International Business: Volkswagen Essay
International Business: Volkswagen
The foundation of Volkswagen dates back to the Third Reich. For the opening of the international automobile show in Berlin 1934, Adolf Hitler demanded the development of a car which should be priced at a maximum price of 1000 Reichsmark and thus remain affordable for the average citizen. This car should be named ‘Car of the people’ (Volkswagen) and offer space for a family of four members. The first model was designed by Ferdinand Porsche in 1934 and in May 1937, the “Gesellschaft zur Vorbereitung des Deutschen Volkswagens mbH” (a company for the preparation of the German Volkswagen Ltd.) was established in Berlin (Volkswagen AG 2013). One year later, the company changed its name into “Volkswagenwerk Gmbh”: The beginning of today’s popular German car manufacturer.
Over the last decades, Volkswagen turned from being the owner of a single production plant in Wolfsburg into Europe’s largest automobile producer and the third largest of the world with a yearly turnover of about € 192,676 million. The company sells, directs and produces twelve automobile brands all over world. 550,000 employees work together to produce 37,700 cars per day which can be purchased in 153 countries (Volkswagen Company 2013). The following report focuses on the automotive division, excluding the financial services division and other subsidiaries.
1a) The design of a multinational enterprise’s (MNE) strategy is primordially determined by the institutions and the prevailing culture of its home country. Volkswagen’s (VW) economic origin is found in central Germany, a town called Wolfsburg, where one of its largest production sites is still in place. Often described as Europe’s economic engine (Iwulska et. al 2013), Germany possesses a culture favoring individualism and refusing power distance (Hofstede 2013, appendix 1.1.). With a score of 67 on Hofstede’s individualism scale, Germany joins those Northern European countries prioritizing self-actualization, which often leads German workers to pioneer the motto of “live in order to work”. In this context, the work itself constitutes an important source of self-esteem in the German culture.
This mentality strongly ties in with a pronounced masculinity, prioritizing career progression and material rewards as well as approving a sharp differentiation in gender roles (Peng & Meyer, p.75).At the same time, the exchange between the average worker and their supervisor is marked by mutual constructive feedback and participation (Peng & Mayer, p.75), as expressed in low power distance scores. However, one can observe the strong concern for structured situations which describes a core element of the German culture (Vector Study 2012). Typical for a country scoring high on the uncertainty avoidance scale, Germany favors a bank-based financial system where risk reduction portrays a priority (Tadesse et al. 2005, p.4). In contrast, Germany scores particularly low on the long-term orientation scale, as expressed in its great appreciation for respecting traditions as well as establishing the truth (Hofstede 2013, appendix 1.1.).
Another determinant of designing a successful strategy displays the global connectedness of the country, namely the degree of information exchange, human resources and trade with other economies of the world. With the second highest overall connectedness index, Germany meets the expectations of one of the world’s largest exporting economies. Such strength in export is promoted by the achieved European Integration (EU) which remains the most globally connected region of the world (Ghemawat 2012). As opposed to the modest sustainable rally of the overall global connectedness index in those years following the financial crisis (Ghemawat 2013), Germany managed to further approach its peak value of 2007 whilst consolidating its economic position in Europe as seen by its presence in Europe’s top 10 countries in all four pillars of the index (Ghemawat et al. 2012, appendix 1.2.).
Given Germany’s increased trade with other European countries, its merchandise trade score in the breadth dimension is more inward-oriented. Contrary to this, Germany shows a strong tendency for outward trade flows of both merchandise trade as well as services in the breadth dimension. In this context, Germany’s focus on manufacturing becomes evident with reference to higher scores obtained for both inward and outward merchandise trade than for its equivalents in services. Overall, Germany displays an example of rising depth in its global exchange with other economies whilst continuing to sharpen its global profile as expressed in an increasing score in the breadth dimension.
b) Volkswagen can be described as a truly home-region oriented company, given that the largest proportion of sales revenues is created in Europe (table 1). However, it nearly achieved to attain 20% of its sales revenues in another region, namely South America, pointing towards Volkswagen’s objectives of further expanding globally (Volkswagen AG 2013).
