VOLKSWAGEN GROUP’S AUDI UNIT TAKEOVER

12 Pages   |   2,483 Words
Table of Contents
Executive Summary.. 2
Introduction.. 3
Motivation for Acquisition Deal 4
Short-term and Long-term Repercussions of the Acquisition.. 6
Strategic Outcomes of the Acquisition Deal 8
Expected Strategic Directions of the Group.. 9
Conclusion.. 10
References. 11
 

Executive Summary

Volkswagen acquired Ducati in 2012 through its brand Audi. Ducati had been in financial crisis for quite some time. Following the acquisition and control, Volkswagen began to rebuild the management of Ducati and also announced its intentions to enhance its business in China. The two corporate entities generally have distinct culture and absorption procedure is different in different acquisition processes.  The brand propositions of Audi and Ducati are distinct.
The motivation for Volkswagen to engage in acquisition of Ducati is to consolidate its competitive positioning in the product category of motorcycles. Volkswagen also benefited from the technology of Ducati and skills of the Italian skilled workers. The acquisition is also beneficial for Ducati to overcome its liquidity problems.
There are significant short-term and long-term repercussions of this acquisition both for the companies and the motorcycle industry as a whole. The industry dynamics are likely to become highly competitive. Also, penetration into fast growth markets like Chinese market will be facilitated. It is expected that the future strategic direction of the group would be to expand Ducati’s market to newer regions for a time horizon of three to seven years.

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Introduction

Volkswagen AG is a German automobile manufacturer, headquartered in Wolfsburg, which is a consolidated parent company of commercial vehicles. It is the largest automobile manufacturer in Europe and the second largest in the world. Through its 12 brands, it is present on all world markets and manufactures both cheap cars, upscale cars, trucks and motorcycles. Ducati Motor Holding is a motorcycle manufacturer based in Italian city of Bologna.
The acquisition deal for Ducati has been carried out in 2012 by the Volkswagen Group through its brand Audi for 860 million Euros in order to compete with rival BMW in the field of motorcycles. Ducati is a respected brand in consumer markets which was founded in 1926 and is one of the best known motorcycle manufacturers in the world (Emmi, 2012). On the other hand, Volkswagen is the largest automobile manufacturer in Europe and the second largest in the world.
Ducati had been in financial crisis for quite some time and the financial investor Invest industrial took over the Italian company a few years ago when it was in crisis. The acquisition deal has been finalized on 25 May 2010 (Cassiman and Colombo, 2006). By September 2012, Volkswagen began to rebuild the management of Ducati and also announced its intentions to enhance its business in China.
There are some key considerations in corporate mergers and acquisitions. Firstly, two corporate entities generally have distinct culture and absorption procedure is different in different acquisition processes (Wales, 2012). Mergers and acquisitions that turn out to be successful are those in which corporate cultures are not very distinct or there is mutual tolerance towards changes in management style.
In addition, employees and management must be understanding that mergers and acquisitions not only entails acquisition of all or a majority of the entity, but also alienation, sale of divisions, sale of certain subsidiaries or lead changes in the ownership structure of the firm. Therefore, employees or management of the acquired company must not be disturbed at such occurrences. In addition, shareholders should not be perturbed or panic during acquisition processes and must be cognizant of the fact that the purpose of mergers and acquisitions is to increase shareholder wealth and achieve competitive advantage in the market.

