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AN EXECUTIVE BRIEFING ON

THE AUDI GROUP THE CAR INDUSTRY

Researched by

...

DBA Intake 1

NCU COE Doctoral Program

Ha Noi, Viet Nam

February 2009

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CONTENTS

PART I: EFFECTIVENESS ASSESSMENT.......................................................................3

THE COMPANY............................................................................................................................................................3

THE COMPETITORS ..................................................................................................................................................4

EFFECIENCY AND EFFECTIVENESS CALCULATION......................................................................................6

PART 2: DOMINANT MARKET ENVIRONMENTAL ASSESSMENT ..............................8

Introduction.....................................................................................................................................................................8

Legal- Regulatory environment.....................................................................................................................................9

Economic Environment ...............................................................................................................................................10

Technology environment..............................................................................................................................................11

Cultural Environment..................................................................................................................................................12

INDUSTRY ANALYSIS...............................................................................................................................................13

Porters five forces and the auto industry...................................................................................................................13

International car market..............................................................................................................................................14

The German car market .............................................................................................................................................16

The future outlook of car industry..............................................................................................................................16

PART 3: GLOBAL ENVIRONMENTAL ASSESSMENT.................................................19

Country- Trade bloc profile.........................................................................................................................................20

Vietnam economys profile........................................................................................................................................20

Political climate..........................................................................................................................................................23

Trade relations and statistics......................................................................................................................................24

Trade Bloc review..........................................................................................................................................................25

Vietnams automotive market......................................................................................................................................30

COUNTRY- TRADE BLOC ENTRY STRATEGIES..............................................................................................33

MARKETING STRATEGY........................................................................................................................................36

REFERENCES..............................................................................................................................................................39

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Part I: EFFECTIVENESS ASSESSMENT

THE COMPANY

The Audi Automobile Group (Audi AG), comprising the Audi and Lamborghini brands, is

one of the most successful carmakers in the premium segment. At the core of the

Company is the Audi brand, whose vehicles captivates customers around the world with

their modern design and high builds quality. The stated ambition of the Audi brand is to

fulfill challenging customer expectations of pioneering innovations through the brand

essence of Vorsprung durch Technik that means advancement through technology as

well as the brand values of sportiness, sophistication and progressiveness. Furthermore,

the Company is placing in-creasing emphasis on the sustainability of the technology it

uses. Customers experience this brand identity through a diverse range of models, whichenabled Audi to further strengthen its good position on car markets worldwide.

At the end of 2007, 26.3% of sales of Audi brand come from Germany, nearly 45% from

Europe (excluding Germany), 10.6% from China (including Hong Kong), 9.7% from USA

and 8.5% from other countries in the world market.

The Audi Group is headquartered in Ingolstadt, Germany. This is where Technical

Development, Sales, Administration and substantial portions of the manufacturing

operations are based. In addition to the high-selling A3, A3 Sport back and the A4 Sedan

and Avant models, the new A5 Coup and the ultra-sporty S3 and S5 Coup versions

are built there as well. Volume production of the new Audi Q5 will additionally begin in

2008. The bodies of the A Coup and Roadster and of the A3 Cabriolet are also made in

Ingolstadt.

At Neckarsulm, the Companys second German location, AUDI AG manufactures the A4

Sedan, A6 Sedan, Avant and all road Quattro, S6 Sedan and Avant models, as well as

the A8 luxury sedan, plus its high-performance A8 W12 and S8 versions.

The Audi R8 mid-engine sports car, hand-crafted to exceptionally high standards, and

the new RS 6 Avant are built by Quattro GmbH, which is also based at Neckarsulm. This

company, a wholly owned subsidiary of AUDI AG, also supplies an attractive

customization program for all Audi models (e.g. S line, exclusive line) and sells exclusive

lifestyle articles that embody the spirit of the brand with the four rings. The Belgian plant

in Brussels, which became part of the Audi manufacturing network in March 2007,currently builds the A3 Sportback and the VW Polo on behalf of Volkswagen AG.

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AUDI HUNGARIA MOTOR Kft. develops and builds engines for AUDI AG and other

Volkswagen Group companies, as well as for third parties, at Gyr, Hungary. The Audi A

Coup and Roadster models and the new A3 Cabriolet are also built there in partnership

with the Ingolstadt plant. This Company has advanced to become one of the countrys

major exporters and highest-revenue businesses. The Bologna region of Italy is home to

Automobili Lamborghini S.p.A., which builds the Gallardo Coup, Gallardo Spyder,

Gallardo Superleggera, Murcilago LP640 Coup, Murci-lago LP640 Roadster and

Reventn super sports cars.

Vehicles of the Audi brand and of other Volkswagen Group brands are sold in Italy by

VOLKSWAGEN GROUP ITALIA S.P.A., a subsidiary of Automobile Lamborghini Holding

S.p.A., based in Verona.

Audi also set many sales subsidiaries in the world. There are 10 sales subsidiaries,

including Audi Australia Pty Ltd., Audi Japan K.K., Audi Brazil Distribuidora de Veculos

Ltda. Audi Volkswagen Korea Ltd., Audi Vertriebsbetreuungsgesellschaft mbH, Audi

Volkswagen Middle East FZE, Audi of America, LLC, Audi Canada Inc., Audi Retail

GmbH, Audi Zentrum Hannover GmbH.

THE COMPETITORS

To define clearly the competitors of Audi, firstly we should see the diagram 1 of

automobile brand in the world.

There are 7 main groups of automobile makers in the world. It can be seen that from

Germany, in premium segment, major competitors of Audi AG are BMW AG with

BMW, Mini and Rolls-Royce brands, Daimler AG with Mercedes-Benz brand.

BMW group

BMW AG (BMW or the Company) is a global manufacturer and distributor of automobiles

sold under the BMW, Mini and Rolls-Royce brands, with a focus on the premium car

market segment. The companys production facilities are based predominantly in

Germany, with the North American, German and other European countries accounting

for the bulk (more than 70%) of automobile shipments. BMW also produces motorcycles

and has a growing financial services business- largely to support its automotive

business- but BMW-branded car sales are the primary source of earnings.

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Diagram 1: Relationship between automobile brands in the world

(Source: autoblog.com)

BMW has consistently generated profitability above the industry average, particularly

relative to its European and North American peers. BMWs strong brand image andluxury market penetration have largely supported premium pricing relative to higher-

volume producers. Product and technology innovation are the key reasons for BMWs

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competitiveness in the premium-car segment. Its flagship 3 Series has maintained a

leading market position in the premium middle-class car segment and is the primary

earnings driver for the Company (43% of BMW brand unit sales in 2006). Importantly,

BMWs focus on the higher growth, premium automobile market segments has reduced

its exposure to economic cycles. Reduced cyclicality, and increased geographic

diversification outside of Germany since 2001 have contributed to stability in earnings

and cash flow.

The strategic objective is clearly defined: The BMW Group is the leading provider of

premium products and premium services for individual mobility.

Mercedes- Benz cars

Mercedes- Benz cars is a well-known brand of Daimler AG. Daimler AG with its

businesses Mercedes-Benz Cars, Daimler Trucks, Daimler Financial Services,

Mercedes-Benz Vans and Daimler Buses, is a globally leading producer of premium

passenger cars and the largest manufacturer of commercial vehicles in the world.

Daimler sells its products in nearly all the countries of the world and has production

facilities on five continents.

Mercedes- Benz is headquartered in Stuagart, Germany with 95,526 employees (at the

time December 31, 2007) and total revenues of the year 2007 is EUR 52,430 million. The

products supplied by the Mercedes-Benz Cars division range from the high-quality small

cars of the smart brand to the premium automobiles of

the Mercedes-Benz, Mercedes AMG and Mercedes-Benz McLaren brands

and to the Maybach luxury sedans.

Most of these vehicles are produced in Germany, but the division also has production

facilities in the United States, France, South Africa, Brazil, India, Vietnam and Indonesia,

and since the year 2005 also in China. Worldwide, Mercedes-Benz Cars has 17

production sites.

The division's most important markets in 2007 were Germany with 27% of unit sales, the

other markets of Western Europe (34%), the United States (19%) and Japan (4%).

