Sourcing Strategy China

VOLKSWAGEN VOLKSWA GEN 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


Overview

1. Export of Parts

An Overview of Volkswagen‘s Policy in China


3. Olympic Program

3


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


Export of Parts Cost Factors – Comparison with Eastern Europe Comparison of cost factors between China, Germany & Eastern Europe 200

400 400

150 110

x e d 100 n I

80 80 50

130

120

100

Eastern Europe

90 90 70 40 40

0

20 Personnel Cost

China

Productivity

Machinery

Germany

Tooling

Raw material

Eastern Europe

Source: Proudfoot Productivity Report 2005; Dudenhoefer B&D; Inst. Deut. Wirtschaft; Roland Berger; Global Insights; 5


Export of Parts

Characteristics

Examples

Manual component assembly + localized components

• Battery Cable • Wiring harness

Cost Advantage*

≥30%

Semi-automatedcomponent assembly + localized components

• Lighting • Wiper • Electronic

≥

25%

Material advantage: e.g. fabric/glass/plastic

• Aluminium • Fabrics • Glass

≥

30%

*) incl. logistic costs (tax, transport etc) to Europe 6


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


Overview



3. Olympic Program

8


Common Sourcing in China Historically the Joint Ventures sourced separately      

Changchun

Bora A4 Golf A4 Jetta A2 Sagitar Caddy etc.

Individual Sourcing FAW-VW

Shanghai

Individual Sourcing SVW

     

9

Santana B2 Santana 3000 Polo Passat Lingyu Touran etc.


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


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


Common Sourcing in China Pilot Project Golf Platform Common Sourcing for: Platform parts Carry Over Parts 

FAW-VW



CSG

SVW

VW WOB

CSG = Common Sourcing Group 6 participants (2 of each party) decisions are to be made unanimously  

12


Common Sourcing in China Targeted Development of Supplier Costs Index for Material Costs of a Medium-Class Car [%] Example

20

110 - 120 100

20 Euro revaluation against the RMB Until 2005

40 % 70 - 80

Costs

Necessary cost reduction for Chinese Suppliers Europe 2005

China H1 2005

China 2008 13


Overview



3. Olympic Program

14


Olympic Program Branding/ Positioning Product Costs

The strongest market portfolio within China 10 – 12 new models until end of 2009

Competitive cost structure

Capacity

Capacity utilization > 90%

Sales & Marketing

Best in class sales network and evaluation of users

Corporate Culture

Speeding up of decision processes local management

15


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


Olympic Program Steps of Changes in Purchasing Strategy Step 1

√

Sourcing New Projects: Common Forward Sourcing   

Step 2 2006

Common Sourcing of platform and carry over parts Participants: FAW-VW, SVW & VGC Pilot Project Golf Platform

Sourcing Serial Parts: Common Global Sourcing 

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

Strategy Change Step 3 Start 04/2006



 

Switch from model related sourcing to part family related sourcing which covers all models produced in China Localization Market orientated technical specification 17


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

Sourcing Strategy China Analyst/Investor Conference Shanghai, 24 May 2006 18


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.

Sourcing Strategy China

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