Launch of the VW Phaeton

Résumé du document

The objective of this paper is to apply real option analysis to Volkswagen's (VW) business case of introducing the Phaeton model in the upper-class car segment. Although VW traditionally only produced small and medium-sized cars, it started selling the Phaeton in 2002. Here, we look at only the VW brand, not the corporation which would also include Audi, Bentley, Bugatti, Seat, and other brands as well. The decision for this endeavor was taken at the end of the 1990s, when the economic boom led many car manufacturers to believe that the upper-class and luxury class segments would yield substantial growth rates in the future. The analysis in the following paper will be twofold. Firstly, we will take the position of VW as of the end of the 1990s and consider whether the decision to introduce the Phaeton makes good business sense. For this purpose, both a net present value (NPV) analysis and an additional real option valuation (ROV) will be undertaken. As a second step, the results of the real options valuation will be used to derive an advice for VW as of today. It will explain measures regarding the company's continuity with the Phaeton, whose market introduction turned out to be very disappointing. As it will be shown, a pure NPV analysis shows that the Phaeton should not have been introduced. However, this result is not final as it has not take into consideration several other factors.

Extraits

[...] The car industry has followed roughly the same trends, since the GDP growth and car sales are highly correlated. Especially the consumer confidence is a major indicator for industry sales figures.1 Thus indeed, after having suffered from 1990 to 1994, car makers experienced a growing demand at the end of the 90s. That is why Toyota, GM, and VW for instance have launched a huge number of new car developments during the late 1990s. These new developments also had to meet the new customer requirements in terms of quality, design, equipment and safety standards. [...]

[...] To achieve a higher level of profitability, many companies revised their strategy 1 Cf. Standard & Poor's Industry Survey (2005), p and invested into new market segments, especially the upper-class and luxury car segments. This general upward trend was based on the assumption that the economic growth “would carry forever”2. However, since 2001, uncertainties arising through the stock market crisis, terrorist attacks, and the political crisis in the Middle East have jeopardized future growth expectations of car makers.3 These conditions led to a shock in consumer demand, thereby caused a large oversupply of cars, which then also resulted in a fierce price competition. [...]

[...] Chew, Edmund: Car Industry is Feeling Better about Auto-Friendly Slowdown, in: Automotive News Europe, Vol No December 2001, p.1. Datamonitor: Volkswagen Company Profile; October 2005. DPA News Service: Nach Phaeton-Aus in USA: Bernhard bekennt sich zu Luxuswagensegment November 2005. Hoenig, Andreas: VW erlebt Phaeton-Debakel in den USA, in: Stuttgarter Nachrichten November 2005, p Lander, Mark: Heady Days for Makers of Luxury Vehicles, in: The New York Times September 2002, p.24. Manager Magazin: Modelle für Millionäre of retrieval: 6 Mai 2006. Peterson, Thane (2006): Living Large in Luxury Cars date of retrieval: 6 May 2006. [...]

[...] Rehsche, Michael: Die Luxusklasse und der Phaeton, in: SonntagsZeitung August 2003, p date Standard & Poor's: Industry Survey Auto and Auto Parts December 2005. w/a Der misslungene Einstieg von VW in die Luxusklasse, in: Frankfurter Rundschau January 2005, p w/a Neuer Bentley könnte in Dresden gebaut werden, in: Spiegel January 2005, p w/a VW will mit Porsche Geld sparen, in: Tages-Anzeiger October 2005, p w/a Aktuell, in: Kfz Betrieb, No January 2005, p.8. Wüpper, Thomas : Misslungener Einstieg in die Luxusklasse, in: Stuttgarter Zeitung February 2005, p. 12. [...]

[...] He is also the one who chose the current CEO, i.e. Mr. Pischetsrieder, for his position. That is why Mr. Pischetsrieder may be reluctant to stop the Phaeton, which was the biggest project of his predecessor. In addition to this, one might also question if VW has undertaken everything to increase the value of the project. As it becomes obvious in the analysis, flexibility is very important when facing huge uncertainties. That is why a more modular design of the Cf. [...]