Leading risks and opportunities in the business model of Audi.

Audi is a leading global brand of premium cars and SUVs. It is a part of the product portfolio of Volkswagen AG. In recent years, Audi’s popularity has continued to surge driven by several factors including excellent product quality, stylish design as well as research and development. In the premium car market globally, Audi has formed a very distinct identity for itself. The four rings of Audi set it apart from the competition and its focus on customer experience has helped it build a distinct position for itself in the market. In the Chinese market, which has quickly grown to become one of the largest auto markets in the world, Audi is among the best selling premium and luxury brands. With time, the level of competition in the auto industry has continued to grow and companies are focusing more than ever on research and development, product design as well as marketing to maintain their market share and leadership position. Audi has also focused on innovation and brought a large range of cars and SUVs that cater to the taste and preferences of the modern generation. However, while on the one hand while the global market is full of opportunities on the other it is also full of challenges. Apart from operational and legal risks, there are other kinds of risks too before automobile brands like Audi that can be social, environmental or technological in nature. 

Risks and opportunities arising from  GENERAL ECONOMY, INDUSTRY AND MARKETS:

There are several risks related to the general economic conditions as well as the condition of the overall automobile industry and the global markets. Fluctuations in the global and the regional economy and currency exchange rates affect the business and profitability of Audi globally. 2019 was a challenging year for automobile brands globally since a lot of economic and political changes affected automobile businesses. Two major factors that affected the automobile businesses were Brexit and the trade dispute between the US and China. Apart from the uncertainty due to Brexit which still prevails, the trade sanctions imposed by the US and China on each other also had a negative impact on the supply chain and profitability of Audi. Like Audi, several more automobile brands have a large part of their supply chains located in China. The tariffs imposed by the Trump government led to growth in the prices of raw materials and drove operational costs higher for brands like Audi. The US-China trade wars had a direct impact on the supply chain of Audi since its preliminary suppliers of electronic modules are located in China. The trade war gave rise to a supply gap resulting in loss of earnings. As a result, Audi was forced to look for alternatives wherever possible. Economic performance in specific regions, as well as the level of regulation, also creates both opportunities and risks for Audi. In China, while the level of regulation is high, the region has seen strong economic growth over the past several years. This had led to higher demand and stronger earnings from the region. In the US also, the level of unemployment remained lower during the past few years and economic activity high leading to higher economic growth and earnings for Audi. However, the spread of COVID-19 has led to lower economic activity in several leading markets including the United States and China as well as other markets like the United Kingdom. So, while companies are doing their best to absorb the impact of the Coronavirus pandemic, it is not sure how long this situation will last and how deep its impact will be on the premium car market and Audi. It is difficult to predict the complete impact of coronavirus on various economies and the time it will take to bring economic activity back on track. So, car brands including Audi expect to miss their delivery targets under the current scenario. Volkswagen has already announced a production suspension till April 19th. Following Brexit, there is also strong uncertainty in the UK car market and collapse or recession could have a severe adverse impact on Audi’s business there. However, in case the pandemic is quickly brought under control and economic activity returns globally, there are significant opportunities awaiting brands like Audi. The company can expect to gain fresh stimulus from its electric initiative as well as other innovative drive technologies. In 2019, Audi brought its first fully electric Audi E Tron, apart from which it offers five other plugin hybrid models. Over the next few years, the company plans to release more fully electric cars as well as plugin hybrid models. Other areas where Audi has significant opportunities include Automated driving as well as Artificial intelligence. Since the demand for SUVs has kept growing worldwide the brand also intends to expand its SUV portfolio over the coming years.

Risks and opportunities related to research and development:

