Introduction
In this report will be discussing the internalisation approach related to the Volkswagen Group in the Chinese market, understanding the factors that lead the global company to expand and how to do so. In the first part, it will be possible to comprehend the vital factors of the companies using the Porter`s Diamond framework. Whereas the second part will be focus on recognise the advantages of internalisation using the OLI model, ending with the conclusion evaluating on how effective the VW group strategy in this EMN market is.
Porter`s Diamond model
The Porter Diamond Model suggests that the national home base of an organization plays an important role in the creation of advantages on a global scale. This home base provides basic factors that support an organization, including government support but they can also hinder it from building advantages in global competition (Porter, 2018).
Figure 1: The Porter Diamond Model
Chance
The VW group have seen the chance to the enter the market in China, with the First Mover strategies.
Most of Volkswagen’s competitors were content to export small volumes to China and wait to see what would happen. The German company chose instead to launch operations on the ground, with a view to building its brand slowly and launching key relationships, including at various levels of government. Volkswagen accepted that it would be years before it saw financial returns if ever (Lantenois, 2018).
The car market in the early 80s was almost inexistent. As late as 1985, the country produced a total of only 5,200 cars (China GDP: how it has changed since 1980, 2018).
Figure 2: China- Motor Vehicle Production
Chinese state-owned automobile manufacturers primarily focused on large commercial trucks, with only a small number of passenger cars being produced.
Factor Conditions
There are many factors to taking in consideration, in this case the most vital is the technological advantage. Having a strong brand recognition and as in the early 1980s, the economic reform in China took places, it encouraged Volkswagen’s senior managers to identify the country as a future growth market for passenger cars. They decided to establish sales and production in the country as soon as possible to reap the benefits of being first (First Mover, 2018).
Volkswagen has already operated 100 production plants in 18 European countries, and other nine countries out of European, which have America, Asia and Africa (Figure 2). Now, VW has nearly 501,956 employees, in every working day it can produce over 34,500 vehicles and sells its vehicles in more than 150 countries (Volkswagen AG, 2013).
Figure2: VW global activity. As a one of the global market leaders, VW possesses complex product portfolio including nearly all classes of cars, which extend from low-consumption small cars to luxury class vehicles. (Volkswagen AG, 2013).
Related and supported industries
Its first joint venture in China, Shanghai Volkswagen Automotive Co., Ltd., was established in October 1984. This joint venture, now called SAIC Volkswagen. was in the process of building an electric-car plant in Anting, near Shanghai by late 2018; it was expected to make 300,000 e-vehicles per year, starting in 2020 (First Mover, 2018).
The second, and much larger, joint venture, FAW-Volkswagen Automotive Company Ltd. was established in Changchun in February 1991. It manufactures VW and Audi brand cars. In 2018, an executive with FAW-Volkswagen’s Audi division said that two million China-made Audi cars will be sold in the country by 2020. As of the end of 2017, the total to date was 777,000 (First Mover, 2018).
The Chinese companies and Volkswagen held equal shares in both cases. Volkswagen shared its technology, and factories were built or retooled to make Volkswagen brands.
Demanding conditions
As for consumers, a tiny fraction of the population earned enough to buy a car. Keeping a vehicle running was also problematic: Shanghai, for example, had a population of 12m in 1985 but 70 petrol stations at most (China GDP: how it has changed since 1980, 2018).
Figure 3: VW sales in China
Rivalry: Low- Medium
By 1995, Volkswagen had at least 70 per cent of the Chinese domestic car market. It had achieved a powerful first-mover advantage, and for several years other carmakers, domestic or foreign, were in its shadow (Volkswagen in China – successful cooperation for 40 years, 2018).
By the early 2000s, that first-mover advantage was diminishing. Aggressive marketing of low-cost brands by other foreign companies, such as General Motors, and improved quality on the part of local carmakers meant that by 2004 Volkswagen’s market share had fallen to 15 per cent (Volkswagen in China – successful cooperation for 40 years, 2018).
Chinese customers still had a favourable view of the brand, and once Volkswagen was again matching rivals on price – and outdoing many on quality – they flocked back.
