The Globalisation Strategy for Volkswagen in China - Case Study Example

Individual report Table of Contents Volkswagen in China 3 Part: 1 4 Features of National Innovation 4 Legal and political environment in China 5 Industry that attracts FDI 7 Motivation & obstacle for an international company 9 Major risk in China 10 Part: 2 12 Features of National Innovation System (NIS) 12 Investing in China will promote innovation 14 Strategy to leverage the peculiarities of the China’s NIS 15 Reference 17 Bibliography 21 Introduction Globalisation has played a great role in uniting the world into a single global village. Contemporary corporate businesses can no longer be confined by national boundaries. They have come out of their national identity and have emerged as true international brands. With time, companies came to realise that in order to minimise business risk and expand operations, it is necessary to explore new potential market. Companies now pay special attention to innovation and creativity in order to acquire extra competitive edge. Hence, companies are diversifying their business process to take advantage of globalisation. They are investing in foreign countries to explore potential resources existing in these nations. They use innovative business strategies to enhance the profitability of business and quality of products and services offered to the customers. Undoubtedly, this improves the competitive advantage of the company and helps it to acquire a competitive position in the market. To develop a better understanding of globalisation and its impact on contemporary business environment; an in-depth analysis of business environment of China will be conducted. This analysis will help to identify the motivational factors as well as the obstructions faced by the international company. This analysis will also assist in understanding features of national innovation system existing in China’s automobile sector which help to attract high amount of foreign direct investment. And finally, the strategy to be followed by Volkswagen will be discussed to introduce innovation in the existing business process. Volkswagen in China This report basically discusses the globalisation strategy to be selected by one of the well know international brand, Volkswagen for expanding its business. The company was established in 1937 by the Nazi trade union in Germany. The term “Volkswagen” means “peoples car”. With time, the company diversified its market and became an international brand (Volkswagen). As per the market data, Volkswagen has a dominant position in China. In the second quarter of 2010, China was the most profitable market of Volkswagen (Cremer, 2010). The data published by the company reflects a sharp increase of €172m in operating profit during Q3 in China market (Schäfe, 2010). From January 2010 to September 2010, the company performed well in China, registering a stupendous growth both in terms of volume and profitability. In the last three quarters, Volkswagen sold 1.48 million cars in China; a growth of 39 percent on y-o-y basis. This was almost double the number of cars sold in the domestic market. At present, the company enjoys a market share of 18.3 percent in the automobile sector of China. According to JD Power, an automotive research firm, the car sales in China is expected to reach 16.23 million. Among all the international brands, China is one of the most attractive markets and well as the most competitive. Volkswagen has announced that it will invest €6bn in China to further expand the business (Schäfe, 2010). All this information suggest that China is one of the most important markets of Volkswagen, which makes it imperative for the company to invest in innovative business strategy in order to attain sustainable growth. Before developing business strategy, Volkswagen will analyse the existing business environment of China. Part: 1 Features of National Innovation The recession of 2008-09 was a curse to almost all the developed nations. During that time, these nations had to bear huge financial crisis and economic growth decreased drastically. However, performance of developed nations was comparatively better. Among these developed nations, China’s performance is remarkable and it emerged as the fastest growing nation of the world. By first half of 2010, China took over Japan as the second largest economy of the world (Barboza, 2010). In the second quarter of 2010, the gross domestic production of China was $1.337 trillion which was higher than Japan’s gross domestic production of $1.288 trillion in the same quarter (Bloomberg News, 2010). Today, China is an attractive destination for almost all the international brands, indifferent of the sector to which they belong. Large population and enhancement in living standard are positive signs for high demand and thus more and more international companies are targeting China as one their favourite market. Economic growth in China has been influenced by foreign investment made by several companies in the last decade. According to IMF, FDI represents a long term relationship between the investors and the country, helping the host company to get the required assistance in improving its economic performance in the long run (Le & Hui, n.d., p.514). As per the Ministry of Commerce, FDI is constantly increasing in China since the last eight years. The data explains that there is a healthy growth of 1.1 percent year on year basis and FDI has reached to USD 56.53 billion (CIIPP, 2010). The FDI inflow is increasing with time. In September 2010, the FDI was up by 6.14 percent y-o-y and 47.6 percent was mainly contributed by the manufacturing sector of China (CSJ, 2010). This data is sufficient to reflect that how the international companies are targeting China to take advantage of its unique business environment. Legal and political environment in China High growth in economy can be attributed to the business environment of China. With time, the Chinese government realised that in order to attain high growth in industrialisation, both public and privet sector should work hand in hand. However, till data the government of China has played a vital role in the economy. From early 1990s, legal reform was one of the major priorities of the Chinese government. The government introduced more than 300 new laws and regulations and among them, majority were related to economy reforms. The government of China is always more concerned about the manufacturing sector. This is because, 