Analysis of Euro Multinational Enterprises International Business Strategies Adopted in Chinese Auto Market - Case Study Example

Volkswagen in the Chinese Auto Market Table of Contents Abstract 1 1. Introduction 2 2. Volkswagen 2 2.1 Company Background 2 2.2 Volkswagen’s International Strategy 3 3. The Chinese Auto Market 4 3.1 PEST Analysis of the Chinese Auto Market 4 3.2 The Competitive Environment 5 Table 1: Automotive Manufacturers in China 5 4. Volkswagen’s Experience in China 6 4.1 Development of Joint Ventures 6 4.2 Successes and Failures 6 Table 2: SVW & FAW-VW Sales 2009-2012 7 4.3 Future Prospects 7 5. Conclusion 8 References 9 Abstract The entry and growth of the Volkswagen Group in China is a comprehensive example of a sequential international strategy beginning with distribution, moving into manufacturing, and finally becoming a true decentralised, transnational enterprise. While VW’s Chinese experience cannot be described as anything but very successful, there are still some risks associated with intellectual property protection and the wider economy that the company should be prepared to manage if necessary. 1. Introduction This report presents a case study of Volkswagen in China. Volkswagen, one of the world’s largest auto manufacturers, has had a presence in the Chinese auto market for nearly 30 years, and has enjoyed remarkable success; according to the company, China is both the largest and fastest-growing market for Volkswagen. In this report, a brief background of the Volkswagen Group is presented, along with an examination of VW’s successful international strategy. The general characteristics of the Chinese auto market are then discussed, along with a description of the competitive environment. VW’s entry and joint venture strategy in China is then presented along with a description of the company’s ambitious plans. To conclude the report, recommendations for meeting potential risks are offered. 2. Volkswagen 2.1 Company Background Volkswagen is one of the world’s most successful auto manufacturers, founded in 1937 and headquartered in Wolfsburg, Germany. By volume the Volkswagen Group is the largest automaker in Europe and the fourth-largest in the world, delivering more than 9.2 million vehicles to customers in 153 countries in 2012, which amounts to a 12.8% share of the world passenger car market (Volkswagen AG2, 2013). The VW Group comprises 12 brands from seven different countries: Volkswagen Passenger Cars (Germany), Audi (Germany), SEAT (Spain), ŠKODA (Czech Republic), Bentley (Great Britain), Bugatti (France), Lamborghini (Italy), and Porsche (Germany) passenger cars; Ducati motorcycles (Italy); and Scania (Sweden), MAN (Germany), and Volkswagen Commercial Vehicles in medium and heavy trucks. The Group also includes a Financial Services Division and an industrial machinery division (IHS Global Insights, 2012). The VW Group is an enormous global operation, employing 550,000 people worldwide. With the opening of a second facility in Mexico in January 2013, the Group now has 100 vehicle or component manufacturing facilities in 27 countries, which produce a total of 37,700 vehicles each day (Volkswagen AG2, 2013). While economic conditions in 2012 were still not entirely stable, particularly in Europe, the Group nevertheless posted strong income growth, recording €193 billion in sales revenue and €21.9 billion in after-tax profit. These figures represented increases from 2011 of 21.4% and 38.6%, respectively (Volkswagen AG1, 2013). The VW Group performed particularly well in China, the company’s largest market, which is discussed in greater detail below. 2.2 Volkswagen’s International Strategy Volkswagen established an international strategy fairly early in the company’s history, in part as a way to recover from the destructive effects of World War II. VW’s first overseas venture was established in Canada in September, 1952 as Volkswagen Canada Ltd., and the company expanded into Brazil as Volkswagen do Brasil Ltda. the following year. By 1959, Volkswagen do Brasil had become the largest automaker in Brazil (Keller, 1993). Peter Hartz, a former director of Volkswagen, described VW’s approach to international growth as an extension of a company philosophy of meeting customer needs through sequentially adding value-added processes (Hartz, 1996). In the context of internationalisation, the company has moved through three phases (Dicken, 2005). The Canadian and Brazilian expansions, along with VW’s acquisition of the failing state-owned brand SEAT in Spain in the 1980s were distribution-oriented multinationalisation. The next phase, production-oriented multinationalisation, was realised after the opening of Eastern Europe, when VW was able to establish manufacturing facilities in Eastern Germany and elsewhere, which was helped by VW’s acquisition of ŠKODA; the company’s opening of manufacturing facilities in Mexico was also part of this phase. The third phase, which is Volkswagen’s current state, is the globally-operating transnational company, in which much of the company’s activities – manufacturing, distribution, and research and development – are decentralised (Pries, 2003). The Volkswagen Group has primarily expanded through acquisitions and strategic alliances/joint ventures rather than greenfield investment, in line with the philosophy of maximising existing value-adding processes (Hartz, 1996). This is a key to VW’s overall success, as it increases production and distribution efficiency and permits relatively rapid large-scale market entry. A good example of this efficiency is the production of the midrange VW Touareg SUV and the high-end Porsche Cayenne; the two vehicles have enough common architecture to allow the Touareg assembly plant in Slovakia (formerly a ŠKODA works) to produce the complete VW vehicle while also producing the bodies for the Porsche version, which are later finished in Porsche assembly plant in Leipzig, Germany (IHS Global Insights, 2012). VW’s China operations are another example of efficiency; the two joint ventures with which VW gained access to the China market were already China’s two largest manufacturers, giving the German company an almost ready-made production and distribution system (Pries, 2003, IHS Global Insights, 2012). 