The Investigation of Volkswagen's Entry Strategy in China's Car Market

MA MANAGEMENT DISSERTATION
XIAOFENG WEN
The Investigation of Volkswagen’s Entry
Strategy in China’s Car Market
By
XiaoFeng Wen
2007
MA MANAGEMENT
17,957 words
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XIAOFENG WEN
Keywords
Volkswagen (VW); Market Entry Strategy; Foreign Direct investment (FDI); China’s
car industry; Shanghai Volkswagen; Joint Venture.
Abstract
China is one of the most attractive investment destinations for the world investors,
now almost all the world car-manufacturing giants have launched their factories in
this country, making huge efforts to explore their market share. And it has one of the
world’s largest car markets, in the past few years sales have grown forty to sixty
percent annually. The favorable macro-environment and policy environment has
enabled China’s car industry grew fast and steadily.
Volkswagen (hereafter VW) is one of the earliest investors and the biggest foreign
car maker in China, its entry and development strategy is very successful, now it
controls over 30% of the China’s car market. This piece of study analyses the
international strategy of VW, and focuses on its investment strategy in China,
particular attention was paid on its selection of entry modes when it entered Chinese
market, the objective was to find out which particular modes did VW use to enter
Chinese market and what are the rationales behind such choice.
It was found that it is the macro environment (political, economic, social and
technological) and micro environment (threat from five forces) of China lends itself
to a particular entry mode: joint venture. It also presented the challenges and
directions of the company in its future development in China
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Acknowledgements
In the course of writing this dissertation, I am indebted to my supervisor Richards
John. He led me and continuously pushed me to finish my dissertation, immolate his
time, and gave advice cannily through out the dissertation writing progress.
I am also very grateful to my friend, David Wu, who provided me much useful
information, and my girl friend Yang Gao, who heartened me with her love.
XiaoFeng Wen
Business school
University of Nottingham
September 2007
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TABLE OF CONTENTS
1.0 INTRODUCTION 8
1.1 Introduction 8
1.2 Introduction of Topic 8
1.3 Research Objective and Research Questions 9
1.4 Available Research Method 10
1.5 Limitation of Research 10
1.6 The Structure of Dissertation 11
1.7 Summary 12
2.0 LITERATURE REVIEW 13
2.1 Introduction 13
2.2 Key Entry Modes and Influential Factors 13
2.3 The Review of Foreign Direct Investment 16
2.31 Definition of Foreign Direct Investment
2.32 Knowledge about FDI and Key Factors Affecting the FDI Decision
2.33 Types of FDI and Their Advantages & Disadvantages
2.34 Wholly Owned Subsidiary or Joint Venture
2.35 Greenfield or Acquisition
2.36 Key Theories and Models Affecting FDI Decision
16
17
22
26
27
27
2.4 Summary 36
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3.0 RESEARCH METHODLOGY 37
3.1 Introduction 37
3.2 Research Purpose 37
3.3 Philosophical Perspectives 38
3.4 Research Strategy 40
3.5 Data Type, Source and Collection 40
3.6 Summary 42
4.0 VW International Strategy and Its Enter China Strategy 44
4.1 Introduction 44
4.2 VW’s International Strategy 44
4.21 The Overview of VW
4.22 VW’s International Strategy
4.23 VW’s Competitive Advantage
4.24 VW’S International Enter Strategy
44
46
49
51
4.3 VW’s Strategy in China 54
4.31 VW in China
4.32 The Two Joint Ventures in China
54
54
4.4 Summary 55
5.0 The Investment Environment of China’s Car Industry 57
5.1 Introduction 57
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5.2 The Macro Environment of China’s Car Industry 57
5.21 Political Environment 58
5.22 Economic Environment 60
5.23 Social – Cultural Environment 62
5.24 Technological Environment 64
5.3 The Micro Environment of China’s Car Industry 65
5.31 Five Forces Analysis 65
5.32 The Current Status of China’s Car Industry 67
5.4 Summary 69
6.0 VW’s Future Challenges and Directions 70
6.1 Introduction 70
6.2 SWOT analysis on VW in China 70
6.3 The Future Directions of VW in China’s Group 73
6.4 Summary 74
7.0 Discussion and Conclusion 75
7.1 Discussion
7.2 Conclusion
75
75
REFERENCE 77
APPENDIX 82
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List of tables and figures
Figure 1.7 The structure of the dissertation 12
Figure2.2 Modes of entering foreign markets 15
Table 2.32 Factors affecting the FDI decision 19
Figure 2.33 Types of FDI 22
Figure 2.36-1 Porter’s five force 28
Figure 2.36-2 SWOT Analysis Frameworks 33
Table2.36-3 Factors in PEST 34
Figure 3.3: Underlying Philosophical Assumptions 38
Table 3.5 The structure of interview questions 41
Table 4.21-1 The brief introduction of VW 44
Figure 4.21-2 The VW group structure 45
Table 4.21-3 The brands of VW 45
Figure 4.21-4 VW Production Facilities Worldwide 46
Chart 4.22-1 The Global Geography of VW 47
Table 4.22-2 Three phases of VW’s International Profile 48
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Table 4.4 Volkswagen in China 56
Figure 5.22-1 Growth of Real GDP of China 1978-2005 60
Figure 5.22-2 China’s Real GDP 1992-2004 61
Figure 5.22-3 China FDI Growth 1984-2004 61
Figure 5.3 Major Players and their relationship in China’s Car Industry 68
Table 6.2 SWOT analysis on VW in China 70
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1.0 Introduction
1.1 Introduction
The introduction chapter will briefly introduce the topic, the research objective, and
the structure of the project, it seeks to make clear that why to choose this topic, what
the project will do, and how to do.
1.2 Introduction of topic
Car industry has been one of the fastest growing industries in the world for the last
two decades, averagely a 2% annual growth (Eurosif, 2007), and it is still showing a
upward trend, the growth rate is forecasted to be 27% from 2004 to 2009
(Datamonitor, 2007). While it is growing rapidly, the industry environment keeps
continuously changing, and now the industry is highly competitive and consolidated,
and the globalization of the industry has been accelerating dramatically. Nowadays, a
few major players dominate the industry, mergers and alliances happen very
frequently among them. With the saturation of the European market and the North
American market, which have been the most competitive area in the last years, the
new emerging economies in Latin America and East Asia have become the new
battlefield for the giant global car makers.
As well known, China’s car industry has a history of just 50 years since 1953, and it
has become one of the pillar industries of China today. China has shifted from a
nation of bikes to a mobile population in just one generation. Peng (2006) pointed
out after China’s reformation in its foreign direct investment policy since 1981, more
and more car makers in the world are racing into this market that also brings big
change to this industry. For example, car sales in China are doubling almost every
year, and it has been the world’s most revved-up car market. Nowadays, China’s car
industry is growing from an infant industry to a mature industry. Most important,
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Chinese government has a series of new policies on national car companies, on one
hand reforming the national car companies, on the other hand attracting more foreign
investors invest into Chinese car market, which brings the Chinese car industry a
dramatic development. Owing to the widespread public policy issues surrounding
the car industry, from labor to environment concerns, car industry has become more
and more attractive to foreign investors.
VW was one of the earliest foreign carmakers in China, which made direct
investment and succeed in entering Chinese market with its preliminary strategy.
VW set up joint ventures with the only two passenger carmakers in China - Shanghai
Auto Works and First Auto Works. In 1978, it firstly negotiated with Shanghai Auto
Works in China. And the reformation & open door policy that launched in the next
year in China increase the speed of negotiation process. In 1984, Shanghai-VW was
set up and started local production of the Santana in the next year. In 1988, FAW
started its licensed production of Audi and set up FAW-VW brand. Two years later,
it introduced a new model named Jetta to the market. Today, VW has been the most
successful foreign car maker, which controls almost 50% car market in China.
(Datamonitor, 2007)
Through the introduction background, both China’s car industry and VW’s entry
strategy in China are very significant to be studied in. Hence, this piece of project
will analyze the market entry and expansion strategies adopted by VW. In other
words, the focus of the study is reviewing the main entry strategies adopted by VW
when entered the Chinese market and why these strategies were appropriate during
that period.
1.3 Research objective and research questions
The objective of this project can be summarized as the following three aspects:
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The first objective is to identify the major factors that influence VW’s selection of
entry strategies, it will through the investigation of VW’s international strategy to
achieve this objective.
Then, the second objective is to analyze VW’s investment activity in China, to find
out the company’s entry strategy.
The third objective is to find out why VW used joint venture entry strategy when it
entered China’s car market. It will compare the VW’s international strategy and the
strategy in China, and analyze the Chinese investment environment.
Finally, it will briefly analyze the company’s future direction and development.
Hence, the research questions are: What entry modes have Volkswagen used when it
entered the China’s car market What are the rationales behind such choices What
makes it so successful
1.4 Available research methods
The deductive approach is applicable research method. The strategy of this research
will include the following three stages: first, exploratory studies; second, descriptive
studies; third, explanatory studies. Furthermore, secondary data of this topic is
available for this study.
1.5 Limitation of research
Naturally, with the available time period, the research will not be able to study all of
the investment activities of VW, as well as collecting primary data from activities
can not be able to do. Thus, this research will briefly introduce that part.
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1.6 The structure of dissertation
This research is structured in nine main sections with the reference and appendix
sections allocated at the end.
The first chapter presents the introduction, background of global car industry,
China’s car industry and VW in China’s car market. It also outlines the objectives of
this study, which lead this researcher to the selected topic and addresses relevant
aspects underlying this dissertation.
The second chapter is literature review, it mainly introduce the foreign direct
investment, and factor about that.
The third chapter presents and describes the methodology employed in this research,
which will mainly use the qualitative research
.
The chapter four focuses on analyzing the VW’s international strategy and its
investment activity in China, it seeks to find which entry strategy is VW’s most
favorable strategy and what entry strategy did VW use when it enter China’s market.
The chapter five analyses the China’s investment environment on car industry, it will
use PEST and five force mode in order to know why VW use that entry strategy
when it enter China’s car market.
The chapter six briefly analyses the future direction and challenges of VW in China.
The chapter seven is the concluding chapter, which draws conclusions and
implication of this dissertation.
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1.7 Summary
This chapter briefly introduced the global car industry, China’s car industry, and
VW’s investment activity in China, all of that are also seen as the motivations to
choose this project
The objective of this project is to find out what influence VW select the entry
strategy when it entered China’s car market, in order to achieve this objective, some
key research questions were set, they are “what entry modes have Volkswagen used
when it entered the China’s car market What are the rationales behind such choices
What makes it so successful”
Finally, it showed the structure of the dissertation, and summarized in figure 1.7.
Figure 1.7 the structure of the dissertation
Introduction
Literature review
Research methodology
VW international strategy and enter China strategy
The investment environment of China’s car industry
Future direction and challenges
Discussion and Conclusion
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2.0 Literature review
2.1 Introduction
Literature review provides a background of the existing research on the topic and
those theoretical frameworks that can be used to achieve the purpose of the
investigation. In order to construct frameworks for further research, this chapter
briefly introduces the literatures on international business entry modes, and then
mainly introduces literatures on Foreign Direct Investment (FDI), factors affecting
the FDI decision, types of FDI, the advantages and disadvantages of each type. Also,
it will introduce some key theories and models, which may influence the FDI
activities.
2.2 Key entry modes and Influential Factors
International business is all commercial transactions, private and governmental,
between two or more countries (Dniels, Radebaugh and Sullivan, 2004). Domestic
firms engage in international business very many reasons, marketing objectives,
strategic reasons, behaviour motives or economic rationales (Peng, 2006), most
importantly, to expand sales, to acquire resources and to minimize risk (Dniels,
Radebaugh and Sullivan, 2004).