EFFECIENCY AND EFFECTIVENESS CALCULATION

Unit: EUR millionAUDI

Year 2003 2004 2005 2006 2007Revenue 23,405 24,506 26,591 31,142 33,617Percentage Change 4.7% 8.5% 17.1% 7.9%

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COGS 22,297 21,989 23,429 27,309 28,478Percentage Change -1.4% 6.5% 16.6% 4.3%Gross Profit 1,108 2,517 3,162 3,833 5,139Percentage Change 127.2% 25.6% 21.2% 34.1%

MERCEDES- BENZ1

Year 2003 2004 2005 2006 2007

Revenue 51,446 49,630 50,015 51,410 52,430Percentage Change -3.5% 0.8% 2.8% 2.0%COGS 48,320 47,964 50,520 49,627 47,677Percentage Change -0.7% 5.3% -1.8% -3.9%Gross Profit 3,126 1,666 -505 1,783 4,753Percentage Change -46.7% -130.3% 453.1% 166.6%

BMW2

Year 2003 2004 2005 2006 2007

Revenue 41,525 44,335 46,656 48,999 56,018Percentage Change 6.8% 5.2% 5.0% 14.3%COGS 38,320 40,752 43,369 44,875 52,145Percentage Change 6.3% 6.4% 3.5% 16.2%Gross Profit 3,205 3,583 3,287 4,124 3,873Percentage Change 11.8% -8.3% 25.5% -6.1%

Source: Annual report 2007,2006, 2005, 2004, 2003 of Audi AG, BMW AG, Daimler

Audi

Revenue from 2003 to 2007 has increased steady which reach the growth rate of nearly

8 percent in 2007. The cost of sales for the Audi AG raised by 4.3 percent in the period

2006-2007 review to EUR 28,478 million as the result of the higher sales volume. Further

productivity gains, improved process and optimized material costs were the main reason

for the disproportionably low rise in the cost of sale relative to revenue. Overall, the Audi

AG enjoyed a notable increase in gross profit of 34.1 percent to EUR 5,139 million.

Mercedes- Benz

Mercedes-Benz Cars volume of business in 2007 increased to 52.4 billion, primarily

due to the market success of the new C-Class models launched in 2007. There was a

positive impact from the significantly higher profit from the Mercedes-Benz Cars division,

which profited from the efficiency improvements it achieved and from the favorable

development of unit sales.

1Mercedes- Benz cars

2Including 3 brands: BMW, Mini and Rolls- Royce

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The Mercedes-Benz Cars division improved its gross profit to 4,753 million in 2007

(2006: 1,783 million), and the divisions return on sales of 9.1% significantly surpassed

its target, although it had been raised from 7% to 8%. The cost efficiency of the

Mercedes-Benz Cars division was further improved with the implementation of the CORE

program. The significant increase in earnings was also due to the positive development

of unit sales, especially of the C-Class.

BMW

Revenues of the BMW Group rose at an above-average rate on the back of a pleasing

sales volume performance and thanks to the dynamic growth of its financial services

business. Group revenues rose to euro 56,018 million in 2007 and were therefore up by

14.3 % on a year-on-year comparison. Excluding the exchange rate impact, revenueswould have risen by 17.6 %. The BMW Group profit before tax, at euro 3,873 million, was

6.1 % below the record level achieved in the previous year. Excluding the effect of the

settlement of the exchangeable bond on shares in Rolls-Royce plc, London, pre-tax

earnings were, as forecasted, slightly above the previous years level.

Part 2: DOMINANT MARKET ENVIRONMENTAL ASSESSMENT

European market can be seen as dominant market of Audi AG, since the large part of

market share of Audi comes from this place.

Introduction

The European Union common market formed in 1993 with 12 member nations. Since

then, it has grown to 27 member states, a population of nearly 490 million (Internet

World Stats), and a GDP higher than that of the United States. The European automotive

industry has a long history in Europe and today, car manufacturers have production

facilities in almost all the member states. Not surprisingly, Europe is the world's largestvehicle producer: one third of the 50 million cars produced globally are manufactured in

the European UnionIn total, more than 12 million European families depend on

automobile employment, with 2.3 million direct jobs and another 10 million in related

sectors. The car industry represents 6% of total European employment. Cars also

represent a major source of income for the EU member states. Vehicle taxes contribute

for 360 billion yearly to government revenues, that is, 3.5% of European gross domestic

product.

The European car industry has given important support to the shape of the current

European Social Model. The European automobile manufacturers are fully part of the

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achievements of the European social model. And they are committed to maintaining its

existence: A skilled and flexible work force is essential, and the industry makes

continuous efforts to achieve even higher standards.

The car industry is and will remain a cornerstone of the European economy and society.

Legal- Regulatory environment

This environment includes national and local governments - to determine and maintain

the legislative framework within which organizations do business. Examples include

contract law, consumer protection, competition and trading policies. The European Union

guidelines and directives which aim to achieve consistency across member states.

Regulatory bodies - for example Office of Fair Trading, Advertising Standards Agency,

Competition Commission, etc. These bodies are there to monitor and regulate

commerce.

Indeed, the European Union has developed the most advanced regional set of rules on

competition and a model of supranational governance in which regulatory decisions on

competition rest with a 27-member EU Commission.

An example of regulation that effect strongly on car industry is Car Emission Regulation.

It impact significantly on sales of cars. Amongst other things, the impact assessments

questionably foresee a 30% drop in market price of precious metals; do not contain a

proper cost effectiveness analysis; and assume that the effect on costs of mass

production applies right from the start of manufacturing. This leads to an underestimation

of Euro 5 and 6 related costs by about 33%. Respond to this regulation, Audi AG has

reduced emissions of organic compound by around 38 percent since 1998.

Le Clair (2000) provides a detailed analysis of the legal developments affecting industrial

marketers in the EU and suggests that harmonization of product safety rules, labeling

rules and product liability rules are now on the books. Rules on loyalty premiums and

comparative and misleading advertising have also been completed. The regulations on

contract pricing, price fixing and tying agreements and monopoly pricing have all been

sealed. Distribution and logistics rules including market allocation agreements,

cooperative agreements, direct marketing, distance selling and e-commerce as well as

the logistics regulation are also harmonized. Nevertheless, the complete legal harmony

in practice may still be far from complete and marketers and lawyers should work

together to ensure that legal and regulatory concerns are monitored and integrated into

the everyday marketing decision-making process.

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Economic Environment

The economic environment consists of factors that affect consumer purchasing power

and spending patterns. In Europe, nations vary greatly in their level of income.

Some of economic profile of EU in 2007:

GDP at Prices and PPPs of 2007, growth rate: 2.7%

GDP per Capita at Prices and PPPs of 2007, Growth Rate: 2.1%

Consumer Price Index, 2005=100: 104.3

(Source: Eurosta)

EU-27 GDP was EUR 11,583,403 million in 2006, with the euro area accounting for

72.8% of the total. The sum of the four largest EU economies (Germany, the United

Kingdom, France and Italy) accounted for almost two thirds (64.7 %) of the EU-27s GDP

in 2006. Cross-country comparisons should be made with caution and it is necessary to

consider the effect of exchange rate fluctuations when analyzing data. For example, the

apparent fluctuation of GDP in the United States is, to a large degree, a reflection of a

strong dollar between 2001 and 2003 and a subsequent reversal to a strong euro

thereafter, rather than any inherent change in the level of GDP in dollar terms (which has

continued to rise).

Having grown at an average rate of around 3 % per annum during the late 1990s, real

GDP growth slowed considerably after the turn of the millennium, to just above 1% per

annum in both 2002 and 2003. The latest data available for 2006 showed a recovery, as

the EU-27s economic output rose, once again, by around 3 % per annum.

In order to look at standards of living one of the most frequently cited statistics is that of

GDP per capita. This indicator averaged EUR 23 500 in 2006 in the EU-27, withLuxembourg reporting by far the highest GDP per capita (EUR 71 600) across the Union.

Even after accounting for the relatively high cost of living in Luxembourg, GDP per capita

in PPS terms remained almost twice as high as in any other Member State. This is partly

explained by the importance of cross-border workers in Luxembourg. The lowest levels

of GDP per capita among the Member States were recorded in Bulgaria and Romania,

where living standards (again in PPS terms) were approximately 40 % of the EU-27

average in 2006.

