Globalization and Volkswagen - Essay Example

? Volkswagen and Globalisation Volkswagen and Globalisation College Volkswagen was incorporated in the year 1937. Volkswagen group is regarded as one the globe’s foremost automobile manufactures with its headquarters situated in Wolfsburg at Germany. By globalising its business activities, Volkswagen has not only spread its activities in all the five continents of the globe but also able to transfer its technology to these markets, has created local employment and by adding local contents in its products it has opened the doors for local businessmen and has offered jobs to local people, it has helped to nourish local industries in foreign markets and has achieved cost savings about 15 to 25% due to local contents. This research essay is going to analyse how Volkswagen has benefitted from the process of globalisation. Volkswagen and Globalisation Globalization can be referred as an active method of liberlisation, integration of market across the extensive array of markets internationally from goods to labor and from capital to services and technology. Globalisation is footed on the principle of freedom: the freedom to have commerce with the rest of the globe and capitalise on each nation’s relative gains; the freedom to invest where returns on capital are deemed to be highest within a tolerable magnitude of risk and the freedom to establish business of country’s of one’s choice, freedom to earn more profits or to enjoy a wide market share or for an individual to seek better wages or working atmosphere. (Hogan, 2005, p.294). In other words, it is a free and borderless world where capital, labour, technology flows where there is a high return. (Dehesa, 2006, p.1). As per Cairncross (1997), globalisation is the “death of distance”, for Panic (1997), it is the end of the “nation state” and for Ohmae (1990), and it is a “borderless world “with vanishing national disparities. As per Siebert & Klodt’s definition (1999:116), globalisation can be illustrated as the method of changing separate individual, national economies into a combined and integrated world economy. (Kleinert, 2004, p.2). Various empirical studies reveal a very crucial role played by MNCs (Multinational companies) in the process of globalisation. MNCs hold strong places in all three channels of globalisation and by clarity, they vouch for all foreign direct investment ( FDI), they are very active in trade , with thirty percent of global trade taking place within the MNCs and not between the MNCs and they transfer the knowledge and the bulk of technology across borders through intrafirm business transactions , create employment in host countries , responsible for rapid growth of GDP in the host countries and can be said to be responsible for increasing the standard of living in the countries, they conduct the business. (Ervin & Smith, 2008, p.24). Thus, due to the poignant position of MNCs, globalisation can be referred as the business decisions made by the MNCs as regards to their international business activities under transforming scenarios of international competition. (Kleinert, 2004, p.3). Globalisation also refers to the liberalisation of financial flow. Financial liberalisation eventually increases economic growth, efficiency and development by infusing new technical know and foreign investment. Economic liberalisation connotes introduction of policies like removal of credit controls, deregulation of interest rates, privatisation of banks controlled by government, elimination of credit controls, permitting foreign financial institutions in the domestic financial markets and relaxation of the bar on the entry of private sectors. In short, it can be said that liberalisation means removal all barriers from the inflow of capital outside the frontiers of a nation. (Ariccia, 2008, p.3). It is to be noted that one cannot expect that mere economic liberalisation cannot achieve inflow of capital as only about 14 nations could attract in excess of eighty-five percent of private flows to the developing nations. The capital inflow through FDI is directly depending upon the both the external and the internal market, the existence of institutions like state and market, geopolitical features, infrastructure that ensures a mixture of security to the capital and competitive returns.( Westerfield & Abbink ,2004, p.28). In the globalisation process, many MNCs have emerged out of merger and diversification, for instance, in the case of media companies like Time Warner and News Corporation. Merger and acquisition occur where companies merge or buy the other companies; thus, by diversifying, they branch out into entirely different areas of activity. (Ritzer, 2007, p.295). As per UNCTAD ( 2008b,p.3), in the year 2007, the aggregate value of mergers and acquisitions was around $ 1637 billion , which is a twenty-one percent increase as compared to 2000 figures, and they acted as the major element behind cross-border FDI. (Martell, 2010, p.144). According to UNCTAD (2008b, p.27), as of date, there are about 79,000 MNCs with 790,000 affiliates. Industries like pharmaceuticals, automobiles, utilities, telecoms, electronics, and petroleum comprise of sixty per cent of the business activities of the giant 100 MNCs. British Petroleum, General Electric, Shell and Toyota top the list of giant global MNCs in terms of value of assets owned by them in various countries trailed by Ford, Volkswagen, Vodafone and Exxon Mobile. These top MNCs are all Japanese, US, Dutch and UK based companies and in the year 2006, about eighty-five per cent of top MNCs had their head offices in Japan, Europe and in the US. About seventy-two percent of the top one-hundred MNC companies have been located in the following five countries” U.K, U.S.A, France, Japan and Germany. (Folsom & Boulware, 2004, p.153). In the