3. The Chinese Auto Market 3.1 PEST Analysis of the Chinese Auto Market Political: Beginning in about 1979, China began opening up its economy and moving away from the strict Communist principle of complete self-reliance, a process that is still continuing today (Tang, 2009). In terms of the auto industry, that meant a shift from a centrally-controlled, fully vertically-integrated sector; still, the political orientation of China is still mainly inward-looking. The country’s policies are designed to avoid becoming a base of expansion for American or European manufacturers, and instead to allow foreign entry in a controlled way to support and expand its own automotive industry’s capabilities (Yang, 1994). Economic: China is still one of the healthiest economies in the world, having achieved second-place (ahead of Japan and behind the United States) in terms of economic strength sometime in 2010 (International Monetary Fund, 2012). Although rapid economic growth averaging close to 10% for several years has created a number of problems such as rapid urbanisation and income inequality, China still has a rapidly-growing and increasingly wealthy consumer market, and is projected to continue to grow at a relatively fast pace for the foreseeable future (World Bank, 2013). Sociocultural: The sociocultural environment in China affects auto manufacturers in two ways; first, principles of self-reliance and nationalism, which are as deeply ingrained in the culture as they are manifestations of the Communist political system, lead the Chinese to adopt a cautious, advantage-seeking posture when dealing with foreign investment, both at the governmental and business levels (Fung, Iizaka & Fung, 2004; Griffin & Pustay, 2005). Second, the growth of the middle class in China has created a large demand for status consumption; owning an automobile is a sign of wealth, and owning an automobile of foreign make is considered especially desirable (Yang, 1994; Tang, 2009). Technological: Although as the Chinese automotive industry has evolved the technological gap between it and foreign manufacturers has narrowed, the industry still aggressively pursues technology transfer as a key objective, which is why nearly every Chinese manufacturer has entered into some kind of joint venture with a foreign company (Gallagher, 2003). Early on in foreign companies’ forays into the Chinese industry many problems with intellectual property and patent infringements arose, but these have been greatly reduced in recent years through stricter monitoring by the Chinese government (Yang, 1994; Tang, 2009). 3.2 The Competitive Environment Because of the proliferation of joint ventures in the Chinese auto industry, the number of wholly-domestic manufacturers is smaller than the number of foreign-invested firms. The table below summarises the relationships of Chinese auto manufacturers: Chinese Manufacturers in Joint Ventures Foreign Partners Wholly-Domestic Chinese Manufacturers First Auto Works (China FAW Group) Volkswagen (FAW-VW) Toyota (FAW-Toyota) Mazda (FAW-Mazda) General Motors (FAW-GM) SouthEast Chery Geely Baoding Great Wall Zhongxin Hafei Shanxi Han Jiang Jiangling Dongfeng Automobile Co. Peugeot/Citröen Kia Honda Shanghai Automotive Industrial Co. Ltd. (SAIC) Volkswagen (SVW) General Motors (SGM) Chang An Automobile Co. Ford Suzuki Guangzhou Automobile Co. Toyota Honda Beijing Automobile Co. (BAIC) Hyundai Mercedes-Benz Nanjing Automobile Co. Fiat Brilliance China Automotive Holdings BMW Table 1: Automotive Manufacturers in China (Source: Barton, 2007; Tang, 2009; IHS Global Insights, 2012) The most recent significant change in joint ventures in China was the exit of Chrysler following the collapse of its ill-fated merger with Daimler AG (Mercedes) in 2009; previously, Chrysler and Jeep vehicles were distributed through the joint venture with BAIC (IHS Global Insights, 2012). Aside from that, the number of manufacturers and brands – each of the Chinese joint venture partners produces vehicles under one or more of their own brands, besides the foreign brands that are built or distributed – indicates the highly competitive nature of the market. Because demand remains high some competitive pressure is likely relieved, but on the other hand, it would be a reasonable assumption that other issues, such as maintaining production at appropriate levels, are a key factor. 