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In recent years, labor productivity among those Member States that joined the EU since

2004, in particular the Czech Republic, Hungary, Slovakia and the Baltic Member States

has been converging quickly towards the EU-27 average.

There has been a considerable shift in the economic structure of the EU economy in the

last few decades, with the proportion of gross value added accounted for by agriculture

and industry falling, while that for most services was rising. This change is, at least in

part, a result of phenomena such as technological change, the evolution of relative

prices, and globalization, often resulting in manufacturing bases being moved to lower

labor-cost regions. More than one quarter (27.7 %) of the EU-27s gross value added

was accounted for by business activities and financial services in 2006. There were three

other branches that also contributed significant shares of just over one fifth of total value

added, namely other services, which is largely made up of public administrations,

education and health systems, as well as other community, social and personal service

activities (22.5 %); trade, transport and communication services (21.3 %); and industry

(20.3 %). The remainder of the economy was divided between construction (6.2 %) and

agriculture, hunting and fishing (1.9 %). (Source: Eurostas yearbook 2007)

As such, the three groups of services identified above accounted for 71.5 % of total

gross value added in the EU-27 in 2006. The relative importance of services wasparticularly high in Luxembourg, France and the United Kingdom, as well as the holiday

destinations of Cyprus and Malta. Services accounted for more than three quarters of

total value added in each of these five countries.

For the automobiles manufacturers the globalizations means the fusion between

important companies like Renault-Nissan group or Daimler-Chrysler group (that

functioned till recently), therewith the globalization also means the buying of smaller

brands by the bigger once, as Renault done with our traditional car manufacturer fromPitesti, Dacia Automobile. For the example we can talk of one of the most success car

manufactures of the moment the Volkswagen group, which own the following brands

Skoda, Seat, Audi, but also the luxury sport car Lamborghini.

Technology environment

Technology is a fast moving and changing environment. Technological advances can

affect materials, components and products, manufacturing business processes,administration and distribution systems of Audi.

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Technology occupies the most important place in automobile manufactures industry, and

we can even says that if you have not a product in compliance with technology

development you disappear or you will be buy by which is most adapted to new. An

example of last generation technology is the last generation of Volkswagen group TFSI

engines, which have the most reduce carburant consume at this time. It is also important

to mention that the devise of Audi factories is Progress by technology Discover your

Audi model or Your progress is our motivation Audi definition for Progress by

technology is: technological innovation is experience in this domain and a permanent

search and attempt of find and implement new and revolutionary technologies. A belief

which involve sportive, perspective reflection and high quality and which is find again in

each car how have Audi logotype. Also Audi group says, Words and imagines can not

equal the intensive experience of Progress by technology , the real pleasure of driving

an Audi. Have a pleasant time in choosing your own Audi! Also in development and

technology market growing strategy, Audi have devices your dynamism is our passion.

The dynamism is a factor of progress in this way the innovations in development of

engine are very important.

Also technology means progress and progress means unless pollution- The cleanest

Diesel in the World; In the middle of the 2008 year, Audi will start the cleanest turbo

diesel engine in the world. The new TDI propellers will use the last common rail

generation, with Injectors and 2000 baric injection pressure a recalculation system very

efficient and optimize extra felling. For the first time in the world, for a good manage of

burning process, were put on sensors in burning room. The new Diesel versions, witch

will respect Euro 5 norms above it will be enforce, will have a reduction of nitrogen oxide

emission with 90%. In 2/07 Audi Magazine, to accentuate the top of the range of

technology involve in its automobiles, Audi make compare in time between the best

planes of the time and his products. In 30 years compare is Audi Imperator and Junkers,

the parallel auto-air in 80 years put face to face Audi 100 and Boeing 707, in 80 Audi

quarto fight with F-18 Hornet, and in our days Audi A8 is placed near Learjet -45 XR.

Those are only few ideas about technology that Audi try to use to promote his products,

and we can say they succeed to do this thing, Audi has in this moment Mercedes and

BMW the main competitors on the European market and also Romania, lets remained

our self that in 70-80 years Audi was not a high class automobile how it is in the present

days, its main competitors were Fiat, Renault, Peugeot, Citroen and Opel.

Cultural Environment

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The cultural environment is made up of institutions and other forces that affect a societys

basic value, perception, preferences and behaviors. There also remains the matter of

cultural compatibility across corporations. "British firms are run by accountants, German

firms by engineers and Italian firms by designers (Blanco, 2001). It is also suggested

that at the corporate level, EU can be divided into five separate sub-cultures: Nordic,

Germanic, Anglo, Latin and Near East. Data from middle managers in medium to large

size corporations in food processing, telecommunications and financial services

industries in Greece, Italy, France, Portugal and Spain show a corporate and leadership

cultural convergence trend in the Latin segment of the EU (Nikandrou, Apospori, and

Papalexandris, 2003). These types of findings suggest that industrial marketers should

form sub-regional business strategies in the EU.

Understanding the similarities in market position, becoming familiar with foreign contexts

and developing shared values and beliefs between subsidiary and headquarters

managers may make MNCs pursue a centralized control policy, thereby adopting a

standardized approach to international marketing strategy and tactics (Laroche,

Kirpalani, Pons, and Zhou, 2001). Indeed, Picard, Boddewyn, and Grosse (1998) report

a significant increase in the relative power of regional headquarters on international

marketing decisions for many American multinationals based in the EU.

INDUSTRY ANALYSIS

The global automotive industry is one of the largest industries in the world and one of the

prime drivers of international economic development and social improvement too. It

manufacturers around 65 million cars and trucks a year, and employs millions of people

around the world. The industry accounts for about 10% of GDP in developed countries.

Porters five forces and the auto industry

It is obvious that Porters five forces and the auto industry are well suited to each other.

Any prospective auto company would do well to consider these forces. The rivalry,

barriers to entry might make them think again. Established auto companies, though, are

more powerful than their suppliers and have little threat of substitutes for an established

brand that moves with the technology. Car industry analysis using Porters generic

strategies is ubiquitous.

The relationship among Porters five forces in the automobile industry, detailed below

clearly proved its competitive nature.

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1. Threat of New Entrants The existing loyalty to major brands, incentives for using a

particular buyer, higher fixed costs, scarcity of resources, high costs of switching

companies, and government regulations constituted the barriers to entry which in turn

reduced the competition in an industry. Automobile is a high fixed costs industry, so the

entry barrier is quite high compared to others.

2. Power of Suppliers The presence of very few suppliers of a particular product, and

the absence of any substitutes for the product supplied reflected the pressure exerted by

the supplier. Sometimes the product was extremely important to the auto-maker and the

alternatives proved to be very costly. In such cases the suppliers were in a better

position to dictate terms. A lot of suppliers depended on automakers to buy their

products. But if the automaker decided to change suppliers it would badly affect the

suppliers role in auto manufacturing.

3. Power of Buyers Small number of buyers, purchases of large volumes, prevalence

of alternative options, and price sensitive customers were some of the factors that

determined the extent of influence of the buyers in any industry. American consumers

were driven towards foreign cars mainly because most of the auto-makers sourced their

key auto-parts from different suppliers. But this raised doubts on the reliability of the

vehicle itself.

4. Availability of Substitutes If substitutes were available offering similar services, the

likelihood of buyers switching over to another competitor depended mainly on the cost.

The cost of the automobiles along with their operating costs was driving customers to

look for alternative transportation options. The rising gasoline price was bound to

influence the buyers.

5. Competitive Rivalry The presence of many players of about the same size, little

differentiation between competitors, and a very mature industry with very little growth

were the features of a highly competitive industry. Higher the competition in the industry

lower would be the profit margin. To remain ahead in competition, auto-makers were

tempted to offer value added services to the customers incurring more costs. Easy

finance options and long term warranties were offered to lure the customers. But these

measures cut into the profit margins.

International car market

The world automobile industry is witnessing an unprecedented scale of change in the

1990s. The end of Cold War structure witnessed the rapid spread of the information

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revolution and the international economic globalization. The wave of globalization has

directly affected the international automobile industry and has accelerated the global

reorganization of it.

