick-

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up and camper), and the VW Karmann Ghia sports car were the only new models introduced alongside the ‘Beetle’ (although VW never formally gave it that name) until 1968. On entry to the US market, from 1949, the Volkswagen was briefly sold as a Victory Wagon. Production increased dramatically over the years, the total reaching one million in 1955. The UK's first official Volkswagen importer started with parts for the models brought home by soldiers returning from Germany. Canadian Motors Limited brought in Canada's first shipment of Volkswagens in 1952 and sales in North America quickly soared, thanks in part to famous New York-based advertising campaigns. Volkswagen advertisements became as popular as the car, using crisp layouts and witty copy to lure younger, more sophisticated consumers. Although the car was becoming outdated during the 1960s and early 1970s, American exports, innovative advertising, and a growing reputation for reliability helped production figures surpass the levels of the previous record holder, the Ford Model T. On 17 February 1972 the 15,007,034th Beetle was sold, and VW could now claim the world production record for the most-produced single make of car in history. In 1964, VW acquired Auto Union, and in 1969 NSU Motorenwerke AG, the former owning the historic Audi brand which had disappeared after the Second World War. VW ultimately merged Auto Union and NSU to create the modern Audi company and would go on to develop it as its luxury vehicle marque. Beetle sales had started to decline rapidly in European and North American markets by 1973, and the company was struggling with plans to replace it. VW's ownership of Audi/Auto Union eventually provided the answer with its expertise in front-wheel drive and water-cooled engines, influences which paved the way for the new generation of VWs: the Passat, Scirocco, Golf and Polo. First in the series was the VW Passat, introduced in 1973, essentially a fastback version of the Audi 80. In spring 1974, the Scirocco followed, a coupé designed by the Italian Giorgetto Giugiaro. The pivotal model emerged as the VW Golf in 1974, its angular styling designed again by Giugiaro. Its design followed trends for small family cars set by the 1959 Mini: a transversely mounted, water-cooled engine in the front, driving the front wheels, and a hatchback, a format that has dominated the market segment ever since. With the Golf's introduction, Beetle production shifted to Brazil and Mexico. Passat, Scirocco, Golf and Polo shared many character-defining features, as well as parts and engines, and built the basis for VW’s turn-around. The Golf has been the mainstay of the VW lineup since its introduction and the mechanical basis for several other VW cars. In the 1980s, VW’s sales in the United States and Canada fell dramatically, despite the success of models like the Golf elsewhere, as the Japanese and Americans became able to compete with similar products at lower prices. VW decided to expand elsewhere, mostly in developing countries, notably signing a co-operation agreement with the Spanish carmaker SEAT in 1982, eventually buying the company outright in 1990. The second-generation Polo, launched in 1981 and sold as a hatchback and coupé, was an even greater success for VW. It sold well until finally being replaced by an all-new version in 1994. Also arriving in 1981 were the second generations of the Passat and Scirocco, the latter this time being a coupé. After the launch of the Mk2 Golf in 1983, the next major car launch was the third-generation Passat at the beginning of 1988.

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In 1991, VW launched the third-generation Golf, which was European Car of the Year in 1992. In 1994, VW unveiled – to a positive response – a ‘retro’-themed concept car resembling the original Beetle. In 1995 the Sharan was launched in Europe, the result of a joint venture with Ford, which also resulted in the Ford Galaxy and the SEAT Alhambra. The company's evolution of its model range was continued with the Golf Mk4, introduced between 1997 and 1999, and also leading to the creation of a host of other cars within the VW Group; the VW Bora, SEAT Toledo, SEAT León, Audi A3, Audi TT, and ŠKODA Octavia. In 1998 the company launched the new Lupo city car, the world's most fuel-efficient car at the time. The sixth-generation Golf was launched in 2008, again giving rise to several refreshed models within the group: the VW Jetta, VW Scirocco, SEAT León, SEAT Toledo, ŠKODA Octavia and Audi A3 hatchback ranges. VW long resisted adding a Sports Utility Vehicle (SUV) but changed its mind with the introduction of the Touareg, made in partnership with Porsche, while also working on the Porsche Cayenne and later the Audi Q7. The Touareg has been a modest seller at best, but VW persevered to add a compact SUV in 2006, the Tiguan. Having built its status as one of the biggest auto producers in the world, the recent VW story is dominated by the 2015 diesel emissions scandal. Against this background, the company’s 2016 global advertising campaign shows a red-haired toddler ageing through a period of 40 years in a gradually evolving set of VW cars that begins with a Beetle and ends with its latest models. The TV commercial concludes with the message: ‘It’s more than just a car. It’s a lifelong companion.’ In print the ad carries a more direct message: ‘It’s more than just a car. It’s keeping your promises.’ This approach has been considered bold by some, controversial by others, with VW having admitted the scandal was not a product of corporate negligence but rather deliberate manipulation of test results. Despite this, VW has chosen to promote itself in Europe with a message of trust, at a time when the emissions scandal is far from resolved. Called ‘aspirational positioning’ by marketers, this approach doesn’t reflect the current reality in communications but shows a positive vision and then sets out to make this a reality. As the campaign develops, industry observers will be watching keenly to see whether customers are prepared to forgive Volkswagen for its recent behaviour and keep buying into more traditional VW values and propositions. Sales at VW are down, but only by 14% in the UK in January 2016, suggesting that many consumers may actually be less concerned with corporate reputation in favour of keeping faith in the power of brands to enthuse and improve. Market performance and issues affecting VW’s value proposition The 2015 diesel emissions scandal, dubbed the ‘diesel dupe’, is the biggest issue affecting recent VW market performance. In September that year, US authorities found that many VW diesel cars being sold in America had software that could detect when they were being tested, changing the performance accordingly to improve results. VW has since admitted cheating in US emissions tests. At the time, VW had had a major push to sell diesel cars in the US, backed by a huge marketing campaign trumpeting its cars' low emissions. The US findings covered 482,000 cars in the US only, but VW has admitted that about 11 million cars worldwide, including eight million in Europe, were fitted with the so-called ‘defeat device’. The company has also been accused of modifying software on the 3-litre diesel engines fitted to some Porsche and Audi as well as VW models, claims that the company denies.

