The Road Ahead for Shanghai Volkswagen24

Problem statement: Shanghai Volkswagen is a joint venture between the German Volkswagen AG anda consortium of Chinese partners. The-25-year agreement signed by the partnersin the middle of 1980s provided for 50 percent Volkswagen AG equity in theventure. By 2001, this cooperation was the most successful automobile venture inChina. Attempts by the U.S. AMC Jeep Corporation and other carmakers failed.While other companies were attracted by the potential of swift, huge returnsbecause of the largeChinese population of 1.2 billion people (certainly only a very small percentagewould be customers), Volkswagen built the venture gradually over the years.

By2001, it had achieved a market share of over 50 percent as a result of introducing”hot” models and assuring reliable service. But a great deal of effort wasnecessary to build up this market. The early years were not without difficulties.For example, Volkswagen had to develop suppliers for quality components, trainthe work force, work under constraints imposed by the host government, andshare its latest engine technology. The Santana model, which proved successful inBrazil, was the primary vehicle that suited the Chinese market. By 1995, theimproved Santana 2000 was introduced. The ultimate aim of the Chinesepartners, however, is to design and eventually develop cars by themselves.

Thefactory, not far away from Shanghai, has one of the most modern engine plants.Chinese engineers and managers were sent to the factory in Wolfsburg, Germany,for training. Moreover, Chinese managers and technicians attended Germanuniversities to gain engineering expertise. One of the major difficulties was thelack of suppliers of quality components. Therefore, Volkswagen introduced anincentive system that paid its suppliers handsomely for quality car parts. At thesame time, the company worked hard to build relationships not only with thesuppliers but also with the community.

The Chinese government, on the otherhand, provided tax incentives and ‘protected the car market for Volkswagenduring the early years. For example, from 1993 to 1996, it did not permit othercarmakers to set up joint ventures for passenger car assembly.The combination of hot models and reliable service resulted in an 8 percent salesincrease in 2000 and expected sales of more than 14 percent in 2001. Besides thepopular Santana model, Volkswagen also produced letters, Passats, and Polos,which resulted in the production of more than 400,000 cars in 2001. But the