year 2006, there were six MNCs from developing nations like Hong Kong, China, the Republic of Korea, Malaysia, Mexico and Singapore “which appeared in the top 100 MNCs in the globe. (Martell, 2010, p.144). Globalisation and German Economy Germany is deriving a lot of advantages from the globalisation process. Now, about 45% of German’s economic output comprises of exports. Its allocation of international trade stood at 7.5% for services and 9.7% for merchandises between 2000 to 2005 alone .Germany is the fifth largest receiver of FDI in the globe as it had attracted more than US$ 430 billion between 1995 to 2005. EU expansion towards Eastern provinces is reaped by German companies, and they are now able to expand their operations not only in Europe but around the globe. As per research made between 1996 and 2005 on the overseas direct investment by Deutsche Bundes bank reveals that overseas direct investment in foreign countries had augmented domestic employment on balance. Due to high tax burden, German is not attracting huge FDI as compared to U.S.A and other EU nations .Despite of advantages derived due to globalisation, German investment market is still trailing as there is no indication of enactment of reconciled private equity regulations including financing and mergers and acquisitions. However, to rectify this anomaly, the corporate tax was reduced from 39% to 30% in 2008. There is a wrong notion among German public that globalisation has reduced employment and enhanced the offshoring. German publics should be educated that Germany had achieved various benefits like enhanced competitiveness, higher production, higher funding for research and development and deployment of more investment in innovative technologies. (CGEA 2009). The above table illustrates that Germany has derived large benefits by espousing globalisation as a good chunk of jobs have been created in Germany within a decade. (CGEA 2009). As already pointed out, Germany has benefited out of globalisation as it attracted large FDI with which more industries have been established and more jobs and more exports have been achieved. (CGEA 2009). However, Germany witnessed a low level of investments in the year 2006 as compared to the year 1993. (CGEA 2009). This demonstrates, though the Germany is one of the benefactors of globalisation but not reaping advantages embedded with it fully. Further, German government has to make substantial improvements in their economic conditions to reap the full benefits of globalisation. As in France, Germans are also averse to growth, promoting and innovating ideas like use of nuclear energy, genetic engineering, etc. Further, on the German government side, there is a need of political determination like removal of the red tape system, deregulation of labor market and to reform the federal structures, etc. Thus, Germans should aware free movement of capital, services and goods and with an enhanced entrepreneurial atmosphere which will maximise welfare to the Germans. Thus, politicians in Germany should assume more responsibility to offer strong guidance and to be more open in this regard. (CGEA 2009). Volkswagen Volkswagen can be termed as a real, true MNC as it operates in all the five continents around the globe. In Africa , It operates in seven countries , in Asia , it functions in 17 nations , in Europe , it has business activities in more than 38 nations , In Australia , in three countries and in America , more than 31 countries /states. Volkswagen was incorporated in the year 1937. (Wiese, 2009, p.1). Volkswagen group is regarded as one the globe’s foremost automobile manufactures with its headquarters situated in Wolfsburg at Germany. (Potsch, 2011). Volkswagen brands are widely used in Europe and around the world and about one in every five new cars manufactured are offered from Volkswagen, which is about 19.5% of the aggregate of globe’s automobile production. Group has delivered around 6.189 million cars in 2007, which corresponded to about 9.8% of the global passenger car market. As of date, in more than 150 nations, Volkswagen brand is being sold. (Potsch, 2011). In the year 2010, Volkswagen Group has delivered around 7,203,000 units as opposed to 6,336,000 units 2009 which represent about 13.7% increase over the year 2009. In the year 2010, Volkswagen group has achieved sales of 7,278,000 units as against 6,310,000 units in the year 2009 which represents about 15.4 increase as compared to last year. Further, Volkswagen group has achieved a production of 7.358,000 units in the year 2010 as against 6,055,000 units in the year 2009 which represents about 21.5% as compared to earlier year. (Potsch, 2011). By expanding its operations throughout the world, Volkswagen is able to capture a market share 71.9% as of 2010, and it is expected to capture a market share of 100.9% in 2018. If you analyse the above table, for Volkswagen, China is the biggest market and in the modern Chinese market, Volkswagen is the first automotive pioneer. (Baumann, 2010, p.4).Volkswagen started its operation in 1984 in China as a joint venture between Shanghai Automotive Industrial Corporation and Volkswagen. Volkswagen Group is reaping the maximum benefits of globalisation, mainly by making joint venture with the local manufacturers and using local contents in the manufacturing. Volkswagen in China has a production of target of 4 million cars as of November 2010. (Potsch, 2011). In Million Units Accruals 2010 Projection for 2013 Projection for 2018 Aggregate Group’s Market Growth Achieved and projected 71.9 87.7 100.9 North America 14% 18.7% 19.6% Western Europe 14.5% 15,6% 16,5% Eastern Europe including Russia 3.2% 4.1% 6.1% China 16.9% 22.2% 26.8% Japan 4.9% 4.9% 4.4% South America 4.9% 6% 7.5% India 2.8% 4% 5.6% Rest of the Globe 10.8% 12.3% 14.3% (Potsch, 2011, p.8). Volkswagen had