Region| Europe| North America| Asia-Pacific| South America| Total| Sales revenues(mio)| 28.191| 6.554| 4.392| 7.429| 46.565| Percentage sales(sales revenues/Total sales revenues)| 60.541%| 14.075 %| 9.431%| 15.954 %| 100%| Table 1: Sales revenues by region (Interim Report 2013)
2a) One of VW’s most important ownership advantages at the upstream end portrays its standardization in production practices, namely in terms of MQB and MLB (Taylor 2012). These production systems allow for building different models from using the same components whilst increasing the productive efficiency and reducing the throughput time across all its international business units (Buiga 2012). In this context, the transfer of its standardized production practices across its business units globally is supplemented by VW’s ability to do so “without the customer noticing” (Taylor 2012). This ability is, however, strongly promoted by its second remarkable ownership advantage at the downstream end, namely VW’s internationally recognized and maintained brand identity.
Generally, Volkswagen is perceived by customers as a carmaker offering high both quality and longevity with cars such as the beetle succeeding over decades (Haig 2011). Consequently, its brand identity displays the source of its global competitive advantage, given that consumers associate it with the aforementioned advantages (Taylor 2012), contributing to its continuously increasing brand value (Interbrand 2012). Given its innovations in the light of fostering sustainability and the resulting recognition of being ranked fourth among Interbrand’s Best Global Green Brands, Volkswagen’s brand identity is destined to improve further; most likely to be presented through the continuation of its brand value growth (Interbrand 2012).
b) The Uppsala model by Jan Johansen and Jan-Erik suggests “that internationalization is a dynamic process of learning in which firms take decisions over their next step based on what they know at that time”(Peng & Mayer 2011). Experiencing new markets and cultures reduces the liability of outsidership and influences the firm’s ability to perceive risks and to recognize opportunities. The stage model is similar to the Uppsala model because both models imply that a step-by-step process is necessary to reduce market uncertainty whereby the stage model does not focus on the experimental learning process, but on the increase in degree of commitments. If firms, for example, first make use of licensing, afterwards founding a joint venture and finally owning subsidiaries, then they are able to reduce cultural and institutional distance.
After China started to open some of their trade borders to take part of the international trade, VW signed a contract in 1985 to establish a joint venture “Volkswagen Shanghai Automotive Company Ltd.” was the first joint venture in the Chinese automobile market. With an equal share of 50% for the German and Chinese shareholders, VW is and will not be able to fully own a subsidiary. To ensure the market leader position, VW founded a second joint venture in 1991 whereby the German shareholders only have 40% of the shares (Volkswagen AG 2013). However, in April 2002 the Shanghai-VW joint venture extended the contract until 2030 which shows that VW puts great value on effectively occupying the position of China’s largest foreign car marketer (Feng 2007). VW’s entrance into the Chinese market supports the stage model more than the Uppsala model because the incremental steps are recognizable; founding the first joint venture in Shanghai, then another one in Changchun and finally extending the contracts.
3a) The automotive industry is known to be one of the most globalized industries due to companies organizing its production in a global value chain (Sturgeon et al. 2008). As Volkswagen is one of the world’s largest automotive companies, its thousands of suppliers are located across the globe. Even though VW’s headquarters are located in Germany, only 26% of their cars were produced in its home country. The company operates with more than 100 foreign affiliates in South America, Eastern and European countries, South Africa and Asia (Chiappini 2011). In most factories, different motor vehicle models are produced, whereas in others, automotive products and components are assembled. Considering the number of factories outside its home region, VW’s degree of offshoring is very high
. As the suppliers make a substantial contribution to the company’s success, reliable partnerships need to be present. This leads VW to establish a cooperative relationship with a number of long-term oriented suppliers to increase its focus on the quality of each component. Furthermore, VW’s focus on quality, technology, and innovation, leads it to select its suppliers on cost to quality basis. Additionally, VW selects only the suppliers which implement production-related environmental and social standards according to global minimum standards (Volkswagen AG 2006).
b) The advantages of VW’s international sourcing strategies are stable relationships with its suppliers which allow for a high integration in the production processes. By choosing reliable and trustworthy suppliers, VW gains a competitive advantage in ensuring the high quality of assembled components. As the focus lies on the product’s quality, sourced inputs cannot always be purchased at the lowest price.
In order to provide all production facilities with the necessary supplies, VW is dependent on a large number of suppliers which increases the risk of deficient components. VW tries to counteract this risk by implementing a selective admission process for its suppliers. Its offshoring strategy enables the company to exploit lower production costs in emerging countries. At the same time, by setting up production facilities in different countries, import restrictions can also be avoided. In order to become the world’s leading car manufacturer by 2018, VW must enhance its collaboration and integration with its suppliers in the long term to strengthen its competitive advantage.
