The Main Market of Volkswagen Group - Essay Example

Corporate Social Responsibility of Volkswagen AG 2007 Introduction Volkswagen Group with its headquarters in Wolfsburg is a well-known German automobile manufacturer, which has the fame of the largest automotive producers in the world. The Group encompasses eight European automobile brands: Volkswagen, Audi, Bentley, Bugatti, Lamborghini, SEAT, Škoda and Volkswagen Commercial Vehicles. In spite of the close connections among its parts every brand is quite unique and posses itself as an independent unit on the market. VW AG offers a wide range of autoproducts from small low-consumption vehicles to luxury class cars. Besides the private sector the company successfully operates of the sector of commercial vehicle, selling spans pick ups, busses and heavy trucks (Volkswagen, 2007). The main market of VW is naturally Europe but its brands successfully operate on the international market as well. Thus, company’s second largest market is China, where Volkswagen Group China can be called the Second largest Joint venture automaker. VW AG occupies a large part of the automaker industry and in 2006 is was reported to have a 9,7 % share of the passenger car market in the world, having sold 5.734 million cars compared with the 5.243 million in 2005 (Volkswagen, 2007). It estimated by the researchers that 19.9 % of cars, i.e. every fifth car, purchased in Western Europe, were produced by VW AG. Company shows good financial activities, having increased its group sales from 95.3 billion Euros in 2005 to 104.9 billion in 2006 (Volkswagen, 2007). As stated in the company profile the primary goal of the Company is to “offer attractive, safe and environmentally sound vehicles which are competitive on an increasingly tough market and which set world standards in their respective classes” (Volkswagen, 2007). The notion of CSR In this paper I’ll try to present the company profile. I’ll recall the main historic facts about the company; describe its market policy and corporate social responsibility strategy. The issue of CSR is quite new and acquired its importance not as long as 30 years ago. First, corporate social reduced only to financial reimbursement of the company to its shareholders. However, soon it became apparently not enough and corporate responsibility developed a wider range of policies and actions. Nowadays, there are quite many definitions of CSR. We will mention those, which are most popular. Keith Davis definition related corporate social responsibility to company’s “decisions and actions taken for reasons at least partially beyond the firm’s direct economic or technical interest” ( Davis, 1960). Eells and Walton claim that the issue of social responsibility is connected with the “problems that arise when corporate enterprise casts its shadow on the social scene, and the ethical principles that ought to govern the relationship between the corporation and society” (Eells & Walton, 1961). CSR is also defined as a level of responsibility, which is displayed in strategies and actions of the company, which have s direct or indirect impact on stakeholders and environment. According to Waddock, Corporate management can not avoid corporate social responsibility, as it is the basis for the formation of Corporate Citizenship (Waddock, 2005). The Committee for Economic Development suggested one more definition pf CSR, which is based on “three concentric circles” approach. In this approach the inner circle is composed of primary economic functions like economic development, company production and jobs offered. The next, intermediate, circle states the necessity for awareness of modification of social values in the process of goods production. Finally the third, outer, circle includes new and therefore still vague responsibilities, which are important for the company seeking to improve social environment (Committee of Economic Development, 1971). Different scholars apply different meanings to CSR and give different influence to it. Thus, according to Cowe and Porritt, corporate social responsibility is quite limited and is restricted to responsibility, which the company bears for its influence on society. “ But precisely because of this micro focus, and because of its voluntary nature, it only occasionally connects with the overarching objective of sustainable development.” (Cowe and Porritt, 2002). With the increase of interest to corporate social responsibility there appeared numerous approaches and models of this phenomenon. S. Prakash Sethi developed three management approaches used by the company to fulfill social obligations. They are the social obligation approach, the social responsibility approach, and the social responsiveness approach. Every approach proposed by Sethi describes different attitudes of the company to performance of responsibilities to society (Sethi, 1975). For example, companies preferring only social obligation approach think that business pursues only economic goals and therefore their CSR is restricted to observation of the existing laws. The socially responsible approach is a bit wider and incorporates not only economic but also