Volkswagen in China - Report Example

Individual Review on poster presentation (Volkswagen in China) Table of Contents Individual Review on poster presentation (Volkswagen in China Introduction 3 The success story of Volkswagen in Chinese auto sector 3 The history of Chinese auto sector 5 Strategy followed by Volkswagen 10 Introduction Volkswagen, the largest car manufacturers of Europe has accrued the position of a popular international car in the Chinese auto sector. For the company, China is a highly profitable market. Brands like Audi Luxury and Jetta and Lavida are quite successful in China. At present the main aim of the company is to overtake the sales and profitability of one of its strong competitor Toyota Motor Corp in the Chinese market by 2018 (Cremer, 2010). Because of growing demand for innovative cars in China, Volkswagen is paying special attention to this strategic market. The success story of Volkswagen in Chinese auto sector Volkswagen has a long history in China and plays a vital role in the Chinese automotive industry. In 1985, the Company signed a deal with SAIC that was formed by the merger of several local car manufacturers of China. This was a strategic move in history for the Chinese auto industry as well as Volkswagen. The company, Volkswagen Automotive Company Ltd (SVW) first identified those market segments which can be easily served with the existing product portfolio. Hence, Audi 100 became the Government officials car and Jetta emerged as commonly used taxies. Such strategic monopoly of the company assisted it to acquire a secure market share in China. This was the first phase of market penetration for Volkswagen in China and soon the company started developing strategies to further penetrate the market and expand its market share (Ray, 2003). Volkswagen was the first western auto manufacturer that entered China. The company was smart enough to be used as taxi and government cars which helped it to gain economies of scales. This strategic move also had a marketing aspect. The cars running on the roads of Shanghai acted as company’s showroom and thus more and more people came to know about the brand portfolio of Volkswagen. With time, the taxi fleet in Shanghai underwent an up gradation and each time a new model from Volkswagen’s brand portfolio has replaced the old one. Eventually, the company entered joint venture with local companies to develop a stable and reliable supply chain in the market. However, with increasing market competition from the local as well as international players in the auto industry, market share of Volkswagen started declining in early 2000s and the company went into crisis (EBF, 2007, p.47). With its innovation and creative thinking, the company introduced changes in its products as well as business strategy and reoccupied its lost image and established itself as one of the most popular cars. The history of Chinese auto sector With time the Chinese auto sector has undergone a drastic change. China had always been an attractive destination for international companies for setting their production units. This was mainly because of high supply of cheap labour and low cost of resources. However, with increase in economic growth of China, the demand for goods and services increased to a great extent. Figure 3: Economic growth of China v/s domestic demand (Source: Economic Dreams - Economic Nightmares, 2008) Improvement in the economic condition of China accelerated the demand among local consumers. Purchasing power of people increased and this helped them to improve their living standards. This increase is demand directly affected the auto sector of China. With time, demand for small cars increased and China emerged as an attractive potential market among several international car manufactures. Figure 4: Increase in automobile sale in China (Source: McDonough, 2009) Apart from Volkswagen, General Motor (GM) also entered the Chinese auto sector in 1997 and set its subsidiary as Shanghai General Motor. The company closely followed the strategy that was used by Volkswagen to enter the Chinese market. GM acquired shares of several Chinese local car manufacturers and soon the company’s brand name gained popularity. After understanding the basic consumer behaviour in China, GM introduced its popular brands like Cadillac and Chevrolet that performed well in China’s car market. Almost all the car sold under the brand name of GM was manufactured in China. Soon China turned as a high profit making market for GM. To balance the growing demand, GM opened other facilities and increased its production capacity. However, the problem of high operating cost in US market was absent in China. After entry of Volkswagen and General Motor; Honda, a Japanese car manufacturing company made its entry in China’s auto sector. Soon in 2000, many other Japanese carmakers like Toyota and Nissan entered the market and reported a healthy growth in sales. Many other famous international brands like BMW and Mercedes also made an entry in China’s automobile sector (EBF, 2007, p.47-48). Figure 5: Quality difference in Chinese v/s international cars (Source: Reuters, n.d.) Success of China’s auto sector is attributed to world class technology, high degree of innovation and creativity and positive external factors. The Chinese car industry is paying special attention to green cars. Some of their qualities have been portrayed with help of a graph. Figure 6: Green car in China (Source: TNS, 2010) Therefore, it can be said that the Chinese auto industry is still in a transformational phase where the demand is growing day by day. To cater to the changing requirement of the customers and the changes taking place in the market dynamics, several multinational companies are trying hard to expand their market share. These companies collaborate with the local carmakers to gather data related to Chinese customers and then use innovation and technology to develop brands that are effective in fulfilling customer’s requirement in an innovative manner. Figure 7: Chinese Car Navigation Market Size, 2005-2010（Unit:10,000 sets） (Source: Research in China. 