4a) Ghana is currently one of the most favorable emerging markets in West Africa with a GDP growth rate of 14.4 % and a FDI inflow of US$3 billion per year (World Bank 2013). It is one of the most secure countries in terms of corruption and furthermore, the supported change in institutional frameworks by the World Bank and the IMF simplifies business practices (Gyetuah 2009). Moreover, the geographical location offers many opportunities to serve the complete west coast by shipping and to reduce transaction costs. Volkswagen already has plants in South Africa, which recently gained a membership of the BRICs, but the company’s responsiveness to market changes in the northern countries is poor because of the distance. Besides, Ghana offers a unique opportunity set for businesses.
It has many natural resources for example cocoa, gold, silver, industrial diamonds, manganese, bauxite, fish, rubber, hydropower, petroleum, timber, salt, limestone and oil (The Central Intelligence Agency 2013). Ghana has become the magnet of many European and especially Chinese companies, particularly in the oil industry which shares ties to the automotive industry. Currently, only Toyota Ltd. has a plant in Ghana and consequently competition is relatively low which facilitates the gathering of a significant market share (List of companies 2013). However, Ghana is weakened by “the increasing flow of drugs through West African States [that] is beginning to undermine the state, through weakening its institutions, its local communities, and its social fabric” and since the production of oil and gas not only businesses but also terrorism is attracted which create a certain risk for many companies (Aning 2008).
Figure 1: Emerging Markets (http://emergingmarkets.ey.com/worldmap/ghana/) b) Volkswagen should focus on the hub in Ghana by founding a majority joint venture with a local company. This strategy lowers the liability of outsidership while accelerating the comprehension of the culture and economy to prevent threats of piracy. Volkswagen can consequently share costs and risks with its local partner, thus limiting the financial risk of investment. Furthermore, a fusion with a local company creates a dynamic network which is vital for the distribution to other countries and is politically preferred. The strategy of a joint venture in an emerging economy is more profitable and secure than in a developed market where formal and informal institutions are important and an inherent part of the legal framework and culture. While entering developed markets is more profitable when taking direct actions, making use of the ownership advantages and critical success factors, entering an emerging market stresses cultural sensitivity and caution.
5a) Recently Volkswagen entered the Mexican emerging market by finishing a new plant in January 2013. This was primarily done due to aid their strategic objective to increase sales in the United States. The demand for passenger cars in the US is forecasted to be 7 million units. Moreover, in 2011 the automobile “production increased by 12.5% to 2.64 million units” and a growth of 8 – 9 % per year are expected until 2016 (Bouman 2012). With the favorable geographic location of Mexico and its 12 FTA with 43 countries, NAFTA Volkswagen has a great opportunity to expand sales (Grant Thornton 2012). Another strategic objective is to strengthen its market position in North America which is an essential component of the Volkswagen Group’s global growth strategy (Volkswagen AG 2013). Apparently, North America has 17,167,000 cars of which 4.9 % are vehicles of Volkswagen (Volkswagen AG 2013). To fulfill its strategic objective with a high cost reduction it was necessary to enter the Mexican market.
b) VW regards FDI as one of its preferred entry modes. With the intention of penetrating both local and neighboring markets, VW has set up manufacturing plants in India aiming at establishing an “export base to the around regions” (Wen 2007, p. 51) in addition to its recent announcements of increasing the density of its production facilities network in Mexico (FDITracker 2013). Aside from FDI, Volkswagen has entered foreign markets through those modes considered less risky: strategic alliances and joint ventures. Throughout the portfolio of countries in which VW operates, it has formed strategic alliances with firms such as Daewoo Motor Sales Co for marketing purposes in South Korea. Additionally, VW entered several joint ventures and thus achieved the penetration of markets in both developing (e.g. Angola) and developed (e.g. U.S.) economies (Wen 2007, p. 52-53).
In this context, the formation of joint ventures displays VW’s prior mode of entry for the Chinese market and could not have been substituted by any other of the aforementioned entry modes. Given the legal obligation by Chinese authorities, VW entered two joint ventures in the 1990’s which have been extended ever since whilst continuously pursuing FDI by investing in both existing and new production facilities (Schrott 2012). In the case of China, these joint ventures displayed not only VW’s single -legally possible- entry mode for one of the world’s largest car markets, but also a source of production resources, as well as both knowledge and network relations for the Chinese automotive market (Schrott 2012).
c) As far as VW’s multinational strategy is concerned, one can clearly identify its global approach, characterized by its standardization practices
throughout the primary process and the bureaucratic operation that envelops its subsidiaries.