societal purposes. Finally, company with the social responsiveness approach develops its business practice in accordance with societal, economic goals and also commits to overview and prevent future social problems ( Sethi, 1975). Nowadays, one of the most popular interpretation of CSR, is exemplifies with the help of the pyramid of CSR, proposed by Carroll. This is a four-item conceptualization of social responsibility, which assumes the idea that company bears not only economic and legal obligations, but also ethical and discretionary (philanthropic) ones (Carroll, 1971). These four types of social responsibilities, which are included to CSR, are economic, legal, ethical and philanthropic and can be represented as a pyramid as suggested by Caroll in 1971 (Carroll, 1971). VW history In order to discuss the contemporary policies and practice of the company, I’d like first to briefly outline its history. The founder of the future VW Company, Ferdinand Porsche, was famous for the racing cars that he designed for the 750-kg racing class. As early as 1931 he designed a car that carried many of the features of the first VW. The prototype was completed in 1932 but due to heavy demand for motorcycles this car was not developed any further. Porsche was then approached by NSU who planned a small car with a 1500cc engine (UKcar, 1997). The result was “Type 32”. Subsequently NSU also backed out of the project after a number of prototypes had been built. The car developed by Porsche had many mechanical similarities like the Tatra V570, and after WWII, VW had to pay Tatra compensation because apparently VW had pirated their design and technology. In early 1930s Nazis came to power in Germany and Porsche realized that the plan for the new roads was suitable for his car. Adolf Hitler had a keen interest in cars and he prevailed upon Ferdinand Porsche to make changes to the original design of 1931 and make it more suited to people’s car or “Volks Wagen”. Hitler’s intention was the changes would make the cars affordable by common people and they could buy the car by means of a savings scheme. The changes included fuel efficiency, reliability, ease of use, and economically efficient repairs and parts. Hitler’s idea was that the car could carry 5 people, cruise up to 62 mph and cost only 1000 Reich Marks. Porsche seized this opportunity to push his car forward and signed a memorandum agreeing to build the prototype in 12 months (UKcar, 1997). VW honoured its savings agreement and after WWII developed the car body of the prototype of what is known as the Beetle today. The new factory at KdF-Stadt, now called Wolfsburg was built only for the factory workers and a handful of cars were produced. During the Second World War the plant started producing armaments and some 20,000 forced labourers, prisoners of war and workers from concentration camps worked at the plant. After the war, the responsibility for Volkswagenwerk was planed in the hands of the British Military Government and production for Volkswagen Beetle began under the management of Major Ivan Hirst (Volkswagen, 2007). In 4 July 1985 the name of the company was changed to Volkswagen AG, which aimed to show the company’s extension and diversification from its headquarters. Now the company has the name of “Volkswagen Group” worldwide and is one of the largest and well-known car manufacturers in the whole world (UKcar, 1997). Corporate social responsibility of Volkswagen AG VW is a large company operating worldwide and employing over 325,000 people, who produce over 24,500 cars and are involved in vehiclerelated services. Among its employees 93,084 are salaried workers and the rest are hourly workers (Volkswagen AG, 2007a). The terms of employment at VW are flexible workweek. They follow a standard workweek of 28.8 hours in an effort to save jobs (Berg, Appelbaum, Bailey & Kalleberg, 2003). When the demand is weak the workers may work four 8-hour days for nine weeks and then take the 10th week off. This results in an average of 28.8 hours/week over ten weeks and they are paid for 28.8 hours per week. When the demand is strong the workers may be required to work five days a week. This results in an average 36-hour week. Hours above 28.8 are credited to the employee’s “working time account” and hours above 35 are banked at a premium rate. During the slack period the workers can take time off. They can collect additional pay for the hours in their working time account at the end of the year. This strategy is in line with the CSR principles as they demonstrate social responsibility without compromising on company profits. It also takes care of job losses in these days of high levels of unemployment (Berg, Appelbaum, Bailey & Kalleberg, 2003). In Germany according to law, the company is required to give 50% of its supervisory board seats to labour representatives (Sims, 2007). This has given rise to conflicts of interest and bribery in corporate Germany because executives need the board’s support to get their jobs going. The trade unionists and the employee representatives have a say in crucial decisions like appointment and dismissal of members on the board and other