Volkswagen in China - Research Paper Example

? Volkswagen in China VOLKSWAGEN IN CHINA INTRODUCTION: In the last few years there has been immense growth in the automobile industry in China around 15% which when compared to world’s growth rate of 1.5% is significantly high. China is a very competitive market in the automobile industry with almost all the world’s leading automobile brands operating in the country. In order for MNCs to operate effectively and gain a competitive advantage it is important to assess the competitive position and the relationship between success and strategies. In a highly competitive market it is very important for companies to gain a competitive advantage over its competitors. This can be achieved by either cost advantage or offering differentiated product. Hills work suggests that the differentiation strategies in the automobile sector in China can be beneficial because of many reasons like Chinese automobile is an expanding market and is the world’s second largest automobile industry, therefore has a lot of potential for business. Automobile industry in general has a lot of potential for differentiation strategies and gaining market through it which is evident by the lavish expenditure done on the promotion of these cars. (Chen, J., & Yao, S. 2006; Barrow, C. 2009) This paper will focus and discuss Volkswagen’s globalization strategies for internalization, how it formed strategic alliances globally and how it positioned itself for global competitiveness through its formulated strategies and built strategic ventures and alliances. VOLKSWAGEN INTERNATIONAL: Volkswagen dates back to 1937, was founded by Ferdinand Porsche who started it as an automobile advisory company. Being unsuccessful in selling his proposed model he collaborated with Nazi Government to setup a factory and produce the cars of his proposed model. In the post World war period, VW made the most selling car of the 1950s the Beetles. It was then that VW gained recognition throughout the world. In 1960s it opened a plant in Mexico which produced cars on new lines and technology and with time strengthens its position all around the world. (Rana et al.2005) Volkswagen started off with its two joint ventures in China. Its first project was a 50% venture with local leading brand Shanghai Automotive Industry Corporation (SAIC). The other venture was another 50% joint venture with First Auto Works (FAW) in 1991. Initially the company struggled to gain market but later in 1990s its brand Santana ruled the market. These joint ventures together occupy almost half of the market share in Chinese market and have a 70% annual growth rate. China is Volkswagen’s second largest market in the world after German market. (Chen, J., & Yao, S. 2006; Barrow, C. 2009) Volkswagen since its start in its Shanghai joint venture in 1985 was considered to be one of the leading the carmaker in China and occupied an eminent position in the market. The emerging Chinese automotive market was a threat for Volkswagen dominant market and soon it faced severe competition with companies like Toyota, Suzuki and General Motors in Chinese markets. One of the head of VW China commented in 2005 that suddenly China has become the toughest market. (Thun, E. 2006) Not even foreign, local market players like Cherry and Geely also competed and tried to win the market by aggressive pricing strategies. In a research of 2002 Volkswagen occupied the largest market share in China, the details of top 5 market share holders are given below: Manufacturer Sales (units) Market Share Shanghai Volkswagen 301,095 23.8 FAW-Volkswagen 207,858 16.4 Shanghai GM 110,763 8.8 FAW Toyota 95,433 7.5 Dongfeng Citroen 85,088 6.7 The table shows Volkswagen in combination with both its ventures SVW and FAW-VW have been the leading automobile company in China with largest market share in 2002. (Chen, J., & Yao, S. 2006; Barrow, C. 2009) SVW initially competed with minimal investment in China, it was able to capture high market share in the early days but soon it faced competition by the modern foreign and local car makers. After years of minimal investment in 2001 SVW invested 2.2 million dollars in its China operations. One of the board members of VW announced that the company plans to invest further 4 billion Euros to expand and gain market in China through vast capacity and new products and lines. This expansion will be financed by the cash flows obtained by the current running ventures S-VW and FAW-VW. (Leeman, J. J. A. 2010; Chen, J., & Yao, S. 2006) Volkswagen through its ventures offers a range of products in China, which broadly operates in two brand groups. These include The Classic (Volkswagen Brand) which has passenger cars like Bugatti and Skoda and the Sports (Audi) including Lamborghini, SEAT and Audi. Volkswagen China has differentiated its product by expanding vertically that is introducing two brands of cars, the Volkswagen and the Audi i.e. the luxury car. The Company has also adopted horizontal differentiation by introducing eleven models of the lower medium priced Volkswagen range and four luxury Audi cars. By adopting and expanding through