However, for domestic firms, foreign market is much different from their own
countries’ market, hence, choose a mode to enter foreign market is very important.
Hill (2005) stated that normally a firm could choose six modes to enter foreign markets:
exporting, turnkey projects, and licensing, franchising, establishing joint ventures with
a Host-country firm, or setting up a new wholly owned subsidiary in the host country
(Figure 2.2), and next will gives a brief introduction of these modes:
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Exporting: It can be defined as shipping goods to another country for sale or exchange.
This is still the most popular entry mode now, and many manufacturing firms begin
their global expansion as exporters and switch to another mode later. For example:
Diebold (Hill 2005).
Turnkey Projects: According to Peng (2006), Turnkey projects refer to projects in
which clients pay contractors to design and construct new facilities and train personnel.
At their completion, contractors hand clients and proverbial “key” to the facilities
ready for operations-hence the term “turnkey”.
Licensing: A licensing agreement is an arrangement whereby a licensor grants the
rights to intangible property to another entity for a specified period, and in return, the
licensor receives a royalty fee from the licensee (Hill, 2005). The intangible property
includes patent, inventions, formulas, process, designs, copyrights and trademarks.
Franchising: It is a specialized form of licensing in which the franchiser not only sells
intangible property to the franchisee, but also sells the template of doing business (Hill,
2005). The franchiser will often assist the franchisee to run the business on an ongoing
basis. It is primarily employed by services companies.
Joint Venture: It is a “corporate child” that is a new entity given birth and jointly
owned by two or more parent companies (Peng, 2006). Operational responsibilities
and financial risks and rewards are shared while preserving their separate identity. It
could be in three forms, minority JV, which means less than 50 percent equity, 50/50
JV, and majority JV, which means more than 50 percent equity (Peng, 2006).
Wholly Owned Subsidiary: In a wholly owned subsidiary, the firm owns one
hundred percent of the stock. Establishing a wholly owned subsidiary in a foreign
market can be down in two ways:
(1) Greenfield venture, which means setting up a new operation in a foreign country;
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(2) Acquisition, which means acquiring an established firm in the host country.
All the entry modes have advantages and disadvantages, hence trade-offs are
inevitable when selecting an entry mode. Peng (2006) and Hill (2005) states that the
factors influenced entry modes selection are:
Resources and capabilities: The amount of resources required by each entry mode
is very different. For example, wholly owned subsidiary is the most expensive mode,
if a firm cannot afford it; it has to go with other cheaper modes, such as licensing and
franchising.
Amount of control: Different modes of entry give different degree of control over
the subsidiaries. For example, in franchising and licensing, quality control is difficult,
and amount of control in joint venture depends on the level of ownership, wholly
owned subsidiaries give the most control in decision-making.
Risk of losing technology: Managers are afraid to lost technology to their local
partners when some high risk of losing technology modes is selected. For examples,
in licensing, the licensees very often reproduce technology; joint venture partners
may also learn technology from the firm; technology risk is probably lowest in
wholly owned subsidiary.
Familiarity with the host country: if the firm is not familiar with the host country,
it is probably better to choose joint venture, in that way the firm can benefit from the
local partner’s local knowledge.
Figure2.2 Modes of entering foreign markets
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2.3 The review of Foreign Direct Investment
2.31 Definition of Foreign Direct Investment
There has been a great deal of literature on FDI, such as World Trade Organization
defined FDI as occurring “when an investor in one country (the home country)
acquires an asset in another country (the host country) with the intent to management
that asset” (WTO, 1999). Daniels (2004) stated “foreign investment means
ownership of foreign property in exchange for a financial return, such as interest and
dividends.” And Hill (1999) indicated foreign direct investment occurs when a firm
invests directly in facilities to produce and/or market a product in a foreign country.
In the recent years the most common definition of FDI is related to the compilation
Balance on Payment accounts. It was originally provided by International Monetary
Fund (IMF) in 1993 and then endorsed by the OECD in 1996, and revised by the
OECD in 2005. ‘Foreign direct investment reflects the objective of obtaining a
lasting interest by a resident entity in one economy (“Direct investor”) in an entity
resident in an economy other than that of the investor (“Direct investment
enterprise”). The lasting interest implies the existence of a long-term relationship
between the direct investor and the enterprise and a significant degree of influence
on the management of the enterprise. Direct investment involves both the initial
transaction between the two entities and all subsequent capital transactions between
them and among affiliated enterprises, both incorporated and unincorporated.’
According to the Balance of Payments Manual: Fifth Edition (BPM5) of United
Kingdom (2007), FDI refers to an investment made to acquire lasting interest in
enterprises operating outside of the economy of the investor. Further, in cases of FDI,
the investor’s purpose is to gain an effective voice in the management of the
enterprise.
The United Nations provides a definition that focus more on the control issues,
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according to the UN system of National Accounts, Foreign Controlled enterprises
include subsidiaries with more than 50% owned by a foreign parent. Associates of
whom foreign ownership is 10-50% ... may be included or excluded by individual
countries according to their qualitative assessment of foreign control. Hill (2001)
said that with the phenomenon of foreign direct investment. Such as foreign direct
investment occurs when a firm invests directly in facilities to produce and/or market
a product in a foreign country.
2.32 Knowledge about FDI and Key factors affecting the FDI decision
Foreign direct investment is a company controlled through ownership by a foreign
company or foreign individuals. FDI is important because production facilities
abroad comprise a large and increasingly important part of international companies’
activities and strategies.
FDI plays an extraordinary and growing role in global business. It can provide a firm
with new markets and marketing channels, cheaper production facilities, access to
new technology, products, skills and financing. For a host country or the foreign firm
which receives the investment, it can provide a source of new technologies, capital,
processes, products, organizational technologies and management skills, and as such
can provide a strong impetus to economic development.
The direct investment in buildings, machinery and equipment is in contrast with
making a portfolio investment, which is considered an indirect investment. In recent
years, given rapid growth and change in global investment patterns, the definition
has been broadened to include the acquisition of a lasting management interest in a
company or enterprise outside the investing firm’s home country. Thus, it may take
many forms, such as a direct acquisition of a foreign firm, construction of a facility,
or investment in a joint venture or strategic alliance with a local firm with attendant
input of technology, licensing of intellectual property and so on.
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In the past decade, FDI has come to play a major role in the internationalization of
business. Reacting to changes in technology, growing liberalization of the national
regulatory framework governing investment in enterprises, and changes in capital
markets profound changes have occurred in the size, scope and methods of FDI. New
information technology systems, decline in global communication costs have made
management of foreign investments far easier than in the past. The sea change in
trade and investment policies and the regulatory environment globally in the past
decade, including trade policy and tariff liberalization, easing of restrictions on
foreign investment and acquisition in many nations, and the deregulation and
privatization of many industries, has probably been the most significant catalyst for
FDI’s expanded role.
The most profound effect has been seen in developing countries, where yearly
foreign direct investment flows have increased from an average of less than $10
billion in the 1970’s to a yearly average of less than $20 billion in the 1980’s, to
explode in the 1990s from $26.7billion in 1990 to $179 billion in 1998 and $208
billion in 1999 and now comprise a large portion of global FDI. Driven by mergers
and acquisitions and internationalization of production in a range of industries, FDI
into developed countries last year rose to $636 billion, from $481 billion in 1998.
(Fung and Tong, 2004)
Proponents of foreign investment point out that the exchange of investment flows
benefits both the home country (the country from which the investment originates)
and the host country (the destination of the investment). Opponents of FDI note that
multinational conglomerates are able to wield great power over smaller and weaker
economies and can drive out much local competition.
In the past 15 years, the content of FDI has changed that because the advent of the
Internet, the increasing role of technology, loosening of direct investment restrictions
in many markets and decreasing communication costs means that newer,
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non-traditional forms of investment will play an important role in the future.
Many governments, especially in industrialized and developed nations, pay very
close attention to foreign direct investment because the investment flows into and out
of their economies can and does have a significant impact. In the United States, the
Bureau of Economic Analysis, a section of the U.S. Department of Commerce, is
responsible for collecting economic data about the economy including information
about foreign direct investment flows. Monitoring this data is very helpful in trying
to determine the impact of such investments on the overall economy, but is especially
helpful in evaluating industry segments. State and local governments watch closely
because they want to track their foreign investment attraction programs for
successful outcomes.
What are factors influencing the firm’s decision to undertake FDI Griffin and
Pustay (2005) summarized that into 3 factors, there are supply factors, demand
factors, and political factors (Table 2.32), they are well explained why firms choose
to undertake FDI to enter into foreign market. Dunning’s eclectic theory also shows
three conditions of FDI, there are ownership advantage, location advantage and
internalization advantage (Brouther et al, 1996). It is a very popular framework too.
Table 2.32 factors affecting the FDI decision
Supply factors demand factors political factors
Production cost Customer access Avoidance of trade
barriers
Logistics Marketing advantages Economic development
incentives
Resource availability Competitive advantages
Access to technology
Customer mobility
Source: Rick W. Griffin, Michael W. Pustay (2005)
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1. Supply factors
Supply factors include production cost, Logistics, Resource availability and Access
to technology, and these factors are influence decision when the firm undertakes FDI.
Production costs: the foreign locations may have lower land prices, tax rates,
commercial real estate, or lower cost of labor, it made the production cost lower, and
the firm will gain more profit. For example, China is famous for its low-cost workers,
the salary rates it much lower than developed countries (e.g. one- third to western
countries), and a lot of firms have flocked to China to benefit from its low cost
workforce.
Logistics: firms may produce their produce in the foreign countries when
transportation costs are high. In other word, FDI may save the large transportation
costs rather than exporting.
Availability of natural resources: because of the limitation of natural resources or
raw material in home country, firms may choose to undertake FDI.
Access to key technology: technology may share between domestic factories and
foreign factories when the firms undertake FDI.
2. Demand factors
Demand factors include customer access, marketing advantages, exploitation of
competitive advantages and customer mobility. These factors are influence decision
when the firm undertakes FDI.
Customer access: a lot of international businesses require firms to have a physical
presence in the market, so in the foreign countries they have to undertake FDI. For
example, KFC has to locate outlets in foreign countries in order to provide its freshly
prepared fired chicken to foreign customers.
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Marketing advantages: by adopt FDI, the foreign firm may gain from “buy local”
attitudes of host country consumers and improve their customer service. For example,
Taiwan’s Delta products shifted some of its production to a Mexican factory just
across the border from Nogales, Arizona, not only get the local customer, but also
provide better service to US customers.(Wall street , 1996)
Exploitation of competitive advantages: a firm which has big trade mark, brand
name, or technology may not just export its products to foreign countries, normally it
will decide to undertake FDI to exploit competitive.
Customer mobility: if customers or clients are in or will move to the foreign country,
firm will decide to undertake FDI. For example, after Samsung decided to construct
and operate an electronics factory in northeast England, six of its Korean part
suppliers also established factories in the vicinity. (Financial Times, 1996)
3. Political factors
Political factors include avoidance of trade barriers and economic development
incentives. These factors are influence decision when the firm undertakes FDI.
Avoidance of trade barriers: FDI may help firms to avoid trade barriers.
Economic development incentives: Government offer incentive to firms to induce
them locates new factories in the government jurisdictions. Government may offer
lower tax rate in a certain period, reduce the utility rate and so on.