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Details of how this 'defeat device' worked are not fully available, but the US authorities said that the engines had computer software that could sense test scenarios by monitoring speed, engine operation, air pressure and even the position of the steering wheel. When the cars were operating under controlled laboratory conditions – which typically involve putting them on a stationary test rig – the device appears to have put the vehicle into a sort of safety mode in which the engine ran below normal power and performance. Once on the road, the engines switched out of this test mode. This resulted in the engines emitting nitrogen oxide pollutants up to 40 times above what is allowed in the US. Matthias Müller, Chief Executive Officer at Volkswagen AG, offering apologies to customers and stakeholders in the company’s 2015 Annual Report, said:

‘We find ourselves in the midst of what is probably the greatest challenge in the history of our Company. We are doing everything we can to overcome this crisis: with effective technical solutions for our customers and trustful cooperation with all the responsible authorities in order to completely and transparently clarify what happened. We are gradually making progress. Looking to the future, we must above all learn from past mistakes and draw the right consequences so that something like this can never happen at Volkswagen again. That is what is needed to rebuild trust and get our Group back on the right track.’

Early in 2016, the US Justice Department sued VW in a federal court, questioning VW’s efforts to restore its credibility and accusing the company of impeding and obstructing regulators’ inquiries and providing misleading information. The estimated total cost of the scandal may, according to projections, exceed $18 billion. More difficult to estimate is the invisible and long-term damage to the company, such as the negative impact on brand trust and reputation, customer satisfaction, employee morale and loyalty, and investor confidence. Even more importantly, there is an externality effect where such scandals and apparent deceptions not only tarnish the reputation of other automakers and even corporations in unrelated industries, but also undermine the public’s trust in the business, and heighten consumers’ cynicism about greenwashing – companies giving the impression that their policies and products are more environmentally friendly than they actually are – now carried even further as ‘greenfrauding’. Although VW has set aside about $18bn (£14bn) to cover the cost of vehicle refits and a settlement with US authorities, analysts predict the bill could rise much further as a result of lawsuits and regulatory penalties. For example, about 1,400 lawsuits have been lodged at the regional court in Braunschweig near VW’s Wolfsburg headquarters. Plaintiffs say the German carmaker did not inform shareholders quickly enough over its cheating software; VW insists it did not break capital market regulations in the disclosure of its cheating. The biggest claim at the Braunschweig court, totaling €3.3bn, was filed on behalf of institutional investors a few months ago in 2016. This included a filing for €30m in damages, two investor groups demanding €1.5bn and €550m respectively, and an investment company that sued the carmaker for €45m. In the UK, late in 2016, London Mayor Sadiq Khan urged the national government to take tougher action against VW, saying the £1.1m VW had offered in the UK to date was ‘outrageous’. Khan urged the government to secure other concessions equivalent to those obtained by the US authorities, and said he wanted UK VW owners to have a buy-back option and compensation for cities such as London, which is estimated to have up to 80,000

