Volkwagen in China

4.0 Case Study: Volkswagen in China

4.1 Brief History of Volkswagen

Volkswagen (VW) was founded in 1937 and literally means ‘car of the people’. The Headquarters are situated in Wolfsburg, Germany and is one of the worlds leading automobile manufacturers. In 2011 it held a 12.3% share of the world passenger car market, with profit (after tax) amounting to 15.8 billion Euros, double from 2010. It is made up of 12 brands, all operating as individual entities and maintaining individual characters with broad product ranges. (Volkswagen, Online). With the huge success of the Beetle in the 50s, VW went on to thrive producing numerous iconic cars that people recognized the world over (Som, 2007).

4.2 Entry into China

China is one of the fastest growing economies in the world, with a huge market and attractive consumer base (Khan and Hu, 1997). Peng (2006) highlighted that after Chinas reformation in its FDI policies since the early 1980’s, many automobile companies have expanded their operations into China. The opening of Chinas doors to foreign business meant the economy grew quickly and the need for cars began to rise. Volkswagen was the first Western auto manufacturer to enter China and make a direct investment in 1985 by setting up a Joint Venture with Shanghai Auto Works and signing a 25 year contract to produce passenger cars (Som, 2007).

It was from here it enjoyed a 20 year near monopoly in taxi and official government fleet cars. It was this strategy that meant Shanghai-VW could take advantage of economies of scale with their large volume sales. Shanghai Auto Works provided the capital along with cheap labour and operational costs. Volkswagen brought their manufacturing technology, management abilities and knowledge of production (Pujol, 2010). Not only did Volkswagen benefit from its strong competitive advantages it certainly had first mover advantage. It now has 9 production plants in Asia (VW, Online).

4.3 The Eclectic Paradigm and Volkswagen

4.3.1. Ownership Advantages and Internationalization Advantages Volkswagen had many competitive advantages when moving into China. Firstly it had established an extremely strong brand power across the globe, meaning upon entering China they harnessed marketing efficiencies. VW are recognized as innovative technological leaders, with their Wolfburg plant being one of the leading in the world (Som, 2007).

They use key distinctive features in its vehicles that separates it from competition (Tierney, 2001 as cited in Rugman and Collinson 2012, p23) and there is good evidence to support the reliability of German automobiles. Secondly VW were able to take advantage of economies of scale thanks to high volume sales in Europe and then China. Finally VW had a very efficient and innovative production system. These were all key advantages that allowed Volkswagen to fulfill the customers demands in China.

4.3.2. Location AdvantageChina is one of the worlds fastest growing car markets with years of double digit growth in 2002 and 2003 (Som, 2007). China in the past 30 years saw a large rise in FDI in all markets thanks to economic reforms and much money was invested into infrastructure. It quickly become an advanced and accessible market. Volkswagen had carefully selected Shanghai Auto Works as a good local partner who were situated in the economically booming city that is Shanghai.

Li (2000) highlighted that as the first mover VW took advantage of selecting the best local suppliers and could be very cost competitive. Shanghai remains the largest city by population, has the biggest port in China and is a center for finance and trade (China Window, Online). These factors meant Shanghai-VW was at the heart of a huge customer base and certainly provided location advantages.

4.4 The Oligopolistic Reaction TheoryAlthough many automobile companies were slower to follow than the Oligopolistic Reaction Theory would suggest, many more automobile companies now have established joint ventures and production facilities in China.

VW may have been quick to see the market potential but in the 1990s the passenger car market grew quickly and many competitors followed suit and set up fast in China. GM (General Motors) have now replaced VW as the leader and firms such as Toyata, Honda and Nissan have reported rising sales and the intention to invest heavily in coming years (Som, 2007).

Interestingly the theory may be correct in that European companies did follow VW to China, however there are no others that have been successful. PSA Peugeot Citroen were quick to follow in 1992 but they still have minimal presence and BMW and Mercedes have failed to gain much of a market share. It could be argued these cars appeal to different ends of the market, but the theory does not suggest this should be distinguished between. In fact there is very little literature on why FDI into the same locations by competitors can see such drastically different results for the firms.

5.0 Conclusion

Shanghai-VW are recognized as one of the most successful FDI ventures into China from when the Chinese economic reforms were made in the eighties (Li, 2000). They were a market leader and initially the firms competitive advantages coupled with Chinas attractive market meant they experienced significant growth and high profits. Unfortunately they seemed to fail to continue to develop their products to match the demands of consumers in the past decade and this was necessary to respond to growing competition.

Further to this, China in 2011 announced they were withdrawing support for foreign investment in the car industry in order to grow their domestic market. Volkswagen are determined to maintain a high market share and grow further in China but have already secured further global expansion with FDI (another joint venture) into India in a similar story to how they first entered China – they are once again experiencing first mover advantage and utilizing their competitive advantages their. Whether they will learn from mistakes made in China is yet to be seen.