Figure 2: VW’s multionational corporate structure (Pötsch 2011)
In this context, VW has recently implemented the standardization of its IT infrastructure across unit and country boundaries, in addition to the cost-efficient MQB (see 2a) production system in place (Microsoft 2012). Such measures clearly indicate the identification of VW’s global standardization strategy given that it holds centers of excellence in each of its sales regions (see figure 2.). Nevertheless, VW still lacks the diffusion of knowledge and innovation across country boundaries and among subsidiaries in the same region, as a result of the centralization of R&D in its home country (Schmid et al.). Consequently, VW does not follow a transnational strategy which would include this aforementioned diffusion, but remains strategically centralized (Möller 2005), particularly in considering itself as “the innovative car maker from Wolfsburg [..]where [its] home lies” (Volkswagen 2013).
6a) As one of the world’s leading automobile manufacturers, VW sets high standards in both, social and environmental concerns and it was therefore not easy to find significant dilemma situations. Nevertheless, in many emerging countries, VW was confronted by the social issue of rising pressure to engage in behavior, which is considered strongly unethical in the Western World (Deutsche Presse Agentur 2005).
Figure 3: Worldwide Governance Indicators (http://info.worldbank.org/governance/wgi/mc_chart.asp#)
Engaging in corruption and bribery is common in countries with weak control systems and can give firms large advantages. With the high degree of power that comes along with the size of an influential company like VW, it is also harder to keep control over all business entities. Over the last decades, VW had to face several allegations of bribery and corruption. In 2005, information about a bribery scandal in India involving the former HR chief at VW’s Czech unit, Skoda, became public.
The firm reacted immediately by submitting the case to court (NDR 2013). Besides, VW also faces the environmental dilemma of increasing sustainability while keeping costs to a minimum. Furthermore, VW is pressured by several environmental organizations, particularly Greenpeace, who accused VW of not making sufficient progress on fuel efficiency. Over the past five years, VW reduced the carbon emissions of its latest models by 13% and introduced a range of new car models with cleaner engine technologies, thereby acting in accordance to the latest criteria (Handelsblatt 2012). In 2013, VW also agreed to reduce the CO2 emission standards of its newly produced cars to an average of 95g/km by 2020 and subsequently finally reached an agreement with Greenpeace.
* b) As a large MNE, VW has a number of stakeholders that need to be satisfied. Since its stakeholders are highly interrelated, the firm has to focus on strategic actions that are in accordance with all its stakeholders. *
* Figure 4: Stakeholder Dialogue (Volkswagen 2013)
* Even though the social dilemma of corruption can occur all over the world, it is prevalently perceived in emerging countries. The issue is therefore of global relevance and especially harmful to the company and its employees. Uncovering corruption is of utter importance for VW and in order to satisfy all stakeholders, the firm has implemented a specific system which enables employees and business partners to fight corruption (Volkswagen AG 2013). A globally standardized strategy in this issue is explicitly important since any form of fraud is unacceptable in VW’s home country. Volkswagen is therefore trying to counteract any mode of corruption, as the publication of such affairs involves highly undesirable consequences for the future.
* The increased need of sustainable processes and environmental awareness is also a global issue. Even though sustainability does not have the same significance in every culture, VW sets high standards for all the production facilities as well as its suppliers worldwide. By implementing the same norms for all employees, suppliers and other parties involved, VW wants to ensure the same quality and standards that it is known for in its home region. In order to maintain the credibility concerning sustainability and CSR, a globally standardized strategy is highly appropriate.
c) Both, VW and Unilever have remarkable similarity in allocating considerable value to social responsibility and sustainability. Unilever’s approach is very similar to that of VW as both companies have similar corporate governance manuals and strongly encourage ethical behavior. While Unilever actively tries to reduce its impact on the environment by trying to halve its carbon footprint by 2020, VW set the goal of reducing the CO2 emission of its new-car fleet by 30% until 2015.
Furthermore, both companies sacrifice retained earnings to invest in the improvement of sustainability and social responsibility in order to maintain a good public image. Moral philosophies and environmentally sound behavior are highly prioritized and both firms refrain from behavior that can be considered unethical in the host countries, for instance by implementing strict regulations for their suppliers. Improving corporate social responsibility policies, as well as developing more efficient processes, is favored from the viewpoint of the corporation and the society at large, so both firms’ approaches can be supported.
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