4. Dunning’s eclectic theory
John Dunning in his theory stated that FDI will occur when three conditions are
satisfied:
Ownership advantage: firms must own some specific competitive advantages
compete with foreign firm; these advantages may include brand name, experience,
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product differentiation, and so on.
Location advantage: firms must gain more profit than just export products to the
foreign countries. For example, VW produces its products in China to enjoy lower
labor cost.
Internalization advantage: firms must gain more benifit from controlling the foreign
business activty than hiring a local company to provide the service.
2.33 Types of FDI and Their Advantages & Disadvantages
When a firm decides to enter a new market in another country through foreign direct
investment, the next step is to choose between the different types of FDI (Figure 2.4),
wholly owned subsidiary or joint venture (Definitions in the chapter 2.2), and next
will introduce the advantages and disadvantages of them.
Figure 2.33 Types of FDI
FDI
Wholly owned subsidiary
Joint venture
Greenfield
Acquisition
1. Joint Venture
Advantages
Firms can gain the benefits from a local partner’s knowledge of the host countries,
competitive conditions, political systems, business systems, culture and language; the
costs and risks can be shared by the local partners, especially when the development
costs and risks of opening a foreign market are high. Finally, joint venture reduces
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political risk as it involves a local firm. In many countries, political consideration
makes joint ventures the only feasible entry mode. This is the reason that joint
venture is so popular when firms enter the Chinese market.
Disadvantages
Firstly, firms have to face the risk of giving control of technology to the local partner.
Majority ownership in the venture can help exercise greater control over the
technology, but it is difficult to find a local partner who is willing to settle for
minority ownership (Wang, 2003).
Secondly, a joint venture does not give a firm the tight control over subsidiaries that
it might need to realize experience curve or location economies. Thus, it is difficult
to make strategic change to coordinate global attacks against rivals, as the partner
may not will to cooperate.
Thirdly, shared ownership leads to conflicts and battles for control between investing
firms if their goals and objectives change or if they take different views as to what
the strategy should be, this is especially serious when the firms are from different
nations, culture differences also can cause problems.
2. Wholly Owned Subsidiary
Advantages
Wholly Owned Subsidiary reduces the risk of losing technical competence to a
competitor, particularly when a firm’s competitive advantage is based on
technological competence. This is why many high-tech companies prefer this entry
mode for overseas expansion. And it gives tight control over operations in different
countries; this is necessary for engaging in global strategic coordination, as the firm
could use the profit from one country to support competitive attacks in another. in
order to realize learning curve and location economies, a global production system
needs to be established and centrally determined decisions are needed, this requires
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high control over the subsidiaries, wholly owned subsidiary gives such tight control
(Hill, 2005).
Disadvantage
Establishing a wholly owned subsidiary is the most costly method of serving a
foreign market in terms of capital investment. Firms must bear full capital costs and
the risks. When acquisition is adopted, other problems such as culture issues also
raise.
As it said before, there are two ways to establishing a wholly owned subsidiary,
Greenfield and Acquisition
1). Greenfield
Advantages
By establishing a Greenfield venture in a foreign country, a firm can build the kind
of subsidiary company that it wants, thus it is easy to establish operating routines and
organization culture in a new subsidiary than it is to concert the operating routines of
an acquired unit. This is an important advantage international business for
transferring products, core competencies, skills and know-how from the head office
to the new established subsidiary. A good example would be Lincoln Electric, which
proved that it is almost not possible to transfer its organization culture to an acquired
firm by its experience (Hill, 2005).
Disadvantages
The first disadvantage of Greenfield venture is it needs very long time to establish
the building from the ground up.
It is also risky, as it is associated with uncertainty with future profit prospects, there
is a possibility that the future profit cannot cover the costs of the venture, the loss of
VW recently in the Chinese market is an example (Wang, 2003).
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Finally, since it is slow to establish a Greenfield venture, there is the possibility of
being preempted by aggressive competitors who enter the same market via
acquisition.
2). Acquisition
Advantages
Acquisitions are quick to execute. Unlike Greenfield venture, acquisitions save the
time of building the subsidiary; therefore a firm can quickly build its presence in the
target market. For example, Daimler-Benz rapidly showed its presence in the US
market by acquiring and merging a few big US automobile companies (Wild 2006).
Second, it is easy to preempt the competitors because it is quick; many firms make
acquisitions for this purpose. This is particularly effective in the industries that are
rapidly globalizing, such as the telecommunication market. It is possible that
acquisitions are less risky than Greenfield ventures, as firms buy assets that are
already making profits, so less uncertainty, and also, except for the tangible assets,
firms also buy intangible assets such as local brand name and experienced managers,
these all reduce the risk.
Disadvantages
Firstly, acquired firms are often overpaid, especially when more than one firm is
interested in it, and top managers tend to overestimate their ability to create value
from an acquisition.
Secondly, culture clash is another important reason for the fails of acquisitions.
Culture difference between the established firm and acquired subsidiary cause high
management turnover, which harms the performance of the acquired firm, especially
when the managers have valuable local knowledge. For example, in the first year
after Daimler acquired Chrysler, many senior managers left because of culture clash
(Hill, 2005).
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Finally, many acquisitions fail because attempts to realize synergies by integrating
the operations of the acquired and acquiring entities are slowed by the differences in
management philosophy and company culture.
2.34 Wholly owned or joint venture
Company resources: the most basic factor that a firm needs to consider is its
resources and capabilities. The amount of resources required by the two methods is
different. For example, wholly owned subsidiary is the most expensive mode,
however, joint venture may require less resources.
Second, the issue of control, how much control the firm wants over the subsidiary
should be considered, in joint venture, the amount of control depends on the level of
ownership and conflicts over control issues happen frequently in joint venture, WOS
gives the most control.
Thirdly, Joint venture has risk of losing technology to local partners; technology risk
is probably lowest in wholly owned subsidiary.
Fourth, familiarity with the host country, if the firm is not familiar with the host
country, it is probably better to choose joint venture, in that way the firm can benefit
from the local partner’s local knowledge. If the host country government prohibits
foreign ownership, joint venture would be the easier way to enter the market than
WOS.
Moreover, the company’s core competency also has impact on the choice of entry
modes. If the companies’ core competency is its technology knows how, it would be
better to choose WOS, as it has the lowest possibility of losing technology to
partners.
Finally, where the pressure for cost reduction is great, a firm is likely to prefer WOS.
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By manufacturing in the optimal locations firm may be able to realize substantial
location and experience curve economies, but in joint venture, the firm does not have
such tight control to achieve that.
2.35 Greenfield or Acquisition
If a firm is seeking to enter a market where there are well-established incumbent
enterprises and other global competitors are also interested in establishing a presence
in the market, acquisition may be preferred as Greenfield venture is too slow, it gives
the competitors chance to preempt. If the firm is considering to enter a market where
there are no incumbent competitors to be acquired, it may have to choose Greenfield
venture.
Moreover, if the competitive advantage of the firm is based on the transfer of
organizationally embedded competencies, skills, routines and culture, Greenfield
may be the better choice, as it is much easier to build a set of routines and
organization cultures in a new subsidiary than transferring them to acquired firm.
2.36 Key theories and models affecting FDI decision
This dissertation will use PEST mode and Porter’s five forces mode to analyze the
macro and micro environment of China’s car industry, through the investigation, it
seeks to answer the question: what entry modes are appropriate to be used when a
carmaker enter the China’s car market, and why.
1. The Five Forces Model
The Five Forces Model is an important model for analyzing an organization industry
structure in strategic processes, which is introduced by Michael E. Porter in his book
“Competitive Strategy: Techniques for Analyzing Industries and Competitors” in the
year of 1980.
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The five force model is applied to analyze opportunities and threats by 5 major
forces in the organizations micro-environment, as the bargaining power of suppliers;
the bargaining power of buyers; the threat of potential new entrants; the threat of
substitutes; and the extent of competitive rivalry. (See Figure 2.36-1)
These forces determine the intensity of competition and hence the profitability and
attractiveness of an industry. Based on the information derived from the Five Forces
Analysis, companies are able to decide how to create their strategy in order to
develop their opportunities and protect themselves against the threats in their
industries. (Richard Lynch, 2006)
Figure 2.36-1: Porter’s five force
Source: Johnson, G. and Scholes, K. (2002)
Bargaining Power of Suppliers:
Suppliers provide all of the raw materials and components for final goods production.
(David Jobber, 2004; Richard Lynch, 2006) The cost of these resources determines
the profitability of the firm.
The bargaining power of suppliers is likely to be high when:
• The market is dominated by a few large suppliers rather than a fragmented
source of supply. Thus, it is difficult for the firm to switch from one
supplier to another.
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• There are no substitutes for the particular input, such as for the input which
requires high technology support.
• The switching costs from one supplier to another are high, unless the firm
as power to rise its own price as compensation. (Richard Lynch, 2006)
• There are many buyers in the market, and they do not threaten to integrate
backward into supply (David Jobber, 2004)
Furthermore, the suppliers may integrate forwards in order to obtain higher prices
and margins, e.g. Brewers buying bars. This threat is especially high when:
• The buying industry has a higher profitability than the supplying industry.
• Forward integration provides economies of scale for the supplier.
• The buying industry hinders the supplying industry in their development
(e.g. reluctance to accept new releases of products).
• The buying industry has low barriers to entry.
In such situations, the buyers often face a high pressure on margins from their
suppliers with limited strategic options. And a stable and friendly relationship with
powerful suppliers is considered as a potential competitive advantage in buying
industry.
Bargaining Power of buyers:
Under a strong bargaining power of buyers, the firms are difficult to determine the
price in the market, and get small profit margins from their products.
Buyers bargaining power is likely to be high when:
• There are only a few buyers in the demand side, or there is a concentration
of buyers, the firm has little option to switch to an alternative buyer.
• The buyers clear the cost of products, and they are price-sensitive.
• The product is undifferentiated and can be replaces by substitutes. That
switching to an alternative product may be relatively simple and cheap. Or
the customers could even produce the product by themselves.
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• The supplying industry comprises a large number of small operators, the
buyers can free choose among different firms.
• The supplying industry operates with high fixed costs, thus, it desires high
speed of turnover.
• The product is not of strategically importance for the customer.
Threat of New Entrants:
The competition in an industry will be higher when it is easier for a potential entrant
to enter this industry. The threat of new entrants brings to the existing firms is the
potentially change on market environment and market structure, such as market
shares, prices, and customer loyalty etc.
The threat of new entries will depend on the extent to which there are barriers to
entry. Under a low entry barrier, potential entrants will enter the industry easily, that
is always a latent pressure for reaction and adjustment for existing players in the
industry.
Porter argued there is seven key barriers for a potential entrant enter the industry.
(Richard Lynch, 2006), they are
• Economies of scale (minimum size requirements for profitable operations).
• Product differentiation.
• Capital requirements: when high initial investments and fixed costs are
required in this industry, the entry barrier is high.
• Switch costs: the entry barrier is high when switching cost is high for
customers to switch from the one firm to the other. That means it is
difficult to obtain the customers from the existing players.
• Access to distribution channels and access to raw materials. For example,
when the distribution channels and raw materials are controlled by existing
players, the entry barrier is high.
• Cost advantages of existing players due to experience curve effects of
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operation with fully depreciated assets.
• Government policy, such as the protection of intellectual property, which
requires patents and licenses in the industry. In this situation, the entry
barrier is high.
Furthermore, the entry barrier is also high when
• The brand loyalty of customers is very high, or the existing players have
close customer relations, e.g. from long-term service contracts.
Threat of Substitutes:
Substitute exists as an alternative choice for customer in the market, with lower
prices or better performance parameters for the same purpose of the existing products.
