Case Study: Restructuring Process of Volkswagen

As western automobile markets reached saturation, automobile giants like Chrysler and Volkswagen resorted to restructuring. Volkswagen had concentrated on its portfolio restructuring since early 90’s. Volkswagen acquired Skoda in 1991. Volkswagen helped Skoda to emerge out of bankruptcy and Skoda soon became “U.K.’s best loved car”. This in turn helped Volkswagen, whose profits were declining around the same time. It gained access to the little penetrated car market of Eastern Europe. In 2009, it acquired 49.9% stake in Porsche. During recession, Porsche plunged into debts. Volkswagen used this opportunity to gain from its rival, who had a respected brand name globally. Even though the car market has matured in western parts of the globe, Volkswagen has been using strategic acquisitions to grow further.

Restructuring Process of Volkswagen Case Study

The financial restructuring process of Volkswagen, called as ‘ForMotion’ is well-known. This restructuring process began in 2004. With the commencement of ‘ForMotion’, a number of workers lost their jobs. The working hours of most of the workers were extended. Downsizing for restructuring had become infamous by then. A number of companies operating in mature market had adopted downsizing. Did the downsizing of its plants work for Volkswagen?

‘Restructuring hurts Volkswagen’ was the headline of Los Angeles Times on October 28, 2006. The profit of Volkswagen had plunged by 92% in the third quarter of 2005. Spokeswoman Christiane Ritz said “the costs of employee buyouts and a deal with metalworkers union IG Metall to provide one-time payments of 6,279 Euros per person into workers’ pension funds were booked in the third quarter”.

But as demand for Volkswagen cars grew, the profit started rising. During the release of financial statements for the year 2005, the group chairman, Dr. Bernd Pischetsrieder, revealed the following facts: “Profit before tax rose by 58.2 percent to 1.7 billion in 2005. Overall, however, the level of earnings we achieved remains unsatisfactory”. Hence, the group decided to continue with the restructuring plan.

But the true test of any company in the automotive industry was the global recession in 2008. Initially, in 2008, Volkswagen, too, felt the heat of the recession. But 2009 saw Volkswagen emerge as the only survivor in the automotive industry. Portfolio restructuring had helped Volkswagen to work in newer car markets. Even after the financial restructuring, its position was weak in the United States of America. But it proved to be a boon for Volkswagen. “VW is coasting through 2009, boosting its share of global car sales to 12% from 9.9% in the first half of the year”, reported time.com (2009). If Volkswagen had used only financial restructuring, it may have suffered major losses. It had invested money in financial restructuring, which was yet to be recovered through its profit. During recession, some of the smaller Skoda cars had performed better than the parent brand in the car markets. But the cost reduction achieved through the financial restructuring complemented the portfolio restructuring and Volkswagen survived. Thus, a mixture of restructuring strategies helped Volkswagen in alleviation of harm caused by the recession.

The restructuring process surely helped Volkswagen in a mature market. But the sales have started stabilizing again. And this time, Volkswagen has come up with a new strategy. It has begun exploring hitherto unexplored markets. Initially, it was the cheap labor in India that attracted Volkswagen. But now, Volkswagen has set its eyes on the unexplored Indian car markets. Volkswagen began the execution of its plan with the launch of ‘Polo’ in India. The Indian car market is predicted to be favorable for Volkswagen and is expected to generate additional revenues.

Thus, it is true that restructuring (both financial and portfolio restructuring) has helped Volkswagen to not only survive in a mature market but also emerge as a leader in the automotive industry. But corporate restructuring can aid a mature industry only to a certain extent. It may help a company to perform better than its competitors in a mature market. It may also assist the growth of a company through acquisitions. But after a certain point, the company has to look for newer avenues of business.

 

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