VOLKSWAGEN Group China

Rüdiger Koch
Executive Vice President Purchasing
Volkswagen Group China

Sourcing Strategy China

Analyst/Investor Conference
Shanghai, 24 May 2006

1
VOLKSWAGEN Group China
Overview

1. Export of Parts
An Overview of Volkswagen‘s Policy in China

2. Common Sourcing in China

Rolling out Strategic Change

3. Olympic Program

2 VOLKSWAGEN Group China

Overview

1. Export of Parts
An Overview of Volkswagen‘s Policy in China

2. Common Sourcing in China

Rolling out Strategic Change

3. Olympic Program

3 VOLKSWAGEN Group China

Export of Parts
Target

Export target of the Volkswagen Group 2006

Export purchasing contracted volume from
China of US$ 1 billion p.a.

Focus

Parts, components

Raw material (steel, etc.)

Tooling

4 VOLKSWAGEN Group China

Export of Parts
Cost Factors – Comparison with Eastern Europe
Comparison of cost factors between China, Germany & Eastern Europe

200
400
400

150
130
120
110
Index

100 Eastern
100 Europe
90
90
80
80
70
50
40
40
20
0
Personnel Cost Productivity Machinery Tooling Raw material

China Germany Eastern Europe

Source: Proudfoot Productivity Report 2005; Dudenhoefer B&D; Inst. Deut. Wirtschaft; Roland Berger; Global Insights;

5 VOLKSWAGEN Group China

Export of Parts

Cost
Characteristics Examples
Advantage*

Manual component
• Battery Cable
assembly + localized ≥30%
• Wiring harness
components

Semi-automated- • Lighting
component assembly • Wiper ≥25%
+ localized components • Electronic

• Aluminium
Material advantage:
• Fabrics ≥30%
e.g. fabric/glass/plastic
• Glass
*) incl. logistic costs
(tax, transport etc) to Europe

6 VOLKSWAGEN Group China

Export of Parts
Focus Supplier

Requirements to become a focus supplier:

Cost advantages of at least 20%

compared to Europe

Positive ratings from Technical Department

and Quality Assurance of VW Group

7 VOLKSWAGEN Group China

Overview

1. Export of Parts
An Overview of Volkswagen‘s Policy in China

2. Common Sourcing in China

Rolling out Strategic Change

3. Olympic Program

8 VOLKSWAGEN Group China

Common Sourcing in China
Historically the Joint Ventures sourced separately

Bora A4

Golf A4

Jetta A2

Sagitar

Caddy
Changchun
etc.
Individual Sourcing
FAW-VW

Shanghai
Individual Sourcing
SVW
Santana B2

Santana 3000

Polo

Passat Lingyu

Touran

etc.

9 VOLKSWAGEN Group China

Common Sourcing in China
Other Challenges from a Purchasing Perspective

Current Conditions:

Cars for the Chinese market are becoming more technically
sophisticated (e.g. Touran, Caddy, Sagitar)

Technical expertise of local suppliers in some areas
insufficient

Not all suppliers have optimized quality assurance system

Some materials not locally available (e.g. different
types of steel)

High tariffs on parts and materials

Dependent relationship between the Chinese joint venture
partners and their supplier networks

Opportunity to achieve a platform strategy providing
scale economies of common and carry over parts

10 VOLKSWAGEN Group China

Common Sourcing in China
Pilot Project Golf Platform

Common Sourcing Process (SVW, FAW-VW & VW AG)

for platform and carry over parts.

Bundling of purchasing volume (China)

Reducing investments for tooling

Enhancing competition

Generating economies of scale & scope due to high volume

Increasing volume and depth of local content

Target:
Just one supplier per platform part and
carry over parts in China

11 VOLKSWAGEN Group China

Common Sourcing in China
Pilot Project Golf Platform

Common Sourcing for:

Platform parts
FAW-VW
Carry Over Parts

CSG VW WOB

CSG = Common Sourcing Group

6 participants (2 of each party)
SVW

decisions are to be made
unanimously

12 VOLKSWAGEN Group China

Common Sourcing in China
Targeted Development of Supplier Costs

Index for Material Costs of a Medium-Class Car [%]

110 - 120 20 Example

100
20
Euro revaluation 40 %
against the RMB
70 - 80
Until 2005
Costs

Necessary cost reduction

for Chinese Suppliers

Europe China China

2005 H1 2005 2008
13
VOLKSWAGEN Group China
Overview

1. Export of Parts
An Overview of Volkswagen‘s Policy in China

2. Common Sourcing in China

Rolling out Strategic Change

3. Olympic Program

14 VOLKSWAGEN Group China

Olympic Program

Branding/
Positioning The strongest market portfolio within China

Product 10 – 12 new models until end of 2009

Costs Competitive cost structure

Capacity Capacity utilization > 90%

Sales & Best in class sales network

Marketing and evaluation of users
Corporate Speeding up of decision processes
Culture local management

15 VOLKSWAGEN Group China

Olympic Program

Costs Competitive cost structure: -40%

Actions to be taken to achieve 40% cost reduction

Product Cost Workshops (Produktklausuren)

Supplier Workshops

Switch of Purchasing Strategy

Common Forward Sourcing

Common Global Sourcing

Part Family related Sourcing

Depth of Localization

Market orientated technical Specification

16 VOLKSWAGEN Group China

Olympic Program
Steps of Changes in Purchasing Strategy

Sourcing New Projects: Common Forward Sourcing

Step 1

Common Sourcing of platform and carry over parts
√
Participants: FAW-VW, SVW & VGC

Pilot Project Golf Platform

Sourcing Serial Parts: Common Global Sourcing

Step 2
2006
Combining volumes of FAW-VW, SVW and VW
Group (Export)

Strategy Change
Step 3
Switch from model related sourcing to part family related
Start sourcing which covers all models produced in China
04/2006
Localization

Market orientated technical specification

17 VOLKSWAGEN Group China

VOLKSWAGEN Group China
Rüdiger Koch
Executive Vice President Purchasing
Volkswagen Group China

Sourcing Strategy China

Analyst/Investor Conference
Shanghai, 24 May 2006

18
VOLKSWAGEN Group China
Disclaimer
This presentation contains forward-looking statements and information on the business
development of the Volkswagen Group. These statements may be spoken or written and can
be recognized by terms such as “expects”, “anticipates”, “intends”, “plans”, “believes”,
“seeks”, “estimates”, “will” or words with similar meaning. These statements are based on
assumptions relating to the development of the economies of individual countries, and in
particular of the automotive industry, which we have made on the basis of the information
available to us and which we consider to be realistic at the time of going to press. The
estimates given involve a degree of risk, and the actual developments may differ from those
forecast.
Consequently, any unexpected fall in demand or economic stagnation in our key sales
markets, such as in Western Europe (and especially Germany) or in the USA, Brazil or China,
will have a corresponding impact on the development of our business. The same applies in
the event of a significant shift in current exchange rates relative to the US dollar, sterling and
the yen.
If any of these or other risks occur, or if the assumptions underlying any of these statements
prove incorrect, the actual results may significantly differ from those expressed or implied by
such statements.
We do not update forward-looking statements retrospectively. Such statements are valid on
the date of publication and can be superceded.