48.6 percent of China’s GDP is contributed by the industry sector. The legal system of China is responsible for attracting such high rate of growth in the GDP (U.S. State Department, 2010). The government of China has introduced several policies to promote industrialisation. Even in the phase of recession, the government introduced stimulus and injected liquidity to protect the industry from the effects of recession. In China, the government exercises significant power over the decision making processes. As a result, with changing business environment, the government has introduced active changes in the prevailing policies. Chinese government is known for its image of being a protectionist because the government has always protected its local companies from international competition. However, with time, the government has realised the importance of foreign investment in the economic development of China. Thus, the government reformed its policies to attract international companies to invest in the Chinese economy. To cope up with the international standards, the government of China decided to enhance the transparency and thus it started publishing certain required information. The Chinese government decided to accept all the administrative laws introduced by WTO. This brought China and other international economies at par with the global standard in terms of basic laws and regulations (Halverson, n.d.). Therefore, the change in the attitude of the Chinese government resulted in flexible fiscal and monetary policies. As compared to the developed nation, the laws related to environment are not that stringent. Hence, the companies who operate their production units in China do not have to make high investment in introducing environment friendly policies. The above mentioned policies provide sufficient information regarding the role played by the government of China in attracting companies to invest in China. Success of China is indebted to its government but the legal system suffers from certain loopholes. Political unrest and high corruption is existent though not rampant. Sometime, high degree of flexibility in legal laws results in injustice to some people. Ever, the human rights laws in China are not at par with the international standards (Kent, 2010). The rate of globalisation has made it imperative for the Chinese government to readdress this spasm or face the consequences of losing ones position in the international market. Industry that attracts FDI As discussed earlier, the volume of FDI is increasing at healthy rate in China. About half of the foreign inflow is directed towards the industrial sector. In China, there are several sectors that attract foreign investors. Among them, the charm of automobile sector is worth a special mention. The market analysts have predicted that in the coming few years, demand for cars and other automobile will grow all around the globe. The demand will be high mainly in the developing nations where living standard of people is increasing because of their increasing purchasing ability. Hence, the automobile companies are in the process of identifying the changing needs of potential customers and then developing innovative products that possess the ability to fulfil the requirement in a more innovative manner. China is emerging as the supplier of several automobile components to many international car manufactures. In China, the automobile sector has witnessed many mergers and acquisition with national as well as international companies. This has resulted in achieving economies of scales and the cost of production has reduced to a great extent. In China, several first tier suppliers have become assembler. This helped them to develop backward integration and introduce innovation with much more ease (Sasuga, 2008, p.3-4). (Figure 1: Sales figures in automobile sector in China, 2005-2009) (Source: EuroChinacom, 2010) Figure 2: Vital statistics related to China’s automobile sector (Source: EuroChinacom, 2010) Favourable business environment coupled with cheap labour, availability of resources and healthy legal environment makes the automobile sector of China one of the most attractive destinations for international companies. Figure 3: Dispersion of World Automobile Production in 2007 (in 000) (Source: Sasuga, 2008, p.5) Motivation & obstacle for an international company There are several factors, the combined effects of which have made China the Mecca of investment to foreign companies. Among them, cheap labour is the one most important. As compared to developed nations, multinational companies have to pay much less to the labours working in their China’s production units. This is because of the large supply of labours in the country. This encourages international companies to set their production facilities in China (China Internet Information Center, 2002) The labour rate is not just cheap but the productivity of workers is also comparatively high. Due to poor labour laws and absence of strong union in China, the employees often agree to work for long working hours even in poor working condition. This minimises cost of labour and increases the profitability of companies. Apart from cheap labour, flexible and less stringent legal standards have also proved to be a boon for the FDI. To attract foreign capital, the Chinese government has introduced several attractive policies. MNCs interested in starting a business in China have to collaborate with any local company. This helps the local companies to learn new technologies and contemporary management practices. Despite the factors mentioned above, there are some issues that act as obstacles for the international companies. Although the Chinese government has introduced several changes in the existing legal structure and policies to attract FDI, in many cases the protectionist image of the government is visible. Even the government has acknowledged that it needs few more years to become a “free market” (Foster, 2010). Increasing concern regarding environmental issue, have compelled the Chinese government to introduce more stringent environment law. This will affect the profitability of international companies having their production units in China (Zhongying, 2008). Major risk in China Before entering any foreign countries, the international companies analyse the major risks that characterise a particular economy. As more and more companies are entering China, the degree of competition is also becoming intensive with every