There are both risks and opportunities related to research and development for a premium automobile brand. As competition in the automobile industry has continued to grow, investment in research and development has become mandatory. While it drives operational costs significantly higher for the automobile brands, on the other hand, returns on R&D investment are generally visible in the longer term. However, with time customer expectations from a product may change and so can the market and statutory requirements. The main risk here is that of deviation from the planned project goals during the production process in vehicle and powertrain projects. Technical, temporal or financial deviations can result from the changing market or statutory requirements or due to changed customer expectations and shifts in planning assumptions. Completely new research and development projects and especially those developed in combination with other platforms can be particularly complex and full of risks. The high complexity of such projects often leads to missed targets and unexpected delays. To manage such risks, Audi has implemented a systematic production process with clear milestones, quality approvals, permanent monitoring, and clear responsibilities. This systematic product process also takes into account new requirements that may arise from electrification and digitalization as well as from technology partnerships. Audi has adopted a wide range of management and monitoring tools to mitigate the risks associated with research and development. Before designing new products and bringing them to the market, Audi conducts a comprehensive environmental analysis and researches consumer expectations in specific markets. Another specific area in research and development is legal which also gives rise to some major risks. For example, the legislation related to approval for new products has continued to grow tougher and this has led to challenges related to technical feasibility, organizational affordability, on-schedule implementation and the need to adjust development processes in accordance with the new legal requirements. However, while on the one hand, there are several risks related to the research and development process at Audi, there are major opportunities also in this area. Since Audi is a part of Volkswagen AG that too presents it with a diverse range of opportunities and higher synergy potential in the form of joint development projects for vehicle architectures, modules, and components. The various R&D programs and platforms of the Volkswagen AG provide Audi with strong leverage in terms of research and development.

Operational Risks and opportunities:

There are several types of operational risks in the business model of Audi which can be legal in nature or related to supply chain and quality. The biggest complications are several times related to the legal framework in various markets around the globe. There are a large number of country specific legal standards and systems, the audi group is facing an increasingly complex legal framework related to the product approval process. There is always a risk of failing to meet product certification standards as well as approval related standards. In case Audi fails to meet these standards, the consequences can vary from approval restrictions to sales bans.   These things can result in a delay in the introduction of a finalized product to the market. To mitigate the risks related to legal frameworks, the Audi group monitors changes in legal frameworks globally continuously. Apart from that, it has also established processes and controls including suitable reporting. Continuous risks assessment is also compulsory given the complex nature of the legal framework. Moreover, the company has continued to improve its countermeasures for mitigating the risks arising from legal frameworks. These countermeasures are also supported by strong IT systems. 

One of the main supply chain related operational risks for Audi is related to the supply of battery cells for its fully electric vehicles. Supply gaps resulting from capacity bottlenecks or technical modifications at supplier companies can result in delayed production or negative effects on volume, profit and CO2 targets. In order to mitigate this specific risk, the company is working to ramp up capacity by adding more suppliers. There are additional risks related to the brand’s supply chain as well. For example, fluctuations in production can cause a violation of terms agreed upon in the contract with a supplier or a supply chain disruption can cause temporary supply bottlenecks. Supply chains can be disrupted by various regions which can be natural, political, economic or of other kind in nature. As in the current case, the spread of COVID-19 has resulted in supply chain disruptions for several automobile brands.  Audi has adopted preventive and reactive risk management within Procurement to mitigate supply chain risks. For mitigating risks arising in the supply chain, Audi has created rigidly defined processes based on risk assessment to decide which contracts are awarded to which supplier. The other methods the brand has adopted to reduce risks in its supply chain include comprehensive scenario and future analyses, emergency plans and appropriate insurance cover. Apart from that Audi has adopted its own crisis management model to manage any crisis. Production at individual plants can also fluctuate due to other reasons including supply chain disruption, volatile developments in the global car market as well as accidents at the suppliers. The automobile brand uses a large variety of proven tools to manage such a situation. Quality related problems are also a major operational risk facing Audi. However, the company has adopted a quality management process that works to analyse and rectify quality related problems right during the product development process. Quality management is an important focus for Audi since any quality related issue can have a heavy financial impact on its business.

However, operational areas are not just full of risks. There are several opportunities as well which can help the company find faster growth and build a robust position in the global automobile industry. Audi has adopted a transformation plan that aims to improve mainly procedural, cross disciplinary and structural issues, as well as improve efficiency and reduce complexity. The plan also aims to scrutinize and pinpoint opportunities to utilize the potential of the brand better. Now the brand is increasingly making use of Group Wide platforms, modules and joint developments, along with the associated increased use of carry over parts in the Volkswagen Group, creating further opportunities to reduce direct material costs. 