It means a threat for the existing firms as taking their customers, reducing their
potential sales volume.
Similarly to the threat of new entrants, the treat of substitutes is determined by
factors like:
• Brand loyalty of customers.
• Close customer relationships.
• Switching costs for customers.
• The relative price for performance of substitutes.
• Current trends.
Competitive Rivalry between Existing Players:
This force describes the intensity of competition between existing firms in an
industry. High competitive rivalry may due to the competition on prices, products
and service, promotions, margins, technology R&D etc. Competition between
existing players is likely to be high when:
• There are many players in the industry of about the same size, which
means no firm dominates the market over others.
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• Players have similar strategies.
• There is not much differentiation between players and their products;
hence, there is much price competition.
• Low market growth rates (growth of a particular company is possible only
at the expense of a competitor).
• Barriers for exit are high (e.g. expensive and highly specialized
equipment).
Generic Competitive Strategies:
In order to coping with the five competitive forces, Porter (1985) identified three
main potentially successful generic strategic approaches to outperforming other firms
in an industry, which include cost leadership, differentiation and focus (Barney 2007).
Firms either can focus on:
• Cost leadership: the attainment of the lowest unit cost base in the industry
• Differentiation: the ability to charge a premium price for offering some
perceived added value to the customer – e.g., improved quality. Note that it's the
customer's perception that differentiates the product, not the product itself
(Taylor, 2005).
• Focus: firms should consider the degree of focus they wish to apply to their cost
leadership or differentiation strategy.
Porter (1980) suggests that an organization should concentrate on one type of generic
strategy and should not mix each of the strategy together, as each generic strategy
demands different and dedicated, resource base. If a firm intends to combine
different generic strategies, the organization will end up being “being stuck in the
middle” and not have the capabilities to compete effectively (Wickham, 2002).
As a summary, the five forces collectively determine the profitability of the industry,
which helps companies understand the opportunity and threat of an industry, and
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figure out how to mitigate the pressure of threat and obtain the opportunity. Under
the analysis of five forces model, companies can start to see how this relates to the
generic strategies (see appendix 1: the Five Forces Model and Generic Strategies). In
order to develop effective strategies, a company must understand the implication of
the forces and how each of them affects the company in its strategy formulation.
However, porter also stated that forces that take on prominence in shaping
competition could be different in different industries. (Besanko et al, 2000)
2. SWOT analysis
SWOT analysis provides information that is helpful in matching the firm’s resources
and capabilities to the competitive environment in which it operates, and helps to
know the position of the firm in the existing market, then firm can decide if they can
use FDI as entry strategy. The Figure 2.36-2 shows how a SWOT analysis fits into an
environmental scan:
Figure 2.36-2 SWOT Analysis Frameworks
Strengths:
A firm’s strengths are its resources and capabilities that can be used as a basis for
developing a competitive advantage, so it is a firm’s internal analysis, and normally a
firm’s strengths may include: patents, strong brand names, good reputation among
customers, cost advantages from proprietary know-how, exclusive access to high
grade natural resources and favorable access to distribution networks, etc.
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Weaknesses:
The absence of certain strengths may be viewed as a weakness. Hence they are: Lack
of patent protection, a weak brand name, poor reputation among customers, high cost
structure, lack of access to the best natural resources and lack of access to key
distribution channels, etc
Opportunities:
The external environmental analysis may reveal certain new opportunities for profit
and growth. So the opportunities of a firm are like: An unfulfilled customer need,
arrival of new technologies, loosening of regulations, and removal of international
trade barriers, etc.
Threats:
Changes in the external environmental also may present threats to the firm. So the
threats of a firm should include: Shifts in consumer tastes away from the firm’s
products, emergence of substitute products, new regulations and increased trade
barriers
3. PEST analysis
PEST analysis is a very important mode, which is used to scan firm’s
macro-environment before beginning the marketing process, for example, and firms
can use it to test if they can enter the foreign market. The PEST analysis is known as:
Political factors, Economic factors, Social cultural factors and technological factors.
The table 2.36-3 gives an example of some factors that might be considered in a
PEST analysis
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Table2.36-3 Factors in PEST
Political Analysis Economic Analysis Social Analysis Technological
Analysis
- Political stability - Type of economic
system in countries of
- Demographics - Recent technological
developments
- Risk of military
invasion
operation
- Government
- Class structure
- Education
- Technology’s
impact on product
- Legal framework for
contract enforcement
intervention in the free
market
- Culture (gender
roles, etc.)
offering
- Impact on cost
- Intellectual property
protection
- Comparative advantages
of host country
- Entrepreneurial
spirit
structure
- Impact on value
- Trade regulations &
tariffs
- Exchange rates &
stability of host country
currency
- Attitudes (health,
environmental
chain structure
- Rate of
- Favored trading
partners
- Efficiency of financial
markets
consciousness, etc.)
- Leisure interests
technological
diffusion
- Anti-trust laws
- Infrastructure quality
- Pricing regulations
- Skill level of workforce
- Taxation-tax rates
and incentives - Labor costs
- Wage
legislation-minimum
wage and overtime
- Business cycle stage
(e.g. prosperity, recession,
recovery)
- Work week
- Economic growth rate
- Mandatory employee
benefits
- Industry safety
regulations
- Discretionary income
- Unemployment rate
- Inflation rate
-Product labeling
requirements
- Interest rates
Source: David Jobber, 2004
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The number of macro-environmental factors is virtually unlimited. In practice, the
firm must prioritize and monitor those factors that influence its industry. Even so, it
may be difficult to forecast future trends with an acceptable level of accuracy. In this
regard, the firm may turn to scenario planning techniques to deal with high levels of
uncertainty in important macro-environmental variables.
2.4 Summary
The literature review chapter shows:
The modes of international business, there are exporting, turnkey projects, licensing,
franchising, joint ventures, and wholly owned subsidiary. The factors influenced
manager’s decision is: resources and capabilities, amount of control, risk of losing
technology and familiarity with the host country. After introduced these definitions
of these modes, it helps to have a general understand of foreign market entry
strategy.
And then mainly introduce literatures on Foreign Direct Investment because it is the
main strategy of VW, which enter into Chinese car market. This part include:
definition of FDI, reason of firms choose FDI (three factors, three conditions), the
types of FDI, the advantages and disadvantages of each type, and the key theories
and models affecting FDI (five-force, PEST, and SWOT).
In the next chapter, the methodology of this research will be presented. Also, it
includes the selecting research method, adopting the appropriate research strategies
as well as collecting of primary and secondary data.
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3.0 Research methodology
3.1 Introduction
The previous chapter on literature review has set up the theoretical background for
the present research, this chapter introduces the purpose of the research, explains the
philosophy behind the research, approach, strategy and techniques adopted in the
process of collecting, interpreting data and reaching conclusions.
3.2 Research purpose
As we all know, management research aims to discover a set of causal laws that can
be used to predict general patterns of human behaviour (David Jobber, 2004), so the
purpose of this paper is to move from the surface problem to the reasons behind, it
aims to find out what particular entry mode did VW choose and why did it chose the
mode when it entered the Chinese car market.
According to the purpose of this research, this paper will adopt three kinds of
enquiries, there are: exploratory, descriptive, or explanatory (Yin 1994)
Exploratory studies aim at exploring something, and are appropriate when the
research problem is difficult to delimit. The purpose is to gather as much information
as possible concerning a specific problem. Exploratory research is often used when a
problem is not well known, or the available knowledge is not absolute. The technique
that is best suited for information gathering when performing an exploratory research
is interview (Yin, 1994). So in this paper, the purpose of this study is to answer
“what is VW’s international strategy (both in China and the other countries).”
The descriptive research purpose is used when a problem is well structured and there
is no intention to examine the casual relationships. The conclusion of the study is
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derived from a conclusive description of the examined aspects or variables (Bryman
and Bell, 2003). Hence, the purpose of research moved to gain further understanding
of the issue in this study (for example, by reading relevant literature), and it is
descriptive and aimed to portray a detailed profile of the contexts (Robson, 2002),
researcher expects the study will answer the question “how the VW entered the
Chinese market”.
Explanatory is to develop precise theory that can be used to explain the empirical
generalizations. Based on this, the researcher tries to answer the research question,
which is “What are the rationales behind VW chose such entry mode and what
makes it so successful” by collecting, analyzing and interpreting both primary and
secondary data.
3.3 Philosophical perspectives
Research philosophy is a very important element of the business and management
research, Saunders (2003) states that it (research philosophy) is the way that
researcher think about the development of knowledge. Epistemology refers to the
assumptions about knowledge and how it can be obtained. Thus, Chua (1986)
suggest three categories, which based on the underlying research epistemology such
as: positivist, interpretive and critical (see Figure 3.3)
Figure 3.3: Underlying Philosophical Assumptions
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Positivist: it is often adopted in the research philosophy, which reflects the principles
of positivism (Saunders, Lewis & Thornhill, 2003). The results worked out by
researchers are from observable social realities and can be law like generalizations
similar to the ones obtained by scientists (Saunders, Lewis & Thornhill, 2003). The
researchers focus on highly structured methodology to facilitate replicate previous
data and quantifiable observations, results in statistical analysis (Saunders, Lewis &
Thornhill, 2003).
Interpretive: the researchers need to recognize the subjective reality of their study
so as to be able to understand the motives, actions and in intention of research
participants. The philosophical base of interpretive research is hermeneutics and
phenomenology (Boland, 1985). Interpretive research does not predefine dependent
and independent variables, but focuses on the full complexity of human sense
making as the situation emerges (Kaplan and Maxwell, 1994).
Critical: it requires the researchers to understand the people’s social constructed
interpretations and behaviors which would affect by their broader social force,
structures or process (Saunders, Lewis & Thornhill, 2003).
In order to analyze the current situation of China’ car market and VW, the
philosophy behind this part of research will be positivist, moreover the PEST
analysis (for China’ car market), Porter’s five force model and SWOT analysis (for
VW) is employed to assist it. And reflects a critical stance when interpret social
reality and prospect people in the society. However, this research is inclined to an
interpretive philosophy, it because the objective of this research is answer the “why”
and “how” question, it cannot answer clearly by quantifiable observation and
statistical.
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3.4 Research strategy
Quantitative research classifies features, count them, and even construct more
complex statistical models in an attempt to explain what is observed (David 2003).
Thus, in this paper, quantitative analysis can helps researcher to analyze the
phenomena of VW enters China’s car market, but it cannot clearly identify what
rationales behind this. According to the research objective is to identify the key entry
strategy that adopted by VW when it entered the China’s car market, and find out
what behind this phenomena, hence, quantitative research is not main strategy in this
paper. According to the limitation of quantitative research, the researcher of this
paper will mainly adopt the qualitative research strategy.
The qualitative research is aim to discover the responders’ attitudes, values,
behaviors and beliefs (David 2003). It can be used to discover the cause of
phenomenon that is represented in the finding of a quantitative research, and it seek
to answer “how” and “why” of phenomena occur as its objective which in order to
understand the world from participants’ frames of reference. Hence, it can answer
research question very well.
3.5 Data type, source and collection
According to Saunders et al. (2003), to be able to understand the research area more
in detail, empirical data must be collected. There are two different types of empirical
data that can be collected: primary and secondary. The primary data is collected from
specific problems, while the secondary data is collected from a more general
purpose.
In this paper, the primary and secondary data have been collected and mainly
qualitative, the quantitative data will be used as well, but not in statistical way, it is
only used to support the qualitative data.