Motivation for Acquisition Deal

 The motivation for Volkswagen to engage in acquisition of Ducati is to consolidate its competitive positioning in the product category of motorcycles in order to compete with rival BMW. Volkswagen’s subsidiary Audi has been losing its competitive edge against its archrival BMW for quite some time (Wales, 2012). The battle that rages between BMW and Audi for the lead in the premium segment has been a major motivator for Volkswagen to acquire a brand with strong presence in premium motorcycle segment. Also, Volkswagen needed to have motorcycle manufacturing unit other than a renowned brand name in its portfolio.
Figure 1 - Ducati Quarterly Net Income 2008-12 (source: bloomberg.com)
Volkswagen also benefited from the technology of Ducati and skills of the Italian skilled workers which harbingers a competitive advantage and a bright future of the company. Ducati had a loyal and growing customer base, which is a key advantage for global presence. Also, the excellence of engineering work at Audi and the VW group implies synergies for both entities.
The motivation for Ducati was to overcome its liquidity problems. Although, following 2009 Ducati seemed to recover from its financial crisis, mainly due to the sales success of the Monster Dark, the debt of the company has been accumulating year after year and had reached 280 million Euros (Cassiman and Colombo, 2006). It was important for the survival of the company to be owned by a group with strong financials. The debts of the two-wheeler maker had jumped to 1.7 times its revenue and the annual interest payments on these debts were getting difficult for the company to be paid annually. Also, strategic difficulties were foreseen by Ducati since the motorcycle business is getting difficult and the European market has halved in recent years. There acquisition deal was, therefore, fulfilling needs of the both parties and seemed promising in terms of benefiting the shareholders of both organizations in the long-run.
It is important to mention that Ducati and Audi appealed distinctly to their own market segments. Ducati appealed to its specific niche since its design was made by ​​famous Italian designer Massimo Tamburini. In addition, during its development, each part of the engine was subjected to computer processing in order to reduce weight and increase strength. Ducati is renowned for its unique 90° V-twin or L. Also, its reputation is built largely on multiple victories in motorcycle racing rather than functional benefits.
On the other hand, Audi is known for its German association. Interestingly, despite being a subsidiary of Volkswagen Group, it has maintained its brand value rather than going down to the affordable level of Volkswagen. Also, Audi’s brand name is known more in car market, including associations of sports prestige through its two subsidiaries that are Lamborghini and Quattro.
These distinct propositions indicate that the two brands are unlikely to cannibalize each other’s market share; rather they are likely to sustain their own loyal markets. European bikes does not carry the same prestige as their cars, hence, ducati will provide the necessary leverage to penetrate high end market.

Short-term and Long-term Repercussions of the Acquisition

There are significant short-term and long-term repercussions of this acquisition both for the companies and the motorcycle industry as a whole. The acquisition is beneficial for the industry at large in view of the further development of urban mobility. Ducati is a technologically superior brand and the acquisition deal took care of the immediate financial distress on this brand (Paulo, 2012). There are benefits for both Ducati and its consumer market of this acquisition because it provides much needed sustainability to this brand. Volkswagen, on the other hand, may not derive any immediate financial gains in the short-run.
There are long-run benefits for the industry, as well, since Ducati is in the process of development of electric two-wheeler vehicles which are needed vehicles for the market especially for short distances. In the long-run Volkswagen will benefit by a new revenue stream and will gain profitability through this acquisition. The acquisition of Ducati will benefit it in the long-run by giving the brand an international exposure which is important because the motorcycle market in Europe have halved during the last few years. 
Figure 2 - Changes in Comparative Market Shares in Global Motorcycle Industry 2006-11 (source: Yahoo Finance)
 The industry dynamics will of course become highly competitive following the acquisition because the market size of the industry does not get impacted due to this acquisition, however, the competition does increase tremendously following this strategic move of Volkswagen. When Ducati is backed by the ownership of such a strong group, it will adopt strategic moves to gain market share from existing players in the industry (Emmi, 2012). In addition, Audi’s management has already expressed intentions to expand their operations at the global level and increase the reach of the brand beyond the traditional European market of Ducati. Japanese motorcycle manufacturers – like Yamaha, Honda and Suzuki – are also attempting to gain maximum share of global consumer markets on the basis of superior design and better fuel efficiency.
The impact of this acquisition deal will also be felt across international markets. With the financial backing of a strong group like BMW, Ducati will now be able to make its presence felt in the large and promising markets like China. Ducati has already been quite late in entering this market since Harley Davidson and Benelli entered this market well before Ducati. Also, their experience has largely been positive for Chinese market. The acquisition deal is likely to have a strong impact on the international market since Joint Ventures of businesses like other market entrants in Chinese markets didn’t carry the whole essence of the brand. These brands were also skeptical about the purchasing power of Chinese market and, consequently, didn’t enter with their high value brands. Ducati, therefore, has the potential to bring about this change.