business operations (Wharton, 2007). Thus the board members become subject to firing by the Supervisory Board. This creates conflicts of interests and this close relation with the trade unionists has led to the scandals that the company has been recently involved in. The board also plays a major role in decisions regarding building of new factories and long-term investment (Genet, 2003). We can see the attention of the company to its workers, however, corporate social responsibility issues of the company are not restricted to the care of the company about its employees. As stated on the company’s corporate site “Forging the right blend of values, sustainability and innovation is the core challenge of our age. Only if we succeed in this endeavour will we be able to hold our own in the marketplace of the future” (Moving Generations, 2005-2006). According to the company report in 2003, sustainability is considered to be among seven Corporate Values. By stating this, the company makes a promise to “take account of the long-term goals approved by the company in our daily work” and thus to maintain “long-term balance between economic, environmental and social goals”. The company promises to “safeguard the future in all respects”, which is one of the major responsibilities of the company management activity. Due to this fact corporate social responsibility is deeply entrenched in the overall activity of the VW AG (Moving Generations, 2005-2006). Let’s briefly overview the main achievement of the company in the field of the corporate social responsibility. Company management considers CSR among one of the main cornerstones of the corporate culture. Social responsibility is viewed by the company not merely as donations to welfare activities, but as creation of the safeguard workplaces, constant training of its employees, and common decision-making concerning the future corporate future. The implementation of the CSR policies takes place at all plants of the company in all parts of the world. One of the main goals of the VW social responsibility issues concerns protection of environment. In fact for any automobile company this should be one of the primary concerns due to the deeply-entrenched public opinion that cars are responsible for environmental pollution. Therefore, the company aims to implement high environmental standards for protection through all plants y means of new advanced technologies and environmental management systems and education of employees, rising their environmental awareness (Moving Generations, 2005-2006). Management of the company is sure that there is a need to add values for the sake of keeping and improvement of one’s place on the national and international markets. This can be done through strengthening of its brand image and better social policies. Finally, the company insures transparent corporate leadership, which is viewed as a main source of stable long-term development. In this the company governs by the German Corporate Governance Code (307). For the sake of insuring its corporate future the company relies on the policy of the independent Supervisory Board, which supervises and directs the Board of Management (Moving Generations, 2005-2006). In its way to create powerful social responsible corporation VW made the first step by providing safeguard and attractive workplaces. The company is much concerned with attraction and retention of the motivated and highly-skilled workforce, which is done through success- and performance-based corporate culture. VW plans to ensure long-term employability and establish lifelong-learning models. This strategy is also required by the demographic change, which takes place in the contemporary highly industrialised Western Europe (Moving Generations, 2005-2006). In May 1995 the company issued its Environmental Policy, where it stated its main principles of environmental protection and resource conservation (312). Since tat time the company gradually implemented these principles at all its plants. The “Declaration on Social Rights and Industrial Relationships” was the first document in the automobile industry, which established standards for employee relations. In 2004 Volkswagen published its Occupational Safety Policy act, where it listed the main principles and duties regarding occupational safety (Moving Generations, 2005-2006). As it was already stated Volkswagen AG pays much attention to the environmental issues. One of the primary tasks in this strategy is the reduce CO2 emissions. Company launched its “Climate Strategy”, which focuses on this problem and devises possible ways how to eliminate the harmful effect of CO2 on environment. The working group develops programs of alternative fuels and powertrains, and special training for drivers for promotion of saving energy driving. The other proof of the company’s concern with environmental issues is establishment of heat, power and refrigeration plants for Audi and Volkswagen (Moving Generations, 2005-2006). The European Union general policy demands the reduction of new car emissions. VW has improved fuel efficiency at less than half the rate needed (EU, 2006). In keeping with its CSR