The Entry of Volkswagen Into China's Car Market - Coursework Example

China is among the most attractive destination for investments for all the car manufacturing giants in the world. The country has the largest car market in the world. The favourable policies and macro-environment have been instrumental in the steady growth of the car industry. Volkswagen (VW) is among the biggest foreign car maker and earliest investors in China. Its market entry was quite successful. Currently, the company controls more than 30 percent of the car market in China. The current paper analyses the entry of VW into Chinas car market. Also, the claim of Uppsala model being a poor guide to the internationalization process has been assessed. Furthermore, the paper has explained the reasons behind multinationals considering the national culture in their engagement to foreign direct investment. Entry of Volkswagen in China VW was among the earliest investors in the car industry in China which succeeded in making direct investment and entry into Chinese market with a preliminary strategy. The company established joint venture with the only existing two-passenger car manufacturers in China; First Auto Works and Shanghai Auto Works. The first negotiations were held with Shanghai Auto Works in 1978(Huchet et al. 2007, p. 56). The negotiation process was necessitated by the policy on reformation and open door in 1979. By 1984, Shanghai-VW was established, and in 1985, they started local production of Santana. In 1988, FAW began the production of Audi and established the FAW-VW brand. Two years down the line, it introduced the Jetta brand to the market. As of today, VW can be considered among the most successful and prominent car maker in China where it controls an approximate of 50 percent of the Chinese car market. From a strategic perspective, the entry of VW in China started from the need by the company to create a competitive and strategic position within the Asian markets. As a result, VW aimed at achieving this through establishment of low-cost manufacturing site for all the automobiles sold in Asia, as well as for all the components that were to be incorporated for products manufactured outside China (Moon 2005, p. 151). Establishment of Shanghai-VW and FAW-VW joint ventures was critical with VW contributing significantly to the joint venture in terms of capital resources, expertise and technologically. The two joint ventures allowed VW to operate in Chinese markets as well as facilitating the supply of the accessory products. The management and establishment of long-term relationships in its joint ventures enhanced the success of VW in China. Also, the suppliers of foreign parts in the joint ventures enabled VW achieve an 85 percent content rate for the local markets. By 2000, China had a 15 percent market share of the car market in China (Zhao 2010, p. 90). However, after China entered into World Trade Organization (WTO), the VW officials had predicted that the industrial policy by the government would facilitate sales but the entry into WTO led to the collapse of the market share resulting into a crisis in VW. Other challenges included the coordination issues where the cars launched by the joint ventures targeted same consumer markets creating internal competition within VW. Also, china had acquired poor habits from the state-owned enterprises in China as lack of desire to progress on failure to react to challenges (Zhao 2010, p. 91). Uppsala Model The Uppsala model refers to the theory that explains the gradual intensification of foreign activities by the firm (Vahlne and Jan 2013, p. 189). The model is a component of the stage models that depend on behavioural-based theories that divide the internationalization process of a company into various phases. The model lies in the principle that the various phases of internationalization enhance the involvement of the company in international trade, an opportunity that facilitates the acquisition of empirical experience and knowledge. Based on the proponents of the model, the level of internationalization is ambiguously affected by the experience in foreign markets, size of the company and the time it has been in existence. The model is characterized by dynamism and attends to all export activities rather than direct foreign investment only. The stage models have been criticized and supported on the role they play during the internationalization process. Such criticisms predominantly highlight the incapability of explaining the behaviour of many multinational companies in the internationalization process. Most of the criticism is due to ignorance of the born globals. This means that born globals focus on global markets immediately after their establishment without prior knowledge of development stages (Vahlne and Jan 2013, p. 190). Despite Uppsala model contributing greatly to the broader understanding of the internationalization process of many firms, the model suffers lacks some fundamental basics in describing the Total Internationalization Process. For instance, the model fails in considering the management incentive and related effects to decision making. The model ignores the four sequential steps necessary when considering market entry as franchising. Such ignored entries prove to be difficult to be placed on the scale of the model. The model fails in explaining the reasons behind the foreign direct investment and the reasons for its use in ultimate market operations. For instance, the model fails to show why the export mode may not be conducted as the final stage during internationalization (Johanson and Jan-Erik 2009, p. 1411). Another limitation of the Uppsala model in the internationalization process lies in the fact that basic features of most firms may not be investment abroad, especially when assessing the intolerably high risk of investment. Nevertheless, there is a possibility of firms that do not invest abroad having risky and intolerable experiences. This may result when future general uncertainty of the industry remains high on belief that the first-mover advantage is necessary. In such a case, a firm may be compelled to invest abroad despite the adventure being extremely high-risk related due to insufficient knowledge on the markets. The resulting