Strategic Outcomes of the Acquisition Deal

The roots of this strategic step of Volkswagen do lies in the past expressions of the company of the need to gain a sizeable holding in two-wheeler category. Ducati’s acquisition by Audi is certainly a step toward this strategic intent. Even for Ducati, this acquisition comes as a part of strategic design. The manufacturer had been part of the majority of the Italian financial fund Investindustrial, but the parent group was not as much interested in the product, but rather about fast and strong financial gains. Consequently, low investment was made in the product or market development.
The above mentioned phenomenon is exhibited by the fact that the Italian unions strongly welcomed Ducati being taken over by Audi. Ducati employees are currently under uncertainty given that the Italian media have for weeks expressed sentiments against the sale, yet there have been evidences that the corporate culture of Ducati has remained intact following the takeover which has been welcomed by employees: Audi has not indicated the slightest intention to relocate the production site.
Since, it has only been six months since acquisition deal has been executed, it is quite early to say whether the acquisition deal is a success or not, yet Ducati is the twelfth brand of the Volkswagen group and is already termed highly important component (Cassiman and Colombo, 2006). Also, the purchase had been long speculated, especially the motorcycle VW supervisory board chief Ferdinand Piech said to have played a key role in the process, the strategic interest of the two groups supplemented each other. For this reason, the acquisition deal can be termed as a success.

Expected Strategic Directions of the Group       

The strategic move is coherent in terms of market realities. Ducati offers to its parent group – Volkswagen – its experience in lightweight, special motor technology and advanced control systems. Moreover, the external environmental scans exhibit that the demand for motorcycles in Asia will grow significantly. With the takeover of Ducati Audi will supplement its own development endeavours. Audi has for some time been experimenting with different materials to reduce vehicle weight. Furthermore, Audi plans to profit from a special combustion process that Ducati has developed. Therefore, to a large extent the strategic move of acquisition form part of a coherent corporate strategy.
A highly important consideration following acquisition is to maintain distinctiveness of Ducati brand. Suzuki already markets a line of motorcycles and Ducati can only command premium pricing if the positioning and customer offering of Ducati is sizably different from competition. A key indicator of positioning of a product are the visible components, therefore, similarities in the visible components of the products must be avoided with other product offerings – both within the group and from competition. The case also mentions that Ducati carries a tradition of a cult following around its group in certain markets. The key challenge for Volkswagen Group is to sustain this brand essence of the acquired brand.
It is expected that the future strategic direction of the group would be to expand Ducati’s market to newer regions for a time horizon of three to seven years. However, during the first two years of operations, the attempt of the group would be consolidate its own operations and to bring coherence among the cultures of the two entities. Ducati, established in 1926, is already accustomed to change. Since the 1980s, the takeover by Audi is now the fourth change of ownership.
Volkswagen may be short on liquidity to make immediate investments in marketing, since the final purchase price paid by the parent group is relatively low at 300 million Euros. In the short run, the group is also likely to adopt extensive measures to reduce costs and to expand simultaneously (Cassiman and Colombo, 2006). For the time horizon of three to five years, instead of forming new plants the focus would be on increasing production from plants based in Thailand and Brazil.

Conclusion

The paper discussed acquisition of Ducati by Volkswagen and the strategic rationale for such acquisitions. It is found that the motivation for Volkswagen to engage in acquisition of Ducati was to consolidate its competitive positioning in motorcycle industry. It is concluded that strategic benefit of this acquisition is that Volkswagen gains superior technology of Ducati and skills of the Italian skilled workers. It has been found that Ducati is not likely to cannibalize Audi’s market and will contribute necessary advantage to enter high end market. Further, it is discovered that the acquisition is also beneficial for Ducati to overcome its liquidity problems. Finally, it is concluded that short-term and long-term impacts of this acquisition will be observed in the motorcycle industry and the future strategic direction of the group would be to expand Ducati’s market to newer regions.
 

References

Cassiman, B. and Colombo, M. (2006) Mergers & Acquisitions: The Innovation Impact, London: Edward Elgar Publishing.
Emmi, E. (2012) Ducati brings back Ciabatti, 19 Oct, [Online], Available: http://www.gpone.com/index.php/en/201210198598/Ducati-brings-back-Ciabatti.html [1 Nov 2012].
Paulo, S. (2012) VW profit slumps on European gloom and tech costs, 24 Oct, [Online], Available: http://articles.economictimes.indiatimes.com/2012-10-24/news/34708163_1_vw-profit-italian-motorcycle-maker-ducati-hans-dieter-poetsch [1 Nov 2012].
Sherman, A. (2011) Mergers and Acquisitions from A to Z, Ohio: Amacom Publishing.
Wales, R. (2012) VW celebrates Ducati acquisition with Audi A1 Ducati Edition, 19 Oct, [Online], Available: http://www.nitrobahn.com/news/vw-celebrates-ducati-acquisition-with-audi-a1-ducati-edition/ [1 Nov 2012].

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