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Interview is the most common method of data gathering in qualitative research (King,
2004), and is adopted as the primary method to collect primary information in the
present research. The goal of a qualitative interview is to see the research topic from
the perspective of the interviewee, and to understand how and why they come to
have this particular perspective (Kvale, 1983), it meet the requirements of the
research objective. Hence, the primary data has been conducted through a personal
interview and the interviewee is Mr Cai Qian, Sculpt Project Manager of Shanghai
Volkswagen, the purpose of the interview is to find out the information about VW’s
entry strategy in China’s car market, what are they consider about, the structure of
the interview questions are shown in table 3.5
Table 3.5 the structure of interview questions
What kind of entry mode
did VW choose when it
enter China’s car market
and why
Government policy, both
encouraging and
restricting
Competitive advantage
of VW
Any other things affect
the entry strategy
The limitation of primary data is the collection process is very difficult, because the
data can only collected from very top managers or decision-makers, but make
appointment with these people is nearly improbable, even though the researcher
arranged an interview with a manager of VW.
Due to the limitation of primary data, this paper will mainly use the secondary data.
Hence it is a library-based project, which means this topic will be addressed by using
published information for the construction; thus, this research will conduct with the
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secondary research, using relative secondary data. These data are mainly obtained by
accessing to journal articles, school library database, academic books, documentaries,
survey reports as well as Internet sources. These secondary data is used for
investigate China’s investment environment, China’s car industry environment, the
VW’s international investment strategy, and its enter China’s car market strategy.
The literatures also come from secondary data.
However, use the secondary data also has limitations. Firstly, the data could quickly
run out of time, because the publishers could easily to update the information on the
daily basis, and in the car market, the figure is changing occasionally, for instance, at
the time the researcher is organizing the data, that data might be changed after the
researcher organized, thus, it is a problem for researchers to develop a updated
analysis or argument. Thus, the researchers need to collect the data as new as
possible, to keep update, to minimize this effect. Secondly, the data may not reliable,
because the data published by other organizations might also secondary; the
researcher is unknown about the original source of data, and various data has been
published by different organization, it could confuse the researchers, they may
wander which source of data is the most accurate one. By considering on this, the
researchers could more focus on the data, which issued by the government sectors, it
cannot be guaranteed as 100 per cent reliable, but at least, these data are more
authoritative.
3.6 Summary
The purpose of this paper it aims to find out what particular entry mode did VW
choose and why did it chose the mode when it entered the Chinese car market. It will
goes through three kinds of studies, there are exploratory, descriptive, and
explanatory. The research philosophy of this paper is inclined to an interpretive
philosophy, but in order to analyse the current situation of China’ car market and
VW, it is also include positivist philosophy and reflects a critical stance. This paper
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will mainly use qualitative research, collecting secondary data, although they have
several limitations, it is more appropriate to be used in this paper.
The next chapter will briefly introduce the international strategy of VW and its
operation in China. It will focuses on the international strategy of Volkswagen and
find out if there are some particular reasons that company choose a particular entry
mode when it entered Chinese market.
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4.0 VW international strategy and its enter China strategy
4.1 Introduction
In Chapter two, it reviewed the existing literature in the field relate to this project,
this chapter and the following chapter aim to find out (1) what entry modes are
frequently adopted by VW in its international expansion process; (2) What entry
mode did VW applied when it entered into the China’s car market. After
understanding this differentiation, this study will identify whether there are any
particular reasons that VW chose such a particular entry mode in China different
from its international strategies.
4.2 VW’s international strategy
In order to understand the investment activity of VW, this part will focus on the
international strategy of VW. It will give a brief introduction of VW at the beginning;
secondly, finding out the most favorable entry modes that VW has been used in the
past; finally, analyzing the company’s international strategy and competitive
advantage etc.
4.21 The overview of VW
VW is a world-wide Car maker, it headquarters is in Wolfsburg of Germany. The
Group been founded in 1937, and now, it is incontrovertible that VW is one of the
most successful car makers all over the world. (See Table 4.21-1)
Table 4.21-1 the brief introduction of VW
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The Group’s car producing business can be divided into two brand groups, the Audi
and Volkswagen brand group. The Audi brand of group is mainly made up of the
Audi, Lamborghini and SEAT brands. The Volkswagen brand group includes the
Volkswagen, Skoda, Bugatti and Bentley brands (see Figure 4.21-2 and table 4.21-3).
The product ranges is very wide, it covered nearly all classes of cars, which extend
from low-consumption small cars to luxury class vehicles. (Volkswagen AG, 2007).
The financial service part of the group includes financial services for retail and
insurance purposes, EuropCar and Leaseplan (Global Insight, 2007).
Figure 4.21-2 the VW group structure
Table 4.21-3 the brands of VW
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The Group has already operated 44 production plants in eleven countries of
European, and other seven countries out of European, which have America, Asia and
Africa (see Figure 4.2-4). Now, VW has nearly 345,000 employees, in every working
day it can produce over 21,500 vehicles, and sells its vehicles in more than 150
countries. (Volkswagen AG, 2007)
Figure 4.21-4: VW Production Facilities Worldwide
Source: www. Volkswagen-ag.de
4.22 VW’s international strategy
Dicken (2005) said, “Outside Europe, VW is a major producer in Brazil and in
Mexico. Within Europe, prior to the opening up of Eastern Europe, VW concentrated
its production in two countries in a clear strategy of spatial segmentation. Highly
value, technologically advanced cars was produced in the former West Germany;
low-cost, small cars were produced in Spain where VW undertook a massive
investment programmed in Seat. During 1990s, after the collapse of the
Soviet-dominated system, VW moved rapidly to establish production of small cars in
eastern Germany and to take a 70 per cent stake in the Czech firm, Skoda.” (See
Chart 4.22-1). Hence, the product of VW is thoroughly transnational.
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Chart 4.22-1: The Global Geography of VW
Source: SMMT (2001) World Automotive Statistics
However, look through the development history of VW, it has passed three phases in
its international strategy, they are Distribution oriented multinational company,
Production-oriented multinational company, and globally operating transitional
company. (See Table 4.22-2) The following part will briefly introduce the
organizational changes happened during the three phases under three dimensions,
namely, corporate governance and profit strategies, product structure and market
strategies, and production systems.
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Table 4.22-2: Three phases of VW’s International Profile
Source: Pries, L (2001). Accelerating from a Multinational to a Transnational Carmaker
1. Distribution oriented multinational company:
It can be started from the 1940s to the 1967, the VW Company tried to open a few
production facilities out of Germany, which include Canada, the USA and France,
the prime strategy was enter these big markets to get the market share and acquire
cheaper labor. However, due to the lack link between foreign companies and the
headquarters, the foreign factories were still using older methods and producing
older models cars compared with the center plant for the national markets and they
have relatively high autonomy from the headquarters.
2. Production-oriented multinational company:
During the period from 1967 to 1990, the VW group changed their production
network, it is a heart-stirring changing in VW’s history, because the company plants
were redefined in a transnational division of labor, the periphery plants were
increasingly integrated into a global division of production, not only produces the
older models than the center plants.
Although the product structure and market strategies was still in center-periphery
figure, the peripheral plants sill produced and sold older models, the gap of models
closed slowly, and they gained an important role in the overall transnational division
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of labor in the organization.
3. Globally operating transitional company:
This period is between the 1980s and 1990s, Volkswagen began to shift more and
more from a simple multinational company to a globally operating transitional
company (Pries, 2001).
The changes happened in this phase relate to three dimensions, which are the product
structure & market strategies, corporate governance & profit strategies, and
production systems at both the headquarters and the periphery plants level. They
integrated new foreign companies and reorganized the overall corporate governance
structures. There is no longer a big fixed hierarchy between the centers and the
peripheries; the company searched for best production places and best practices.
They diffused knowledge among the periphery plants and the headquarters, although
the headquarters still owned the core strategic competencies such as R & D and
design, knowledge diffusion is much greater than before. They recently have opened
new plants as technical and organizational laboratories in the development of new
production systems and best practice principles. The strategic function of each plant
is to maximize the exploitation of all local idiosyncrasies and to optimize intra
consortium competition and learning processes (Pries, 2001).
Nowadays, Volkswagen has become a transnational car maker in real sense, and has
succeed with the most extensive and systematic transnational strategies in the world.
(Dicken, 2005).
4.23 VW’s Competitive Advantage
1. Leveraging international resources, assets and competences
VW has been trying to obtain access to cheap international resources through its
global production network; the group has 41 manufacturing plants in the entire world.
(Global Insight, 2006) The group has also built a brand portfolio that covers most
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segments of the automobile market. These advantages help the group achieves
economies of scale and economies of scope simultaneously.
2. Knowledge creation and innovation
Normally, knowledge creation and innovation happen either in the center and
transferred to local branches, or in the local branches and primarily used in local
markets. There have been some new trends recently, knowledge creation can happen
in subsidiaries and transferred worldwide; or globally linked, which means recourses
and capabilities of many operations pooled to joint create and manage new activity.
VW Group’s knowledge leverage used to be in center-periphery model as it used to
be a multinational company during the second half of the past country. However,
now, as a transnational organization, its knowledge creation and innovation are
globally linked, its new Beetle product and production in Mexico is a good example.
VW’s Mexican plant used to produce completely out-fashioned models, which were
sold mainly in Mexico. The Mexican factory assigned a subordinated position to the
Puebla plant. The Group’s distribution of resources, functions, competencies and
power between headquarters and plants followed a center-periphery configuration.
The situation changed dramatically since the 1990s, when the Group made a
qualitative shift of the organization structure. In 1993, when VW was having a
difficult time in the US market, they realized that they need a competitive car for the
small car market, and they need to be innovative in order to compete with the major
competitors, therefore they made the decision to produce the New Beetle in Puebla.
In 1995, the Mexican plant was defined as keystone in VW’s market strategy to
recuperate presence in USA reviving the image and nostalgia of the old buggy and
combining it with a high tech fun car for a market niche (Pries, 2001). 30 managers
and technicians mostly from Mexico came to Wolfsbury to develop the project and
prepare production in Puebla, and 200 technicians were prepared in Puebla, the new
Beetle was produced in 1997 and the production of the new Beetle accounts for 40%
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of the Mexican production. (VW website, 2007) This is the signal of the changes in
VW’s product structure, production system, market strategy and knowledge learning
and leverage configuration. An inter-hierarchical team working and management
system was developed.
4.24 VW’s international entry strategies
1. Acquisition & Greenfield
It is well known that VW is one of the most successful car makers in the world, it is
not only because the quality of its car but also the successful entry strategies it used.
The Group now consists of seven major brands, which include Volkswagen
Passenger Cars, Audi, Bentley, Seat, Skoda, Bugatti and Lamborghini. Except
Volkswagen Passenger Cars brand, rest of them were all bought in the form of
acquisition. Audi was bought from Daimler-Benze in 1964; Bentley, was bought in
1998 from Vickers along with Rolls-Royce, but the company cannot produce cars
using the brand of “Rolls-Royce’s” because this trademark is belonged to BMW;
majority of Seat was acquired in 1987, Bugatti and Lamborghini were both acquired
in 1998. The Audi division also bought NUS in 1969, but the brand was never used
since 1977 (Wikipedia Contributors, 2007).
Hence, it is clear that acquisition is the most favorable entry mode for VW in the past.
But because the available targets have been gradually reduced in recent years, and
the adverse global market conditions together with the rapid erosion of the profit,
VW Group has been more cautious with its investment and its acquisition activities
were reduced. Nonetheless, the Group is still investing widely in some new models
and new plants, for examples, it constructed a new plant in Dresden and restructured
its operations in Brazil. Because of it huge potential market, and the experiences
from the maturity North American and European market, it has also continued to
expand its production capacity in China , Mexico and many other emerging markets.