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VW cars that have a defeat device installed. He suggested compensation could fund a national diesel scrappage scheme. A few months earlier, in June 2016, VW’s own shareholders strongly criticised its executives and demanded changes to the management structure, in the first annual meeting since the emissions scandal broke. Investors used the meeting in Hanover to criticise the German company’s board for its handling of the scandal, and to call for a dramatic overhaul of its corporate governance. Ulrich Hocker, head of the German shareholder association DSW, said there had been a collective failure by the management board. ‘We are looking at a shambles,’ he added. VW’s major competitors in the UK Ford Ford is the biggest-selling car brand in the UK. It sold 326,643 new vehicles in 2014, giving it a market share of 13.2%. Ford has four manufacturing plants in the UK, a research centre and 550 dealerships, employing around 35,000 people. Ford’s best-selling vehicle is the mid-size Ford Focus, on the market since 1998. Another popular model is the Ford Fiesta, the most popular car in 2014 in terms of new sales in the UK. Other vehicles on offer from Ford range from the small, moderately priced KA, to the family-sized Mondeo, to its top-end performance model the Ford Mustang. In 2014, Ford pledged to spend £1.5 billion on low-carbon and environmentally friendly engine and vehicle technology over five years. Vauxhall Vauxhall is a British brand first launched in 1903 but with a US parent, General Motors. Vauxhall employs around 35,000 people in the UK, and has manufacturing plants near London and Liverpool. Vauxhall is the second largest car manufacturer in the UK, with new car sales of 269,177 in 2014, giving the brand a 10.9% share. Vauxhall’s most popular model is the small Corsa, the third biggest selling model of 2014. Other models on offer include the popular Astra family car, the compact seven-seated Zafira and the electric Ampera, which sits at the top of the Vauxhall pricing range. Vauxhall re-launched its Viva marque in 2015, with the car featuring the power steering ‘City Mode’, which reduces the effort needed for travelling at slow speeds in cities. Vauxhall has also developed a range of lightweight ‘whispering diesel’ engines. BMW BMW Group owns three brands, BMW, Mini and Rolls-Royce, and has three manufacturing plants in the UK. In 2014, BMW sold 148,878 units in the UK, placing the manufacturer as the fifth most popular with a 6% market share. MINI holds a further 2.2% share. BMW offers a range of premium cars, from the BMW 1 Series hatchback, to the BMW 46M with turbocharged engine. The range is made up of six different series, which come in different bodies, including saloon, touring, convertible and coupé. In the long term, BMW is planning to offer plug-in hybrid versions of all its core-brand models.

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Nissan Nissan is a Japanese automotive manufacturer established in 1933. In the UK, Nissan produces more than 500,000 units a year from its manufacturing plant in Sunderland. In 1999, Nissan built an alliance with Renault, whereby the two companies work as partners while keeping separate brand and corporate identities. Nissan was the sixth most popular car manufacturer in 2014, with a 5.6% share of the new car market. Nissan released eight new models in 2014. Cars available in the range include the popular Qashqai model – the first mainstream ‘crossover’ car – and the Juke model, the crossover made for the city that recently gained an update. Nissan aims to be the leader in the electric car market with its Leaf model, which it claims to be the best-selling plug-in vehicle in 2014. Mercedes-Benz Mercedes-Benz Cars is part of the Daimler Group, a German automotive company that specialises in premium cars and commercial vehicles. Mercedes has no manufacturing plants in the UK. Its UK head office is located in Milton Keynes. Mercedes-Benz held a 5% share of the UK new car market in 2014, giving it seventh position. The premium range at Mercedes-Benz includes hatchbacks, saloons, estates, coupés, cabriolets, SUVs and MPVs. In 2014, Mercedes entered the compact SUV sector with its new GLA model and also released the Mercedes-Benz S 500 Plug-in Hybrid. The company claims that it has the largest portfolio of 12-cylinder vehicles. PSA Peugeot Citroën PSA Peugeot Citroën is a French vehicle manufacturer comprising the Peugeot and Citroën brands, which merged in 1976. Peugeot sold 103,566 units in the UK in 2014, with a 4.2% market share. Citroën sits tenth, with 3.4% of new car sales in 2014. Peugeot has been on a ‘product offensive’ in recent years, continually updating its range. The brand offers environmentally-friendly options through its hybrid range and electric iOn vehicle. Citroën markets a range that includes a full-electric car and hybrid vehicles. The latest model in the Citroën range is the new C4 Cactus. Peugeot 208’s Hybrid Air 2L uses a 1.2 litre petrol engine, which can run on short bursts of compressed air produced during braking, giving it an impressive fuel economy of up to 141mpg (2L/100km). Toyota Toyota is a Japanese automotive manufacturer that has been building cars in the UK since 1992. It employs 3,000 people in the UK, including at its manufacturing plants in North Wales and Derbyshire. In 2014, Toyota held a 3.8% share of the new car market in the UK. The brand was the ninth most popular brand for new car buyers. In the UK, Toyota’s vehicle range includes the small Aygo model, the Avensis saloon and the Land Cruiser SUV. Hybrid versions of the Yaris, Auris and Prius are available, with Toyota claiming to have created the world’s first seven-seat hybrid. Toyota’s Auris Hybrid, Auris 5 door and Avensis models are all built in the UK, with many parts sourced within this market. Toyota’s FV2 concept car is a cross between a car and a bike. The concept offers a ‘riding mode’ in which the driver can drive from a standing position, steering by shifting body weight, much like skiing or riding a bike.