these two strategies, Volkswagen has acquired a sizeable market for its products in China. By offering high quality luxury and medium priced cars for the masses, Volkswagen has proved its notch over many local and international car manufacturers in China. (Chen, J., & Yao, S. 2006; Barrow, C. 2009) The group has delivered more than 8 million vehicles in China since 1984 from both of its ventures. VW has the most modern and sophisticated car manufacturing lines and process in China. (Leeman, J. J. A. 2010; Barrow, C. 2009; Chen, J., & Yao, S. 2006) VOLKSWAGEN CHINA: The market in China for automobile industry is a booming market and is given additional importance by the Chinese government in terms of financial and developmental assistance. Emphasis has been given for producing more passenger cars than commercial vehicles, creating circumstances that would allow the manufacturers to achieve economies of scale and inviting foreign companies to establish in the Chinese market so they can introduce new technology in the market. Steps have been taken to enable the foreign companies to easily establish in the Chinese market by reducing Tariffs for automobiles and promoting property, custom and finance rights for the international companies. However entering Chinese market is a point of concern for the investors as they have to enter in cooperation with a local partner as a joint venture and foreigners cannot hold more than 50% of the holding. Till date there has been numerous numbers of joint ventures in the Chinese automobile market which have led to billions of dollars of investment. (Chen, J., & Yao, S. 2006; Barrow, C. 2009) When Volkswagen entered the Chinese markets in 1980s, there were two major suppliers for raw material in the car industry and both these suppliers were government controlled. There were no substitutes for raw material in the car industry and the switching cost of suppliers was pretty high, as raw material would have to be taken from foreign countries at higher cost, instead of using local suppliers. Hence, the power of suppliers was a threat. But the Chinese government issued a promotional policy for foreign investors to work in collaboration with local car manufacturers, where raw material was provided at lower costs and without barriers from local suppliers.. With the increasing demand for cars in the market, Volkswagen with its differentiated cars and advanced technology easily got the market share. Hence, the power of buyers is not a threat to Volkswagen in the Chinese car markets. Due to China’s promotional policy for foreign investment in the country, there is no barrier to entry in the Chinese markets. Many car makers, such as BMW, Toyota, Ford, and Honda have invested in the Chinese car industry in the form of joint ventures. The threat from substitutes is high in China, as the commonly used mode of transportation in China is the Bicycle. Plus, the cost for a car is much higher than that of public transportation and cycles. With the increasing fuel prices, the power of substitutes might be held pretty high in the Chinese car industry. There is no significant competition in the local car industry as not many car makers are competing in the Chinese industry. However, due to foreign car makers entering the Chinese markets, there is a lot of competition now, as most of the car brands are highly undifferentiated products, competing on price, and a lot of advertising has been undertaken to promote the products. Therefore, investing in these markets by joints ventures and alliances is a profitable undertake for Volkswagen (Wen, X. 2007) There are three major car manufacturers in the Chinese markets currently, the FAW Group, Dongfeng Automobile Corp (General Motor) and VW Group, Volkswagen and GM being the most popular car brands in Chinese markets. Other popular brands are Toyota, Honda, and Suzuki etc. (Wen, X. 2007) VOLKSWAGEN’S GLOBALIZATION STRATEGIES: In order to understand the entry mode which Volkswagen took in China, let us look at the globalization strategy adopted by Volkswagen adopted all over the world. As mentioned earlier, Volkswagen is one of the largest car makers operating in around 150 countries across the globe. Volkswagen specializes in two brands “the Volkswagen brand” and the “Audi brand”, with a number of product ranging from low consumption to luxury cars. The Company has varied its strategy according to the conditions and circumstances prevailing in a country, as producing low cost cars in Spain and advanced technology cars in Germany. (Wen, X. 2007) Volkswagen aims not only to gain a strong position in the domestic market but also to appear as a prominent international player. For that the company has grown sustainably by globalization which has even led to structural changes in the company. Due to increased competition the interdependency among various divisions, structures and firms has grown very strongly. (Rana et al.2005) The globalization strategy adopted by Volkswagen is that apart from being very successfully operative in the domestic market it has tried to grow internationally. VW started exporting cars in 1949 to Netherlands