Global demand for cars in 2007 was supported to a considerable extent by sustained

strong economic growth in emerging countries. Economic dynamism in Asia, Latin

America and Central and Eastern Europe was the main factor behind the 4.2 percent rise

in vehicle sales worldwide to 58.4 million passenger cars. By contrast, the markets in the

U.S. and Japan contracted. The overall market for passenger cars in Western Europe

reached only the level seen the year before, due in particular to the sharp decrease in

new registrations in Germany.

Disregarding the German market, the car market in Western Europe exhibited an upwardtrend in 2007. Total new registrations were up 3.1 percent year on year, at 11.7 million

passenger cars. Prompted by the payment of a disposal bonus for end-of-life vehicles,

which favored the compact car segment in particular, the Italian car market made

distinctly positive progress, posting growth of 6.8 percent. Of the remaining key high-

volume markets, the UK and France reported growth of 2.5 and 3.2 percent respectively,

while 1.2 percent fewer new vehicles were registered in Spain.

Economic growth in the countries of Central and Eastern Europe gained further

momentum by comparison with 2006, with new registrations rising by 30.2 percent to a

total of 4.2 million vehicles. In Russia, the already booming car market exhibited

especially strong growth in response to the economic upturn, increasing by 37.5 percent

to 2.3 million passenger cars in the period under review. In the United States, the market

remained tight due to the intensive use of sales incentives. The ongoing real estate crisis

and high fuel prices had a negative impact on vehicle sales. With 16.1 million

registrations of new passenger cars, the car market overall showed a year-on-yeardecrease of 2.5 percent.

In contrast, the upward trend on car markets in South America accelerated. In Brazil,

passenger car sales rose by 26.9 percent to almost 2.0 million vehicles, while new

registrations in Argentina were up 28.9 percent to 402,000 passenger cars.

The Asia-Pacific region again witnessed a dynamic market for cars in 2007. Unit sales

there totaled 14.3 million passenger cars, representing an increase of 7.8 percent. As in

previous years, the driving force behind this growth was China, which achieved an above

average growth rate of 22.2 percent, bringing it to second place behind the U.S. with an

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overall market volume of 5.1 million passenger cars sold. The Indian car market, too,

maintained its dynamic progress, with growth of 16.0 percent, bringing total vehicle sales

to around 1.2 million units. In contrast, registrations of new cars in Japan fell by 5.2

percent to 4.4 million vehicles (Audi annual report, 2007).

The German car market

In the first few months of 2007, the German car market was strongly influenced by

consumers moving their purchases of cars into 2006 in order to avoid the rise in the VAT

rate on January 1, 2007. The situation on the car market improved only marginally as the

year progressed due to continuing reticence on the part of consumers. Registrations of

new passenger cars in Germany reached around 3.1 million units by year end, down 9.2

percent from the year before. The economic recovery in Germany therefore had no

impact on the car market.

Demand for more fuel-efficient diesel models rose as a result of further fuel price

increases over the course of the year. The percentage of overall registrations accounted

for by diesel models gained 3.4 percentage points, to 47.7 percent. German-built

vehicles proved to be very popular on international markets, as a result of which high

passenger car exports over-compensated for weak domestic demand. In the year under

review, exports of passenger cars totaling 4.3 million units bettered the previous years

record figure by 10.6 percent. The countries of Western Europe were the most important

sales region, accounting for 2.6 million passenger cars, an increase of 10.7 percent. The

strong euro and difficult market conditions had a negative effect on exports to the U.S. in

2007. German manufacturers were nevertheless able to nearly equal the previous years

export volume, with attractive new models helping them to a total of 551,000 passenger

cars.

Bolstered by high export demand, German car manufacturers built 5.7 million cars in

2007, a year-on-year increase of 5.8 percent and therefore a new record total. The

number of German-brand cars built abroad was up 10.4 percent over the previous year,

at 5.2 million units.

The future outlook of car industry

General economic situation

It is believed that the global economy will slow down in 2009, following multiple periods

of strong growth. The principal determining factor here is the prospect of a rapid

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slowdown in the U.S. economy, outweighing robust economic growth in numerous

developing and emerging countries. The sustained high level of crude oil and raw

materials prices will also have a dampening effect.

In the United States, the continuing crisis in the real estate market will put a damper on

consumer spending. This will go hand in hand with increasingly restrictive lending

practices on the part of the banks, resulting in reduced private-sector investment activity.

Economic growth for the year as a whole is therefore expected to weaken even further.

In the Euro zone, the economy will cool down somewhat in 2008, but the stable upward

trend will be sustained. The Audi Group expects to see a further decline in economic

growth in Germany. The dynamism of exports and capital expenditures will probably

ease off. On the other hand, however, consumer spending is likely to be stronger andmake a larger contribution to economic growth than in 2007, not least due to the

continued upward trend of employment, coupled with higher collective-bargaining

settlements and lower inflation than the year before.

The rate of economic expansion will remain high in many countries throughout Latin

America as well as Central and Eastern Europe. Most notably in Russia, the rapid

upward trend will continue thanks to the strong exports of the countrys energy

producers.

The Chinese economy will be dampened somewhat in 2008 as a result of the weakening

of the U.S. economy and the corresponding downturn in exports to the U.S. Its economic

dynamism will, however, remain at a high level, with GDP growth likely to remain in the

double-digit range. Continued vigorous economic expansion is expected in India. The

Japanese economy will again expand at only a very modest rate in 2008.

The car industry

The Audi Group anticipates a renewed increase in global demand for automobiles of

over 2 percent in 2008 to around 60 million passenger cars. Principal growth hotspots

will be the emerging markets of China, India and Russia. The general market

environment will remain difficult in Germany. The forecast rise in consumer spending will

induce only a slight improvement in sales figures. The Audi Group expects to see an

increase in the volume of new registrations in the German market of just under 2 percent

to around 3.2 million passenger cars.

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The Audi Group expects registrations of new cars in Western Europe (excluding

Germany) to decline to 11.4 million vehicles. Dwindling sales figures in Italy will be the

main factor at work here.

In the countries of Central and Eastern Europe, on the other hand, the market will remain

dynamic, although the growth rate will be down slightly from the previous year. The Audi

Group is forecasting growth of over 9 percent for the Russian automobile market to

nearly 2.6 million passenger cars.

A further deterioration in the U.S. car market is expected in 2008. The overall market

volume of 16 million units sold will probably slip below the previous years total due to the

weakening of consumer spending.

The Asia-Pacific region will again enjoy strong growth in demand in 2008. The Chinese

car market, in particular, will continue to expand and should reach nearly 6 million units

a growth rate of 17 percent. The rate of growth forecast for India is even higher at around

19 percent, bringing the total to 1.4 million passenger cars. In contrast, new registrations

in Japan will rise only marginally to just under 4.5 million passenger cars.

Increasingly intensive competition within the automotive industry and the ailing health of

the economy will again pose major challenges for the Audi Group in 2008. An even

greater effort will therefore be required to repeat the economic successes of the past.

Management is nevertheless convinced that the Audi Group will be able to build on the

outstanding results for 2007 and post positive overall results for its business activities in

fiscal 2008.

Anticipated development of vehicle sales

The Audi Group will sustain growth in vehicle sales in 2008 and plans to improve

significantly on the previous years record figure by selling more than 1 million Audivehicles. A large number of new models and derivatives, as well as those products with

an established market presence, should aid the core Audi brand in accessing new

customer segments and give the brands appeal a long-term boost.

In its home market of Germany, the highest-volume market for Audi vehicles, the brand

with the four rings is striving to improve its market performance. Audi believes that it is

well equipped for further success in Western Europe, despite intensive competition there,

and expects to achieve growth in the face of a generally downward market trend.

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Audi expects that the new markets in Central and Eastern Europe, and especially

Russia, will continue to provide strong impetus for growth.

Audi is aiming to strengthen its image and market position in the U.S. by further

extending its exclusive dealer network and launching new, attractive models. The market

launch of the new Audi A4 will provide vital impulses here.

In its largest export market, China, Audi intends to continue to benefit from market

growth and to strengthen its position of leadership in the premium segment. The locally

built long-wheelbase version of the Audi A6 will play an important role in these plans.