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Hyundai Hyundai is a car manufacturer based in South Korea, where the majority of its vehicles are produced. In Europe, Hyundai has a plant in the Czech Republic and a design centre in Germany. In the UK, Hyundai accounts for 3.3% of the new car market. In the UK, Hyundai has replaced its entire line-up of 14 cars with new models in four years. The latest releases include the new i20 and the Santa Fe – a large SUV. Hyundai is the first car manufacturer to bring fuel cell zero-emissions vehicles to the UK, with its ix35 Fuel Cell model. The vehicle can travel more than 350 miles before refuelling, with no harmful tailpipe emissions. Jaguar Land Rover Jaguar Land Rover (JLR) is a company that brings together two British car brands: Jaguar and Land Rover. Tata Motors acquired the brands in 2008 and merged the two marques into one company. JLR claims to be the largest investor in automotive research, development, and engineering in the UK, employing almost 24,000 people at its engineering facilities and manufacturing plants, in the Midlands and North West England. The vast majority of JLR’s cars are exported abroad; however sales have been increasing in recent years in the UK. JLR is positioned in the ultra-premium segment, holding 0.7% of the UK market. It is an export success story, selling more than 460,000 vehicles in 2014, with more than 80% sold abroad. JLR is leading the use of aluminium in vehicle production. The company claims that using aluminium for the body structure reduces the car weight by 40%, lowering emissions. Jaguar Land Rover aims to increase the use of aluminium to 75% of the entire vehicle where feasible. Innovation and opportunity influencing future growth and profitability of the company and industry In recent years the automotive industry has seen heightened investment in research and development activity. According to the latest Office for National Statistics survey, in the period 2002-2013, expenditure on research and development in the sector more than doubled from £916 million to £2.06 billion. Furthermore, over 90% of this 2013 amount was sourced by foreign-owned business, further highlighting the importance of foreign investment in the profitability and sustainability of the UK motor vehicle industry. One such development was the formation of the UK’s Advanced Propulsion Centre in 2013, which at a cost of £1 billion is intended to position the UK as a global centre of excellence for low-carbon vehicle development and production. This is a huge and growing area of the market, given mounting environmental consciousness throughout the UK and wider world. Vehicle manufacturers including VW are currently showing a heightened level of interest in innovation as a way of distinguishing themselves and their vehicles from the competition. Current attention is focused on vehicle connectivity, the rollout of new technology, and opportunities presented by alternative fuels, as well as on rebasing the experience of using a car. BMW and VW have teamed up with Harman, a consumer technology company, to introduce new infotainment systems in their new 7-Series and Tiguan models, respectively. The technology includes a number of industry firsts, among them automatic over-the-air quarterly map downloads and richer city detailed building graphics.

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Luxury carmaker Bentley Motors has launched an app that creates a personalised virtual car design. The Bentley Inspirator uses emotion recognition software that records the user’s facial expressions in real time while they are watching a variety of lifestyle-themed videos, and creates an individually designed car using the data. Audi and Hyundai unveiled new smartwatch integration technology for its cars in 2015. Audi’s LG smartwatch has the ability to lock/unlock a car as well as start it remotely. Hyundai’s remote start smartwatch system includes a voice recognition feature. Mercedes-Benz cars have featured fatigue detection systems in their vehicles for a number of years. Ford is taking things a step further. It is developing in-car technology that tracks drivers’ vital signs, such as heart rate, through seat belt and steering wheel sensors. Already present in the electric/hybrid market with its Prius model, Toyota branched out to another potential future power source in 2015: hydrogen. The brand’s new Mirai model generates power for its electric motors by mixing oxygen with hydrogen from the car’s fuel tank, rather than being drawn from a battery as in a conventional electric car. The car maker says the Mirai costs around half as much as a normal diesel car to run and is capable of covering about 300 miles on a single tank of hydrogen. In December 2015 German car brand Porsche confirmed that its all-electric Mission E concept car would go into production. It claims that the Mission E will be one of the fastest and greenest cars on the road. Porsche has developed a special 800-volt charger unit that will recharge the car’s batteries to 80% power in just 15 minutes. In November 2015, Swedish brand Volvo unveiled Concept 26, a new autonomous driving system aimed at enhancing the in-car experience for drivers during dull driving conditions such as long motorway trips. It has developed different modes for the cabin and driver to be in: in ‘drive’ mode, the car minimises distractions, while in ‘relax’ mode – for when the car is stationary, such as in long tail-backs – the seats recline to allow the driver to watch TV on a screen attached to the dashboard. Owners of the new BMW 7-Series launched in October 2015 can choose from eight aromas to create a custom fragrance for their car interior. The fragrances are reminiscent of raw materials such as wood, bringing the familiar fragrances of the outdoors. BMW unveiled its latest developments in collision avoidance at the Las Vegas Consumer Electronics Show. The manufacturer is striving towards entirely collision-free driving by incorporating four advanced laser scanners into its BMW i3 research vehicle. Ford’s ‘Sync 2’ connectivity system first became available in the European market in 2014 with the new Focus. The voice-activated system has a colour touch screen that can be split-screen, and advanced voice control for audio, navigation and climate control. Nissan announced in January 2015 that it was teaming up with NASA on a five-year research and development project for driverless cars. The two organisations will share expertise, focusing their research on self-drive systems, interface solutions, applications, and software analysis. Nissan is aiming to introduce commercially viable self-driving cars by 2020. New safety innovations from Mercedes include the Intelligent Light System. This includes curve illumination, where the light follows the wheels’ steering movement, so pedestrians and cyclists can be seen much earlier when going around a corner in the dark. Mercedes’

