Shanghai Volkswagen: Time for a Radical Shift of Gears

1 Apply SWOT-Analyses to SVW in 1985 and 2004 and evaluate the Match between SVW’s Strategies and its Internal and External Environments at both Time Points.

1.1 SWOT Analysis 1985

1.1.1 Strengths

In SVW’s early days, the availability of an existing network to undertake sales and distribution was an advantage to the joint venture. SVW had strong relationships to the government, since SAIC was under the government’s supervision. That helped to find a big market share in China and get large contracts with the government, related companies and taxi fleets.

With the technology and know-how of VW, SVW had a big plus point compared to other local producers.

1.1.2 Weaknesses

SVW used a simple-technology and simple-product strategy. Furthermore there was quite a high cost structure, while sales and the production team where weak. How-ever it could work as long as there were no strong competitors on the market.

1.1.3 Opportunities

There were just a handful of state-owned car plants that produced a few outdated models in a low-tech inefficient environment. There was no company that produced safe passenger cars with an innovative design. Since there were no foreign car pro-ducers in China, SVW could use the “first-mover advantages”.

Another opportunity is related to the infrastructure of China. If the government im-proves the infrastructure, the Chinese people are going to see a sense in buying a car in future.

1.1.4 Threats

Many doubted that it would be possible to produce and sell at least 100.000 units per year in China in order to achieve the economies of scale necessary to produce a re-turn on investment. Furthermore experience in other developing countries suggested that a GDP per capita had to reach $ 4000 to $ 6000 before large-scale family car buying could take place. When SVW started to produce the GDP stood at just $ 291 and there was just a production of 5.207 units annually.

There are not enough and proper infrastructure to use a car in China as one would do in Europe. Therefore Chinese people maybe do not see any point in buying a car.

Chinese workers so far did not have the skills and experience that they would need to produce a high quality car as VW produces in Germany. Furthermore the company would have to invest huge amounts in production-technology.

1.2 SWOT Analyses 2004

1.2.1 Strengths

So far SVW was market leader in China for 20 years. People know the brand and maybe already had a SVW. Even SVW lost its market leading position in June 2004; this was just a one-month ranking.

Consumers in China develop preferences more on emotional factors and intangible attributes rather than tangible attributes and furthermore they are extremely brand-conscious and placed great importance on industry leadership. So far SVW was in-dustry leader and Chinese consumers know the brand, therefore this is a major strength toward their competitors, since 80% of them are the first time on the Chi-nese market.

1.2.2 Weaknesses

SVW just used simple-technology and a simple-product-strategy so far. Now the con-sumer profile underwent a major transformation. In former years buyers had been state-owned enterprises and governmental organisations while in 2004 the major buyer groups are private persons.

Since consumers started to search for more variety and other global automakers are planning to introduce new models and upgrades in China, SVW gets pressure to ac-celerate its production of new models. People in China are very price consciousness. Since SVW has a high cost structure due to product over-designing and two different supply bases, and a low profit per car, this fact could get SVW in trouble.

SAIC is not just with VW in a joint venture. General Motors and VW are both also in a Joint Venture with First Auto Works (FAW), a major competitor of SAIC. This fact can lead to internal fights since VW is always afraid of technology transfers and would have liked to consolidate the two joint ventures with SAIC and FAW.

Another weakness of SVW is the lack of control as far as sales and marketing is con-cerned. The sales force was only used to selling to public organization instead of serving private customers. And compared to General Motors, SVW failed to build up an innovative and competent sales and marketing team.

1.2.3 Opportunities

In 2000 China had fewer than 10 passenger cars on the road per 1000 people. When we look at Taiwan with 250 or Germany and the United States with 500 cars per 100 people, there is a significant potential. This is also confirmed by an annual growth rate of 30% of car sales in the last years.

1.2.4 Threats

In the previous years competition on the Chinese market grew. Almost all major automakers are on the Chinese market and announced their expansion plans. In 2010 the Citigroup projects a designed passenger vehicle capacity surpassing 10 million units. State owned automakers mostly formed joint ventures with foreign com-panies and are expanding their capacities as well. Furthermore they improved their competences.

Private companies, which were producers of lower-end segments and second-tier players in the short term, now could get strong competitors. Those companies prof-ited from their flexibility and low cost structure in former years and maybe now get a strong force on the market.