towards environmental protection, VW has sponsored a new special professorship to facilitate the further development of fuels made from biomass (SunFuel, n.d.). VW is making a contribution of one million euro towards this research. VW has already developed a fully synthetic diesel fuel known as SunFuel in collaboration with a Saxony based company which specializes in gasification technology for biomass. VW’s goal is to come with environmentally less damaging alternatives to petroleum as a source of energy (Moving Generations, 2005-2006). Concern of the company with its employees is obvious in numerous projects of VW for retaining the experience of its employees and introduction of programs for young specialists. It’s a well known fact the Europe “grows older” meaning that the number of older people constantly grows. On the one hand it is a big challenge to the company. On the other hand, Volkswagen Group considers that older employees posses great experience of work and at the same time are able to cope with stress situations even better than younger generations. Therefore, the company decided to maintain their employability. For this VW established high standards of healthcare services and create age-related working-time models. The proof of this is establishment of Volkswagen Coaching “Lifelong Learning” (Moving Generations, 2005-2006). On the other hand the company is well-aware of the potential of new young specialists and promotes their involvement with company practices. Volkswagen tries to promote lifelong employability for young specialists. For this the company constantly improves the level of knowledge and skills of young employees and creates necessary conditions for new generation to combine their work and family life. Special programs for young mothers were devised in order to prevent the loss of this well-trained group of employees. The range of possibilities offered by VW is really wide from shift-work to part-time work or even teleworking. This promotes loyalty of the working staff and increases the intellectual capital of the company (Moving Generations, 2005-2006). Volkswagen within globalisation framework Volkswagen AG also deals with globalisation, which is perceived by many Europeans as a threat to their well-being largely due to the fear of more severe competition and job losses. VW tries to change this opinion and change this distorted viewpoint by promotion of new opportunities for new employees around the world and safeguarding its European workers. For VW globalisation is a very important issue like for any automobile company, for which is it is profitable to locate its production capacities in developing countries, where labour costs are lower and environmental policies are not so strict. VW views globalisation as advantage rather than a threat and proves that international division of labour is beneficial for both industrialised developed countries and developing nations as well. Globalisation in VW’s presentation is a contribution to sustainable development in the whole world and on the other hand an important step for maintaining competitiveness of the company. This understanding urged the development of the company on international market. Thus, the production in Latin America was established over 50 years ago, company owes plants in South Africa, Asia and Eastern Europe. This expansion is viewed by the company management as an important obligation requiring to act in accordance with the environmental norms and social responsibilities policies worldwide (Moving Generations, 2005-2006). Regardless of the place of the VW plant, be it either in Europe or in Brazil or China, VW is concerned with development of regional infrastructure. The company states that when it starts a plant, it becomes responsible not only for the life standards of its employees for also for all the additional jobs – schools, public transport, local authorities, retailers and catering servers. So, the company promotes its social responsibility policies these local infrastructures (Moving Generations, 2005-2006). The other aspect of the globalisation process is improvement of company’s global position through an efficient supply chain management (SD, 2002). VW was one of the few companies that could take the challenge of globalization and survived despite cost cutting measures. It did suffer in Spain during this period. European car manufacturers are taking up the challenge of globalization but they are attacking the US/South American markets. Both BMW and Mercedes set up plants in USA but they found that it is much more than setting up a plant and taking on staff. They realized that the prestige of German cars comes from the fact they are ‘built in Germany’. Hence the drive to maintain a global position had to be carefully balanced with the brand image and the brand image can be sustained only when the working conditions are not strictly regulated. Mercedes sent all their workers to Germany for technical training. VW is planning to set up a plant in Mexico where it plans to roll out 120,000 examples of its new Beetle every year. VW is also targeting Brazil. After VW took over Skoda in 1991, the