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‘magic body control’ technology registers when the road is going to become uneven and will adjust the suspension to counteract, as far as possible, any bumps or dips in the road. Peugeot has developed an Emergency Collision Alert & Braking system, which provides audible warnings before applying the brakes if at risk of collision. Citroën’s new C4 range features a seven-inch touchscreen showing all the media and navigation functions, including hill start assist, intelligent traction control and blind spot monitoring. Toyota’s recent developments revolve around becoming a ‘smart mobility society’, where cars can communicate with the driver, other cars and the outside environment, particularly through linking up to the driver’s smartphone. For example, the car may be able to provide recommendations on places to go for lunch, or the driver could control things such as air conditioning remotely using their smartphone. For comfortable driving, Hyundai’s latest Santa Fe range offers Flex Steer, where steering can be adjusted to three different settings, depending on the environment: normal, comfort or sport. Safety developments include five air bags: driver’s and passenger’s front, side impact, curtain and driver’s knee; as well as brake lights that automatically flash when the car performs an emergency stop, and hazard lights which automatically come on once the braking has occurred. Jaguar Land Rover’s justDrive system, which is a platform for in-car connectivity to a smartphone, was launched in November 2014. The system is voice-activated with advanced speech recognition that uses any app on the system to fulfil the driver’s request. For example, the driver can say ‘Tell George I’ll be late’ and the system will create a text message or tweet to send. The company is in the development stage of gesture control technology to operate selected in-car features in order to minimise the driver’s distraction time from the wheel. For example, sun blinds, rear wipers and satellite navigation map functions are already being tested so they can be adjusted by movement of the hand. This technology has the potential to be on sale within the next few years, according to the company. Global issues Across the world, the automotive industry continues to grow, with global revenues of $1,252.6 billion in 2015 expected to increase to $1,577 billion in 2020. Sales and production in China are booming, while a strong recovery in the US continues to surpass expectations. But along with record growth, the industry is also facing unprecedented challenges: Demographic changes and profound shifts in global economic power are causing

massive upheavals in demand. Consumer expectations are changing radically. New technologies are dramatically changing vehicles, from the advent of the ‘connected

car’ and enhanced driver support (especially regarding safety) to better fuel efficiency and new or improved power trains.

Automotive manufacturers and suppliers are confronted with increasing complexity as a result of increasing numbers of products and options, shorter technology cycles, increasing pressure to innovate, and global supply networks. At the same time they need to balance

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the needs and demands of customers, investors, regulators, non-governmental organisations (NGOs) and the public. Global oil prices remained subdued in 2016, helping to boost household real income levels and increase disposable income. Furthermore, with interest rates in the eurozone sitting at 0.00%, consumers have benefited from access to cheap credit and thus the ability to finance new and used vehicle purchases. 2016 saw further growth in vehicle sales in Germany, expected to reach 5.9% growth, and total sales of 3.7m vehicles by year-end. Growth will largely be driven by strong domestic consumption, which is being supported by improving labour markets, access to cheap credit and low levels of inflation. These factors are leading consumer confidence to near post-2008 highs, and that being so, private consumption is expected to remain robust over the coming quarters, which will drive growth in the German auto market. In 2016, passenger cars continued to benefit from Germany's consumers further increasing spending in reaction to rises in real wages, as Germany's labour market tightened and unemployment fell below its pre-unification lows. Forecasts suggest the market in Russia is nearing a bottom in its sales declines and will return to growth by the end of 2017. This is also being reflected in increased activity, as carmakers prepare for the market to return to growth. Toyota, for example, will add the new RAV4 to its St Petersburg production line from August, while Mercedes-Benz confirmed at the beginning of the year that it still plans to build a Russian plant. The country is not without its risks, however, and still has poor investment and economic openness. The stability of most Western European countries continues to offer VW high rewards, demonstrated by the kind of investment projects announced for these countries. Their low-risk environment and well-developed high-value manufacturing bases mean that there has been a wave of investment in electric vehicles and new plants from VW and other similar brands. Central and Eastern European states continued to offer high growth in 2016, although many of these are showing growing pressures in the labour market. This is likely to create labour shortages and rising wage bills for carmakers, ultimately limiting the effects of any cost-cutting plans companies may want to implement in the region. Future outlook Appointed in 2016, VW’s new CEO Herbert Diess’s first comprehensive global strategy identifies the US as a critical market to drive the automaker’s profitability in the next decade, but recognises that a full recovery there will be a long-term project. VW is now committed to electric vehicles as a successor to the diesels that had been critical to previous growth ambitions. Those diesels – which accounted for about 20 percent of Volkswagen’s US sales before the emissions scandal – will not be part of VW’s US future. Diess told reporters in Wolfsburg that ‘We want to write a comeback story,’ insisting that the brand had to move from being a niche carmaker in the world’s second largest auto market to being a volume player, if it wants to strengthen its profitability. Diess admitted it would take perseverance to prevail in the US market, anticipating that even with fresh products his plan would need 10 years to make VW attractive again to the broad base of American car buyers. ‘We believe that the USA has the greatest potential for