The Group also built a manufacturing plant in India for the Skoda brand, and
hopefully it would become the export base to the around regions. Furthermore , it has
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increased the assembly volume in Ukraine through Skoda subsidiary. The Group has
recently made an acquisition of LeasePlan, a fleet management business formerly
owned by ABN Amro, with two partners, which is valued at two billion Euros. It is
also considering to invest in a new assembly plant in Russia recently, and it aims to
produce three models in 2007 (Global Insights, 2007).
2. Joint Ventures & Strategic Alliances
There are two joint ventures companies formed by VW in China, and the partners are
the largest car makers in China, therefore VW has an opportunity to gain low-cost
plant and get a competitive position in the Asian market, this will be discussed in
details later in this paper.
Besides that, VW also formed joint ventures and strategic alliances with other
manufacturers in order to enter foreign markets and co-operate on the development
of cars and production of key components. Take common SUV architecture for the
VW Touareg and Porsche Cayenne for example, VW’s plant in Slovakia produce the
vehicle bodies, then VW’s vehicles are finished and assembled in Slovakia,
Porsche’s are finished in the plant of Leipzig (Global Insights, 2007).
The Group also considered a co-operation with Maserati, which is a sports car brand
of Fiat, aiming to develop several technical and commercial co-operation projects. It
was reported that VW was planning to use QuattroPorte, which is Maserati’s
four-door sports saloon platform, as the plant for its C1 concept new luxury model.
However, the C1 project was suspended indefinitely; the Group did not enter into the
alliance with Maserati (Global Insights, 2007).
There are also many other joint ventures and alliances that the VW participated, for
examples:
1. Skoda formed a joint venture, Asia-Auto, to launch assembly of all Skoda models
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in Kazakhstan by September 2005. The Ust-Kamenogorsk plant has enough spare
capacity to assemble between 30,000 and 40,000 units for Skoda per annum.
2. VW has signed a co-operation deal to launch assembly operations in Angola.
VW’s partner, Ancar, will invest US$48 million to set up the production site, where
output is to be gradually increased to 160 units per day.
3. VW has signed a strategic alliance deal with Daewoo Motor Sales Co. to sell its
vehicles in the latter’s dealer showrooms in South Korea.
4. The VW Group has a joint-venture agreement with Euro car, a Ukraine-based
carmaker, which produces a range of Skoda and VW vehicles.
5. A joint venture with US-based Archer Daniels Midland (ADM) with a view to
carrying out research on biodiesel fuel for the automotive industry. The aim is to
develop clean, renewable fuels by adding natural substances to diesel petroleum.
6. A joint venture with Salzgitter, a German steel and technology conglomerate,
which will focus on car recycling and vehicle end-of-life issues.
7. VW Mechatronics, a joint venture with Siemens VDA was set up to produce
innovative Piezo unit injectors for diesel engines in a new plant located in Stolberg.
The production capacity will be gradually expanded, with a targeted annual
production increase from 2m to 4m Piezo unit injectors when capacity is raised.
Compared to conventional solenoid valves used in diesel engines, the new fuel
injection units deploy much more rapidly responding Piezo actuators, making fuel
injection control more precise and flexible. This will help VW to build an entirely
new generation of high-performance and low-emission diesel engines.
Source: Global Insights (2007)
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4.3 VW’s strategy in China
In the last part, the entry modes that VW has adopted frequently were discussed,
most importantly, acquisition, a few Greenfield projects, and the Group also has
involved in a number of joint ventures and alliances. In this Chapter, the investment
strategies of VW in the Chinese automobile market are going to be reviewed, and
will be compared and contrasted with the company’s investment strategies in other
countries.
4.31 VW in China
The VW was one of the earliest foreign car makers, which made direct investment in
China. In 1984, VW became the first foreign car maker invested in China, helping to
launch the land of the bicycle into the age of the car. From the strategic point of
view, according Hill (1999), the VW’s investment in China proceeded from the
starting-point: the desire to create a strategic and competitive position in the Asian
market. VW aimed to achieve this objective by ways of gaining a low-cost
manufacturing site for automobile to be sold in Asia and for components to be
incorporated in products manufactured outside Asia, thus, establishing the
FAW-VW and Shanghai-VW joint ventures are obviously important for VW’s
strategic objective. On the other hand, VW has contributed to the joint venture
company with capital resources, technology and knowledge of production process.
4.32 The two joint ventures in China
Shanghai-VW is the first joint venture that the VW invested in China, and it is also
the first joint venture in the Chinese car market after China started its reformation
and opened its market to the world. It was established in March 1985, by VW,
Shanghai Automotive Industry Corp and China National Automotive Industry Corp.
The joint venture is equally shared, the Chinese shareholders own 50% of the interest
and the German shareholders own the other 50%. The contracted period of the joint
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venture was 25 years. On April 12, 2002, the shareholders signed an agreement to
extend the contract for another 20 years till 2030 (SVW, 2006). It locates in Anting
International Auto City on the northwest outskirts of Shanghai; it currently has a
product lineup made up of six series out of five passenger car platforms of Santana
B2, Santana3000, Passat, Polo, Gol and Touran (SVW, 2006).
FAW-VW is the first large-scale passenger car maker in China, which involved a
total investment of 11.13 billion Yuan initially and increased to 23.435 billion Yuan
(US $2.8 billion) when the second plant was constructed in 2003 (FAW-VW, 2007).
The VW and the First Automotive Works Group Corporation form it in 1991, and
Audi AG joined the partnership in 1995 (FAW-VW, 2007). The FAW Group
Corporation and VW share the share of the FAW-VW joint venture with 60% and
40% respectively, and the 40% of VW’s share is furthered divided between VW AG
(20%), Audi AG (10%), and VW Automobile (China) Investment Co, Ltd. (10%)
(Wikipedia Contributors, 2007). The FAW-VW locates in the northern Chinese city
of Changchun, with an annual output level of 330,000 vehicles, 300,000 engines, and
180,000 transmissions, and offers a wide range of more fifty models in Jetta, Audi
A6, Audi A4, Bora and Golf series (FAW-VW, 2007).
Nowadays, the VW China Group controls more than 30% of the Chinese car market,
which makes it to be the largest foreign car marketer in China. Furthermore, China
has been the second largest market for VW, which is only after Germany (Wikipedia
Contributors, 2007).
4.4 Summary
This chapter gave a briefly introduction of VW’s international strategy, it shows that
VW has passed three stages in its internationalization process, now it has become a
transnational company in real sense and its knowledge leverage used to be in
center-periphery model, now an inter-hierarchical team working and management
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system has been developed.
It also shows that VW has selected joint venture as the main entry mode when it
entered the Chinese car market, (The two joint ventures has been introduced in
sections 4.32 in this Chapter, also summarized in Table 4.33). And VW has been
taken part in a number of other joint ventures in other countries. However,
acquisition has been the company’s favorite entry mode, but why the Group chose
joint venture over acquisition and other forms of entry modes Together with the fact
that joint venture is also the most popular entry mode adopted by other leading car
makers in the world when enter Chinese market, therefore, it is not difficult to
conclude that this choice is largely related to the Chinese particular investment
environment circumstances. Hence, the next Chapter will focus on the particular
circumstances in China that have lent itself to the particular entry mode, joint
venture.
Table 4.4: Volkswagen in China
Source: www. vw.com
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5.0 The investment environment of China’s car industry
5.1 Introduction
In the last chapter, it found that the acquisition is the most favorite entry mode for
VW, however, the company applied joint venture enter China’s car market, that may
related to the Chinese particular investment environment circumstances. Hence, this
chapter will review the China’s car industry and the investment environment of
China.
It will use the PEST model and Porter’s five forces model to analyze the macro and
micro environment of China’s car industry. Through the investigation, it seeks to
answer the question that about: why did the Group choose joint venture over
acquisition and other forms of entry modes when it enters China’s car market.
5.2 The Macro Environment of China’s car industry
China’s car industry used to be under-grown a few years many car makers could not
meet the quota of production, and production capacity was laid idle (see appendix 2:
China’s car industry annual production 1955-1995). Even when the economy has
been changed to more market oriented over the last two decades, the car industry
were still operating under a planned economy system and remained highly regulated
before the middle of the 1990s. The Chinese government started to develop the
domestic car industry since 1994, and in order to protect the infant car industry, the
trade policy was very protected, heavy tariff and quotas were imposed on import
vehicles, and other instruments, for example, local content requirement, were used to
limit foreign investment. However, the government eventually realized that without
competition, the industry could never grow up, then along with its economic system
reform and the initiation of the open-door policy, the Chinese government started to
open its car market to foreign manufacturers.
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Since Chinese government proposed the reform and open-up policy, uncountable
changes shaking the world happen in this one of the largest oriented country at every
second. The biggest change is the large inflow FDI in China’s car market, which
brought rich fund and high technology. As maintained before, China’s car market
only have a few years history, in order to develop this industry in China, the
domestic companies had to absorb fund from investment and get world-advanced
technology. The Chinese government also changed attitude and offer advantages to
support foreign investors to absorb more fund to develop national industry.
Multinationals were likely to corporate with domestic car makers. Because they need
domestic channels to sales their products, also foreign companies would get support
from government though the corporation with domestic car makers.
On the other side, China’s car industry would be damaged under the rushing of
multinationals. Small car companies would be bankrupt or annexed in the
competition. Hence, the Domestic companies also need to corporate with
multinationals.
As above, China’s car industry paid more attention to has grown into the pillar
industry of national economy. In order to find why VW use joint venture enter
China’s car industry, to analyze the macro environment is very necessary.
5.21 Political Environment
As it mentioned before, the China’s car industry grows very fast and become into a
pillar industry of national economy. A very important reason is that the Chinese
government has the regulations of restrictions on the FDI activities in car industry.
It is well known that China had an open door policy from the end of the 1970's. The
purpose was to secure the finance for modernization through capital liberalization. It
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same as the policy of the other developing countries, whose purpose was to
supplement the shortage of domestic savings and take in technology and
management know how from more advanced foreign countries. In the car industry,
China has had taken the same policy as other developing countries which was attract
the foreign investment give the protection and privileges to the foreign carmaker, it
helps China, car industry grows fast and made the foreign company easier to enter
this field.
However, the Chinese government does not expect to be an expansion base for
European, American and Japanese car industries. In other words, it wants to develop
its domestic car industry with the help of foreign companies. Hence, in the recent
years, the Chinese government introduced encouraging policies for the domestic
manufacturers to develop their own autonomous branda with the help of foreign
companies. These policies have enabled domestic producers to utilize foreign cars
production platform, engine technology, design technique etc, to built Chinese brand
cars, compete with the foreigners’. At the same time Chinese government is made
clear by the fact that foreign companies are not allowed to have majority (over 50
percent) share holdings in joint venture projects for the production of finished
vehicles. In other words, business in China for foreign carmakers means they will
never have more than the role of assistance provider and are strictly limited to
helping the China’s car industry to develop independently. (See the appendix 3: The
Excerpt of Chinese Auto Industry Policy) After China joined the World Trade
Organization (WTO), it has been opening up its market further to the world, policies
in many industries such as banking and car industry have been relaxed much more
and tariff level has been reduced by a large amount. Along with its huge population
and increasing purchasing power per capital, it is becoming even more attractive to
the multinationals, so that, besides the benefits have brought to the car market which
caused by economic booming in China, the import tariff on finished cars has
decreased from 28% to 25% since the first of July, 2006, and import tariff on some
spare parts also has been deducted due to the agreement China made with WTO.