company has transformed from a small, low volume producer of maligned, cheap and low quality cars into a mass producer of vehicles which have gained an enviable reputation of reliability and quality (SD, 2003). This dramatic U-turn is the most remarkable in the history of automobile industry. In 2001 it produced double the amount of cars that the plant produced in early 1990s. This is being manufactured in Czech Republic and has gained the same reputation as the parent company, which implies that making cars in Germany is not what matters. It is the governance, reliability and the ability to steer the company forward that matters (Moving Generations, 2005-2006). International markets of VW So, VW aims at expansion on the international markets. Let’s consider some of the directions of this expansion. One of the powerful international markets for VW is Asia. Emerging markets like India have become very attractive for foreign investors because of the vast market potential. Firms internationalize and expand overseas but in doing so they tend to exploit the laxity in the norms of operation to their advantage (Krishnan & Balachandran, n.d.). There is lack of concern for local community, consumers and the environment. VW has to ensure these factors as sustainable growth is associated with the care of the community. Adverse or negative publicity can raise doubts about the firm that intrudes and hence VW has to be specially cautious in the Indian market. There have been allegations against Coca Cola for exploiting water resources. Winterkorn shaped the interests of VW in India in the following way: “India is one of the fastest growing automotive markets worldwide. We are intent on playing a key role in shaping this growth. We will also soon be more heavily involved in the Indian market with the Volkswagen brand. Because of the high tariffs on imported vehicles, however, we will only be able to build a satisfactory presence in India if we also manufacture there directly” (VW targets India, Russia; 2008 pretax profit to hit $6.92 billion). After long deliberations and change of the location, VW is finally entering India with an investment of $530 million to set up a manufacturing unit (M&G, 2006). It is expected to be operational by 2009 and it would give rise to 10000 direct jobs and 15000 by ancillary services. It is targeting the low-price market and hopes to achieve success. It expects a good share of the market as the production which is currently 1.11 million may triple to three million annually by 2015. Skoda is already manufacturing in India. It also has big plans for Russia. Unlike in India, VW plans to send semi-knocked-down vehicles to Russia and assemble it locally (Edmunds, 2006). The location has yet to be finalized while in India it will be near Mumbai, in Maharashtra. In Russia they will build the Skoda Octavia and VW Gol models while in India cars will be tailor made according to Indian standards and requirements. In Mexico, VW moved its plant away from the congested region thereby qualifying for public subsidies which encourages industrial growth. Here too VW follows the same collective bargaining agreement and the workers are not affiliated to the Confederation of Mexican Workers. In US too there has been a turnaround as the new management team was able to win the workforce through empowerment, trust building and partnership (Birkinshaw, 2003). The brand image in US has also been changed due to alteration in their advertising strategy. VW scandals The scandals at VW involved both the company officials and the labour union officials. The press called it the “perks-and-prostitutes” scandal (Wharton, 2007). A senior executive was fined with €576,000 earlier this year and received suspended prison sentence for his role in a scandal that involved bribing workers with money, trips and prostitutes (Sims, 2007). VW has always enjoyed amicable cooperation with workers’ union. Peter Hartz, Volkswagen’s now-disgraced HR director, was more than a friend to the union representative on the Volkswagen supervisory board. In return for union support, the union representative was provided with money and girls and company jets and journeys (Brierley, 2007). Globalization and its attendant corruption are the two greatest challenges of the 21st century that has not spared Germany also. This sort of a consensus style gives organized labor a voice in key management decisions. German law requires that work council leaders be consulted on major decisions by large corporations. The union leader apparently demanded and received all the possible luxuries. Germany’s legal system viewed bribery as a cost of doing business and it is still considered necessary. The laws in Germany have changed since they adopted the anti-corruption guidelines promulgated by the OECD in 1999. Hartz, largely responsible for overhauling Germany’s labour market ahs confessed to the crime and stepped down and so has the former head of VWs works council, Klaus Volkert. This has caused the company loss of brand image, and is giving rise to speculations that the insider control should be changed as it leads to abuse of power. The stockholders