Student Research Projects/Outputs No. 052 VW in China Elisenda Pujol MBA 2010 China Europe International Business School 699, Hong feng Road Pudong, Shanghai People’s Republic of China 1 1. Overview of VW. a. History of the group b. The company today 2. China’s car industry 3. 4. 5. 6. 7. VW in China Recent Market car industry in China The fight for the market share VW current performance and future plans. Sources 1. Overview of VW History of the group VW Company was founded in 1937 during the Nazi dictatorship in Germany.
In the early 1930s German auto industry was still largely composed of luxury models, and the average German rarely could afford anything more than a motorcycle. In 1933, Adolf Hitler declared his intentions for a state-sponsored “Volkswagen” program (Volkswagen literally means the car of the people). Hitler required a basic vehicle capable of transporting two adults and three children at 100 km/h (62 mph). The new vehicle was designed by Ferdinand Porsche. During Second World War, production changed to military vehicles.
The company used 15000 slaves as a workforce. After the War, the British Army took control of the town of Wolfsburg, where the VW factory was; Ivan Hirst came from Britain and landed in Germany in the summer of 1945, where he had the original intention to scrap the factory and use the proceeds as war reparations. But Hirst found a pre-war prototype Volkswagen in a remote workshop on the site and realized that the factory could be used for producing cars for the British Army. He persuaded the British Army to place a vital order of 20000 cars.
That saved the company. From 1948, Volkswagen became a very important element, symbolically and economically, of West German regeneration. In the 1950s and 1960s, the famous Beetle and the Volkswagen Bus helped turn the company into an international success story. On the 70s, Volkswagen broke the world car production record: the Beetle surpassed the legendary Model T of Ford, with 15,007,034 units assembled. New models emerged: in 1974 the iconic Golf, then Polo, Passat, etc. Other successful products followed: the Scirocco, the Golf GTI, the Lupo and the Touareg.
The company today In 2008, Volkswagen became the third largest automaker in the world. Organizationally, Volkswagen Group consists of two divisions: the automotive division and the financial services division. Under the automotive division, there are several brands: Audi and Seat, which joined the Group in 1986; Skoda, acquired in 1991; Bentley, Lamborghini and Bugatti, exclusive elite brands, and Scania, a brand of trucks and buses. Hence, the product ranges is very wide; it covers nearly all classes of cars, from low-consumption small cars to luxury class vehicles.
VW cars are positioned as innovative, responsible, providing enduring value. Customers from all over the world associate this brand with quality, reliability and German engineering skills. The financial Services Division combines dealer and customer financing, leasing, banking and insurance activities, and fleet management. 2 Within the group, sales revenue and operating profits are broken down into four geographic regions: North America, South America, Asia/ Pacific and Europe/Remaining markets.
By regions, its strongest position has historically been Western Europe, where its current market share is 21%. China has been the second largest market for VW, only after Germany. Its lowest market share is in North America with 3. 9 percent. Although it still described itself as a “European oriented company”, in 1990 VW sold two-thirds of its cars outside Germany, and produced 40 per cent of its units overseas. In terms of operations, VW has 40 locations worldwide, 6 locations if which are in Asia. 3 The group employs almost 400. 00 employees worldwide, 45% of which are German, but this rate is likely to decrease, as a reflection of Volkswagen global expansion and the group particularly strong growth in the emerging markets; also because Germany has become the most expensive place in the world to manufacture cars. In 2010 VW group sold 7. 2 Million units of cars. Sales revenues were 126. 9 Billion euros and operating profits 7. 2 Billion euros. It has a global market share of 11. 4%. China’s car industry Before the Communist Revolution, Model Ts were sold in China and Buicks were prestige cars.
In the Mao era no one really owned a car. Only the elite had access to them. Engineers were assigned to truck factories because there simply wasn’t a market for passenger cars. During the pre-reform era, the lack of tourism and low disposable income among Chinese citizens also meant there was a low demand for taxis and other passenger cars as means of local transportation. As China began to open itself to world trade and economic reform in the late 1970s, change in the vehicle sector emerged as an important part of the country’s modernization drive.
With an opening to international tourism and foreign business in the early 1980s, the need for passenger cars rose quickly. As domestic production could not meet demand, total imports rose dramatically despite a 260 per cent import duty on foreign vehicles. Taxi companies in particular were looking for Japanese cars, such as Toyota Crowns and Nissan Bluebirds. China’s answer to the import increase was to sign a series of joint-venture passenger car production agreements: In 1983, American Motors Corporation (later acquired by Chrysler Corporation) signed a 20-year contract to produce their Jeep-model vehicles in Beijing.
The following year, Volkswagen signed a 25-year contract to make passenger cars in Shanghai, and France’s Peugeot agreed to another passenger car project to make vehicles in the prosperous southern city of Guangzhou. As late as 1985, the country produced a total of only 5,200 cars. Although joint venture agreements provided a window for foreign manufacturers to tap the China market, there were limits on their participation: vehicle manufacturers could not own a majority stake in a manufacturing plant. They also had incentives and pressures to source parts rom Chinese suppliers, with a 40 per cent local-content rate. The Chinese kept control of distribution networks for the jointly-produced automobiles. In the 90s, the market for both cars and trucks grew, as a consequence of Deng Xiaoping’s actions to speed economic expansion. As a consequence of the increase on GDP from 1992 to 1995 from 10 to 14%, both car production and imports rose dramatically. Likewise, the lower import tariffs contributed to a rise in cars crossing China’s borders. In early 1994, duties fell from 150 to 110 per cent for small cars, and from 220 to 180 per cent for large cars.