action would be based on the conviction of second chance in case the firm fails in making any step at that moment. Consequently, during the internationalization process, the first step may occur much earlier than the predicted time in Uppsala model (Johanson and Jan-Erik 2009, p. 1412). Furthermore, due to rapid technological advancement and increased globalization, there have been numerous challenges in international business. The use of Uppsala model in contemporary international business highlights more deficits in their description of the internationalization process. For instance, the model considers internationalization process based on internal capability and has ignored the external factors like the competitive forces and market potential in the global world, and in some instances overrides the psychic distance factors related with management decision-making (Carneiro et al. 2008, p. 85). Reasons for Considering National Cultural Differences in Foreign Direct Investment The foreign direct investment (FDI) is among the most important subjects during the internationalization process by most multinational companies. The choice of the right entry mode in foreign markets determines the success of the FDI. While the traditional approaches used in explaining the market entry strategies for the multinational enterprises use the management and economic factors, recent studies have identified strong effects of the cultural factors in the market entry strategies (Resmini and Iulia 2013, p. 1). The increased difference in culture between the foreign and home market increased the extent of equity ownership in the mode of entry. Heightened cultural differences prompt most multinationals to exert more control in their entry so as to minimize the transaction costs. Such control may be necessary for culturally distant markets since the resulting transactions in such markets generate high information costs and involves many difficulties in transfer of competencies. The multinationals, therefore, establish more control on international operations and mitigate the cultural institutions and values. Increased control implies improved social exchanges across the markets (Resmini and Iulia 2013, p. 4). For the success of any joint venture in Foreign Direct Investment, the multinationals must strive to maintain reliable partnerships as well as minimizing any risks that may originate from opportunistic behaviours. Different cultures will, normally, have varying levels of trustworthiness. Cultural differences should be used in measuring the different levels of trustworthiness among various countries. For instance, masculinity affects the joint venture projects negatively. Individualism negatively affects the management of the joint venture. Power distance may be used in measuring the level of control of the alliance. Uncertainty avoidance may promote more alliances in foreign direct investment. The cultural differences of the nationals involved determine the ownership of the subsidiary as an entry mode in foreign markets (Omar and Morrison 2006, p. 89). A complete ownership of a firm requires establishment of new business of acquisition of an existing firm within the target market. Knowledge of cultural differences is critical in the acquisition of existing firm in new markets since multinational company can learn from the different routines and norms of the target market from acquired subsidiary. This can be accomplished through increased control after entry into a new market with the high level of cultural differences. The firm will be able to use its superior experience and knowledge on the product it offers. The consideration of the cultural differences will also help the company minimize the costs and risks involved in coordinating the business and managing it from different cultures (Omar and Morrison 2006, p. 90). Therefore, to avoid complexities related to differences in institutions and values between the foreign countries and their home countries, multinationals may select culturally similar locations for the direct foreign investments. The greater similarities as firms enter foreign markets enhance easier and cheaper accessibility of customers. Also, the firms may be in the position to management their business operations as well as competing with homogenous groups of the local firms. However, the increased competition in culturally similar markets prompts most multinationals to seek opportunities in culturally dissimilar countries. The increased international diversification of MNEs translates into increased cultural distance between its portfolios in foreign operations and home country (Omar and Morrison 2006, p.92). References List Carneiro, J., Angela, D. and Jorge, F. (2008). Challenging the Uppsala Internationalization Model: A Contingent Approach to the Internationalization of Services. BAR. Brazilian Administration Review 5(2), pp. 85-103. Huchet, J., Xavier, R. and Joel, R. (2007). Globalization in China, India, and Russia: Emergence of National Groups and Global Strategies of Firms. New Delhi, Academic Foundation. Johanson, J., and Jan-Erik, V. (2009).The Uppsala Internationalization Process Model Revisited: From Liability of Foreignness to Liability of Outsidership. Journal of International Business Studies 40(9), pp. 1411-431. Moon, H. (2005). Investment Strategies by Foreign Automobile Firms in China: A Comparative Study of Volkswagen, Honda, and Hyundai. Journal of Chinese Economic and Business Studies 3(2), pp. 151-71. Omar, M. and Morrison, H. (2006). The Effects of Culture and Politics on Foreign Direct Investment and Sustainable Development in China: Some Research Hypotheses. World Review of Entrepreneurship, Management and Sustainable Development 2(1/2), pp. 89. Resmini, L. and Iulia, S. (2013).Is Foreign Direct Investment to China Crowding out the Foreign Direct Investment to Other Countries? China Economic Review 25, pp. 1-16. Vahlne, J. and Jan, J. (2013).The Uppsala Model on Evolution of the Multinational Business Enterprise – from Internalization to Coordination of Networks. International Marketing Review 30(3), pp. 189-210. Zhao, T. (2010). Study on the Competitive Force of Car Brands in Market of China. International Journal of Business Administration 1.1, pp. 90. Read More