4. Volkswagen’s Experience in China 4.1 Development of Joint Ventures Volkswagen has two joint ventures in China: Shanghai Volkswagen (SVW), and First Auto Works Volkswagen (FAW-VW). SVW was the first joint venture, actually begun in 1984 with a distribution arrangement with SAIC, and then formalised as a joint venture in 1985. The joint venture was originally set for 25 years, and was extended upon approval by SVW’s shareholders in 2002 for an additional 20 years, or until 2030 (IHS Global Insights, 2012). SVW produces Volkswagen and ŠKODA models in its facility in Anting, just northwest of Shanghai (IHS Global Insights, 2012; China AutoWeb2, 2013). The second joint venture with First Auto Works (which is headquartered in Changchun and Jilin) began in 1991 with a production under license agreement to produce the VW Jetta A2 model. The FAW-VW joint venture was fully-realised in 1995 when Audi AG was brought into the partnership and plans were laid for the construction of new manufacturing facilities, followed shortly by full-scale production of VW and Audi models in the existing FAW factories (FAW, 2011). One interesting facet of VW’s two joint ventures is the difference in their ownership structures. SVW is arranged under a kind of concession agreement; ownership is divided equally between SAIC and the VW Group, with a fixed term on the length of the joint venture, which requires government approval for further extensions (IHS Global Insights, 2012). FAW-VW on the other hand is a straight investment. The VW Group owns a total of 40% of the shares, divided as 20% for Volkswagen AG, 10% for Audi AG, and 10% for the VW Group’s Chinese holding company, Volkswagen Automobile (China) Investment Co., Ltd (FAW, 2011). SAIC and its various subsidiaries own a 60% majority share of the joint venture. The different makeup of the two joint ventures illustrates VW’s step-by-step approach to international expansion. The early distribution agreement was a market entry, and was followed by a second step of deeper involvement in the Chinese market, but a step that had a relatively safe exit as it was for a fixed period of time (Hill, Hwang & Kim, 1990). At some point, VW determined they could be confident in their market presence in China, and were then able to enter into a long-term joint venture arrangement. 4.2 Successes and Failures VW’s entry into the Chinese market has obviously been very successful; in its 2012 Annual Report, the VW Group characterises the Chinese market as its largest and fastest-growing, having expanded by 24.6% in terms of revenue in 2012 from 2011 (Volkswagen AG1, 2013). The two joint ventures have had remarkably similar overall growth in vehicles sales over the past four years: Year SVW Sales FAW-VW Sales VW Models ŠKODA Model VW Models Audi Models 2009 600,000 112,800 540,007 142,367 2010 801,268 200,089 610,000 198,000 2011 930,000 220,000 748,188 309,888 2012 1,050,005 230,003 965,888 402,888 Table 2: SVW & FAW-VW Sales 2009-2012 (Source: China AutoWeb, 2013) Although VW’s China experience has been very successful, there have been occasional problems. In November of 2012, FAW and VW reportedly were in dispute over possible patent infringements by FAW of VW’s engine and transmission technologies (Xing, 2012). Another case of intellectual property infringement occurred in September 2012, when the Beijing Automobile Co. (BAIC) was caught copying the VW Tiguan sport utility vehicle (China AutoWeb3, 2012). And in June 2012, Jing Guosong, the Vice President of FAW-VW Sales, was investigated by state authorities for fraud in a case that is yet to be resolved (China AutoWeb4, 2012). While these recent troubles have undoubtedly caused some concern for the company, the continuing success of VW in China indicates that, so far at least, the issues have not harmed the company’s consumer appeal. 4.3 Future Prospects Volkswagen’s future in China is based on a 10-year strategic plan released in 2008 called “Strategy 2018”, which has basic goals of doubling sales (from approximately one million vehicles at that time) and introducing or renewing at least four vehicle models per year in the ten-year period (Li, 2009). Specifically, VW’s plans include increasing production capacity through new factories; SVW is planning two new factories in Nanjing and Yizheng, and FAW-VW is planning two as well, to be located in Foshan and Chengdu. Volkswagen also plans to double the number of dealerships in China from 1,305 in 2010 to more than 2,500 by 2018 to increase competitiveness and meet its ambitious sales goals (Mull, 2011). Because of the VW Group’s decentralised structure, poor economic conditions in Europe have not seriously affected operations in China, and so the Group’s Chinese goals appear to be insulated to a significant extent from global economic conditions (Volkswagen AG1, 2013). However, Strategy 2018 assumes economic growth in China will remain at or above 8% through 2018, so an unexpected downturn in the Chinese economy, while not thought to be likely, does present a risk (Mull, 2011). 5. Conclusion Volkswagen, founded in 1937, entered the international auto market just a few years after recovering from World War II with entry of the brand into Canada and Brazil. The company has proven to be a resilient international brand, with a presence in 153 countries and employing more than half a million people worldwide. The company’s presence in China through two large joint ventures dates back to 1985, when VW entered a partnership with the Shanghai Automotive Industrial Co. Ltd., now known as SVW. Although China is Volkswagen’s largest and fastest-growing market, which has encouraged the VW Group to launch an ambitious ten-year strategic plan, there are still some risks. As recent incidents have shown, protection of Volkswagen’s intellectual property is still a concern (Xing, 2012; China AutoWeb3, 2012). As China has been rather open about its goal to build its own technological and knowledge base through working with foreign investors, care must be exercised to ensure that technology transfers are handled properly by both sides. Chinese economic growth, while not a serious concern at present, may in the future present obstacles to VW’s ambitious growth plans, which are based on the current trends continuing. As the entire world experienced in recent years, economic conditions can change very rapidly; therefore, the VW Group should prepare contingency plans if the Chinese economy – over which they have no control – does not perform to their expectations. References Barton, J.H. 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