2 Identify the Advantages and Disadvantages at SVW as a Pioneer in China’s Passenger-Car Industry. Why has SVW lost many of the Advantages it once enjoyed, and what are Sources of a Sustainable Competitive Advantage in China’s Passenger-Car Industry?

In 1985, Volkswagen was not afraid of entering the Chinese market although other important car manufacturers doubted that it was possible to achieve sustained suc-cess in that country. Despite some disadvantages that VW had to face, the company was very successful in China especially during the first years.

2.1 Advantages

When the company Volkswagen AG and Shanghai Automobile Industry Corporation (SAIC) formed the joint venture Shanghai Volkswagen (SVW) it was the first time that a foreign investment was made in the Chinese passenger car industry. As SVW could realize a huge profit and economies in that closed market it is obvious that the company benefited from being the first mover.

It was advantageous for VW to be able to form this joint venture with SAIC. As SAIC had strong connections to the local government it was no problem to get orders from pubic organisation, state-owned taxi companies and governmental institutions. That was important for SVW as GDP per capita was very low in China and consequently there were hardly any private buyers.

As VW was a pioneer in the Chinese automobile market and in fact the only company that was selling cars, it was not confronted with the pressure of competition. Working with a simple-product strategy and simple-technology was no problem. SVW could achieve a high profit although it just sold one type of car, which was called Santana.

2.2 Disadvantages

However, there were also some problems that VW had to deal with, when it entered the Chinese automobile market. As mentioned above GDP per capita was very low. That was absolutely unprofitable for VW, as the company could not sell many cars to private buyers.

Moreover the infrastructure of China was in a bad condition when VW started to work in that country. Especially the highway system was not well constructed. As a conse-quence there was no reason for people in China to buy a car.

In addition VW entered a market that was affected by low-technology. Dealing with an inefficient environment that lacked any product-development capacity was a real challenge for the VW.

2.3 The Loss of Advantages

In 2001 it was the first time that SVW lost its position as market leader. That was the beginning of a downward trend for the company.

GDP per capita rose significantly between 1993 and 2003 which means that people got richer and as a consequence it was possible for them to buy cars. In fact, private buyers became more and more important whereas state-owned companies formed the minority of car buyers. Those private buyers were very brand-conscious but brand loyalty was not important for them. Moreover many of them just bought cars because of emotional factors. For SVW the changing market was a real challenge and the company lost the advantage of working well with their simple strategies.

Moreover, the rising wealth in China aroused interest in other car manufacturers and consequently SVW had to deal with fierce competition. As SVW was no longer the only company selling to a closed market it had obviously lost the advantages of being the first mover.

2.4 Sources of Sustainable and Competitive Advantages

For an industry that has to deal with a lot of competition it is very difficult to achieve sustainable and competitive advantages. Although it may be difficult it is not impossi-ble. First of all it is important that a company has a special strategy or product that is difficult to copy. Moreover a company could also achieve sustained success if costs and therefore prices are lower that the prices of the competition.

3 What were some Important Challenges Volkswagen AG encountered in the Chinese Market that might not have been present in its Domestic Market? How has it dealt with these Challenges?

3.1 Leadership Position

First of all there is the loss of the leadership-position of Shanghai Volkswagen. 1985 Volkswagen AG and the Shanghai Automobile Industry Corporation made the first Sino-German joint venture of car makers. Every other automobile enterprise found that the market is too risky. Due to this reason sales figures increased enormously after some time and one year later SVW had a market share of nearly 70%.

Some years later, more and more automobile firms established themselves in Shanghai. As they were more flexible than SVW, they were strong competitors. As a result, SVW lost his first-mover advantage as a result of a high-cost structure. The high-cost structure was based on the assembly of complete knocked-down kits which were produced in Germany. This requires an enrolment for the Chinese workers and leads to high sales prices. Since other competitors SVW decreased their prices to a lower basis, the market share of SVW sunk to 20%.

3.2 Simple Technology and Product Strategy

Since the technology and product strategy of SVW was simple, they were not able to reach the expectations of the Chinese customers. Customers expected attractive ve-hicle designs, comprehensive mobility and full service. SVW insisted on the assem-bly of complete knocked-down kits. They were produced in Germany under German standards.