2010) Figure 8: Vehicle purchases leap 84 percent year-on-year in China (Source: Fangfang, 2010) After considering the growth in China’s auto sector, Moody, the global leading rating industry said that it will update the forecast for China’s light vehicle market. Initially, it had forecasted sales of 14.3 million and later on it was updated to 15.7 million for the year 2011. The agency also pointed out that in near future it expects a steady growth of 10 percent per year (Fangfang, 2010). Strategy followed by Volkswagen The company itself accepted that though China is a large market but it was no easy for Volkswagen to enter it. The Chinese market has its own characteristic that differs a lot from other developed nations like UK and US. In 1985, when Volkswagen made its entry in China, the country was following stringent rules and regulations. The government was more interested in taking control over the economy. The local players feared that entry of foreign companies in Chinese market might hamper the growth of local industries. Hence, they were not much interested in undertaking joint ventures with foreign companies. Figure 9: Competitors of Volkswagen in China (Source: Volkswagen, 2006, p.12) With an innovative and creative strategy, Volkswagen managed to emerge as a successful car manufacturer but the company failed to retain its competency and in 2005, the market share fell from 24.2 percent to 17.3 percent (Wessel-Aas, 2005). While operating in the Chinese market Volkswagen lost its creativity and innovation which should be maintained by each and every international level company. On the other hand, it acquired the negative aspects of publicly run Chinese firms there the management is less bothered regarding proactive measures. Figure 9: Situation in mid 2005 (Source: Volkswagen, 2006, p.17) In Shanghai market, the cars offered by Volkswagen were loosing their attractiveness. The existing brands were more famous as taxis and retail customers found them outdated. On the other hand, other multinational car manufacturers introduced their new cars in China to attract the customers. All this resulted in declining market share of Volkswagen. The management realised that the business strategy should be revived to regain its competitive edge in the market and soon the company announced ‘Olympic’ programme. This programme was introduced on 24 May 2006. Figure 10: Restructuring Programme - “Olympic Program” (Source: Volkswagen, 2006, p.18) The company introduced this programme to minimise intra-company competition among its two divisions SAIC and FAW. Often the products of these divisions targeted same customer base. The company decided to solve this problem by increasing cooperation among these units. It had planned to introduce new and innovative model that can fulfil requirements of Chinese customers. The management also decided to introduce cost reduction policies. Restructuring in the sales and marketing policies were made mandatory because this assists in regaining the lost market image of Volkswagen. All these strategic moves assisted the company to regain its competitive position in Chinese auto industry. The company announced that it will invest $2 Billion in China to build two new plants. This will assist the company in increasing the sales from 150,000 units to 500,000 units in South China within a time frame of five years (Inside Line, 2010). Therefore, by introducing innovation and creativity in business, Volkswagen managed to retain an important position in the Chinese auto industry. Reference Cremer, A. 29 July, 2010. Volkswagen Quarterly Profit Quadruples on China, U.S. [Online]. Available at: http://www.bloomberg.com/news/2010-07-29/volkswagen-posts-biggest-quarterly-profit-in-two-years-on-golf-a5-demand.html [Accessed on November 04, 2010]. EBF. 2007. Volkswagen in China: Running the Olympic Marathon. [Pdf]. Available at: http://www.ashoksom.com/12-VW_Olympic_Program_in_China.pdf [Accessed on November 04, 2010]. Economic Dreams - Economic Nightmares. January 31, 2008. Brad Setser Argues Against the China Decoupling Thesis. [Online]. Available at: http://forestpolicy.typepad.com/economics/trade/ [Accessed on November 04, 2010]. Fangfang, L. February 06, 2010. Minivans drive up auto sales growth. [Online]. Available at: http://www.Chinadaily.com.cn/business/2010-02/06/content_9438564.htm [Accessed on November 04, 2010]. Inside Line. April 30, 2010. Volkswagen Invests $2 Billion in China. [Online]. Available at: http://www.insideline.com/volkswagen/volkswagen-invests-2-billion-in-China.html [Accessed on November 04, 2010]. McDonough, M. November 09, 2010. Chinese Consumers May Have Only Begun to Teethe. Fiat Economics. [Online]. Available at: http://fiateconomics.com/?tag=chinese-auto-sales [Accessed on November 04, 2010]. Reuters. No date. With Volvo, China eyes M&A abroad to win at home. [Online]. Available at: http://in.reuters.com/article/idINIndia-45930920100205 [Accessed on November 04, 2010]. Ray, K. 2003. The Chinese Car Industry. SACU. [Online]. Available at: http://www.sacu.org/cifc13.html [Accessed on November 04, 2010]. Sri Lanka Entertainment and Information Portal. No date. Audi 100. [Online]. Available at: http://www.srilankadot.com/wiki-Audi_5000 [Accessed on November 04, 2010]. TNS. June 01, 2010. Beijing Autoshow 2010 an ideal stage to promote brand perception in China. [Online]. Available at: http://www.tnsglobal.com/news/news-BB6CBA00175645E5A5677D5E204CF571.aspx [Accessed on November 04, 2010]. Volkswagen. 24 May 2006. “Olympic Program”. [Pdf]. Volkswagen Group China. Available at: http://www.volkswagenag.com/vwag/vwcorp/info_center/de/talks_and_presentations/2006/05/the_automotive_value.-bin.acq/qual-BinaryStorageItem.Single.File2/240506_Vahland_.pdf [Accessed on November 04, 2010]. Wessel-Aas. July 01, 2005. China--big, but not easy: German car manufacturer Audi--a Volkswagen Group company--hopes its Chinese manufacturing facility in Changchun, will be a cost-effective and high quality hub for procurement. [Online]. Available at: http://www.allbusiness.com/transportation/motor-vehicle-manufacturing/865136-1.html [Accessed on November 04, 2010]. Read More