Audi expects to see positive overall development of unit sales in Japan and the other

markets of the Asia-Pacific region. The Indian automotive market, where Audi began

local CKD assembly of the Audi A6 in 2007, will be playing an increasingly important

role.

Part 3: GLOBAL ENVIRONMENTAL ASSESSMENT

Vietnam's auto industry and market is at an early stage of development. But accession

to the WTO and a population of over 80 million point to positive prospects for market

growth that have already attracted a number of vehicle makers. Worldwide automobile

industry is growing at a rapid pace as many countries are going through the phase of

economic development. And the same scenario is applicable for Vietnam too in South

EastAsia.

Vietnam automobile industry was loosing track till 2005 but it recovered in the year 2006

and posted a good growth rate in South-East Asian countries. Changing lifestyle and

rising spending in automobile-related parts in Vietnam has propelled the growth of

automobile industry in the country. Apart from that, Vietnams entry to WTO has madethe conditions favorable for foreign manufactures as the Vietnamese government has

reduced the auto-component import tax in 2006. Though Vietnam was more of a

motorcycle-oriented country in past years, its passenger car segment witnessed a good

growth after Vietnam joined WTO. Rising income and flexible bank loan structure has

incited the growth in passenger car segment.

With 80,392 units sold in 2007, the market grew by 97% over 2006, of which cars and

commercial vehicles saw the biggest growth rates at 128% and 129% respectively over

2006, while SUV/MPV also saw satisfactory growth rate at 46%.

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There are many reasons that supported the market development: Vietnams national

economy grew well by 8.5% in 2007, which helped the sales of commercial vehicles

increase sharply. As the income of Vietnamese people has been increasing, cars have

become affordable for many Vietnamese people, which has led to the high growth rate of

car sales.

Country- Trade bloc profile

Vietnam economys profile

Vietnam is a densely-populated developing country that in the last 30 years has had to

recover from the ravages of war, the loss of financial support from the old Soviet Bloc,

and the rigidities of a centrally-planned economy. Economic stagnation marked the

period after reunification from 1975 to 1985. In 1986, the Sixth Party Congress approved

a broad economic reform package that introduced market reforms and set the

groundwork for Vietnam's improved investment climate. Substantial progress was

achieved from 1986 to 1997 in moving forward from an extremely low level of

development and significantly reducing poverty. The 1997 Asian financial crisis

highlighted the problems in the Vietnamese economy and temporarily allowed opponents

of reform to slow progress toward a market-oriented economy. GDP growth averaged

6.8% per year from 1997 to 2004 even against the background of the Asian financial

crisis and a global recession. Since 2001, Vietnamese authorities have reaffirmed their

commitment to economic liberalization and international integration. They have moved to

implement the structural reforms needed to modernize the economy and to produce

more competitive, export-driven industries. The economy grew 8.5% in 2007.

Vietnam's membership in the ASEAN Free Trade Area (AFTA) and entry into force of the

US-Vietnam Bilateral Trade Agreement in December 2001 have led to even more rapid

changes in Vietnam's trade and economic regime. Vietnam's exports to the US increased

900% from 2001 to 2007.

Vietnam joined the WTO in January 2007, following over a decade long negotiation

process. WTO membership has provided Vietnam an anchor to the global market and

reinforced the domestic economic reform process. Among other benefits, accession

allows Vietnam to take advantage of the phase-out of the Agreement on Textiles and

Clothing, which eliminated quotas on textiles and clothing for WTO partners on 1 January

2005. Agriculture's share of economic output has continued to shrink, from about 25% in

2000 to less than 20% in 2007. Deep poverty, defined as a percent of the population

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living under $1 per day, has declined significantly and is now smaller than that of China,

India, and the Philippines. Vietnam is working to create jobs to meet the challenge of a

labor force that is growing by more than one-and-a-half million people every year. In an

effort to stem high inflation which took off in 2007, early in 2008 Vietnamese authorities

began to raise benchmark interest rates and reserve requirements. Hanoi is targeting an

economic growth rate of 7.5-8% during the next four years.

Population (2007): 85.2 million

Urban Population, 2007: 23.4 million (27.4 %)

GDP (purchasing power parity): $222.5 billion (2007 est.)

GDP (official exchange rate): $66.4 billion (2007 est.)

GDP - real growth rate: 8.5% (2007 est.)

GDP - per capita (PPP): $2,600 (2007 est.)

GDP - composition by sector

Agriculture: 19.4%

Industry: 42.3%

Services: 38.3% (2007 est.)

Population below poverty line: 14.75% (2007 est.)

Household income or consumption by percentage share: Lowest 10%: 2.9%;

Highest 10%: 28.9% (2007)

Inflation rate (consumer prices): 8.3% (2007 est.)

Investment (gross fixed): 40% of GDP (2007 est.)

Labor force: 45.73 million (2007 est.)

Unemployment rate: 5.1% (2007 est.)

Budget: Revenues: $18.28billion; Expenditures: $19.79 billion (2007 est.)

Public debt: 43.3% of GDP (2007 est.)

Industries: food processing, garments, shoes, machine-building; mining, coal,

steel; cement, chemical fertilizer, glass, tires, oil, paper

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Industrial production growth rate: 17.1% (2007 est.)

Current Account Balance: -$1.199 billion (2007 est.)

Agriculture products: paddy rice, coffee, rubber, cotton, tea, pepper, soybeans,

cashews, sugar cane, peanuts, bananas; poultry; fish, seafood

Exports: $48.3 billion f.o.b. (2007 est.)

Exports commodities: crude oil, marine products, rice, coffee, rubber, tea,

garments, shoes

Exports partners: US 21.2%, Japan 12.3%, Australia 9.4%, China 5.7%, Germany

4.5% (2006)

Imports: $60.75 billion f.o.b. (2007 est.)

Imports commodities: machinery and equipment, petroleum products, fertilizer,

steel products, raw cotton, grain, cement, motorcycles

Imports partners: China 17.7%, Singapore 12.9%, Taiwan 11.5%, Japan 9.8%,

South Korea 8.4%, Thailand 7.3%, Malaysia 4.2% (2006)

Reserves of foreign exchange and gold: $17.16 billion (31 December 2007 est.)

Debt external: $24.41 billion (31 December 2007 est.)

Stock of direct foreign investment - at home: $29.23 billion (2007 est.)

Currency (code): dong (VND)

Fiscal year: calendar year

Form of State: Communist State

(Source: GSO Vietnam, 2007)

Vietnam has been in transition from a centrally-planned to a market-based economy

since 1986. Despite the many positive reforms in the last few years, progress is slow and

trade and industrialization policy remains largely one of import substitution affording

disproportionate protection to the dominant state-owned sector.

High economic growth and development was achieved in the early-to-mid 1990s, but

growth slowed in the late-1990s due to the combined effects of the slow reform process

and declining foreign and domestic investment resulting from the regional economic

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crisis of 1997. Momentum has picked up but this is mostly due to high earnings from

crude oil exports.

As part of its efforts to improve the investment climate, the government is undertaking a

privatization program and is revising its investment laws.

The main deterrents to trade and investment are:

- the lack of a comprehensive and transparent legal system

- restricted land usage rights

- complex foreign investment laws

- continued corruption in infrastructure projects

- the poor state of the financial system

Eighty per cent of banking is controlled by five state owned banks. Another 12 per cent of

the market is controlled by semi-autonomous domestic players. The sector is weighed

down by non-performing loans and government lending practices which favor SOEs.

Standard and poors rate the systemic risk in the banking sector as one of the highest in

the Asia-Pacific region (along with China and Indonesia). As a long-term objective,

Vietnam is committed to global economic integration through participation in APEC, the

ASEAN Free Trade Area and World Trade Organization (WTO). Since joining ASEAN in

1995, Vietnam's exports to ASEAN countries have grown an average 23-25 per cent per

annum.

ASEAN-initiated FDI accounts for 30 per cent of total FDI. The US-Vietnam Bilateral

Trade Agreement was ratified in December 2001 and Vietnam became a member of the

WTO in November 2006.

As a signatory to the ASEAN Free Trade Area, Vietnam is required to reduce many of its

tariffs to less than five per cent by 2006. Vietnams membership of the WTO also willrequire a more level playing field and more transparency in the economy. Strong

protection for domestic firms is, however, expected to continue for some time.

