Volkswagen Strategic Position - Essay Example

? Strategic position analysis Contents Contents Introduction 4 Volkswagen in Greater China: Analysis of strategic position 4 Identification of strategies adopted by Volkswagen 9 Analysis 12 Evaluation 13 PESTEL Analysis 13 Political 13 Economic 14 Social 15 Technological 15 Legal 16 Environmental 16 Porter’s Five Force 16 Bargaining Power of Suppliers 16 Bargaining Power of Buyers 17 Threat of Substitute of products 17 Rivalry among existing firms 17 Recommendations 19 Conclusion 19 Recommendations 19 References 20 Bibliography 21 Introduction The project has been done to conduct a strategic position analysis of Volkswagen. Volkswagen Group is a German automaker that has set up its business in Greater China by the name of Volkswagen group China. Volkswagen is the second largest foreign automaker after General Motors in the world markets. Volkswagen has been one of the early entrants in the automobile markets of China. Since then the company has grown in stature and has gained 30% of the market share in China. Over the course of the study various strategic and analytical tools such as PEST, Porter’s Five Force has been used. Volkswagen in Greater China: Analysis of strategic position Volkswagen Group is a German automaker that has set up its business in Greater China by the name of Volkswagen group China. Volkswagen invested in China as early as 1978 and has seen growth in the sales of automobiles in Greater China by leaps and bounds. The business of Volkswagen in Greater China has significant contribution in the automobile sector and has been a partner of the high speed of economic development in the country. The venture of the German automaker in Greater China has attained a leadership position for the last 25 years and the markets in Greater China earn a significant portion of the revenue of the group. Volkswagen started its first venture in Greater China by the name of Shanghai Volkswagen Automotive Co. Ltd. This first venture of Volkswagen was set up in 1984. Volkswagen at the point of entry to the markets in Greater China took a strategic decision of entering into a long term contract for 25 years for manufacturing passenger cars in Shanghai (Usunier and Lee, 2009, p.24). During that point of time, government regulations were such that foreign companies were not allowed to hold more than 50% share in the industries. Volkswagen entered with a share of ownership of 50% for production and sell of cars in the markets of Greater China. Subsequently in 1991, Volkswagen expanded its operations with a second joint venture in the name of FAW-Volkswagen Automotive Company Ltd. The markets of Greater china are one of the major markets of the German automobile group. By 2004, the German automaker group has laid its strong foundation to forms its subsidiary by the name of Volkswagen Group China. The company is governed by a six member committee of senior management. The senior management is responsible for corporate governance and supervision of the group in Greater China. The members of the governing body are accountable for several divisions of the operations and management that include sales and marketing, finance, operations, personnel and government relations, technology, etc. By focusing on these key areas and strengthening its strategic position in Greater China, the Volkswagen Group China today has sixteen offices that are spread across the country that caters to the automobile markets. Volkswagen over the years has not generated huge scales of revenue from the sell of cars in the markets of Greater China but is also a key contributor to the rapid pace of growth of the economy of China. The members of the governing body in Greater China are not only responsible for the supervision of its operations but also look at the opportunities for new investments for expansion of the markets of the group. Volkswagen group in China has expanded its volume of production of cars over the years with the optimal use of resources of production. The volume of sales of Volkswagen Group China has reached around 2.81 million cars in 2012. The extended operation of the automobile group in greater China includes production of cars and automobile parts, sale of the manufactured cars, service of the cars sold in the markets, manufacture of engines and transmission systems, etc. The services provided after the sale of the automobiles and automobile parts are done through authorized service centers. Apart from the automobiles and the spare parts locally manufactured, the group also undertakes import of certain cars to Greater China which have considerable demand in the markets of Hong Kong, Taiwan, China, etc. The sales and services of the imported cars and its spare parts are also undertaken by the group which has helped to increase its market share and maintain a sustainable position in the competitive markets. The locally manufactured and imported cars are sold by the Volkswagen group China under the brand names of Volkswagen, Lamborghini, Audi, Skoda, Seat, Bentley, etc (Gillespie, Jeannet and Hennessey, 2010, p.22). Volkswagen is one of the early automobile partners of China since the time it started its reforms by opening up the markets to foreign investments. The manufacture of the Audi cars in parts of Greater China is one of the largest global brands. Volkswagen strategy of enter the markets of Greater China with a joint venture was correct as the local government on one hand undertook reforms for the national car manufacturers and on the other hand attracted foreign investments that led to the growth of car markets in China. Also saturation of markets in Europe