and other European counties and USA, the aim of exporting was to utilize its vast production capacities. VW has adopted the path-oriented steps for internalization as it initiated by exporting to neighboring country and gradually stepped to the next stage of internationalization. VA has become a transnational company in order to cope up with organizational structural changes due to increasing industrial capitalism, market competition and globalization. (Rana et al.2005) Exporting wasn’t the only destiny VW wanted to achieve; it wanted to explore different markets and resources by being a MNC. In 1952 VW established itself in Canada as a MNC and began to explore North American markets which led to the formation of VW Brazil. VW has adopted two kinds of strategies for internalization; first one being distribution oriented (which isn’t involved in the manufacturing processes) which it operates in South Africa, Sweden and Svenska. The second one being production oriented (which deals in manufacturing and setting up of factories in the region) which it operates in Brazil and China. (Rana et al.2005) VW since its inception has adopted globalization strategies which broadly fall in three phases of Distribution-oriented MNC, Production-oriented MNC and Globally Operating transnational company. The first phase ranges between the period 1940s to 1969 where the worldwide distribution facility was organized by independent local partner and production facility was mostly offered by North American and European region. In the second phase between 1969 and 1990, VW adopted a Production oriented strategy in which it operated as a multinational and the center-periphery-configuration along with centralization was seen in this era. (Rana et al.2005) In the mid 90s, Volkswagen tried to expand its market by entering the USA and France markets. The main aim was to enter these markets to acquire the market share and obtain cheap labor. However, this was not as successful as they thought due to the lack of proper facilities and technological advancement; these countries were still producing old model cars. Towards the late 90s, the company converted its operations into an integrated global division, where the company was producing old model cars along with the new brands available across the globe. It was towards the late 90s that Volkswagen’s international strategy completely changed and improved for the better. The company converted itself into a globally operating transitional company. Volkswagen developed its product and market structure, the profit strategies and the production system at the headquarters and at the foreign operations level. They tried integrating the production system, so that there wouldn’t be a vast difference in the production method at home and aboard. Knowledge sharing and stimulating foreign conditions to their advantage, led to successful operating of the company in foreign markets. (Wen, X. 2007) After 1990s VW entered a new phase of internationalization and stabled strategy development with the aim to appear as a global transnational company. In this era which still continues VW expanded enormously in all parts of the world particularly in Africa from 14% to 19% and in Asia from 1% to 10.5%. The vast globalization also affected the structural, corporate governance and profit strategies in VW internationally too. VW has been a company close to the concepts of good corporate governance and CSR. The positive drift due to globalization caused VW to take greater inputs of national and micro-regional networks of interest and power groups to operate effectively as an MNC in any region. (Rana et al.2005) In its internationalization process VW adopted a double strategy of acquiring foreign brands and internationalizing its VW and Audi brands. VW involved itself in greater diversification by investing in the financial division which further was a step towards value adding chain to the customers an attempt to become a customer-oriented transnational automobile company. (Rana et al.2005) Moving on the entry strategy in the global markets, Volkswagen has seven major brands; the Audi, Bentley, Seat, Skoda, Bugatti, Lamborghini and the Volkswagen passenger cars. Out of these seven, six were acquired through acquisition. Audi was acquired from Daimler-Benze, Bentley from Vickers along with Rolls-Royce. Acquisition been the most popular mode of expanding for Volkswagen, the company has currently not being using this mode to expand due to current market and economic conditions. However, the company has recently restructured its current operations and has expanded production in existing ventures to meet the growing and emergent markets for Volkswagen cars in Asia and Europe. The company has also acquired LeasePlan recently, a fleet management business, formally owned by ABN Amro. (Wen, X. 2007) DEVELOPMENT OF GLOBAL STRATEGIC ALLIANCES BY VOLKSWAGEN: Volkswagen has also expanded its market by joint ventures and strategic alliances in China, where low cost resources have helped in achieving competitive advantage in Asian markets. Volkswagen has also adopted strategies like using car architecture