Rates fell further in the next two years, averaging some 80 to 100 per cent in 1996. From this year on, there were no further cuts in duties. Still, China continued to have quotas on the number of cars that could enter the country, with import licenses needed to purchase a foreign-made vehicle legally. The country’s 1994 industrial policy statement on the vehicle sector suggested that by the year 2000, domestic production should meet 90 per cent of demand, thus leaving only 10% for imports. In 1999, China entered to the World Trade Organization agreement, WTO.
This had serious implications for Chinese car manufacturers: 4 – Reduction of tariffs in passenger cars. By 2006, tariffs of import products would reduce as a maxiumum of 25%. Increase of 15% annual growth of licensing requirements until elimination in 2005. Elimination of local content requirements on accession. The import rights were granted for 3 years after accession; previously, foreign enterprise could not directly import products. Foreign firms would be able to distribute their cars, unlike before the WTO. Finance conditions also change as non-bank foreign firms could provide unrestricted auto financing.
The entry on the WTO marked a turning point in the China Car industry. The development of the automobile market further accelerated; In addition, early signs from consumer reaction to the WTO announcement in late November 1999, indicated the eagerness for foreign cars. Domestic vehicle sales temporarily fell, as some potential customers were apparently delaying a purchase in anticipation of buying an imported car in the years ahead. The January 2001 fall in duties led to a near doubling of total vehicle imports in the first half of the year.
After the entrance on WTO, domestic manufacturers had to improve their product to face a higher degree of foreign competition. VW in China The Volkswagen group recognized very early the long-term market opportunities in China. First discussions regarding Volkswagen’s involvement in the People’s Republic took place in 1978. In 1982 the basic agreement on building the Santana was signed by Volkswagen and the Shanghai Tractor & Automotive Corporation; at that time Santana was produced in South America and Europe. Just one year later, the model rolled off the production line. In 1984, VW signed a joint venture in China.
It was established in March 1985, by VW, Shanghai Automotive Industry Corp and China National Automotive Industry Corp. The fundamental goals of the joint venture included building the Santana and building up its own engine manufacturing plant. From the strategic point of view, VW’s investment in China proceeded from the desire to create a strategic and competitive position in the Asian market. VW aimed to achieve this objective by gaining a low-cost manufacturing site for automobile to be sold in Asia and for components to be incorporated in products manufactured outside Asia.
In addition to their capital, the Chinese partners made land, labor, buildings, materials and energy available to the joint venture. Volkswagen for their part committed themselves to designing the manufacturing technology, knowledge of production process and to passing on the necessary management expertise. The joint venture was equally shared: Chinese shareholders owned 50% of the interest and the German shareholders owned the other 50% (Volkswagen AG (40%), VW (China) Invest (10%), according to the Chinese policies of attracting FDI in car market. The contracted period of the joint venture was 25 years.
On April 12, 2002, the shareholders signed an agreement to extend the contract for another 20 years till 2030. The company is located 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, Golf and Touran. In 2006 there are 11000 employees working. 5 Volkswagen’s Shanghai plant produced cars that functioned as taxis, vehicles for government officials and transport for the newly emerging business elite. Actually, VW had a near monopoly in government and taxi sales for 20 years approximately.
That enabled VW to sell high volumes and thus harness economies of scale. The taxis became a permanent showroom for the brand, allowing VW to become well known and acquire credibility in China. The second joint venture was with First Automotive Works Group Corporation, in 1990. Agreements on manufacturing Audi 100 under license were signed on 13 August 1988, with this date marking the conclusion of negotiations lasting one year. The joint venture agreement included both the technology transfer for the production and planning of the Audi 100, and the setting up of after sales support.
Expertise was also transferred by providing training for some 500 Chinese workers at Audi in Germany. Furthermore, around 30 Audi employees were posted to Changchun to provide production support. Audi AG, with more than 20 years of development experience in China, was the first global premium car brand to realize domestic production in China. Production started in 1991. FAW-VW was the first large-scale passenger car maker in China, which involved a total investment of 11. 13 billion Yuan initially and increased to 23. 43 billion Yuan (US $2. billion) when the second plant was constructed in 2003. The ownership of the joint venture was 60% FAW, and 40% VW. The 40% of VW’s share is furthered divided between VW AG (20%), Audi AG (10%), and VW Automobile (China) Investment Co, Ltd. (10%). 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. By 2006, they had 8900 employees.
Apart from the two joint ventures that allow VW to operate in China, VW also built a network of joint ventures to supply accessory products. The ability of VW to manage and build long-term relationships with its joint ventures was one of the key factors behind its success in China for many years. Volkswagen also encouraged its foreign parts suppliers to create joint ventures in China, and their resulting product helped SVW achieve an 85 per cent local content rate by 1993. By the end of 2000, VW had an astonishing 53% of the Chinese passenger car market.