and North America and favorable environment for foreign industrial investments led to the growth of automobile sector in China. The Volkswagen Beetle was the first car manufactured by Volkswagen in China which enjoyed overwhelming success for several years. Over a period of time, the competitors from Japanese automobile industry started to enter the markets of Greater China under the brand name of Honda, etc. which started to challenge the dominance of Volkswagen brands in the car markets of Greater China. The Japanese car makers are aware of the taste of the Asian markets and offer competitive prices in the market. Volkswagen’s strategic position in the markets has been sustained due to the quality of the cars manufactured which are designed to meet the fashion trends of the market (Kotabe and Helsen, 2008, p.26). In order to sustain its leadership position in the automobile industry of Greater China, the Volkswagen group has undertaken strategies of marketing to tap the opportunities of the automobile sector. The top luxury car brands that have highest market shares in greater China are listed below. Audi, the brand car of Volkswagen group leads the list of the top luxury brands in greater China. The strategic position of Volkswagen group in Greater China could be analyzed with the help of the pie-diagram as given below. The competitive car market in Greater China is widely distributed among the car manufacturers of Europe and East Asia with the Japanese auto giants making entry into the market through the use of advanced technology and competitive pricing. The market share captured by the Volkswagen group in Greater China is the highest comprising of 21% of the market share of the automobile industry in Greater China. The strategic position of Volkswagen in Greater China is far superior than the second ranked General Motors which 10% share. However, the Volkswagen group would need to consider the emerging market trends and tap new opportunities to expand their scale of operation to meet the increasing demand of the economy and sustain its leadership position (Keegan and Green, 2011, p.32). The market capitalization of the Volkswagen group in China is the highest all over the world. This has been represented in the graphical representation as given below. Volkswagen Group is highly dependent on Greater China in order to promote itself to the leading position among the automakers all over the world by 2018. With the market of Europe and America not showing signs of quick revivals from the situation of global financial crisis, the Volkswagen group has focused on Greater China to drive its volume of business and profitability by tapping the opportunities of the emerging car markets. The Group has allocated an investment of €10bn in Greater China looking at the future prospects of growth. Thus the strategic position of the group is in a leadership role in the car markets of Greater China but the group has undertaken strategies to cope up with the competition offered most by the automakers of East Asia. Identification of strategies adopted by Volkswagen The Volkswagen Group China has adopted crucial strategies in order to establish a long term relationship with Greater China looking at the prevailing favorable conditions for growth of automobile industry in Greater China on the back of economic policy reforms of the government. The sources and the use of funds by the company could be managed by the company over a long period of time. This strategy has helped the Volkswagen Group to acquire a leadership position in China by increasing its sales and revenue earnings over the years. In terms of the market capitalization, Volkswagen emerged as the top car manufacturer in Greater China. Volkswagen Group China started its business by entering into two joint ventures namely Shanghai Volkswagen Automotive Co. Ltd. and FAW-Volkswagen Automotive Company Ltd. The strategic decision of entering into joint venture though enforced by the government regulation at that point of time during the 1980s was beneficial. By entering into the joint venture, the company could acquire cost efficiency in obtaining the inputs available locally for the process of manufacturing. The risk was also shared in proportion to the holdings of the joint venture. Also lack of knowledge of the local taste and preference, language and culture could be averted by the joint venture. Slowly with the gain of experience, the German automaker led its foundation for opening its subsidiary under the name of Volkswagen Group China and at present the group operates sixteen subsidiary offices in Greater China. Thus adoption of strategic approach by the Volkswagen group has helped to expand its operations over the years. Over the years, the dominant position of the German automaker Volkswagen has been challenged by the automakers of East Asia like Japan under the brand names like Honda, etc. In order to sustain its leadership position in the emerging competitive scenario, the group undertook several other strategies in the areas of manufacturing, market, sales, logistics, research and development, etc. In the areas of manufacturing, Volkswagen tried to introduce the product-cost workshops that were designed with an aim to reduce the cost of production. This was achieved by the increase in local capacity of manufacturing which was planned to take advantage of the cheap wages of the Chinese labor. Apart from the focus on reduction of production cost, Volkswagen did not compromise on its high engineering and design quality that has accelerated its growth of market capitalization. In the areas of marketing, Volkswagen focused on adopting the