Volkswagen’s International Market Entrance Strategy

International Dimension for Business

Table of Contents

• Introduction
• Company History
• Company analysis
• Financial Situation
• Growth Strategy
• Environmental Analysis
• PESTLE analysis
• CAGE analysis
• Choice of foreign market entry
• Conclusion
• Reference

Introduction

The twenty-first century is known as an era of rivalry, effort, and the pursuit of power. With the global economy opening up, virtually all businesses, large and small, old and new, are being encouraged to expand internationally (Aswathappa, 2010, p.6). Companies are becoming more adamant about their plans to expand globally. The business faces a variety of difficulties as it moves from a local to an international perspective (Turner & Johnson, 2009, p.2). Setting up infrastructure in a foreign market, buying goods from international vendors, and selling to foreign consumers are all examples of difficulties. The current trend of reducing international trade barriers has been one of the most significant. The World Trade Organization, the General Agreement on Tariffs and Trade, and the International Monetary Fund are all working to boost global trade intensity.

Globalization has recently been a hot topic among businesses. Globalisation is a worldwide phenomena that is described as the coordinated and synchronized flow of products, services, resources, money, and labor. A worldwide relationship between nations develops as a result of this process, ensuring effectiveness in the use of the world’s scarce resources (Milward, 2003, p.10-16).

The current research focuses on the international component of business, or, in other words, the alternative to local listings for doing business. The study will show international market entry techniques such as foreign direct investment, franchising, licensing, and exporting. The investigation will also look into Volkswagen’s international market entrance strategy. Because it is one of the most prestigious international corporations, this organization was chosen to perform the research. A multinational business is defined as one that works both in its native country and in other countries. The choice to select this firm was influenced by its rich history, brand image, and status as the world’s biggest car manufacturing and marketing organization.

Company History

The business was founded in 1937 as ‘Gesellschaft zur Vorbereitung des Deutschen Volkswagens mbH.’ The firm is renamed ‘Volkswagenwerk GmbH’ the following year. In Wolfsburg, Germany, work on a car-making factory began in 1938.

The company’s output shifted to guns and armaments during the Second World War. At the time, the factory employed approximately 20000 forced laborers. Volkswagenwerk was handed up to the British military administration after World War II ended. The Volkswagen Beetle was first mass-produced during this time period.

The company’s product range was expanded throughout the 1950s. In the meanwhile, the Volkswagon bus was put into production. The bus, known as the VB bully, is still popular in current century because to its multi-functionality. With each passing year, the business approaches the one millionth Volkswagen Beetle produced milestone. Employees and dealers from all across the nation and the world came together to commemorate this historic day in a unique way.

In 1972, the firm set a new record for automobile production, with a total of 15,007,034 vehicles produced. With its model ‘passat,’ the firm gradually shifted towards the manufacture of new era automobiles in 1973.

With that start, the business shifted its focus to the manufacture of a wide range of new-age vehicles. Golf was constructed inside the company’s industrial divisions at the time. The car was an instant hit in the market, the demand rose to sky high. In that very year the company also launched porty Scirocco which was a sport car and continued its production till 1981.

The mid 80’s witnessed the birth of second-generation golf which was designed mainly with automated features. The company again made history in the mid 90’s with the car Lupo 3L TDI, the first ever car to consume only 3 litres of fuel in its100 kilometre journey (Volkswagen makes automotive history, n.d.).

Company Analysis

With the passage of time the company has added many feathers to their cap. Volkswagen group successfully owned nine brands they are Bentley, Bugatti, Volkswagen, Audi, Lamborghini, SEAT, Scania, Skoda and Volkswagen commercial vehicles. The brands operate as an independent entity in the market with their own characteristics. The group has its plant set up in 13 European countries and 6 more countries spread across America, Asia and Africa comprises of 48 industrial units. The company employs around 360,000 peoples across the globe. They manufacture around 25,400 vehicles a day. Volkswagen sells its product line to 150 countries around the world. The product line includes Volkswagen polo, Volkswagen Eos, Volkswagen Tiguan, Volkswagen sharan, Volkswagen passat, Volkswagen touran and Volkswagen Phaeton among others (Volkswagen, n.d.). The product line ranges from low-emission compact automobiles to high-end luxury vehicles. The business provides commercial vehicles such as pick-up trucks, buses, and heavy trucks.

The company uses its tagline ‘Das Auto’ which means ‘for the love of automobile’ is a simple and attractive tagline. The competitors of Volkswagen include companies from different parts of the world. The main competitors are BMW, Mercedes, Toyota, Ford, Lexus, Renault and Porsche.

