The Board of Management

The Board of Management Discusses: How Volkswagen combines economic success with social responsibility.

The Volkswagen Group sees the current challenges in the market and society as an opportunity to extend its leading position.

Automobile manufacturers are facing a range of challenges. Customers want even greater quality and more and more equipment features for the same or even lower prices. Environmental standards are rising constantly, and fossil fuels are running short. Society also makes demands of the Volkswagen Group. The Board of Management discusses these issues and presents its solutions.

QUESTION: What challenges will the Volkswagen Group have to respond to in 2007?

PROF. DR. MARTIN WINTERKORN: The keyword for these challenges, both in 2007 and beyond, is “sustainability”. My colleagues and I on the Board of Management think there are three main factors here: “cost-effectiveness and value enhancement”, “technical expertise and quality”, and “environment and social responsibility”.

QUESTION: And what does this mean in concrete terms?

PROF. DR. MARTIN WINTERKORN: “Costeffectiveness and value enhancement” means that we have to achieve more with less. “Technical expertise and quality” means that we want to remain technology leaders and focus our thoughts and actions on our customers’ desire for first-rate vehicles. Finally, “environment and social responsibility” means that we take our role seriously and look after the wellbeing of our employees just as we try to preserve natural resources.

QUESTION: Can you give us an example?

HANS DIETER PÖTSCH: Our successful ForMotion program and ForMotionplus, its successor, are pioneering as far as cost-effectiveness and value enhancement are concerned. ForMotion kicked off a positive earnings trend. For ForMotionplus, we raised the bar even higher: in 2008, we are aiming for consolidated profit before taxes of €5.1 billion or even more. We want to generate at least our cost of capital in the Automotive Division then. We are aiming for a return on investment of at least nine percent over the medium term in this area.

PROF. DR. JOCHEM HEIZMANN: For the Volkswagen Passenger Cars brand, this means that we will increase productivity by ten percent in 2007. We want to save a billion euros in material costs.

QUESTION: How do you want to safeguard the competitiveness of the Volkswagen Group?

DR. HORST NEUMANN: The collective bargaining agreement for the six traditional plants in Germany signed on October 5, 2006 is a significant factor. This saw Volkswagen returning to normal working hours, reducing hourly labor costs to standard industry levels.

QUESTION: But you didn’t reach this agreement without making some concessions to the employees.

DR. NEUMANN: In return, we can better utilize our capacity at the traditional vehicle and components plants. One consequence of this is to safeguard jobs. Our commitment to take on 1,250 vocational trainees each year going forward means that we are continuing to invest in our future. But we shouldn’t forget that only successful companies can create jobs.

QUESTION: As an automobile manufacturer, you aren’t just represented in Germany, but worldwide. How do you live up to your responsibility for employees and the environment abroad?

FRANCISCO JAVIER GARCIA SANZ: There are no differences in the fundamental strategy. We take a lot of care of our employees and their direct environment because we believe that only committed and healthy employees will deliver maximum performance. However, we do respect local conditions.

QUESTION: And what are the local differences?

GARCIA SANZ: At our Puebla plant in Mexico, for example, the company physicians are also available to our employees as family doctors if they need them. And because water is a scarce resource there, we have installed a process water recycling system at our plant that has dramatically reduced our fresh water requirements. We also built a modern sewage treatment plant that far exceeds local standards.

PROF. DR. WINTERKORN: That’s what we mean by social responsibility. It’s also why we support the United Nations “Global Compact” and are committed to human rights, occupational health and safety, environmental protection and the fight against corruption. By assuming responsibility and practicing sustainability, we strengthen our Group’s innovative power and competitiveness.

QUESTION: How do you realize your “environment and social responsibility” goals at the level of your products?

PROF. DR. HEIZMANN: In 2006, Volkswagen launched a vehicle into the market that is essentially proof on four wheels that you can align environmental demands with customer wishes: the Polo BlueMotion. At 3.9 liters of diesel per 100 kilometers, it uses around half a liter less than a conventional Polo. Its 59 kilowatt engine means that it’s just as agile as comparable vehicles, and at around €16,000 it’s no more expensive. Our goal is to launch additional BlueMotion versions of Volkswagen brand models. The next one will be the Passat.