strategy of market differentiation for increasing the sale of its products in competition with the Japan auto makers. Volkswagen realized that the Japanese carmakers are taking advantage of having a better perception of the Asian taste. In response to this rising competition, Volkswagen decided to differentiate the market into several segments so that they are able to offer their branded cars to large number of target customers. This helped the rise of sale of the Volkswagen cars which led to increase in revenue and increase in market share. In order to further increase its sales, Volkswagen strategically adopted the policy of increasing the interaction of the two joint ventures of the company. The increase in interaction led to the increase in orientation of the customers towards the brands of Volkswagen. The manufactured cars were sold through dealerships. The dealerships were then ordered to be tailor-made to the needs of the different target groups of customers in Greater China. Thus the two joint ventures and the dealerships were strategically restructured to meet the demand of the changing automobile markets. The company adopted the strategy of enhancing the research and development in order to upgrade the infrastructure, improve the design along with features of the car manufactured in the local car markets. Considering the large market share of Greater China, several new models were built to develop the in-house facilities of car production. These developments helped to reduce the cost of cars manufactured by the Volkswagen Group China. With these research and developments, the Volkswagen Group China could expand their markets in the face of rising competition. In the area of logistics, the two joint venture companies used to source raw materials like steel, etc required for the manufacture of cars separately from the suppliers. With the advancement of economy and rise in competitive efficiency, the technical expertise of the suppliers to produce technically advancement raw materials have become very significant (Hofstede and Minkov, 2010, p.36). The raw materials and other inputs which include special variety of steel, etc were difficult to obtain due to rising demand and increase in the number of market players. The Volkswagen group has adopted a strategy to establish a single and comprehensive supplier in the global platform who would cater to the manufacturing units of Volkswagen in various parts of the world. Thus the difficulty of arranging for raw materials in situations of high demand could be solved. Also the technical expertise of the inputs would be in the desired range that is required for survival in the competitive market. The supply of raw materials to Greater China were included under the same supplier that would help the Volkswagen group China to achieve economies of scales in its process of car manufacturing. This strategic step was very important to establish its independence in the scenario of increasing supply crunch in the market. It would also help in maintain the flow of production in tandem with the demand of technically advanced cars in the markets of Greater China. The above strategies have been adopted by the Volkswagen from the period of investment in the economy of China to its subsequent rise as a leading player in the automobile markets in Greater China. The strategies in the initial stages were aimed at establishing a strong foundation by considering the risk and return of the investments. In the later stages strategies of the company transformed to maintain its leadership position in the competitive scenario in Greater China. Analysis While entering the Chinese Automobile industry Volkswagen had several options available such as the green field strategy, strategic alliance, joint ventures etc. VW entered China in 1984 as one of the earliest foreign companies to invest into China. The mode of entry of VW was joint venture; or joint ventures to be more specific as VW went for two joint ventures. The first joint venture happened in 1985 between Shanghai Automotive Industry Corp, China National Automotive Industry Corp and VW. (Browaeys and Price, 2008, p. 121). It was an equally shared joint venture. The contract period of the joint venture was twenty five years. On 2002, the share holders decided to extend the contract period for another 20 years i.e. till 2030. Here it needs to be mentioned that it joint venture that happened in 2985 was the first joint venture in Chinese Automobile industry (Jobber, 2012, p.583). VW chose joint ventures because in 1985 the tariff barriers in the Chinese market were quite high, because China was still not a part of WTO. Hence VW had to choose a strategy that would be suitable to enter markets with high tariff barriers. Another factor was the risk factors attached to the entry into international market (Deresky, 2011, p. 231). Through joint ventures VW was able to reduce the political, cultural and economic risks to some extent by using the knowledge base of the local firms regarding the market conditions, consumer taste and preferences, etc. Today VW holds more than 30% of market share in the Chinese Market making it the market leader in the Chinese market. Also China has become the second largest market for VW right after Germany (Czinzota, Ronkainen, Moffett, Marinova & Marinov, 2009, pp. 423-429). Evaluation PESTEL Analysis Political The Car industry of China has grown very fast and has become a major contributor to the national economy. China adopted an open door policy since the end of 1970’s. The main purpose was to achieve modernization through economic liberalization. In the car industry the country has