Political climate

The Socialist Republic of Vietnam (SRV) is a one-party communist state. Although

conservatively communist, Vietnam has undertaken some reforms in recent years. The

political stability of Vietnam lies in the strength of its single, undisputed ruling politicalparty, the Communist Party of Vietnam (CPV).

At the senior level Vietnam is run by a troika consisting of the President, the Prime

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Minister and the General Secretary of the CPV.

In 1986, at a time of economic crisis following years of economic stagnation, the Party

embarked upon a program of limited market-based economic reforms. Under these

reforms known as doi moi the private sector was permitted to exist in a limited capacity.

There was also greater decentralized economic planning and a greater acceptance of

market forces as the determinant of prices and production. This model has been steadily

pursued and a socialist market-oriented economy is now in place. During 1994-1995, at

the height of the open door policy, the Vietnamese Government continued its emphasis

on political and social stability as it seeks to erase any remnants of domestic turmoil

resulting from numerous years of war. The pace of economic liberalization has

outstripped political advances. Vietnams leadership continues to acknowledge the need

for political conservatism and initiates limited political change.

The CPVs exclusive role in government is constitutionally mandated. Members of the

Central Committee of the CPV come from the top echelons in the bureaucracy, the

military, the internal security services, the media and the many state owned enterprises,

which form the core of the nations economy.

There is a growing sense of grass-roots democracy in Vietnam. A slow but steady move

towards a more open and transparent system based on the rule of law is expected,

within the context of a one party state. The Vietnamese Government will continue topursue a policy of gradual economic reform, covering state enterprise, banking, foreign

trade and public administration. Implementation, however, will remain a challenge,

potentially slowed by vested interests.

Trade relations and statistics

Since the collapse of the USSR, Vietnam has largely set aside ideological considerations

in seeking to integrate itself into the international community. The relationship betweenVietnam and the USA continues to be complex. Although the economic relationship has

expanded through the recent ratification of a Bilateral Trade Agreement other issues

have represented challenges to both sides. Vietnams relationship with Russia is still

significant via defense links, however, trade and aid links have diminished in comparison

with earlier years. Japan is now Vietnams major trading partner and bilateral aid donor.

Vietnam applied to join the WTO in 1995 and was formally accepted into the WTO in

November, 2006. It became a member of the Asia Pacific Economic Cooperation (APEC)forum in November 1998.

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Although there have been periods when Vietnams relationship with China has

historically been adversarial, in recent years Vietnam and China have formed a closer

relationship with a broader range of exchanges. Vietnam has shown interest in China

and the achievements of Chinas leadership in transforming China from a centrally

planned to market economy. The interests of a range of European nations in remaining

politically and commercially active in Vietnam are still quite strong; notably the French,

Germans, British and Swedish have strong diplomatic and commercial representation on

the ground.

Neighboring countries such as Korea, Singapore, Malaysia, Thailand and Taiwan are all

significant sources of foreign direct investment for Vietnam, and recent investment

promotion efforts by the Vietnamese Government are aimed at investors from these

countries. Under the AFTA Agreement there will be a tariff-free zone within ASEAN in

place no later than 2006. Vietnam is taking steps to prepare to compete with other

ASEAN members under AFTA and companies from other ASEAN nations are eagerly

awaiting new opportunities within Vietnam that will result.

Trade Bloc review

Vietnam belongs to the WTO (joined 2007), ASEAN and AFTA, so the marketing

environment of Vietnam is strongly affected by the engagement to these trade blocs.

The Association of Southeast Asian Nations or ASEAN was established on 8 August

1967 in Bangkok by the five original Member Countries, namely, Indonesia, Malaysia,

Philippines, Singapore, and Thailand. Brunei Darussalam joined on 8 January 1984,

Vietnam on 28 July 1995, Lao PDR and Myanmar on 23 July 1997, and Cambodia on 30

April 1999.

As of 2006, the ASEAN region has a population of about 560 million, a total area of 4.5million square kilometers, a combined gross domestic product of almost US$ 1,100

billion, and a total trade of about US$ 1,400 billion.

The ASEAN Economic Community shall be the end-goal of economic integration

measures as outlined in the ASEAN Vision 2020. Its goal is to create a stable,

prosperous and highly competitive ASEAN economic region in which there is a free flow

of goods, services, investment and a freer flow of capital, equitable economic

development and reduced poverty and socio-economic disparities in year 2020.

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The ASEAN Economic Community shall establish ASEAN as a single market and

production base, turning the diversity that characterizes the region into opportunities for

business complementation and making the ASEAN a more dynamic and stronger

segment of the global supply chain. ASEANs strategy shall consist of the integration of

ASEAN and enhancing ASEANs economic competitiveness.

In moving towards the ASEAN Economic Community, ASEAN has agreed on the

following:

- institute new mechanisms and measures to strengthen the implementation of its

existing economic initiatives including the ASEAN Free Trade Area (AFTA), ASEAN

Framework Agreement on Services (AFAS) and ASEAN Investment Area (AIA);

- accelerate regional integration in the following priority sectors by 2010: air travel, agro-

based products, automotives, e-commerce, electronics, fisheries, healthcare, rubber-

based products, textiles and apparels, tourism, and wood-based products.

- facilitate movement of business persons, skilled labor and talents; and

- strengthen the institutional mechanisms of ASEAN, including the improvement of the

existing ASEAN Dispute Settlement Mechanism to ensure expeditious and legally-

binding resolution of any economic disputes.

Launched in 1992, the ASEAN Free Trade Area (AFTA) is now in place. It aims to

promote the regions competitive advantage as a single production unit. The elimination

of tariff and non-tariff barriers among Member Countries is expected to promote greater

economic efficiency, productivity, and competitiveness.

ASEANs newer members, namely Cambodia, Laos, Myanmar and Viet Nam, are not far

behind in the implementation of their CEPT commitments with almost 80 percent of their

products having been moved into their respective CEPT ILS. Of these items, about 66

percent already have tariffs within the 0-5 percent tariff band. Viet Nam has until 2006 to

bring down tariff of products in the Inclusion List to no more than 5 percent duties, Laos

and Myanmar in 2008 and Cambodia in 2010.

Following the signing of the Protocol to Amend the CEPT-AFTA Agreement for the

Elimination of Import Duties on 30 January 2003, ASEAN-6 has committed to eliminate

tariffs on 60 percent of their products in the IL by the year 2003. As of this date, tariffs on

64.12 percent of the products in the IL of ASEAN-6 have been eliminated. The average

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tariff for ASEAN-6 under the CEPT Scheme is now down to 1.51 percent from 12.76

percent when the tariff cutting exercise started in 1993.

The implementation of the CEPT-AFTA Scheme was significantly boosted in January

2004 when Malaysia announced its tariff reduction for completely built up (CBUs) and

completely knocked down (CKDs) automotive units to gradually meet its CEPT

commitment one year earlier than schedule. Malaysia has previously been allowed to

defer the transfer of 218 tariff lines of CBUs and CKDs until 1 January 2005.

Products that remain out of the CEPT-AFTA Scheme are those in the Highly Sensitive

List (i.e. rice) and the General Exception List. The Coordinating Committee on the

Implementation of the CEPTS scheme for AFTA (CCCA) is currently undertaking a

review of all the General Exception Lists to ensure that only those consistent with Article9(b)1 of the CEPT Agreement are included in the lists.

ASEAN Member Countries have also resolved to work on the elimination of non-tariff

barriers. A work programmed on the elimination of non-tariff barriers, which includes,

among others, the process of verification and cross-notification; updating the working

definition of Non-Tariff Measures (NTMs)/ Non-Tariff Barriers (NTBs) in ASEAN; the

setting-up of a database on all NTMs maintained by Member Countries; and the eventual

elimination of unnecessary and unjustifiable non-tariff measures, is currently being

finalized.

