History
Starting off as a small German car manufacturing company that was founded in 1937, VW (Volkswagen) has expanded into becoming the third largest car manufacturer in the world at present which focuses on the development of compact and affordable cars (Bagshaw, 2013).
Company Strengths
The strength of VW lies in the compact design of its cars along with their general affordability which makes them an ideal choice for potential customers that live within many of today’s cities and have the need for a cheap, small and reliable vehicle (Bagshaw, 2013). As a result, the company mainly caters to mid- and low-income consumers and leaves the development of larger SUVs and luxury cars to its competitors.
This focus on designing compact yet aesthetically pleasing and affordable cars has resulted in the company consistently winning the car of the year award from 2009 to 2013, which shows investors that in terms of creating a good product, VW can be ranked as one of the best car manufacturers around the world with a great potential for returns on investment (Bagshaw, 2013).
Macro Environment
Despite its origins as a European car manufacturer, a majority of VW sales are primarily outside Europe (particularly, in developing countries within Asia or industrial countries, such as the U.S. and China).
This is a good move for the company given the current consumer predilection of Europeans to prefer more cars with long body than the primarily compact VWs, however, it should be noted that VW also has a considerable amount of sales within its local market, Germany as well as the U.K. (Rieger, 2010).
Investment Thesis
This report believes that VW is an attractive investment due to the consistency of its products as well as its expansion into the developing markets of Asia. When referring to consistency, this primarily centers on the awards it obtained for car of the year from 2009 to 2013 as well as the fact that despite being several decades old, the VW Beatle still continues to rank as one of the most popular motor vehicles.
This is indicative of the fact that the company has good fundamentals in terms of creating products that appeal to its target consumers and is able to get into the markets where it can develop the greatest amount of profitability (Rieger, 2010). The evidence of this can be seen in its expansion into Chinese market, which is a focus of many of today’s automakers, resulting in VW gaining 22% of the local consumer market.
Risks
One of the risks, when investing into VW, is the current economic climate and its potential to reduce demand for cars, regardless the affordability or the mileage. Based on the article âVolkswagen AG SWOT Analysisâ (2012), it was seen that at the onset of the 2008 financial crisis and two years thereafter, demand for private vehicles plummeted as a direct result of the tumultuous state of the global economy.
Car manufacturers, VW included among them, found themselves with an excess amount of stock and invested millions of dollars in profit losses from 2008 to 2011with 2012 acting as a rebound period for these companies (Volkswagen AG SWOT Analysis, 2012). At present, there has been a trend among private vehicle manufacturers to expand into the growing markets of Asia (especially China), in order to take advantage of the recent influx of middle income and newly rich potential clients.
The problem with this trend is that studies, such as those presented in the article âCompany Spotlight: Volkswagen AGâ (2012), show that there is a real possibility for a sudden collapse of Chinese economy brought about through “overheating” in its local real estate industry.
For years, rapid real estate development has been the crux by which China’s economy has expanded; however, this has resulted in an influx of overpriced real estate units (average of $365,000 per unit) with normal Chinese worker being unable to afford them (average salary of less than $320 per month). This has created a glut in a real estate market with over 170 million unsold real estate units (i.e., homes and apartments) within China.
This has created a property bubble on the verge of collapsing within the next few years as the debts that were taken to finance the construction of such units come due. The potential “popping” of the Chinese real estate bubble and the current expansion of VW manufacturing facilities in order to take advantage of the supposed increase demand on Chinese market create a real potential for VW to raise a supply of cars to a local market on the verge of collapse (Company Spotlight: Volkswagen AG, 2012).
Taking this into consideration, this shows VW as a potentially risky investment if it decides to enter into Chinese market. One way of mitigating such a risk would be to expand into other regional markets within Asia, such as the Philippines, which has an economy that is currently being considered one of the fastest growing in the world. Should VW continue to focus on China, investing in the company in the long term would not be considered advisable.
Reference List
Bagshaw, M. (2013). The People’s Car: A Global History of the Volkswagen Beetle. Library Journal, 138(12), 79.
Company Spotlight: Volkswagen AG. (2012). MarketWatch: Automotive, 12(6), 7-17.
Rieger, B. (2010). From People’s Car to New Beetle: The Transatlantic Journeys of the Volkswagen Beetle. Journal Of American History, 97(1), 91-115.
Volkswagen AG SWOT Analysis. (2012). Volkswagen AG SWOT Analysis, 1-10.