have no say in the governance in Germany while the employee representatives have veto power. In 2005 a scandal had erupted that VW staff set up a global network of six front companies to get supply contracts (Bester, 2006). The former staff sought payments for work in India and Angola. VW Future I’d like to acknowledge great achievements of VW on the automobile market. However, there are some threats to its future development and expansion. VW has a lot to learn from manufactures like Toyota and GM. Unlike its US rival, VW fits the same component to its entire range. As a consequence, it has become difficult to sell the expensive cars. Customers get the same quality product underneath so why should they invest in an expensive car. VW buys a lot of its parts while GM manufactures its own. This implies VW has lot of suppliers to deal with and quality becomes a concern. Despite its claims, critics point out that VW has failed miserably to control costs, improve productivity or use a pricing strategy that is viable (SD, 2005). It has also failed to make the sister brands different from one another. They were concerned in making the best car possible regardless of costs but due to increased market competition they have had to sit up and take notice. The revenue from its Wolfsburg-based VW theme park barely covers the cost. It uses a large workforce. Despite having attractive incentive schemes, the economy in Germany being shaky, sales have fallen. It tries to convince that its expensive Golf sales would be going up because of its pricing strategy but it is yet to be seen. Because of the prevalent German laws, the firm is unable to cut labour as the state of Lower Saxony is an influential shareholder. While the firm is environmentally conscious, the Germans strategy of collaboration with works council has failed miserably and has been extensively criticized. The powers have been abused. It has failed to control costs and its hands are tied as it is unable to cut workforce. It may succeed in low-priced cars in the developing nations but it has a tough competition to face from the developed nations although it has managed to reverse the brand image to some extent. These are the main points, which I would like to emphasise. For the sake of the future successful development the company has to manage and overcome these challenges and develop effective strategies, which will eliminate future problems. References Bester, H., (2006). The Tax treatment of Bribes, [online]. Available from: 15 April 2007 Birkinshaw, J., (2003). Volkswagen strikes back, Business Strategy Review, Vol. 14 Issue 4 Winter 2003 Brierley, D. (2007). How corrupt is Germany, [online]. Available from: 15 April 2007 Berg, P., Appelbaum, E., Bailey, T., & Kalleberg, A. L. (2003), International Comparisons Of Employee Control Of Working Time. [online]. Available from: 16 April 2007 Carroll, A.B. The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders, Business Horizons, July-August 1991 Committee for Economic Development (1971). Social Responsibilities of Business Corporations. New York: CED. Cowe, R. and Porritt, J. (2002). Government’s Business. Forum for the Future. Davis, K. (1960). Can Business Afford to Ignore its Social Responsibilities? California Management Review, 2-3, 70-76. Edmunds (2006), Volkswagen Has Big Plans for Cracking Russia Market, [online]. Available from: 16 April 2007. EU (2006), EU mulls legislation as car makers fail on emission targets, [online]. Available from: 16 April Eells, R. and C. Walton. (1961). Conceptual Foundations of Business. Homewood, ill.: Richard D. Irwin. Genet, A. (2003). EU launches action against "Volkswagen law", [online]. Available from: 16 April 2007 Krishnan, S. K., & Balachandran, R., (n.d.), Corporate Social Responsibility as a determinant of market success: An exploratory analysis with special reference to MNCs in emerging markets, [online]. Available from: 16 April 2007 M&G (2006), Volkswagen comes to India, finally, [online]. Available from: 16 April 2007 Moving Generations (2005-2006). Volkswagen AG. Sustainability report. [online]. Available from: < http://volkswagen-sustainability. Com > 1 May 2007. SD (2003). What now for Jaguar and Skoda?, Strategic Direction, Volume 19 Number 8 SD (2005), Can GM, Chrysler and VW fight back? Strategic Direction, VOL. 21 NO. 3 Sethi, S. P. (1975). Dimensions of Corporate Social Performance: An Analytical Framework.California Management Review Spring. Sims, G. T. (2007). Germany rethinks board structure after corruption scandals. [online]. Available from: 15 April 2007 SunFuel (n.d.), Mobility and Sustainability, [online]. Available from: 16 April 2007 UKCar (1997). Volkswagen car history, [online]. Available from: 1 May 2007 Volkswagen. [online]. Available from: < http://volkswagen-ir.de/English_version.337.0.html > 1 May 2007. Volkswagen AG, (2007a), Our Employees. [online]. Available from: 1 May 2007 Waddock, S. (2005). Leading Corporate Citizens: Vision, Values, Value Added. Mc Grew-Hill. Wharton (2007), Hit by an Earthquake: How Scandals Have Led to a Crisis in German Corporate Governance. [online]. Available from: 15 April 2007 Read More