undertaken policies to attract foreign investment and provide privileges and protections to the foreign car makers. However, the country does not want to achieve growth just on the basis of the foreign players. The government wants to develop the domestic car manufacturers also and develop an autonomous brand through the help of the foreign companies. The government policies enabled the domestic players to use the production facilities of the foreign car manufactures. Also the foreign players are not allowed to have majority stakes in joint ventures i.e. more than 50%. Once China joined the WTO, it has opened up the market to the foreign players a lot more. The tariff levels have also gone down (Henry, 2008, p. 89). Economic The economic system of the country has changed to a lot more market oriented system than centrally planned system. The country has made remarkable progress since the economic reforms and adoption of an open economic policy. China has seen rapid economic growth and has emerged as one of the emerging economies in the world. The country has become one of the top destinations for foreign investment. The FDI inflow in the country has increased continuously. There was a fluctuation though in 1997 due the Asian financial crisis. But still, the FDI growth in China has been steady (Dey, 2011, p. 211). The republic of China was founded in the year 1949. The communist party pledged over providing basic necessities including clothing, shelter and food. As the economy of the country has shifted from planned to market based the income level of the people has risen too. Another major development has been the educational reforms in china. Over the years the government has made considerable amount of effort to increase the educational standards of the people of China. This has resulted in the increase in the number of graduates and under graduates in China. Alost eh number of skilled workers in china has gone up too. The increase in the educational level leading to the rise income of the people of China has increased the demand for the foreign cars. Despite of the social reforms there are still various challenges that are being faced by the nations. One of the major challenges has been the income in-equality (Burgemeister, 2003, p. 192). Based on the above analysis it can be said that VW perform joint venture while entering the domestic market and then the company should look to establish production line. Although there exists some other modes of entry to enter the market but the adoption of those models could have raised the retail price as the tariffs was quite high. Hence JV was the best option available to VW (Doole and Lowe, 2008, p. 391). Social One of the main reasons for VW to enter to China happened to be cross cultural differences. While entering the Chinese market it was very important for the company to understand the culture of China as it happened to be quite different from that of the western countries. For this particular reason the choice of entry mode was even more important for the foreign firms entering the country. Joint ventures would continue to be the most popular mode of entry, because the most important factor that influences such selection is the cultural aspects of a country (Kolb, 2008, p. 92). Technological In the recent years due the technological advancement the Chinese cars manufacturers, especially the domestic firms have made considerable amount of technological investment to improve the quality of production. Although in the 80’s the car manufacturers lagged way behind when it came to the use of technology as compared to the foreign manufacturers. (Kotler and Lee, 2008, p. 401). But the entry of foreign firms was not only helpful to the foreign players but also to the local companies as the companies were able to get hold of the advanced technologies used in the production. Legal Legal complexities are a major challenge that us being faced by foreign companies. Government still holds firm control on transparency issues. However, one major challenges faced by the foreign firms is the lack of protection against intellectual properties due to the legislative complexities. (Brown, 2009, p. 209). Environmental Just like other nations Chinese Government is also keeping an eye on the companies to reduce the carbon foot print. Hence companies are looking to engage in a lot more CSR activities to position themselves as greener and socially responsible enterprises. Porter’s Five Force Bargaining Power of Suppliers In china the main suppliers in the car market happened be those companies that provide metal items. Tyre, windscreens, etc it may look like that the bargaining power of the suppliers are quite high as there are not many suppliers in the markets. Also there are no such substitute products too. But as it has been mentioned before the Chinese government had issued one promotional scheme for the foreign companies that the companies would be provided raw materials without any hustle created by the suppliers. Add to that since the entry of VW into China the steel production has increased and there are lot more suppliers in the market. Hence the amount of threat possessed by the supplier bargaining power is low (Maylor and Blackmon, 2005, p. 209). Bargaining Power of Buyers Bargaining power of the buyer was also quite low at the time of the entry into China. During the time of entry into china the bargaining power was low as the people o China did not have many options. But today certainly things have changed as there are a lot players involved in the market. Hence, the bargaining power o the customers are moderate to high (Churchill, 2009, p.211). At the time of the entry of VW the threat of new entrants was quite low as china was not yet a part of WTO and the trade barriers were still on the higher side. But once China joined WTO, the economy opened up and lot more foreign car companies started to come to China. Major automobile manufactures like GM, Toyota, Ford, Honda, BMW, and Nissan-Renault are present in China. Hence at this point of time the threat of new entrants is high. (Nargundkar. 