In an effort to improve and strengthen the rules governing the implementation of the

CEPT Scheme, to make the Scheme more attractive to regional businessmen and

prospective investors, the CEPT Rules of Origin and its Operational Certification

Procedures have been revised and implemented since 1 January 2004. Among the

features of the revised CEPT Rules of Origin and Operational Certification Procedures

include: (a) a standardized method of calculating local/ASEAN content; (b) a set of

principles for determining the cost of ASEAN origin and the guidelines for costing

methodologies; (c) treatment of locally-procured materials; and (d) improved verification

process, including on-site verification.

In order to promote greater utilization of the CEPT/ AFTA Scheme, substantial

transformation has also been adopted as an alternative rule in determining origin for

CEPT products. The Task Force on the CEPT Rules of Origin is currently working out

substantial transformation rules for certain product sectors, including wheat flour, iron

and steel and the 11 priority integration sectors covered under the Bali Concord II.

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Direction of Trade ASEANs exports had regained its upward trend in the two years

following the financial crisis of 1997- 1998 reaching its peak in 2000 when total exports

was valued at US$ 408 billion. After declining to US$ 366.8 billion in 2001, as a result of

the economic slowdown in the United States and Europe and the recession in Japan,

ASEAN exports recovered in 2002 when it was valued at US$ 380.2 billion. The upward

trend for ASEAN-6 continued up to the first two quarters of 2003. Intra-ASEAN trade for

the first two quarters of 2003 registered an increase of 4.2 and 1.6 percent for exports

and imports respectively.

On 11th January 2007, Vietnam joined the World Trade Organization (WTO) and

became its 150th member. Prior to this final step of the accession, the General Council

approved Vietnams membership after years of preparation. The decision ended over 11

years of preparation, including eight years of negotiation. The working party of members

negotiating with Vietnam was set up on 31 January 1995 and met 14 times between July

1998 and October 2006.

WTO accession poses major challenges to Vietnams economy. However, with

cooperation extended by the members, Vietnam will make the most of opportunities,

successfully handling challenges, ensuring fast and sustainable growth, pro-actively

playing its part for the development of the multilateral trading system.

The package of Vietnams accession documents consists of:

- Vietnams commitments on goods of tariffs, quotas and ceilings on agricultural

subsidies, and in some case the timetable for phasing in the cuts.

- Vietnams commitments on services the 60-page document (also a schedule)

describing in which services it is giving access to foreign service providers and

any additional conditions, including limits on foreign ownership.

- The working partys 260-page report describing Vietnams legal and

institutional set up for trade, along with commitments it has made in many of these

areas.

For the majority of agricultural and non-agricultural goods, Vietnam is promising ceilings

(or bound rates) on duties ranging between zero and 35%. Some of these involve

reductions phased over periods up to 2014, the precise end date varying from product to

product.

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Among products with higher ceilings are: alcoholic drinks, tobacco products, instant

coffee and some related products, new and used motor vehicles and components, and

roof tiles. Used vehicles less than five years old can be charged additional flat-rate duties

up to specified limits. These bound rates are legal ceilings. The actual duties that

Vietnam can charge (the applied rates) can be lower than the committed rates. Among

the details of Vietnams commitments is a promise not to charge higher applied rates on

rapeseed (also known as colza or canola) and derived meal, oil and other products than

the duties actually charged on soy products allowing the oilseed products to compete

with soy.

Vietnam has also signed the plurilateral Information Technology Agreement

(plurilateral meaning only some WTO members have signed). For these products,

Vietnam has agreed to allow imports in duty-free. In some cases, the zero duty will apply

immediately; in others it will be achieved gradually over periods ending in 2010 to 2014.

Vietnam has made commitments on a range of services. In some cases Vietnam

reserves the right to limit foreign ownership of service companies operating in Vietnam

for example in some telecommunications services the eventual limits can be 49% or

65%, depending on the service. In a few cases, permitted foreign ownership is

immediately 100% (for example accountancy). In many cases, the permitted foreign

ownership is phased in to reach 100% after a few years (for example express delivery

courier services after five years). As is normal in this sector, the effect of the

commitments depends also on complex relationships with domestic regulations for

example in the first two years, 100%-foreignowned architectural firms can only serve

foreign companies. The commitments and some of the regulations are in the schedule

(lists) of commitments; other information on the regulations is in the working party report.

State enterprises: commercial business (i.e. except for supplying the government) will beconducted on commercial terms without interference from the government. A number of

products are listed as subject to state trading enterprises because of consumption

restrictions, for cultural and moral reasons, or because they are natural monopolies:

tobacco products, petroleum, cultural products such as newspapers, journals and audio-

visual materials, and aircraft.

Privatization and equitization of state enterprises: this will be handled transparently, with

Vietnam supplying annual reports while the program lasts.

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Pricing and price controls: Vietnam will comply with WTO agreements and notify the

WTO of actions it takes to control prices.

WTO agreements dealing with rules: Vietnam will comply with the Customs Valuation,

Rules of Origin, Pre-shipment Inspection, Anti-dumping, Safeguards, Subsidies, and

Trade-Related Investment Measures agreements, with some provisions phased in over a

period.

Vietnams automotive market

Vietnams automotive industry is one of the youngest in the region. Local assemblingof

cars started at the end of the last century and the automotive market has been open for

imports of new cars on a larger scale only since 2003. Used cars to a certain age

maximum are allowed for import only since 2006. Hence, Vietnams car penetration is

one of the lowest in the world, behind all other ASEAN countries as well as India and

China. Because of this recent opening, the car park in Vietnam is very young.

The car market is characterized through very high prices which developed in a phase

when the Vietnamese government wanted to develop the local automotive industry

through protection measures like an import licensing scheme and high customs duties on

CBUs. In addition, various taxes and fees applicable when buying new cars, like the

special consumption tax of 50%, increase cost substantially.

Notwithstanding the low average income and the very high car prices, the passenger car

market is booming since 2007, when new registrations doubled. Both locally assembled

and imported cars are in high demand. For certain locally assembled models there are

waiting lists for about 10 month. We expect further growth of about 35% annually until

2010.

The Vietnamese government latest plans regarding import licenses, tariffs, taxes and

registration fees are a major factor of uncertainty. While WTO and AFTA memberships

will eventually open up the markets and lower tariffs and taxes and the Vietnamese

government initially seemed to fulfill demands earlier as expected today all moves are

aiming at closing up the market again. With more liberal regulations, the car market in

Vietnam might grow much faster than our estimate of 17%.

The distribution structure for new cars is currently shifting to a more organized form

OEMs with an assembling joint venture in Vietnam will organize distribution through

these joint ventures. This was made possible after these foreign invested joint ventures

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were granted import licenses for new cars. Other OEMs without an investment in a

manufacturing presence also nominate official distributors. Until today, the market for

models not assembled in Vietnam was dominated by grey importers and dealers. They

will have a hard standing in the future and are expected to focus on special models the

official distributors are not selling in Vietnam as well as on used cars.

Financing of cars is just developing, with loans being the preferred method of financing.

In a market with very high prices, car financing has a high potential.

Vietnam has no own car brand. There are several OEMs active in Vietnam, mostly

through manufacturing joint ventures with state-owned companies. Although the market

is growing strongly, it is still too small for each manufacturing operation to reach

efficiency. This is one reason why prices are still very high in Vietnam. Vietnam is notused as a manufacturing hub in ASEAN or Asia in general. Other countries like Malaysia

or Thailand are in a better position in this respect. Operations in Vietnam were set-up to

enter the local market, since import of new cars was not allowed for several years. The

Vietnamese government wants to develop the automotive industry but local assembling

operations at least with foreign investment have failed to generate a high localization

rate. One reason is the limited supplier structure in Vietnam.

In line with the size of the car park, the aftermarket is still small. However, it is growing by

over 20% p.a. over the next years to 2010. Growth of the aftermarket is driven by the

growth in car sales and the aging of the still very young car park. The distribution system

for spare parts is just forming. There is no dominating or even larger independent player

in a market, where quality is a big issue for customers who can afford and are willing to

buy a car at the current price level.

In total, the car market as well as the aftermarket is both attractive because of high

growth rates and a large potential market of over 80 million Vietnamese. However, the

market is still too small to justify large scale investments just to serve the domestic

market. With further opening of the local market, which will happen in line with WTO and

AFTA agreements, using Vietnam as a manufacturing base for exports will be more

feasible.