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Volkswagen worldwide in the next decade,’ he said, but added: ‘naturally not in the near future, since we are starting from zero in the US’. More broadly, the Volkswagen Group has unveiled details for its ‘Strategy 2025’ business plan, highlighting its vision for the future across Audi, Porsche, SEAT, ŠKODA and VW. Following the emissions scandal, it comes as no surprise that increasing efficiency is a headline objective. VW hopes to achieve this by giving greater emphasis and investment to electrification, with over 30 new electric models expected to be launched by 2025. According to Strategy 2025, these new ‘e-vehicles’ will use more efficient battery technology to allow greater all-electric range than in the brand’s current line-up. The new vehicles will include standalone models, as well as electrified versions of petrol and diesel cars, with a special electrified platform already in the works. VW’s aim is that this electric strategy should boost profit margins between 7% to 8%, from 6% last year, and it is also looking to sell some of its assets. It aims to sell two to three million electric vehicles in 2025, which, if achieved, would account for between 20% and 25% of the company's total sales volume. The Strategy 2025 plan also confirms a review of all 340 individual vehicle model that make up its product portfolio, and expresses an intention to eliminate those that are not geared toward profitable growth. For VW, as for all major European car manufacturers, the UK’s decision to leave the EU (also known as ‘Brexit’) could have a significant impact in the years ahead. Exactly what impact is – at the time of writing – unclear, but many predict tough times for the industry in the UK, a key export market for VW and others. One effect, according to a senior Germany auto industry expert, might be a shift in production away from the UK towards more low-cost locations: ‘If there’s a “hard Brexit” (in which the UK would not have tariff-free access to the single EU market) then we will see a shift to central and south-eastern Europe,’ said Matthias Wissmann, head of the German Association of the Automotive Industry, adding that countries such as Slovakia and Poland ‘are very attractive, have low labour costs and are part of the EU’. A former German transport minister and one of the country’s most powerful lobbyists, Mr Wissmann also predicted that no carmaker would make big UK investments in the current climate. ‘The longer the period of uncertainty lasts, the longer people will be reluctant to invest,’ he said.

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APPENDIX 1 Insight into customer preferences in auto industry Attitudes towards car purchasing and ownership, December 2015 “Thinking about car purchasing and ownership, to what extent do you agree or disagree with each of the following statements?”

Please note: percentages may not equal 100 due to rounding Base: 1,318 internet users aged 17+ who own a car Source: Mintel Report – Car Review – UK, February 2016 © Mintel 2016

49

26

37

33

16

22

17

9

21

13

6

3

26

47

30

34

48

33

36

40

29

32

24

21

25

28

33

33

36

44

47

50

50

54

70

76

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

I would be interested in a self-driving car

Car manufacturers do not understand the needs ofthose who are using their vehicles

I would be interested in a fully electric car (ie notrequiring petrol or diesel)

I am interested in new finance options making iteasier to own a car (eg personal contract purchase

and personal contract hire)

Newer car brands (eg Hyundai, Kia, Dacia) arebetter value for money than established brands

(eg Ford, Vauxhall, VW, Citroën)

Advertisements for cars do not appeal to me

How environmentally friendly the car is would playan important role in deciding which make/model I

choose

Car manufacturers need to offer greaterfunctionality within their cars (eg off road

functionality, seat configuration etc)

I would consider getting a hybrid car (iepetrol/electric, diesel/electric)

I would be interested in a car that makes greateruse of technology (eg ability for my car to sense

traffic while driving)

I would look for a car based on my lifestyle needsrather than style

Customer service is important when purchasingfrom an independent dealer/garage

Any Disagree % Neither Agree nor disagree % Any Agree %

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Appendix 1 continued Features sought from a new car, December 2014