By 2010, Volkswagen was once again the leading car company in China, with Skodas accounting for about 20 per cent of sales (Volkswagen in China – successful cooperation for 40 years, 2018).
Figure 4: China car Sales 20003-2016
Government
The Chinese government insisted on foreign businesses forming joint ventures with domestic companies. But most Chinese automobile makers concentrated on vehicles for industrial use rather than cars. Also, design and technology were both basic.
Good relationships with government were cultivated, partly because of the levels of state control over business but also because government bodies were important potential customers. These relationships bore fruit early on when Volkswagen won contracts to supply taxis to the municipalities of Shanghai, Beijing and other cities. Red Volkswagen Santana taxis became a common sight on Chinese streets.
The taxis put the Volkswagen brand in the public eye. As more people bought their first car, Volkswagens made in China were a natural choice for many.
The lessons. First, strong brand image was important. And the early contracts that established the brand in the public’s imagination were won at least partly through having good relationships with government.
Ownership advantages
Entering China, VW decided to enter joint venture with two the biggest car makers in the market. German company has contributed to the joint venture with capital resources, technology and knowledge of production process. That allowed them to produce high quality, small compact cars perfectly suited for Chinese developing market. Also, introduction of VW’s corporation policy played essential role in creating successful and competitive enterprise. Success of Shanghai Volkswagen has been achieved due to development of their employees. In 2007, the joint venture gained the title of “Best Companies to Work for in China” (Volkswagen AG, 2009).
All these factors helped company to keep control on process of production and protection on the product. This led VW to reach position of the market leader described in Hymer’s monopolistic advantage theory.
Location advantages
As the most populous country China offered two major advantages from production perspective and potentially very attractive market. Host country could provide great number of or low-cost labour. Moreover, as a collective-mind society, Chinese were able to adopt to VW’s corporate policy. From the other hand, Chinese market with its bicycle society represented great opportunity for the car market in the future. VW was able to take first-mover advantage as the one of the earliest companies invested in Chinese car market. Due to right, however risky, decision VW is still a leader in car market today. However, VW had to take into consideration potential risk related to the investment in China. Despite the introduction of open doors policy in the end of 1970’s, Chinese government did not want to lose control in the market. Therefore, the only possible way for VW to invest in the market was to enter joint venture with Shanghai Automotive Industry Corp which keep 50% of the shares. When second joint venture operation took place in the early 1990’ and FAW-VW was established, VW got 40% of the shares. This was the result of the government policy to help develop domestic car market using technology, known how and organizational skills of foreign partners.
Internalisation Advantages
Despite the fact VW has not reached the major shares in its enterprises in China, it was still the best solution for German company to gain costs efficiency. On the one hand though the policy of open doors tariffs for imported cars where almost 30%. That situation made exporting option unprofitable. Additionally, potential low cost of the production played important role. By entering the joint venture with two the biggest carmakers operating in China VW were able to achieve economy of scale and economy of scope. Through internationalisation operation in China VW was able to control execution and application of their owner’s specific advantages.
Conclusion
VW has entered the market through joint venture mostly due to political environment. Despite opening policy since 1978, Chinese government has been aiming at development of their domestic car industry. VW helped Chinese government to reach the position of second the biggest car market in the world and improve car production technology due to entrance of strong German’s R&D team. On the other hand, Chinese market has become second the biggest market for VW cars in terms of sales after Germany.
Currently it seems that VW is happy from benefits and future opportunities that come from China’s WTO compliance, still impressive market growth or Chinese government’s more and more pro-FDI attitude. Nevertheless, Chinese car market is a dynamic environment which change every year. Therefore, VW must be ready for increasing threats such as increasing competitions from both multinational and domestic car companies. VW is one of the first foreign investors and the biggest foreign automobile manufacturer in China, with shares of 15% of the Chinese car market in terms of sales. Despite the VW preferences for acquisition mode as an entry strategy it decided to use joint venture in China. Although it seemed that it was the best and most preferable option, further arguments provided proof of Chinese politic environment that was responsible for the VW decision of joint venture strategy. Finally, in conclusion it was stressed that VW will have to face not only further benefits from operations in China but also many new challenges.
2018-12-10-1544400373