of other brands in alliance with other car manufacturers to produce differentiated brands. A common example of VW’s collaboration with other brands is VW’s production facility in Slovakia produces the vehicle bodies for Porsche Cayenne and VW Touareg. Porsche are then finished in the plant of Leipzig while VW is finished and assembled in Slovakia. (Wen, X. 2007) There are numerous strategic alliances and joint ventures entered by VW internationally. The main aim of all such alliances was to gain a global competitive edge over its competitors. The strategic alliances build by VW are as follows: VW entered into a co-operation deal with Ancar in Angola in order to launch assembly operations. To strengthen its distribution network in South Korea, VW formed an alliance with Daewoo Motors Sales Co. It entered a joint venture with Euro car, a Ukraine based company for the production of Skoda and VW cars. VW entered Kazakhstan by a joint venture with Asia Auto for assembly of all Skoda models. Another joint venture is initiated with a German company named Salzgitter which deals in steel and technology and will work on car recycling issues. In an attempt to produce low emission diesel engines which are high performance too, a joint venture has been formed by Siemens VDA by the name of VW Mechatronics. For carrying out research on environmental friendly cars and low emission engines a joint venture has been started with a US based company Archer Daniels Midland (ADM). (Wen, X. 2007) Now we shall look at the investment strategies in China by Volkswagen. Volkswagen was the first one to enter Chinese market. In a country where cars were not commonly used, Volkswagen was the first of its kind to introduce luxury and passenger cars to the Asian markets. Volkswagen took up joint ventures and strategic alliances in the Chinese markets to produce efficient low cost cars, by using the cheap labor and resources from the Asian markets and providing them with the technological know-how and production resources. The first joint venture that Volkswagen took up in China was Shanghai VW, in collaboration with Shanghai Automotive Corp and China National Automotive Corp. This joint venture is owned 50% by the Chinese stakeholders and 50% by the German stakeholders. This joint venture produces six series of passenger cars. FAW- VW was the second joint venture formed in collaboration with First Automotive Work Group Corporation. The Audi Group later joined the venture. In this joint venture, majority stakes are held by the Chinese stakeholders. FAW-VW is the first large scale passenger car manufacturer in China. The VW China Group holds the largest market for cars in China, which makes it the largest foreign car brand in China and also China has the second largest market for Volkswagen cars, after Germany. (Wen, X. 2007) Shanghai- VW FA- VW Date of start of joint venture October, 1984 March, 1991 Partnership Ratios Volkswagen- 50% SAIC- 50% Volkswagen- 50% FAW Group- 50% Total Investment 7.8 million RMB 11.3 Million RMB Plant Shanghai (three factories) Changchun, Jilin Province Products Santana, Passat, Polo Jetta, Audi, A4, Bora, Golf Number of vehicles produced 278,890 191,695 Duration 25 years 30 years In the light of the aforementioned points, Volkswagen China should strive to improve its services, quality, increase investment, and look for more prospects in the overseas markets VOLKSWAGEN’S POSITIONING FOR GREATER GLOBAL COMPETITIVENESS Let us now evaluate the competitive advantage of Volkswagen internationally. The company has been looking for cheaper resources and economies of scale in foreign operations. Volkswagen operates 41 manufacturing sites all over the world; this including utilizing the cheaper resources and favorable market conditions in foreign ventures, has given the company brand recognition all over the world. (Wen, X. 2007) The aim of any globalization or internalization strategy is to achieve global competitiveness by focusing on the existing assets of the company and combining them with the global assets of each operative country. In order to benefit greater from internationalization and MNCs, structural changes occur in the operation of the whole group by greater decentralization and autonomous unit for greater information dissemination and global rationalization. (Rana et al.2005) VW has many multinationals which are provides the manufacturing and production facilities all around the world. Volkswagen Finanz GmbH which now operates as a bank Volkswagen Financial Services AG allows access to easy and low cost financing facilities to VW group all over the world. As part of its globalization strategy, VW entered China and opened two production facilities to benefit from the low cost production facility in China. Further VW has acquired many companies in different parts of the world. Apart from focusing on the existing product range VW has enhanced its focus on diversification in different products to build a diversified portfolio and manages risk through globalization for e.g. it rents and leases cars to the end users through European International SA and Financing. (Rana et al.2005) There