2010, p. 391). Threat of Substitute of products Threat of substitute products is also quite high because the country has the largest population that use bicycles; rising oil prices. This may lead the customers to choose other substitute products such as electric cars, bikes or public transport (Porter, 2008, p.344). Rivalry among existing firms The Chinese car industry is looking to enter the maturity stage and the competition level is moderate. But as the more and more foreign companies are looking to enter the market the level of rivalry among existing firms is likely to increase. Another factor that may lead to the increase in competition is the fact that the products offered by the company are undifferentiated in nature. At this point of time due to the entry of the foreign players in the market the Chine car market become a lot broader. Hence the competitive position of VW can be analyzed by suing the porter’s genetic strategy. At this point of time VW is looking to focus on the cost leadership strategy by operating products at a relatively affordable price. Add to that the company is also focusing on options such as vertical integration, outsourcing to achieve operational efficiency and reduce cost. Before providing the final recommendation to provide a future direction for VW SWOT analysis needs to be conducted (Belch and Michael, 2005, p. 325). One of the major strengths that the company has been able to achieve is the low cost of labour and raw materials in china.(Cowan, 2005, p. 67). Volkswagen has very few weaknesses. Some of them have been discussed in this section. Has relatively low amount of new technology and skills over the competitors. The management of the company is also quite old. One of the major opportunities has been the entry of China into WTO which has opened up the economy inviting a lot more investment opportunities. Another major opportunity has been the growth of the Chinese automobile market. This has been a by-product of the entry of WTO into China. Also there has been an increase in the educational level leading to a boost in the life style and income level of the people (Kotler, 2001, p. 25). One of the major threats has been the lack of protection of intellectual properties in China. Volkswagen also faces strong competition in the market due tit eh new policy issued in the year 2oo4. The threat not only comes from international but also domestic firms as the local firms are looking improve the marketing and production efforts. Income in-equality and poverty is also a course of concern (Berger, 2006, p.36). Recommendations As of now VW has been trying to achieve cost leadership but as the competition rises the company may have to think about modifying the strategy and focus on product differentiation. This could be done by launching or re-launching and repositioning models to steer up competition in the local market (Selim, 2013, p.217). The company should focus on augmentation through augmented services such as make to order sales programs to gain customers trust and market share. Volkswagen and the JV partners may have to invest a lot more to boost up the out capacity and to increase sales in China. (Ghauri and Gronhaug, 2005, p. 351). In future Volkswagen may have to use china as the base or hub to explore the Asian market. Already Volkswagen has made it clear about plans to export cars made in China to different Asian countries. This may help the company to lower the cost and improve quality. Conclusion Since the entry of VW in China it has become the largest Automobile Company in the country. One of the biggest reasons of success of VW has been the choice of market entry strategy which happened to be JV. This helped the company to reduce the environmental risks and set up effective distribution network in the country. As a result China has become the second largest market for VW after VW. Recommendations This could be done by launching or re-launching and repositioning models to steer up competition in the local market (Selim, 2013, p.217). The company should focus on augmentation through augmented services such as make to order sales programs to gain customers trust and market share. Volkswagen and the JV partners may have to invest a lot more to boost up the out capacity and to increase sales in China. (Ghauri and Gronhaug, 2005, p. 351). In future Volkswagen may have to use china as the base or hub to explore the Asian market. Already Volkswagen has made it clear about plans to export cars made in China to different Asian countries. This may help the company to lower the cost and improve quality. References Czinzota, M., Ronkainen, I., Moffett, M., Marinova, S. & Marinov, M. 2009. International business (European edition). John Wiley: UK. Henry, A. 2008. Understanding Strategic Management. Oxford University Press: UK. Kolb, B. 2008. Marketing Research: A Practical Approach. Sage: UK. Brown, L. 2009. Marketing and Distribution Research. Ronald Press Company: US. Belch, G and Michael, G.2005. Advertising &Promotion-An Integrated marketing Communications Perspective. McGraw-Hill: UK. Kotler, P. 2001. Marketing Management. Prentice Hall: UK. Burgemeister, S. 2003. 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