Base: 1,297 internet users aged 17+ who own a car

Source: Mintel Report – The UK Car Review: An Insight into Brand Preferences and Market Trends, UK, February 2015 © Mintel 2015

16

4

10

13

21

22

22

22

25

26

27

42

45

0 5 10 15 20 25 30 35 40 45 50

None of these

Other

Fully electric vehicles

Additional on-board power capabilities

Four wheel drive/all-wheel drive technology

Multimedia enhancements

Hybrid technology

Heated seats

Driving enhancements

Cruise control

Adjustable steering wheel/pedals

In-built satellite navigation

Reverse assistance

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Appendix 1 continued Car Ownership, December 2014

Base: 1,297 internet users aged 17+ who own a car Source: Mintel Report – The UK Car Review: An Insight into Brand Preferences and Market Trends, UK, February 2015 © Mintel 2015

3

3

4

5

6

7

10

28

32

0 5 10 15 20 25 30 35

Other

Sports car

Sports Utility Vehicle (SUV)/4Wheel Drive

Executive/luxury saloon/hatchback/estate

Multi Purpose Vehicle (MPV)/people carrier/minivan

Compact saloon/hatchback

Large saloon/hatchback/estate

Medium saloon/hatchback

Small saloon/hatchback

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APPENDIX 2 State of the auto market New and used car market volumes, 2010-15

Total new sales Total used sales Total sales

m Index m Index m Index

2010 2.03 100 6.57 100 8.60 100

2011 1.96 97 6.69 102 8.65 101

2012 2.05 101 7.12 108 9.17 107

2013 2.27 112 7.40 113 9.67 112

2014 2.48 122 7.20 110 9.68 113

2015 (est) 2.63 130 7.30 111 9.93 116

Note: est = estimate m = millions of units sold Index shows the rate of growth or contraction since 2010, with 2010 showing 100 as the benchmark year Source: Mintel Report – Car Review – UK, February 2016 © Mintel 2016

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Appendix 2 continued New car registrations, by broad segment, 2010-15

Mini/supermini

Lower medium/ upper medium

Dual/ multipurpose

Exec/ luxury sports

000 Index 000 Index 000 Index 000 Index

2010 793.0 100 803.7 100 280.8 100 153.4 100

2011 746.0 94 746.3 93 285.7 102 163.2 106

2012 808.4 102 746.0 93 318.8 114 171.5 112

2013 893.5 113 796.9 99 398.8 142 175.5 115

2014 969.1 122 876.1 109 458.4 163 172.7 113

2015 (est)

1,024.4 129 927.0 115 505.6 180 176.4 115

Note: est = estimate

000 = 1,000 Index shows the rate of growth or contraction since 2010, with 2010 showing 100 as the

benchmark year Source: Mintel Report – Car Review – UK, February 2016 © Mintel 2016

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APPENDIX 3 Current and forecast strength of various global auto markets Cars: Volume year on year growth

Region Units 2008 2009 2010 2011 2012 2013 2014 2015 2016 (fore)

2017 (fore)

2018 (fore)

2019 (fore)

2020 (fore)

Australia % -5.3 -7.9 13.6 -2.9 9.9 2.0 -1.8 4.5 1.2 0.8 1.6 1.2 1.4

China % 7.3 52.9 33.2 5.2 7.1 15.7 9.9 7.3 34.9 5.0 5.3 4.0 3.4

France % -0.9 10.1 -2.2 -2.1 -13.9 -5.7 0.3 6.8 4.4 2.6 2.6 2.0 2.9

Germany % -3.0 23.2 -23.4 8.8 -2.9 -4.2 2.5 5.6 6.2 1.8 2.9 3.4 4.0

India % 0.2 25.7 29.2 4.3 2.1 -5.5 3.0 9.4 7.6 8.5 7.9 8.0 8.2

Indonesia % 35.9 -15.9 50.5 11.3 29.3 11.9 -0.4 -16.0 -9.6 6.3 7.6 5.1 6.5

Japan % -3.9 -7.2 7.4 -16.3 29.7 -0.2 3.0 -10.3 -5.2 -2.5 -0.5 0.3 0.5

Mexico % -7.6 -26.2 12.1 14.2 9.7 9.2 6.9 18.4 12.3 10.7 11.1 10.3 11.5

Russia % 15.9 -47.8 29.9 38.9 11 -5.3 -7.6 -35.7 -14.8 -0.6 7.7 14.1 11.1

South Africa

% -24.2 -21.6 30.6 17.5 11.7 1.8 -2.5 -6.0 0 -2.0 -2.0 -1.9 -1.8

UK % -11.3 -6.4 1.8 -4.4 5.3 10.8 9.3 6.3 5.6 4.9 4.7 4.5 4.4

US % N/A -18 9.4 10.2 14.1 7.3 5.5 5.9 3.1 3.6 2.7 1.0 3.1

Note: fore = forecast Source: Mintel Report – Cars – multiple countries – Generated by Mintel Market Sizes – 2016 © Mintel 2016