After the entrance in the WTO, officials at Volkswagen in Shanghai were optimist, and predicted that the government’s industrial policy goal of 90% domestic market share (limiting imports to 10 per cent of consumption) would stay in place. But after the entrance in the WTO, the market share collapsed, falling to 24 per cent in 2004 and finally to 15 per cent. Volkswagen China faced a crisis. Recent car market industry in China China car market capacity production has dramatically increased. In 1992, China’s annual automobile production capacity first exceeded one million.
By 2000, China was producing over two million vehicles. After China’s entry into WTO in 2001, the development of the automobile market further accelerated. Between 2002 and 2007, China’s national automobile market grew by an average 21 percent, or one million vehicles year-on-year. The graph below reflects the extraordinary evolution of the last decade: the evolution of car sales as well as the increase year over year. 6 20,000,000 18,000,000 16,000,000 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 ? . 6 1. 4 1. 2 1 0. 8 0. 6 0. 4 0. 2 0 number of sales % yoy In 2009, 13. 759 million motor vehicles were manufactured in China, surpassing United States as the world’s largest automobile producer by volume. Most of the cars manufactured in China were sold within China, with only 369,600 cars being exported in 2009. Part of the rise on sales was due to moves by the government to stimulate demand. These included cuts in sales tax for small cars. In 2010, both sales and production topped 18 million units, with 13. 6 million passenger cars delivered, in each case the largest by any nation in history. The number of registered cars, buses, vans, and trucks on the road in China reached 62 million in 2009, and is expected to exceed 200 million by 2020, though by 2050 it is expected to be surpassed by India. Of the automobiles produced, 55. 7% are from joint ventures with foreign car makers, as Volkswagen, Mitsubishi, General Motors, Hyundai, Nissan, Honda, Toyota, and the rest is being produced by local brands, BYD, Lifan,Chang’an (Chana), Geely, Chery, Hafei, Jianghuai (JAC), Great Wall, Roewe, etc.
The fight for market share VW lost market share dramatically after the entrance of the WTO. The entry of China in WTO and the consequent opening of the market played a big role on the lost, but there are also other causes behind. Market observers believe that VW’s offer had been growing old and losing appeal. The old favorite, the Santana, was seen as dated. There were also co-ordination issues between the two joint ventures; car models launched by the two ventures sometimes targeted the same consumer, meaning VW was in effect competing with itself.
One analyst also suggested that VW learnt bad habits from China’s state-owned enterprises, such as having no desire to make progress and failing to react to challenges. While price seemed to be an important selling point for middleclass Chinese buyers, technology was beginning to play an increasingly significant role in product differentiation. And in the 7 1990s, VW and the other early entrants sent outdated factory equipment to China to produce older models that were no longer saleable in the West. This practice was increasingly unsustainable.
And it got worse since new entrants, such as Honda, were introducing the latest version of the models in China, with only several months of delay from their home country. In fact, Asian carmakers were already stepping up production and several analysts predicted they would prevail in the Chinese market, replacing Volkswagen or GM. Japanese brands together had a 27. 4% market share in 2006, and have won a reputation based on quality and reliability. The traditional enmity between China and Japan scarcely matters when it came to Japanese nameplates.
Chinese brands have won market share by doing what Chinese manufacturers had done successfully in other sectors: competing on price. Three of the main Chinese brands are Geely, Chery and Lifan. The most successful model has been Chery’s QQ micro-car, which increased sales by 136 per cent in 2006, and which is priced at about $4,000. Such models make car ownership accessible to many new Chinese consumers. Altogether, Chinese brands captured 28. 7% of the market in January 2006. Most Chinese companies had already become proficient at making small, low-cost cars.
Gaining knowledge from joint ventures with Western partners, Chinese carmakers were catching up fast in terms of technology. That meant that sophisticated Chinese brands can not only target the Chinese market, but can also be aimed at the export market. VW current performance and future plans In October 2005, VW China announced its “Olympic” program to restructure the group in China. Its targets included: – To differentiate more between the two joint ventures, to prevent competing with itself, as long as more cooperation between the two joint ventures, in order to achieve synergies.
Introduce new products (10-12) specifically for Chinese customers. A program of cost reduction of 40%, including centralized purchasing and reduction of platforms to increase efficiency. A restructuring of the sales organization and development of more customer-centered sales channels. To “revitalize” the two joint ventures with SAIC and FAW, with the aim of “generating a definite win-win situation for all”. Even if the VW has not reached again its passed market share (currently only 16%), the market is growing so much that VW sales are very promising.
In 2009, they sold 1. 300 units and in 2010 1. 900 units, increasing 35% year over year. In China, the group is building two new vehicle plants in Yizheng and Foshan, both of which will become operational in 2013. The VW group is also planning a new production plant near Guangzhou that will employ 4000 people. Likewise, there are some rumors that VW will create a partnership with Great Wall, to create a low cost brand to target the segment of cars that is growing more, low cost cars, where VW have no presence so far. These types of cars are 20% of Chinese market.