PROF. DR. WINTERKORN: BlueMotion is built on the perception that customers do not want an “either/or” situation when it comes to their personal mobility. Rather, they want four things at the same time: driving pleasure in economical cars that offer first-rate quality at an acceptable price.

PROF. DR. HEIZMANN: Incidentally, the BLUETEC initiative that Volkswagen, Audi and DaimlerChrysler have initiated is moving in the same direction. Again, the goal here is to create more energy-efficient vehicles with lower emissions. The “Clean TDI” that will be launched in the US market in 2008 in the guise of the Jetta even meets the strict Californian emission standards and will significantly increase our market share in the United States.

QUESTION: What’s the key to sustainable success at Volkswagen?

PROF. DR. WINTERKORN: We have to secure growth by building new, competitive models, thus enhancing the allure of our brands and increasing customer satisfaction. Internally, it’s vital for us to improve processes and leverage synergies in the Group. If we can do that, we can offer our employees secure jobs and drive forward environmental protection. Innovation is the driving factor for success in all of these areas.

PÖTSCH: To accompany the undisputed progress that we have made in personnel costs, as well as in parts and components, we must now focus our attention increasingly on topics such as sales and business processes. We can generate even greater synergies here.

QUESTION: What might these be?

PÖTSCH: Part of ForMotionplus addresses just this issue. To give you a concrete example: at more than a billion euros, our Financial Services Division contributed a considerable portion of our 2006 consolidated profit before tax, but this does not mean that cooperation between our vehicle sales operations and our automotive banks can not be expanded further.

PROF. DR. HEIZMANN: The same applies to development and production. We still have a long way to go before we have exhausted all the potential for enhanced productivity, and considerable improvements can still be achieved. Our goal must be to develop and build more vehicles in a shorter time, and still remain within our strict financial targets.

QUESTION: How do you want to achieve this?

PROF. DR. HEIZMANN: Our development and production teams must work together closely right from the outset to ensure a constant exchange of knowledge. Suppliers, too, will be integrated into this process.

GARCIA SANZ: This underscores again how important our suppliers are for our corporate success, because we buy in between 60 and 70 percent of our components. However, suppliers don’t just have to deliver perfect quality, they must also meet minimum ecological and social standards worldwide. That’s why we’ve developed a concept for integrating environmental and occupational health and safety criteria, as well as social rights, into our global procurement management system, based on a dialog with our business partners and support from the academic community.

QUESTION: What standards do suppliers have to meet?

GARCIA SANZ: The concept extends to four key elements: sustainability standards for suppliers, an early-warning system to minimize risk, acknowledgement of our standards by the suppliers together with self-assessment, and finally a monitoring and supplier development process. This concept has been implemented in the Volkswagen Group’s business processes since 2006.

QUESTION: And what are the benefits of this approach?

PROF. DR. WINTERKORN: Ignoring social standards and the environment would permanently damage the attractiveness of our brands. Compliance also delivers economic progress for us: for example, we do not see developing alternative powertrains as an unnecessary burden, but as a challenge to extend further our technology leadership through innovation.

QUESTION: What role do the employees play in all this?

DR. NEUMANN: We will only remain competitive if our employees do their part and are also appropriately trained. In an era of global change, we need employees who see the big picture. This starts with our trainees and young employees. That’s why we’ve launched an international program with the title “Wanderjahre” (years abroad), for example.

QUESTION: Sounds like the old tradition of journeymen carpenters ...

DR. NEUMANN: It’s not dissimilar. The program is geared to mobile, educated young people with aboveaverage performance and development potential. Staying with a host family ensures that they get to experience the cultural aspects of a country and its people. These “years abroad” benefit both sides: Volkswagen gains motivated employees with international experience – and young people develop another perspective from the start of their careers.

QUESTION: Not too long ago, an economic report by investment bank Goldman Sachs on Brazil, Russia, India and China caused quite a stir. It said that, in the long term, these countries will collectively overtake the G6. What’s the position of the Volkswagen Group in these “BRIC” countries?