This strategy, which was successful in Germany, did not work in China as the model was not adapted to local needs. Above all the employees had to be trained to use the modern equipment which led to high costs. Only 20 years later, the first new model after the Santana, Passat, was produced. This was even the first step to change the simple technology.

Furthermore the Chinese infrastructure is completely different to German ones. In China live a lot of people but they suffer from a lack of space. Moreover quality checks were done under German standards. Due to other conditions, they were wrong. Therefore research corresponding to local needs is going to be very important as the products should correspond to them.

3.3 Government Relationship

Government relationships no longer increased the sales figures as more and more private consumers were interested in automobiles. Even existing networks no longer increased sales figures. To satisfy the interests, above all the private consumer ones, SVW had to establish qualitative sales teams. In 1997 the first distribution centres opened.

Moreover Chinese automobile industries had to deal with the remove of nearly all tariff and non-tariff barriers after the WTO entry. The competition became more and more difficult as the industry was no longer protected by the government. Further-more an Automotive Industry Development Policy was introduced in 2004. The indus-try was confronted with a lot of new challenges concerning financing and production.

3.4 Weak Sales and Production Teams

Changes in infrastructure were necessary. Sales and after-sales responsibilities were more and more important but the teams of SVW were very weak. As a consequence SVW installed special centres called Regional Sales and Service Centres. SVW rec-ognized that experiences concerning marketing and sales service were very impor-tant to guarantee satisfied customers. As a consequence skills of the sales teams had to be improved and up to now SVW had 24 centres which deal with sales plan-ning, public relations, financing and a lot more. The employees had to be always up-to-date, as the strong competitor GM had competent sales teams from the first day on.

4 What Strategies should Marcus Schuetz, the Director of Change Management, recommend to SVW’s Senior Management in order to initiate and implement Changes that will revitalise the Automaker and strengthen its competitive Position?

Since SVW was market leader in China for 20 years, the brand is very widely known and this represents one of their major strengths. Chinese consumers are said to be very brand-conscious and exactly this brand-consciousness should be increased even more. SVW should promote their reliable, high-quality cars that offer more se-curity compared to other producers. Since German cars have an excellent reputation worldwide, new customers interested in upper-class cars should be one of their tar-get groups.

From 2004 on, SVW has an advantage to smaller foreign carmakers, since the new automotive industry policy introduced a minimum investment size for a new auto pro-ject including an R & D organization. As a consequence, this raises the entry barrier for small players and reduces the competition in the automotive industry in China.

In 2001, China became a member of the WTO, which means that a fair competitive environment for all players has to be ensured. As a consequence, China has to re-move most tariff and non-tariff barriers in the automotive industry by 2006.

It is obvious that SVW has to react in order not to lose even more market share after the full conversion of WTO rules. Since the automotive industry was one of the most protected industries so far, every company faces the challenge of an open market in China. In future, there are hardly any restrictions any more and the existing 130 car manufacturers are going to be restructured to 5-6 big groups.

Therefore SVW has to decide on further consolidations. Since SAIC and FAW are bitter competitors, it would be better not to try to consolidate them any longer. There was no way of establishing synergies between SAIC and FAW so far and therefore cost could be cut considerably by finding cheap supply firms for both joint ventures and negotiating long term contracts.

By separating SAIC and FAW, internal problems could be solved since General Mo-tors is also in a joint venture with FAW and VW was always afraid of sharing techno-logical knowledge. SVW should try to keep its technological leadership position and keep on producing cars in the middle class and upper class.

To correspond to the cost-consciousness of Chinese customers, a consolidation with a Chinese low-cost car manufacturer could create a competitive advantage in the competition with other major automakers. Like this, SVW would not have to develop and design an own cheap line of cars but could use and if necessary improve the existing car of a future partner.

Despite of the declining growth in the automotive industry, the annual growth rate is still 30 %. This means an enormous potential for selling cars compared to other mar-kets like the United States or Germany. Since private buyers are becoming more and more important, SVW has to build up a competent and highly qualified sales force as soon as possible. At present, major competitors like General Motors dispose of a more competent sales force and therefore SVW has to catch up that drawback.

Due to increasing environmental problems in China, SVW is about to design a car with hybrid technology. The development considers specific Chinese requirements and should correspond perfectly to city traffic. This project underlines even more the technological leadership of SVW compared to its competitors and fulfils even the fu-ture requirements for environmental-friendly cars.