The major risk in Vietnam is the governments policy with respect to the automotive

industry. The Vietnamese government is torn between opening up the market so as to

allow more competition and to eventually lower prices for customers and the wish to

protect the local automotive industry and to limit the expansion of the car park which is

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leading to traffic jams due to a lack in infrastructure. Due to this lack in overall strategy,

there are rather erratic jumps in tariffs and other taxes and fees levied on the import or

purchase of CBUs, CDKs and parts. Hence, Long-term planning is difficult and one

needs to think in scenarios.

To sum up, here are ten basic things to know about Vietnam:

1. Vietnam's population is over 80 million and it's a developing economy with per capita

GDP of more than $800 - distribution of income is relatively even.

2. Vietnam belongs to the WTO (joined 2007), ASEAN and AFTA.

3. The auto market has only recently opened up, so car ownership rates (3 cars per

1,000 people) are well behind China and India; however, the young parc offers

considerable growth potential for vehicle sales and the aftermarket.

4. High import tariffs have meant high car prices; government policy on import duties -

applying to both CBUs and KD kits/parts - remains an area of controversy and

uncertainty though WTO membership should reduce risks for international participants.

5. In a market with high prices and low incomes, financing purchases through loans is

becoming increasingly important.

6. There is no state champion or Vietnam 'own brand'; several international OEMs have

established JVs with state enterprises; brand loyalty is weak, with retail consumers

influenced chiefly by product and price.

7. The auto supplier industry is thus far severely underdeveloped, keeping localization

low.

8. The Vietnamese car parc has grown from 100,000 cars in 2000 to 300,000 by the end

of 2007; 30% of the car parc is accounted for by Toyota brand cars led by the Innova,

Camry and Vios models.

9. CKD assembly of cars began in 1995 and JVs involving Toyota, Suzuki and

Honda have led the market; Ford, Hyundai and Kia are also significant and Chevrolet is

now growing extremely rapidly (Matiz and Captiva).

10. The car market is forecast to grow to over 120,000 units pa in 2010; MPVs and SUVs

are big sellers.

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(Information supplied by Globis - a Germany-based consulting company with broad

international coverage regarding strategy development, especially entry strategies into

new markets).

COUNTRY- TRADE BLOC ENTRY STRATEGIES

Choosing the best way to enter a market is no simple task. Should the market entry

objective be rapid acquisition of significant market share or stay below the radar to

secretly build market share? There is no single strategy to fit all companies, products and

markets.

There are several ways that Audi can choose to enter Vietnam market. Each way has it

owns advantages and disadvantages, so Audi should analyze its way carefully to reach

the opportunities in Vietnam.

Its broad choices are indirect exporting, direct exporting, licensing, joint ventures, and

direct investment. These five market-entry strategies involve more commitment, risk,

control, and profit potential.

Indirect and Direct Export

The normal way to get involved in a foreign market is through export. Occasional

exporting is a passive level of involvement in which Audiexports from time to time, either

on its own initiative or in response to unsolicited orders from abroad.

Active exporting takes place when the company makes a commitment to expand into a

particular market. In either case, the company produces its goods in the home country

and might or might not adapt them to the foreign market.

Companies typically start with indirect exporting-that is, they work through independent

intermediaries. Domestic-based export merchants buy the manufacturers products andthen sell them abroad. Domestic-based export agents seek and negotiate foreign

purchases and are paid a commission. Included in this group are trading companies.

Cooperative organizations carry on exporting activities on behalf of several producers

and are partly under their administrative control. They are often used by producers of

primary products such as fruits or nuts. Export management companies agree to

manage a companys export activities for a free. Indirect export has two advantages.

First, it involves less investment; Audi does not have to develop an export department,an overseas sales force, or a set of foreign contracts. Second, it involves less risk;

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because international marketing intermediaries bring know-how and services to

relationship, the seller will normally make fewer mistakes.

Audi eventually may decide to handle their own exports. The investment and risk are

somewhat greater, but so is the potential return.

Audi can carry on direct exporting in several ways:

- Domestic-based export department or division: Might evolve into a self-contained

export department operating as a profit center.

- Overseas sales branch or subsidiary: The sales branch handles sales and

distribution and might handle warehousing and promotion as well. It often serves

as a display and customer service center.

- Traveling export sales representatives: Home-based sales representatives are

sent abroad to find business.

- Foreign-based distributors or agents: These distributors and agents might be

given exclusive rights to represent the company in that country, or only limited

rights.

Whether companies decide to export indirectly or directly, many companies use

exporting as a way to test the waters before building a plant and manufacturing a

product overseas.

Licensing

Licensing is a simple way to become involved in international marketing. Audi might

licenses a Vietnamese company to use a manufacturing process, trademark, patent,

trade secret, or other item of value for a fee or royalty. Audi can gains entry at little risk;

Vietnamese company gains production expertise or a well-known product or brandname.

Licensing has potential disadvantages. Audi might have less control over the licensee

than it does over its own production and sales facilities. Furthermore, if the licensee is

very successful, Audi has given up profits; and if and when the contract ends, Audi might

find that it has created a competitor. To avoid this, the licensor usually supplies some

proprietary ingredients or components needed in the product; but the best strategy is for

the licensor to lead in innovation so that the licensee will continue to depend on the

licensor.

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There are several variations on a licensing arrangement. Audi might sell management

contracts to owners of foreign hotels to manage these businesses for a free. The

management firm may even be given the option to purchase some share in the managed

company within a stated period.Another variation is contract manufacturing, in which the

firm hires local manufacturers to produce the product. Contract manufacturing gives the

company less control over the manufacturing process and the loss of potential profits on

manufacturing. However, it offers a chance to start faster, with less risk and with the

opportunity to form a partnership or buyout the local manufacturer later. Finally, Audi can

enter a foreign market through franchising, which is more complete form of licensing. The

franchiser offers a complete brand concept and operating, system. In return, the

franchisee invests in and pays certain fees to the franchiser.

Joint Ventures

Audi may join with Vietnamese investors to create a joint venture company in which they

share ownership and control. A joint venture may be necessary or desirable for economic

or political reasons. The foreign firm might lack the financial, physical, or managerial

resources to undertake the venture alone; or the foreign government might require joint

ownership as a condition for entry.

Joint ownership has certain drawbacks. The partners might disagree over investment,

marketing, or other policies. One partner might want to reinvest earnings for growth, and

the other partner might want to declare more dividends. Joint ownership can also prevent

a multinational company from carrying out specific manufacturing and marketing policies

on a worldwide basis.

Direct Investment

The ultimate form of foreign involvement is direct ownership of foreign-based assembly

or manufacturing facilities. Audi can buy part or full interest in a local company or builds

its own facilities. If the market appears large enough, foreign production facilities offer

distinct advantages. First, Audi secures cost economies in the form of cheaper labor or

raw materials, foreign-government investment incentives, and freight savings . Second,

Audi strengthens its image in the host country because it creates jobs. Third, Audi

develops a deeper relationship with government, customers, local suppliers, and

distributors, enabling it to adapt its products better to the local environment. Fourth, Audi

retains full control over its investment and therefore can develop manufacturing and

marketing policies that serve its long-term international objectives. Fifth, Audi assures

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itself access to the marketin case the host country starts insisting that locally purchased

goods have domestic content.

The man disadvantage of direct investment is that Audi exposes a large investment to

risks such as blocked or devalued currencies, worsening markets, or expropriation. Audi

will find it expensive to reduce or close down its operations, because the host country

might require substantial severance pay to the employees.

In reality, most entry strategies consist of a combination of different formats. We refer to

the process of deciding on the best possible entry strategy mix as entry strategy

configuration.

Audi now is applying the first entry strategy to Vietnam- Indirect export. In October 2008,

Audi has co-operation with the Automotive Asia group, which sells the premium cars as

the exclusive importer. Initially Audi will introduce two models, the A8 4.2L TFSI and the

Q7 4.2L TFSI. In 2009, the model range will be increased with the addition of the A6, the

Q5 and the A4. In addition to the showroom, the new 1,600sqm facility in Ho Chi Minh

City is expected to offer customers service and genuine parts. Peter Schwarzenbauer,

member of the board of management for marketing and sales at Audi, said: "The

developing marke

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