PROF. DR. WINTERKORN: The BRIC countries are very important for us because 40 percent of the global population lives there. They are responsible for ten percent of global GNP and are recording extremely dynamic growth. We are investing substantial sums in Russia and India, where we will shortly be building new factories. We have enjoyed a good position in Brazil and China, the other two BRIC countries, for many years. In particular our sales success in China is very encouraging. Audi is recording its strongest growth rates for years there and has raced well ahead of the competition in the premium segment.

GARCIA SANZ: The importance of China for us is also shown by another example. As the first automobile manufacturer in China, Volkswagen has launched an accident research project with Tongji University in Shanghai, because at 152 accident victims per 10,000 vehicles, 127 times more people are killed in road accidents in China than in Germany.

QUESTION: And what concrete steps are you taking to resolve this?

GARCIA SANZ: An accident research team of ten people has been working locally since May 2005 with specialist support from experts from Wolfsburg. It also coordinates and cooperates closely with the local police in the Jiading district. In addition, Volkswagen acts as an adviser to, and sponsor of, a Chinese TV road safety series that’s similar to the format we have in Germany.

QUESTION: The growing demand for mobility in China and other emerging economies brings us to an entirely different question. Fossil fuels on our planet are running out. Do automobiles have a future?

PROF. DR. WINTERKORN: Most certainly. More fuel-efficient powertrains are the first step towards a solution, but they alone are not the answer. That’s why we are also involved in researching second-generation biofuels that do not compete with food production.

QUESTION: What are the advantages compared with the first generation of biofuels?

PROF. DR. WINTERKORN: They can be used without any problems in all of our vehicles and can be distributed via the existing service station network. Moreover, SunFuel – the diesel substitute – and cellulose ethanol, as an additive to petrol fuels, have an almost neutral CO2 balance: production and combustion of the fuel generates only marginally more CO2 than the plant absorbs from its environment while it’s growing. At the end of this long development path towards new fuel sources, in approximately two decades, we expect to see an electric drive system that will draw its energy either from a hydrogen-powered fuel cell or from batteries.

QUESTION: Even if there’s progress in the production and use of automobiles – won’t there still be the problem of disposing of end-of-life vehicles?

PÖTSCH: We’re seeing progress here, too. The awardwinning Volkswagen-SiCon process recovers materials from end-of-life vehicle recycling residues that previously couldn’t be separated at an acceptable cost. This closes the circle of environmentally responsible production, clean operation and extensive recycling. For us, end-of-life vehicles aren’t annoying waste, but a valuable source of raw materials.

QUESTION: How do you encourage this trend towards more sustainability across the entire lifecycle of a vehicle?

PÖTSCH: Cooperation with innovative companies like SiCon is just one way. We also selectively support universities and professorships. The most recent example: the Volkswagen Group is supporting a new foundation chair at the Technical University of Braunschweig for the further development of biofuels to the tune of one million euros.

QUESTION: And how about your own research?

PROF. DR. HEIZMANN: In the field of hydrogen technology, our research department recently announced a breakthrough with the high-temperature fuel cell. This is a key milestone on the way towards wide-scale use of this technology, although the development of the corresponding logistics to match today’s service station network will still take some time to complete.

DR. NEUMANN: Our successful research and development projects also demonstrate the performance of our employees. Volkswagen’s ideal profile calls for skilled, committed employees who are willing to contribute ideas and to get on with the job.

QUESTION: And how do you turn this ideal into reality?

DR. NEUMANN: We invest in a major way in the skills of our employees. Initial training and continuing development are key issues at the Volkswagen Group. We’ll never adopt a “hire-and-fire” policy – apart from anything else, it would damage our own best interests.

QUESTION: Professor Winterkorn, how would you sum up this discussion?

PROF. DR. WINTERKORN: Sustainability is built into the fabric of everything we do. We are being very successful at achieving more with less. Our innovative, wide range of models is fascinating more and more customers. But we never lose sight of our responsibility for our employees and the environment. We’re ready to take on the competition. Or to put it figuratively: we continue to drive safety, but you can feel we are picking up speed.