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According to the Chinese policies of attracting FDI in car market, VW conduct joint
venture entry model with the domestic makers when it enter the market, and then
they can establish the production line in China. Although there are some other entry
model for entering the market such as exporting the finished cars to China; however,
this entry mode could raise the retail price because high tariff (nearly 30%) has to be
paid by the retailers for the import finished cars due to market protectionisms. Joint
venture allows VW hold approximately 50% stock in the VW China companies.
5.22 Economic Environment
China has changed its economic system from a centrally planned system to be a
much more market-oriented system over the last two decades. China has made
tremendous progress since it initiated the reformation and open policy from the
1970s. Since then, the country has experienced a rapid continually economic growth,
and it has to be a key player in the global economic market without doubt. Figure
5.22-1 illustrates the rapid growth of the country’s GDP since China has started the
reform, and Figure 5.22-2 shows the real GDP over the last few decades. In January
2004 the National Bureau of Statistics announced that the Chinese economy had
grown by a surprisingly strong 9.9% year on year in the fourth quarter of 2003, and
export from China increased by 31.4% in 2003.
Figure 5.22-1: Growth of Real GDP of China 1978-2005
Source: World Bank,World Development Indicators, 2007.
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Figure 5.22-2 China’s Real GDP 1992-2004
China has also become one of the world’s top FDI destination countries. An FDI
inflow into the country has been growing fast, although there is a fluctuation around
1997 because of the Asia financial crisis. Figure 5.22-3 shows the FDI Growth in
China over twenty years from 1984 to 2004. FDI inflow has been continually
increasing in the last few years. Foreign direct investment (FDI) in China reached
22.99 billion U.S. dollars in the first five months of 2006, up 2.78 percent over the
same period last year, said the spokesman with the Ministry of Commerce in Beijing
Thursday (National Statistics Bureau, 2007)
Figure 5.22-3: China FDI Growth 1984-2004
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In conclusion, the booming economy is the mainly reason that foreign company
invest in Chinese market, because they can get huge profit, large market, advantage
position, etc. hence, it is not surprise that VW make a huge investment to China’ car
market.
5.23 Social-cultural Environment
When the People’s Republic of China was founded in 1949, the communist party
pledged providing all the basic necessities of life for its people, which include meant,
Food, Clothing, Shelter and Transportation. As China’s economy has dramatically
moved from being planned to market-led based, and with income levels rising
dramatically, the basic need dramatically changed, it moving from basic and public,
to comfort and private. Chinese people thirst to own their private and higher quality
products and services, hence, foreign brand of car with its high quality have large
demand in China’s car market in the late 80s and 90s.
However, there are still many challenges going on, for example, there are still a large
proportion of people living in poverty, and the income inequality problem, the
unsustainable resources exploitation, environmental issues etc. It is going to take
years to overcome these problems; nonetheless, the country’s global competitiveness
and the ability of attracting foreign investment are growing fast.
On the other hand, culture issue is another reason that most companies adopt joint
venture when they enter into China’s market. Culture is the collection of values,
beliefs, behaviors, customs, and attitudes that distinguish one society from another.
Different countries or regions have different cultures. It is determined by the
language, social structure, communication, religion, values and attitudes (Ricky W.
Griffin & Michael W. Pustay 2005). According Hill (2001), it is very important to
understand how cultural differences across and within nations can affect the way in
which business is practiced. China as a huge Eastern nation has many cultural
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traditions and habits that are different with Western countries, it is crucial for the
foreign firms to understand the Chinese culture when invest in China. For the
particular cultural issues that affect companies’ selection of entry mode, the most
important one is “Guanxi”.
“Guanxi” establishes a relational network in the society, which based on
interpersonal connections. It can be found easily in Chinese organizations, which
associate with trust, “mianzi”, and “renqing” in regulating interpersonal relationships.
(Malcolm Warner, 2003; Jie Tang and Anthony Ward, 2003). Hence, doing business
in China, sometimes whom you know is more important than what you know.
Except for the experience, knowledge, skills, and many other factors that lead to a
success of a business, in China, sometimes is the word “Guanxi” that really
determines, or at least makes huge differences on the operation of a business, and
largely influences if the business will be successful. By getting the right “Guanxi”,
the organization minimizes the risks, frustrations, and disappointments when
operating business in china. Take negotiation with Chinese for example: when it
comes to negotiation, western firms think that negotiation skill is the most important
factor that will ensure a success, however, in China, factor that determines if the
negotiation will be successful is that what kind of “Guanxi” you have with the other
party, it reduces a lot troubles when someone on your side has a good relationship
with the decision-maker on the other side. Therefore, it becomes very difficult for
foreign firms to negotiate with Chinese companies without helping of local partner.
However, if you have a local partner, and the local partner knows how to negotiate
with another local company, and more importantly, they may have right “Guanxi”
with them, the negotiation may became much easier. Also, it often it requires the
right “Guanxi” with the relevant authorities, which will determine the competitive
standing of an organization in the long run in China.
Hence, “Guanxi” is so important when doing business in China. Find a partner in
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China is very necessary; it can work out a lot of problem in its “Chinese way”.
As above, due to social reason and cultural reasons, foreign investors including the
car makers well-founded to make a FDI into Chinese market to gain the huge benefit,
and adopt joint venture entering Chinese market, in order to let their local partner
reduce cultural problems,
Here, Mr Cai Qian (the manager of VW) believe that although the number of
wholly-foreign owned investments will certainly increase in the future, joint venture
will still be the most popular entry mode for foreign investors who want to enter
Chinese market, as he believes that the most important factor that influence such
selection is the cultural issue instead of political reasons, he said that even that
political interferences will be reduced largely in the near future, the cultural customs
and other problems, such as the issue of “Guanxi” will still be the main barrier for
foreign investors, therefore he thinks that joint venture is still going to be their best
choice.
5.24 Technological Environment
In the recent years, the encouragement policies on car manufacture and car market
development, have lead to car producers in China, especially domestic
manufacturers, invested huge capital on the improvements of car production
facilities, car safety testing systems and car designing technologies. However, in
80’s, the domestic car makers’ technology, management system are dropped far
behind from the foreign manufacturers, and the industry still in the primary stage,
hence, China is trying to create its own standards to be independent from foreign
patents, use existing foreign technology is implemented in China and will be
implemented by Chinese companies. However, due to legislative implications of
newly guaranteed intellectual property rights China would have to pay huge amounts
of money to foreign companies that hold patents.
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Hence, as it mentioned before, Chinese companies and the government want to
establish their own technological platforms to reduce license fees and to increase
independence from foreign companies, the joint venture mode is quite fit this status
(Sigurdsson 2004), which the local partners gain the foreign firms’ technology and
managerial skills, and the foreign firms get target market share, lower cost, etc.
5.3 The Micro Environment of China’ car industry
5.31 Five Forces Analysis
Power of Suppliers
In China, the main suppliers of car makers are the companies which produce metal
materials, windscreen, tyre and other spare parts. On the surface, the power of
suppliers looks very “high” in the 1980s (VW enter China in this period), because:
1. There are not plenty such companies in China to provide raw material when the
VW join in the China’s car market (1980s), and both he quantity and quaintly
were low. For example, there are only two metal companies in China in 1980s,
and they were all controlled by Chinese government.
2. There are no substitutes for the raw material of car industry.
3. The switching costs from one supplier to another are high, because if the car
company wants to switch their supplier, they have to import these products from
foreign country.
However, as it mentioned before, the Chinese government issued promotion policy to
the foreign investors when they corporate with domestic car makers, the raw material
will be provided in time and without difficulties created by supplier, and China’s
steel has made significant growth, for example in terms of steel production grew
from 27.16 million tons in 1980 to 222.33 million tons in 2003, stood as the largest
producer of crude steel in the world (China National Statistics Bureau, 2004), also
the price of these materials was lower than the other countries; hence, the supplier
force of VW was not a threat.
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Power of Buyers
Bargaining power of buyers is low at that time when VW enter China’s car market,
because:
1. Buyers could cause threats, because there are plenty options and alternatives they
can choose, thus, they can easily switch one brand to another. However, in the
80’s in China there are not so much options to choose, and the demand of car
market is very large.
2. The foreign car maker such as VW has absolute technical advantage and the
quality of foreign cars is much higher than domestic cars. Hence, the foreign car
makers, such as VW could simply use differentiation strategy
to get customers
in China’s car market.
Threats from New Entrants
Due to the China’s attracting FDI policy, the entry barriers of the Car industry in
China is largely reduced, at the same time, the booming of the China’s car industry
and the increasing demand in the market have shown great potential of the industry
and attracted many foreign companies. So far the entire world’s major car
manufactures, for examples, GM, Toyota, Ford, Daimler-Chrysler, Nissan-Renault,
PSA Peugeot Citroen, Honda and BMW, have invested in China, mostly, through the
form of Joint Venture, hence the threats from new entrants are high, however, as the
first investor of China’s car market, VW have a lot of benefit, such as the lower tax,
rental fees and so on, hence it can use cost leader strategy build a higher entry
barriers to the new entries.
Threats from Substitutes
The threats from substitutes are high, because:
1. As well know, China have the largest population to use bicycle in the world.
2. The swathing cost is very high for customers, i.e. car is much more expensive the
bicycle.
3. The oil price is rising, and it seems would continue to rise in the near future, thus,
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the demand for cars could fall due to the high price of fuel, the consumers might
to choose other transporting equipment for traveling such as pubic transport and
electrical bicycles.
However, China has shifted from a nation of bikes to a mobile population in last
century and car industry has become one of the pillar industries, and that change
accord with high speed development of China’s economy. And car makers can
develop their technology to reduce the cost of customers.
Threat from rivals
Chinese car industry is very young, and the competition level is very low. However
due to more foreign players entered into this market segment, and they all put huge
effort to grab as much market share as they can, thus, high competitive rivalry has
been caused.
Another factor leads to this situation, is the products of players offered are highly
undifferentiated, thus, in order to attract customers, more promotional activities have
been launched and mainly through competing on price.
In conclusion, the competition in China’s car market is very low when VW entry
China’s car market, through the five-force analysis, it is because that the Chinese car
industry is very young, the threat from forces is very limited, so it is appropriate to
invest into this market. And due to the macro environment of China, the joint venture
is an appropriate mode to entry this market between 1980s and 1990s.
5.32 The current status of China’s car industry
Now, the Chinese car industry consists of three big and many small players. The
three big players are called “The Big Three”, which are China FAW Group
Corporation, Dongfeng Automobile Co, who are partners of major global OEMs like
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GM, Volkswagen (VW), Toyota etc and Shanhai Automotive Industrial Co. Ltd.
There are also many other players such as Beijing Automotive Industry Holding Co.
Ltd, Chang an Automobile Company Let, Geely and Chery, etc. (see Table 5.3 &
appendix 4). Normally, the small manufacturers are not efficient enough and some
are technologically outdated, and all the big players entered into joint venture with
foreign manufacturers, therefore, foreign brands and models mainly dominate the
China’s car industry. VW and GM are the most successful two, others including
Honda, Suzuki, Toyota, and Peugeot etc. The market structure of China’s car
industry has a great change during these years, so the entry strategy for other foreign
should change be variety.
Figure 5.3: Major Players and their relationship in China’s Car Industry
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5.4 Summary
This chapter provided some background information about the China’s car industry,
and analyzed the industry macro- and micro- environment, with the aid of PEST and
Five Forces model. It gave a brief overview of the economic and investment
environment of China, and outlined the dynamics of the China’s car industry and
introduced the existing state of China’s car industry. It also gave the reason that VW
chose joint venture enters China’s car market.