Sales Risks and Opportunities:

The sales network of Audi is also full of both risks and opportunities. One of the major risks associated with the sales network of Audi related to the company’s strategic direction. Possible changes in the company’s strategic direction could result in volume and profit risks for the company in its leading markets like China. To mitigate the risks, the company conducts ongoing dialogues with its sales partners on the details of cooperation. Apart from that regular reporting to the top management is also a crucial step taken to mitigate risks related to sales. Some other risks in its sales channels are related to the legal framework also. For example, the rules and regulations related to  exhaust, emission and homologation vary worldwide and governments around the world continue to tighten these rules in short cycles. This poses a continuous challenge before Audi since it needs to make sure that a complete range of all engine/ transmission versions is available in all regions which can be made difficult due to varying regulations across regions. These variations can often result in the unavailability of individual models in specific regions and can have a negative impact on the sales volume as well as earnings. Audi has classified it as a high risk factor and continues to improve the measures adopted to mitigate the risk. In the product development areas where the processes are most affected, Audi continues to refine and increase capacity. The brand is also revising, optimizing and simplifying our powertrain portfolio to mitigate the risk. Recent developments and the competitive situation in Europe have also grown the sales volume risks before Audi. The company has taken two important steps to mitigate the risks in European markets. The first is an attractive product portfolio and the second is competitive positioning of its products. Apart from that targeted sales promotions have also helped the brand mitigate the sales volume risks in the European market. Some factors that help the brand mitigate sales volume risks globally include its brand image and attractive product range as well as distinctive design and product quality. Audi also actively watches and manages markets in order to open up new areas of business. 

However, sales is not just an area full of risks and new opportunities are also coming up before Audi in this area. Audi has a young and attractive product portfolio. There are additional opportunities of revenue optimization that arise mainly from its growing portfolio of electric vehicles and mobility services. RThere is also additional scope to create new sales channels in partnership with the retailers due to the growth of digitalization. By focusing its marketing activities on electric mobility, the brand can generate additional sales opportunities. 

Environmental and Social Risks and Opportunities:

Environmental and social matters are also a risky area which most automobile brands are handling at a priority in order to avoid image loss, loss of sales volume as well as to avoid legal tussle. Handling the environmental and social matters requires strategic focus and brands like Audi are creating new strategies to counter the risk. Based on its new strategy, Audi has defined new goals and scopes as well as drawn new project plans to handle social responsibility related risks. There are central functions, committees and work groups that handle these issues on a brand-wide and organization-wide level. Audi also uses a sustainability roadmap to plan its sustainability actions. In 2019, the brand made significant progress in this area. The brand uses KPIs in its sustainability roadmap to measure its achievement of sustainability goals. It has embedded sustainability into its business management so as to counteract the risks arising from sustainability related issues. The European Union has applied CO2 limits on passenger cars and light commercial vehicles since 2009. The limit of 130g/km has been tightened to 95g/km from 2020. In the future the limits will be tightened further and the targets can be met only by increasing the number of electrical vehicles in the product range of Audi. If the brand is unable to meet its fleet targets, EU will apply penalties. Outside the EU as well, fleet CO2 emissions targets are being tightened like in China and the United States.

Other risks rooted in social factors include the protection of consumer data and the personal data of employees. The company has adopted comprehensive measures within its data protection management system to mitigate these risks. However, AUdi also sees significant opportunities in the area of CSR and sustainability and therefore continues to embed sustainability into its products and processes. This has also helped the brand attract new customer segments and create higher awareness of the Audi brand among the public. 

Legal and other risks:

The varying legal frameworks worldwide pose a significant threat to the Audi brand as well as Volkswagen AG. Audi AG, as well as its subsidiary companies, are already involved in a large number of legal disputes. These legal risks can be related to employees, authorities, service providers, dealers, customers, suppliers, products or other contractual parties. The companies involved in such disputes may incur huge penalties as well as might have to adopt costly measures to overcome the legal hassles. Volkswagen had to pay a very large penalty in the case of the Diesel issue. There is also a latent risk of litigation in the areas of competition and antitrust law as well as product liability and patents. Moreover, with growing digitalization more such requirements may arise in the future.

Other Sources: Audi Annual report 2019.

Abhijeet Pratap

Abhijeet has been blogging on educational topics and business research since 2016. He graduated with a Hons. in English literature from BRABU and an MBA from the Asia-Pacific Institute of Management, New Delhi. He likes to blog and share his knowledge and research in business management, marketing, literature and other areas with his readers.