passing time. This will in turn increase the market risk. The Chinese government pays an active role in controlling the economy of the nation. The government possess the right to decide what to be made public and what not. No one is allowed to question the authenticity of the data published by the government. Poor transparency level in China further aggravates the prevailing market risk. However, China is endeavouring to address international issues and undergoing necessary changes in its existing policies. For example, the government has increased the basic wage of its labourers. Such steps have double faced effects. It increases the living standard of its citizens but makes its market less attractive to foreign investors (Kurtenbach, 2010). China is also being pressurised by the international bodies to deregulate its currency (Garnaut, R. August 01, 2010). Part: 2 Features of National Innovation System (NIS) Many scholarly definitions are available on ‘national innovation system.’ The one most popularly used is given by Edquist in 1997, which states that “national innovation system includes all important economic, social, political, organizational institutional and other factors that influence the development and diffusion of innovations (Oy, n.d., p.14). NIS was popular among OECD and other developed countries and now, even the developing nations are paying attention to this model. According to Lundvall (2000), innovation is not solely associated with a single enterprise; rather it takes into account all the factors of external environment. Hence innovation is both social and dynamic in nature (Feinson, n.d., p.17). Niosi (2002) opined that unlike capital flow, knowledge flow from one nation to another is difficult because of its tacit nature. Since knowledge is confined to human brain, it cannot be moved to suit ones need. Hence, to introduce innovation at national level, coordination among government, people, public and private institutions and finally the natural resources should be initiated (Feinson, n.d., p.18). The nation’s innovation system is prone to changes of time. Change has been noticed in theory, subsidy focus and the policies used to introduce innovation. The changes taking place in all these three components has been explained with help of the below given diagram. Figure 4: Innovation in Theory and Policy (Source: Feinson, n.d., p.19) Johnson and Jacobsson (2000) pointed out five main functions of NIS. These are as follows: Creation of ‘new’ knowledge. Providing guidance for the search process. Supplying required resources in form of capital and competency. Facilitating exchange of knowledge, information and vision with external economies. Facilitating formation of market. (Feinson, n.d., p.22) Investing in China will promote innovation To introduce innovation it is essential to generate, share and use knowledge. Nonetheless, the existence of such a phenomenon is mainly influenced by firm’s own capability, presence of supporting institution, the level of technology awareness and support of other research bodies. All other factors which influence innovation in a nation are explained with the help of the below given diagram. Figure 5: Actors and linkages in the innovation system (Source: p.26) China is often termed as the hotbed of innovation. To create knowledge there must be a cheap supply of required resources. In China the resources are available in ample amount at reasonable cost. If a company sets a new plant, it can avail land and other resources quite easily. China also possesses a large supply of skilled and semiskilled human capital that can actively participate in creating innovative products and services. The government of China is also motivating companies to invest in technical sector. Low tax rate, easy availability of loans, friendly foreign policies and other required assistance from the government are some of the other factors that lure international companies to invest in China. Availability of resources is not just enough to induce innovation, unless the environment is conducive. In China, the government has developed collaboration with reputed international universities to help its youth get access to world class education. Along with it, the government has also established several research centres where corporate level research can be conducted. Many well known companies have established their research and development centre in China. In the event of a company investing in China, chances are that it will succeed in implementing innovation in its products and operation process. Strategy to leverage the peculiarities of the China’s NIS Joining World Trade Organisation (WTO), proved to be a boon for China. Inflow of FDI registered a stupendous growth, more particularly in the Chinese automobile sector. These companies introduced world class technology along with contemporary management strategies in its business operation. The combination of innovation, FDI and R&D has given an extra edge to the auto sector of China ( Fang & Mohnen, 2009, p.2). Volkswagen should therefore finalise the strategy to enhance the effectiveness of its NIS in China. This strategy should be based not just on the changes taking place in China but also on the changes in customer behaviour. Volkswagen is one of the major players in the Chinese retail market. Hence it has a basic understanding of the nation’s dynamics. Now if the company sets its own production plant, it will be quite easy to develop an effective business strategy. The company will manufacture cars both for the Chinese customers as well as for the international customers. This production unit should have a R&D department where western technology will be fused with the prevailing knowledge in China to design new and innovative products. Demand for cars is expected to increase in China, making it imperative for Volkswagen to use its contemporary knowledge to develop cars that are effective is fulfilling the specific requirement of Chinese customers in a more innovative manner. The company can also use this production unit for developing cars meant for international customers. Innovation can be introduced in the production system by implementing tools like six sigma, kaizen umbrella, JIT and so on. Volkswagen can establish its contemporary management system and change the prevailing traditional organisational culture. This will further assist in the smooth running of its production unit. 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