As it stated above, China’s car industry was so young in the world car industry. To
develop this sector, the domestic companies had to absorb fund from investment and
get world-advanced technology. The Chinese government also changed attitude and
offer advantages to support foreign investors to absorb more fund to develop national
industry. Multinationals were likely to corporate with domestic car companies.
Because they need domestic channels to sales their products, use China’s local
company’s “Guanxi” to work out the cultural problems, also foreign companies
would get support from government though the corporation with domestic auto
companies. Base on that, the most popular entry mode in this industry is joint venture,
because this mode quite fit China’s macro- and micro- environment.
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6.0 VW’s future challenges and directions
6.1 Introduction
This Chapter will briefly introduce the future challenges and directions of VW in
Chinese market, which will through a SWOT analysis on VW to show the challenges
facing by VW in China, and then summarized the future direction of VW in China.
6.2 SWOT analysis on VW in China
Table 6.2 SWOT analysis on VW in China
Strengths
1. Low cost labour and raw material
2. Strong R & D team
3. Reputation
Weaknesses
1. Few core strengths and low on key
skills
2. Demoded management team
4. Differentiated products
Opportunities
1. China’s WTO compliance
2. Market growth
3. Chinese government’s attitude on FDI.
Threats
1. Increased competition from Chinese
domestic companies and multinationals
2. Increased pressure from customer
Strength:
1. Low cost labour and raw material: The VW group in China can gain the low
cost labour and raw material from China.
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2. Strong R & D team: A full-fledged carmaker must be capable of new vehicle
development. To this end VW made preparations well in advance. In July 1997,
VW started the project for expanding its technical center, and by August 8, 2003,
VW's proving ground, which covers an area of 1.44 square meters and costs an
investment of RMB 1.5 billion in total, had been completed and put into
operation.
3. Reputation: Striving for internationally advanced product quality and
considerate service to get good reputation.
4. Differentiated products: In a market of multiple and comprehensive segments,
the precise positioning of products and full coverage of market segments play a
vitally important role in successful marketing and sales. In the face of
complicated and fierce competition on the car market, VW worked out and
implemented its development strategy oriented towards satisfaction of customer
requirements. The company tried its best to open up market of various segments
and launched quite many products in an all-round way, and by doing so the
company consolidated and strengthened its leading position in the market. VW's
product range expanded from the single model of Santana B2 to the five model
series of Santana B2, Santana 2000, Passat, POLO and GOL with dozens of
product versions that are more precisely positioned and differentially priced with
much wider market coverage.
Weakness:
1. Few core strength and low on key skills: VW had few unique technology
and key skill over other competitors.
2. Demoded management team: Relatively old management group, lack of experienced
personnel in some key managerial positions.
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Opportunities:
1. China’s WTO compliance: It gave VW more opportunities in the free trade
condition.
2. Market growth: The Chinese car industry continued the high speed growth in
2003, in which 2.0189 million cars were produced, an increase by 83.25% over
the previous year, and 1.9716 million cars were sold, up by 75.28% over 2002.
The Chinese car market took on a completely new look in that new models were
launched onto the market at shorter intervals in their diversified versions
characteristic of the latest international trend.
3. Chinese government’s attitude change on FDI: Chinese government had to
change the attitude to encourage FDI to develop the national car industry, Such as
decrease the tax on joint capital companies, reduce the tariff, and increase the
import and export quota.
Threats:
1. Threat from multinational car companies: Volkswagen is facing the fiercest
competition ever in Chinese market, since a new car policy was issued in 2004.
The policy will loosen the restrictions on foreign ownership in car and
motorcycle joint ventures with Chinese partners if the JV is aimed at exporting
automobiles and built within an export processing zone (Data monitor, 2005).
Many other foreign carmakers have already taken advantage of the Chinese
government’s new policy. For example, Japan’s Motors has entered into a joint
venture agreement with China’s Dongfeng Motor and Guangzhou Automobile
group that will begin production later this year. Honda owns 65% of the group
whose plant is located in the Guangzhou Economic and Technological
Development District. Production from the site will be dedicated exclusively for
export. The new car policy will also for the first time allows foreign investors to
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create more than two JV plants in China as was mandated in the previous policy.
The higher number of JVs will be allowed if the foreign investor joins forces
with its existing Chinese partners to merge other companies within China.
2. Threat from domestic car companies: in recent years, the Chinese
government is striving to foster its own car industry, and the domestic car
companies grow very fast. They are big threat to VW sooner or later.
3. Increased pressure from customers: Although the car users were increasing,
however the car products were produced rapidly by different carmakers, the
customers had more options than before. Hence, customers all critically required
the quality, price and services.
6.3 The future directions of VW in China’s group
1. New service: the China’s VW group offers a lot of new service to the Chinese
customers, which will help VW to get more market share in Chinese market. For
example, in 2006, the company introduced a “make-to-order” (MTO) sales
programme to China, which allows car buyers to decide the parts and accessories to
be installed to their vehicles, in another word, customers of VW are able to track the
status of the vehicles they order- from production to delivery- on VW’s web site,
that attract huge number of customers.
2. More investment: German automaker Volkswagen AG and its partner the
Shanghai Automotive Industry Corp (SAIC) will jointly pump 3 billion euros (US $
3.44 billion) into their local joint venture-Shanghai Volkswagen (SVW) over the
nest five years, according to top SAIC executives. The massive investment plan is
expect to strongly boost VW’s output capacity The German company said it aims to
increase its annual sales in China to 1 million units by 2007.
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3. Lower prices: Shanghai Volkswagen has recently relaunched its standard Santana
car, a move certain to heat up competition in the local market. A corporate executive
said that the company has made improvements on the standard Santana model. The
new car is more comfortable and more attractive. But it sold at a lower price than
similar Chinese automobile brands such as the Fukang, produced, which by the
Dongfeng Automotive Corporation in central China.
4. Explore overseas market: Volkswagen has said it plans to export made-in-China
cars to 84 countries within three to five years-if it can bring down costs and improve
quality.
6.4 Summary
This chapter use SWOT analyzed the VW’s internal and external factors which
influences the future development in China, it has strengths like: Low cost labour
and raw material, Strong R & D team, Reputation, Differentiated products,
opportunities like: China’s WTO compliance, Market growth, Chinese government’s
attitude on FDI. Also has Weaknesses like: Few core strengths and low on key skills,
Demoded management team and Threats like: Increased competition from Chinese
domestic companies and multinationals, Increased pressure from customer, Growth
of oil prices.
It also gives some future directions for the VW in Chinese market, such as new
service, more investment, lower price and explore oversea market.
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7.0 Discussion and Conclusion
7.1 Discussion
Through the whole research, it found that the VW company most favorite entry
strategy is acquisition; it was because the company has to use this entry strategy to
build its completive advantage. I.e., as a multinational, VW through obtain cheaper
international resource and leverage knowledge between local and headquarters to
build its own competitive advantages, and in order to achieve this strategy, VW have
to explore foreign industry, own the foreign plant.
However, when they found great potential benefit in China, it decided to use joint
venture to enter this market, it is because that the macro and micro environment of
China’s car industry. E.g., the Chinese policy states that the foreign companies can
enter into their market, but never more than role of assistants, they must help the
government to develop its domestic industry. And the foreign companies also need
local companies help them work out the cultural problem, such as “Guanxi”. Hence
the VW used joint venture to enter China’s car market. It is be proved that VW’s
entry strategy in China was very successful, however, the industry is changing ever
year, now the foreign car makers can use variable entry strategy to enter China’s car
market. Hence, this project may help people to understand VW’s international
strategy and share the successful experience on it’s entering China’s car industry.
7.2 Conclusion
China is one of most attractive investment destinations for the world investors, and it
is one of the world’s largest automobile markets, VW is one of the earliest foreign
investors and the biggest foreign automobile manufacturer in China, it controls now
over 30% of the Chinese automobile market.
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This piece of study analyzed VW’s selection of entry modes when it entered Chinese
car market, the objective was to find out which particular modes did Volkswagen use
to enter Chinese market and what are the rationales behind such choice. In order to
achieve this objective, a lot of researches have been done, which include the analysis
the VW’s international strategy and its entry strategy in China’s car market, the
investigation of China’s investment environment, etc.
Through research, it was found that VW have adopted various entry strategies to
enter foreign markets, mainly include acquisition, Greenfield projects, joint venture
and alliances, but acquisition has been the company’s favorite entry mode. However,
when it entered in China, it selected joint venture as its entry strategy, and it was also
noticed that, not just VW, other world leading car makers all prefer joint venture as
their entry strategy when they first entered Chinese market, therefore, it was believed
that it is the particular circumstances in China, which made joint venture is the
easiest way to enter Chinese market.
Then, it was found that it is the macro- environment of China lends itself to a
particular entry mode, joint venture. And in addition, the future challenges and
directions are provided at the end.
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Appendix
Appendix 1: Five force and generic strategy
Source: Taylor, M. 2005.
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Appendix 2: China’s car industry annual production (1955-1995)
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Appendix 3: The Excerpt of Chinese Auto Industry Policy
Clause No. 28
When a Chinese automobile maker is to utilize foreign funds directly, it must choose
a foreign maker which meets all the following conditions simultaneously as the
partner for joint venture or cooperation. The foreign maker
Should have its own product patent and trademark rights
Should own product development and producing technology, and have a product
technology index in accordance with current legislation in its own country
Should own its independent international sales network
Should possess superior financing ability Above all the possible candidate must
have R & D ability, an independent international sales network as well as sufficient
ability to raise funds.
Clause No. 31
The establishment of Sino foreign joint venture and cooperative venture must meet
all the following conditions:
A technological R & D organization must be established within the company.
The organization must be able to develop product model changes.
It must be able to make products up to the international technology levels of the
1990's.
The joint venture must be intending to export its products and achieving a
foreign currency balance.
When foreign enterprises make the choice of parts, Chinese domestic
ones should be considered equally.
Clause No. 32
For the Sino foreign joint ventures and cooperative ventures producing engines and
finished cars or auto bicycles, the Chinese share holding should not be less than 50%.
Source: China Machinery News, September 20, 1994.
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Appendix 4: Major Players in Chinese car Industry
China FAW Group Corporation:
FAW-VW
FAW-Toyota
THE
BIG
THREE
Dongfeng Automobile Co.:
Dongfeng Peugeot Citroen Automobile Co.
Dongfeng Motor Co. Ltd.
Dongfeng Yueda Kia Automobile Co. Ltd.
Dongfeng Honda Automobile Co.
Shanghai Automotive Industrial Co. Ltd.:
Shanghai Volkswagen Automotive Company Limited
Shanghai General Motors Company Limited
Manufacturing and Distribution
Pan Asia Technical Center
SAIC-GM-Wuling Automobile Company Limited
Shanghai GM Dong Yue Motors Company Limited
OTHER
PLAYERS
Beijing Automotive Industry Holding Co. Ltd.
Beijing Benz DaimlerChrysler Automobile Co.
Chang.an Automobile Company Ltd.
Chang.an Suzuki
Chang.an Ford
Jiangling Motors Group
Geely Automobile
Chery Automobile
China Aviation Industry Corporation II
Changhe Aircraft Industries Group
Hafei Motor Co. Ltd
Shanxi Hanjiang Automobile Co. Ltd.
Brilliance China Automotive Holdings
Baoding Great Wall Automobile Holding Co. Ltd
Source: Luo, 2005
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