has been an increasing demanding of cars throughout the world and as part of VW’s globalization strategy it has seek market through wider expansion of distribution networks and sales in North America, Europe, South Africa and Australia. Product line extension and product diversification creates greater market coverage in the region which has helped in exploring more production, distribution and marketing channels throughout the world. Further it has tried to achieve a global competitive edge over its competitors by moving in the low cost production regions like China, Brazil and Mexico. (Rana et al.2005) VW also realized the short life cycle and the inherited limitation of the automotive industry that is the changing technology and customers taste. By entering low cost production regions like China and Brazil it is successful in creating strong backward and forward integration (linkages). It has expanded product lines and setup plants for producing trucks in China as a step towards diversification. Due to increasing globalization VW has to be more competitive and strategic for which it has developed different nature of companies all around the world which has led to structural changes. Even the production facility is now decentralized according to engineering requirements and to achieve economies of scale for greater global competitiveness. (Rana et al.2005) Moreover, the way in which knowledge and innovation has been shared by Volkswagen to its subsidiaries and other ventures, has been the most astounding contribution to its worldwide recognition. Not only was technology and innovation shared between the headquarters and its divisions, but all over the globe subsidiaries were manufacturing cars on the same technology and with the same innovation as were being produced at home. Hence, everywhere around the world, customers were getting quality cars and with the same advancement as available in local countries; all of this due to effective knowledge sharing and resource creation. One of the major factors contributing to Volkswagen’s success was that the company used its central knowledge and technology in foreign countries, where using the local resources and keeping in mind the local conditions, the ventures were profitable for the company and helped in creating an impeccable brand worldwide. (Wen, X. 2007) CONCLUSION, STRATEGIES AND RECOMMENDATIONS: The company should provide more services to the customers, as it started “Made-to-Order” sales programme, where the customer could select the parts and get a car made according to his own specifications and could monitors it production from scratch to delivery. China being the largest nation population wise requires increasing investment in the industry to elevate production, to meet the increasing customer demand. The Audi Group in China invested heavily to increase production, to meet the growing demand for its luxury cars. (Wen, X. 2007) VW- one of the most recognized German car makers have gained wide market share due to its presence in all the continents of the world. Its position is China is extremely strong and China is the second largest market for the brand in the world. Due to the attractiveness of Chinese car making industry and the potential of growth in its market the brand VW entered Chinese markets through joint ventures. Being such a huge brand VW has built strategic alliances all over the world which serves as one of the key tools to gain competitive advantage over its competitors. Further with its entrance in China, it has strengthen its strategic alliances and joint ventures all the over the world which now and in future will make it the number one company in the automotive sector. VW with its strategic alliances all over the world has tried to become a global transnational multinational company. However, due to the severe competition in the automotive industry all around the world and in China, VW needs to constantly work to achieve competitive edge over its competitors by increasing production in the third world countries in order to achieve economies of scale and advantage of low labor and material costs. As environmental concerns are increasing debate, VW needs to focus on the production of low emission environmental friendly cars. VW further needs to concentrate on its product diversification strategies which can further add more value to the customers. VW in short is a very successful automotive brand with its alliances all around the world which are strengthening and can make VW the biggest automobile company of the world. References Chen, J., & Yao, S. (2006). Globalization, competition and growth in China. London: Routledge. Thun, E. (2006). Changing lanes in China: Foreign direct investment, local governments, and auto sector development. Cambridge: Cambridge University Press. Leeman, J. J. A. (2010). Export Planning: A 10 - step approach. Norderstedt: Books on Demand. Barrow, C. (2009). The 30 day MBA: Learn the essential top business school concepts, skills and language whilst keeping your job and your cash. London: Kogan Page. Baumann, C. (2010). 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