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APPENDIX 4 Running on fumes: how car ads lost their swagger By John Townshend Townshend, J. (2016) Running on fumes: how car ads lost their swagger. 10 May, Campaignlive. http://www.campaignlive.co.uk/article/running-fumes-car-ads-lost-swagger/1393533

APPENDIX 5 Volkswagen sets course for a long journey back By Christiaan Hetzner, Ryan Beene (contributed to this report) Hetzner, C. (2016) VW charts its long journey back: US strategy sees a 10-year road to relevance. 28 November, Automotive News. http://www.autonews.com/article/20161128/OEM/311289911/vw-charts-its-long-journey-back

APPENDIX 6 How personal stories can be used to fight public apathy on Volkswagen By John Sisson Sisson, J. (2016) How personal stories can be used to fight public apathy on Volkswagen. 2 February, PR News. http://www.prnewsonline.com/how-personal-stories-can-be-used-to-fight-public-apathy-on-volkswagen/

APPENDIX 7 Volkswagen: the scandal explained By Russell Hotten Hotten, R. (2015) Volkswagen: the scandal explained. 10 December, BBC News. http://www.bbc.co.uk/news/business-34324772

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APPENDIX 8 The emissions scandal: basic data The scandal Volkswagen’s testing protocols were found to be lacking. The car’s systems knew when the emissions were being tested and turned on pollution-control systems – therefore ‘cheating’ the tests. The emissions were over 40 times the levels that are permitted within the Clean Air Act. What cars are affected? The affected cars are 3.0 litre diesel models including Porsche and Audi brands. They have been split into generation 1 and generation 2. Generation 1 were manufactured between 2009 and 2012. These owners can opt to have their car repaired or repurchased or cancel their contracts with no extra costs. They are mostly the VW Touareg and the Audi Q7 diesel models. Generation 2 are the newer models and are likely to be able altered to comply. But the fix needs approving. They would also need to achieve an 85% recall rate. Size of the problem? 11 million cars of which 600,000 are in the US. What was the US compensation agreed? A $1 billion agreement has been reached with the US authorities. This does not include other funds to mitigate pollution. The US Environmental Protection Agency (EPA) is liaising with VW on this issue. This settlement is over and above the $10 billion that has been agreed in compensation and $4.7 billion in other measures. What is the EU/UK compensation? In the EU the emissions were not above limits but there are moves to gain compensation from VW. There are 1.2m vehicles in the UK that are affected. There is now a class action in the UK on behalf of 77 claimants. Other countries? The scandal has had a marked effect on sales in Brazil and Russia. This has led to the company announcing job losses of up to 30,000 jobs worldwide to save an approximated $3.9 billion a year. They are still facing investigation in countries as far afield as South Korea and Sweden. There are other class actions in the Czech Republic, Lithuania and Greece. Other requirements VW will also need to set aside $225 million to go towards reducing nitrogen oxide (NOx) reduction – the compound that is the key issue in this scandal. This is in addition to other money set aside. This fund will be split between a variety of projects.

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The State of California has achieved an extra settlement that is for them to produce three electric vehicles for the state including an SUV before 2019. Quotes “We are committed to earning back the trust of tall our stakeholders” VW “Abiding by the law is first and foremost the duty of car manufacturers. But national authorities across the EU must ensure that car manufacturers actually comply with the law." Elzbieta Bienkowska, the EU Internal Market Commissioner “Diesel emissions are toxic to human health and its impacts fall especially hard on children, older people and people with existing lung diseases such as asthma. Yet almost nothing has been done to tackle car companies since they were caught cheating emissions tests.” Areeba Hamid, clean air campaigner, Greenpeace. Various internet resources

APPENDIX 9 A road map to the future for the auto industry By Paul Gao, Russell Hensley, and Andreas Zielke Gao, P., Hensley, R. and Zielke, A. (2014) A road map to the future for the auto industry. October, McKinsey Quarterly. http://www.mckinsey.com/industries/automotive-and-assembly/our-insights/a-road-map-to-the-future-for-the-auto-industry

APPENDIX 10 The greatest print campaigns of all time: Volkswagen think small By Joshua Johnson Johnson, J. (2012) The greatest print campaigns of all time: Volkswagen think small. 23 August, Design Shack. https://designshack.net/articles/graphics/the-greatest-print-campaigns-of-all-time-volkswagen-think-small/

APPENDIX 11 VW 'dieselgate' pay out offer outrageously low, says Sadiq Khan By Haroon Siddique Siddique, H. (2016) VW ‘dieselgate’ payout offer outrageously low, says Sadiq Khan. 11 December, The Guardian. https://www.theguardian.com/business/2016/dec/11/vw-dieselgate-payout-offer-outrageously-low-says-sadiq-khan

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