China Europe International Business School Research Paper

Overview of VW History of the group VW Company was founded in 1937 during the Nazi dictatorship in Germany. In the early 1930s German auto industry was still largely composed of luxury models, and the average German rarely could afford anything more than a motorcycle. In 1933, Adolf Hitler declared his intentions for a state-sponsored “Volkswagen” program (Volkswagen literally means the car of the people). Hitler required a basic vehicle capable of transporting two adults and three children at 100 km/h (62 mph). The new vehicle was designed by Ferdinand Porsche.

During Second World War, production changed to military vehicles. The company used 15000 slaves as a workforce. After the War, the British Army took control of the town of Wolfsburg, where the VW factory was; Ivan Hirst came from Britain and landed in Germany in the summer of 1945, where he had the original intention to scrap the factory and use the proceeds as war reparations. But Hirst found a pre-war prototype Volkswagen in a remote workshop on the site and realized that the factory could be used for producing cars for the British Army. He persuaded the British Army to place a vital order of 20000 cars.

That saved the company. From 1948, Volkswagen became a very important element, symbolically and economically, of West German regeneration. In the 1950s and 1960s, the famous Beetle and the Volkswagen Bus helped turn the company into an international success story. On the 70s, Volkswagen broke the world car production record: the Beetle surpassed the legendary Model T of Ford, with 15,007,034 units assembled. New models emerged: in 1974 the iconic Golf, then Polo, Passat, etc. Other successful products followed: the Scirocco, the Golf GTI, the Lupo and the Touareg.

The company today In 2008, Volkswagen became the third largest automaker in the world. Organizationally, Volkswagen Group consists of two divisions: the automotive division and the financial services division. Under the automotive division, there are several brands: Audi and Seat, which joined the Group in 1986; Skoda, acquired in 1991; Bentley, Lamborghini and Bugatti, exclusive elite brands, and Scania, a brand of trucks and buses. Hence, the product ranges is very wide; it covers nearly all classes of cars, from low-consumption small cars to luxury class vehicles.

VW cars are positioned as innovative, responsible, providing enduring value. Customers from all over the world associate this brand with quality, reliability and German engineering skills. The financial Services Division combines dealer and customer financing, leasing, banking and insurance activities, and fleet management. 2 Within the group, sales revenue and operating profits are broken down into four geographic regions: North America, South America, Asia/ Pacific and Europe/Remaining markets.

By regions, its strongest position has historically been Western Europe, where its current market share is 21%. China has been the second largest market for VW, only after Germany. Its lowest market share is in North America with 3. 9 percent. Although it still described itself as a “European oriented company”, in 1990 VW sold two-thirds of its cars outside Germany, and produced 40 per cent of its units overseas. In terms of operations, VW has 40 locations worldwide, 6 locations if which are in Asia. 3 The group employs almost 400.

000 employees worldwide, 45% of which are German, but this rate is likely to decrease, as a reflection of Volkswagen global expansion and the group particularly strong growth in the emerging markets; also because Germany has become the most expensive place in the world to manufacture cars. In 2010 VW group sold 7. 2 Million units of cars. Sales revenues were 126. 9 Billion euros and operating profits 7. 2 Billion euros. It has a global market share of 11. 4%. China’s car industry Before the Communist Revolution, Model Ts were sold in China and Buicks were prestige cars.

In the Mao era no one really owned a car. Only the elite had access to them. Engineers were assigned to truck factories because there simply wasn’t a market for passenger cars. During the pre-reform era, the lack of tourism and low disposable income among Chinese citizens also meant there was a low demand for taxis and other passenger cars as means of local transportation. As China began to open itself to world trade and economic reform in the late 1970s, change in the vehicle sector emerged as an important part of the country’s modernization drive.

With an opening to international tourism and foreign business in the early 1980s, the need for passenger cars rose quickly. As domestic production could not meet demand, total imports rose dramatically despite a 260 per cent import duty on foreign vehicles. Taxi companies in particular were looking for Japanese cars, such as Toyota Crowns and Nissan Bluebirds. China’s answer to the import increase was to sign a series of joint-venture passenger car production agreements: In 1983, American Motors Corporation (later acquired by Chrysler Corporation) signed a 20-year contract to produce their Jeep-model vehicles in Beijing.

The following year, Volkswagen signed a 25-year contract to make passenger cars in Shanghai, and France’s Peugeot agreed to another passenger car project to make vehicles in the prosperous southern city of Guangzhou. As late as 1985, the country produced a total of only 5,200 cars. Although joint venture agreements provided a window for foreign manufacturers to tap the China market, there were limits on their participation: vehicle manufacturers could not own a majority stake in a manufacturing plant. They also had incentives and pressures to source parts

from Chinese suppliers, with a 40 per cent local-content rate. The Chinese kept control of distribution networks for the jointly-produced automobiles. In the 90s, the market for both cars and trucks grew, as a consequence of Deng Xiaoping’s actions to speed economic expansion. As a consequence of the increase on GDP from 1992 to 1995 from 10 to 14%, both car production and imports rose dramatically. Likewise, the lower import tariffs contributed to a rise in cars crossing China’s borders. In early 1994, duties fell from 150 to 110 per cent for small cars, and from 220 to 180 per cent for large cars.

Rates fell further in the next two years, averaging some 80 to 100 per cent in 1996. From this year on, there were no further cuts in duties. Still, China continued to have quotas on the number of cars that could enter the country, with import licenses needed to purchase a foreign-made vehicle legally. The country’s 1994 industrial policy statement on the vehicle sector suggested that by the year 2000, domestic production should meet 90 per cent of demand, thus leaving only 10% for imports. In 1999, China entered to the World Trade Organization agreement, WTO.