invested about € 9.5 billion in China from 1984 to 2010. Not only Volkswagen is making investment in its foreign joint ventures but also uses the cash flow and profits for the further investment in these regions .In the year 2010 alone, Volkswagen delivered around 1.924 cars in China. Volkswagen China is having around 16 companies in China and its total employee’s strength at China is about 41,000 and in other words, Volkswagen due to globalization has created around 41,000 jobs in China. To cater the high expectations of Chinese Customers, Volkswagen Group is contemplating to introduce more new products in China. Volkswagen is remaining as the top automotive company in China as of date. Volkswagen is planning to make further investment in China between 2011 and 2015 about € 10.6 billion, which is to be funded through internal cash flows and local liquidity. Volkswagen entry into China has helped China to nourish its local automobile industries as Volkswagen is using about 80 to 98% local contents from China. (Blanpain et al, 2008, p.54). In Brazil, Volkswagen is the top number 2 automobile manufacturer, both LCV and cars and its market share as of 2010 is about 22% As Brazil is believed to be deriving advantage from Global Recovery with combined profitability and growth, Volkswagen is planning to make further investment between 2010 and 2014 about € 2.3 billion and local automobile industries are anticipated to have a great leap as local content will be about 90% with an aggregate of manufacturing capacity of 920,000 units. (Potsch, 2011). Volkswagen Mexico's manufacturing unit situated in Puebla is a sparkling clean manufacturing unit with the updated technology, and it offers employment to more than 11,000 persons. (Phatak, 2006, p.65). It is to be noted that Volkswagen, for instance, which now offers a bigger share of global sales of Volkswagen than its German parent company. (Kitching, 2003, p.44). In Russia, Volkswagen has made an investment of € 970 million with an annual production capacity of 150,000 units with a total local content about 34%. In India, Volkswagen has made an investment of € 700 million with an annual production capacity of 110,000 units and with a typical local content of 75% Volkswagen has established a local sales company in Malaysia in 2005, and a Memorandum of Understanding was entered with DRB-Hicom Goal in Malaysia to manufacture VM models from 2012 onwards. In Indonesia, manufacture has stated from 2009 onwards with a local partner namely Indomobil for manufacturing VM brands in Indonesia. (Potsch, 2011). By globalising its business activities, Volkswagen has not only spread its activities in all the five continents of the globe but also able to transfer its technology to these markets, has created local employment and by adding local contents in its products it has opened the doors for local businessmen and has offered jobs to local people, it has helped to nourish local industries in foreign markets and has achieved cost savings about 15 to 25% due to local contents. (Potsch, 2011). (Potsch, 2011, p.8). Volkswagen strategy is to achieve higher productivity through lower product investment, and this is achieved by introducing various production processes like process standardization, 3-P –Workshop’s, re-tooling, Volkswagen purchasing process and through flex-line production. Over all deliveries to BRIC markets by Volkswagen has increased about 31.2% in January 2011 as compared to January 2010. Volkswagen deliveries to China and Brazil stood at 30.8% and 18.4% in January 2011 respectively. (Potsch, 2011). (Potsch, 2011, p.26). From the above graph, we can understand that Volkswagen performance in January 2011 has achieved a great leap than that of January 2010. Volkswagen acknowledges the particular context of globalisation and its social obligations to the local societies where its foreign subsidiaries function. Volkswagen is devoted in offering assistance to local societies to extend its support for the development new local industries by making more percentage of local components in their production of vehicles and extends both financial and technological helps to such units by making collaborations with local manufacturers wherever possible.(Potsch, 2011). By reaping the benefits of globalisation, Volkswagen is able to minimise its manufacturing cost and to enhance its sales, by exploiting available cheaper resources in the developing nations by establishing manufacturing units around the globe. A conclusion can be made from the case study of Volkswagen , that globalisation has impacted Volkswagen in many ways as it gained major profits due to globalisation as globalisation has facilitated Volkswagen to establish manufacturing units in all five continents of the globe and has become a true multinational company. By globalising its business activities, Volkswagen has not only spread its activities in all the five continents of the globe but also able to transfer its technology to these markets, has created local employment and by adding local contents in its products it has opened the doors for local businessmen and has offered jobs to local people, it has helped to nourish local industries in foreign markets and has achieved cost savings about 15 to 25% due to local contents. (Potsch, 2011). References Ariccia, Giovanni Dell. (2008). Reaping the Benefits of Financial Globalisation. New York: International Monetary Fund. Baumann, Christian. (2010). International Marketing Plan for Volkswagen. York: Grin Verlag. Blanpain Roger, Lansbury Russsell D & Wailes Nick. (2008). Globalization and Employment Relations in the Auto Assembly Industry. Hong Kong: Kluwer Law International. Confederation of German Employers’ Associations (CGEA). (2009, August). Globalisation and the German Economy. 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