Question

Volkswagen Group as a manufacturing company - describe the nature of business of the selected organisation and explain the impact of fluctuations of the exchange rate on business performance. Identify and explain three factors that may have contributed to exchange rate volatility in your country during the last 12 months and three approaches that can be adopted by the business to minimise the negative impact of exchange rate volatility. [25 Marks]

Answer 1

Nature of business of Volkswagen Group in India:

They are trying to focus on manufacture and sales of Audi, Porsche, Volkswagen and Skoda vehicles in India, under the Make-in-India program, as per current government initiatives, apart from importing them from other foreign manufacturing units and selling to Indian customers. Volkswagen operates via a manufacturing plant at Chakan, near Pune, Maharashtra with an annual production capacity of 200,000 vehicles, for different Car product variants. It has a manufacturing/assembly plant in Aurangabad, Maharashtra for Skoda brand cars for limited car variants.

Impact of fluctuations of the exchange rate on business performance:

• Spare parts costs have gone high
• Every customer, who buys a different priced Volkswagen car, found hard in cost wise, to buy a car or even spares for existing car
• As product and spare parts are imported, have a high lead time, customers find it difficult to buy it on required time line, need more financing options in some cases or they let go the condition of car as it for time being in many appearing cases
• Some customers find it beneficial to switch to other brand cars, by trading their existing cars
• Many customers due to cost are bound to use indigenous / local manufactured substitute spare parts instead of originals, thus hampering Volkswagen brand
• Overall, Volkswagen brand name suffered in terms of brand equity, sales volume and market reach compared to competitors

Factors contributed to exchange rate volatility:

• Recall of thousands of cars contradicting/ non- implication of Euro Emission norms- violation of the Clean Air Act, emission up to 40 times more NO_x for different product variants of cars
• Implementation of GST taxations norms- all dealers are mandate to file correct their actual earnings and implied income tax returns
• Implementation of demonetization of INR

Approaches that can be adopted by the business to minimise the negative impact:

• Considering currency value volatility, Volkswagen need to re-work on car prices for all basic and accessories augmented luxury kind of models
• Volkswagen need to re-configure on spare parts and after sales- repair and service activity prices for the period, where high prices affect to a general and high net worth individual customers
• Volkswagen need to provide better financing to new and existing buyers and execute loyalty schemes/ campaigns