Financial Situation

In the market, the corporation has a solid financial position. The sales revenue has been drastically increased in 2011 compared to the preceding year. The sales volume of Volkswagen in the year 2010 was €61,809 million and it increased to a whopping €77,767 million in 2011. The most vital ratio of the company lies in the factor of profit after tax. The difference between the two years was simply unmatchable. The profit after tax in the year 2010 was €1,824 million whereas in 2011 profit after tax was €6,496 million. This suggests that the company has progressed immensely and holds a strong financial position. In a recent survey conducted by KPMG, they founded that Volkswagen is the only company who is maintaining its faster growth rate. The survey has also outlined that the company will be achieving a high growth rate in the years to come. Presently Volkswagen is ranked 3^rd in the list of car manufactures on the basis of production just behind Toyota and General Motors. The company enjoys a steady global market share of 11.4%.  The company also proposes to spend €62 billion from 2012 to 2016 in order to boost up the production capacity and launch new cars in the market. The primary bid is to surpass Toyota Motor corp. and General Motor co. and become the world’s biggest car manufacturer. Investments in machineries, industrial units and properties alone make up €49.8 billion. The company is also spending high amount in the maintenance of ecological balance and sustainable growth of the organisation. Mr. Winterkorn CEO of Volkswagen also added that their main focus will be on extension of plants in China and emerging countries like India and Brazil.

Growth Strategy

For the years 2010 to 2018, the business has laid out a growth plan. The growth strategy summarizes that the company will be positioning themselves as a global leader in economic and environmental factors within the automobile sector. The company has also delineated four goals that are proposed to make Volkswagen as the most flourishing and enthralling automakers of the world by 2018.

The four goals are illustrated below:

• The company wants to apply innovation and upgraded technology to their products in order to become the global leader in the customer satisfaction process and quality of the product.
•   In order to increase the revenue, the company aims to increase the unit sales of cars to 10 million in a calendar year. The primary objective of increasing the sales volume is to grab high market shares in the growth markets.
• The company also proposed to increase the return on the revenue before tax to minimum 8% so as to make sure that even in tough market situations the company remains in strong financial position.
• The company also aims to be the apex employer across all the regions, brands and companies. This is to make sure that the company operates with the best team in the marketplace.

Recently the company as a part of their growth strategy expanded in emerging markets like India, Brazil to have the most from those geographical segments.  This has been cited as the reason why the company has ensured the leadership position in the Chinese market in the late 2011.  In order to make it happen they executed some strategies such as expanding their operation to the southern and western china and appointing large number of dealers in those places. The sales figure automatically took off. The promotional strategy and product strategy was very sound. In the product segment the company manufactured eco friendly and fuel efficient cars, thereby making sure the customer satisfaction as the topmost priority of the company.

Apart from the achievements in Chinese market the company has successfully started its operation in India. The sales figure increased substantially in 2011 compared to 2010. The company has been able to deliver a mere 25,950 cars of its groups including Volkswagen, Audi and Skoda. But in 2011 the sales figure climbed to 71,895 cars. The growth rate was calculated to almost 180% per annum. There are around 160 dealerships available across India. The hike also took part in Russian market as well; Volkswagen group has an annual growth rate of 69% in Russia. The group is also feeling the need of additional capacity due to strong growth. Among the recent events Volkswagen has launched its Golf blue-e-motion which is an electric charged car and environmental friendly as they are focusing on the lesser emission the Co₂ to 30%. Modular Transverse Matrix (MTM) is also playing a decisive role in the mentioned process (Volkswagen news, n.d.).

The relevant and important factors which are serving the group to get competitive advantage over the competitors are the list of environmentally friendly vehicles and the exceptional standings of the individual brands in the market place. The focus is to develop new ecological standards and lightweight production. Apart from this the company also forecasted to increase its sales by 40% in the year 2012.

Environmental Analysis

External environmental analysis is the task of studying the environment which remains exterior to the organisation. The external environmental analysis is conducted to know the situation of different factors pertaining to a market or a specific country. In the context of this research paper it has been assumed that Volkswagen will be entering the Australian market as a policy of their business expansion. But in order to test whether the expansion will be feasible to the company PESTLE and CAGE analysis has been conducted.

PESTLE Analysis

Political, Economical, Social, Technological, Legal, and Environmental (PESTLE) elements are acronyms for Political, Economical, Social, Technological, Legal, and Environmental aspects. It’s a program that analyzes the surroundings from the outside. The analysis is shown below.

Political – The political variables reflect the host country’s current political stability. Political changes, tax policies, changes in trade restrictions, tariffs, and government stability are all variables to consider. In comparison to other countries, Australia’s government is extremely stable. The government operates under the federal system. Tax policies and tariff systems are both well-structured.

Economical – The economic factors include interest rates, gross domestic product, inflation rate, unemployment rates and growth rate of the economy. Australia ranks among the top developed countries. The GDP is approximately $44,000 per person. Agriculture, retail, and tourism are among the country’s best performers.

Social – The social factors include trends in demographics such as population size, age, cultural factors and consumer activities. Australia ranks in the 6^{th place} according to the total area. The population of the country nearly calculated to 19,913,144. The country generally speaks English as the major language. Australia belongs to a multi-cultural and multi faith society. There are existences of all types of consumers in the market. Some prefers to spend extra for a product which will give them satisfaction. Customers who choose low-cost, high-quality goods, on the other hand, are in the minority.

Technological – Technological factors include rate of new product development, increase in process automation and other technical infrastructures such as technology inducements, technology transfer, impact of internet and R & D activity. In Australia information and communication technology i.e. the use of internet in the household has increased rapidly. Australia also spends very high for the development of technology. Apart from the mentioned data one interacting fact is that Australians are considered as tech-savvy persons. They always love to try out new and innovative products. The products can be in any form may be as a gadget, a car or even mere toys.

Environmental – The environmental factors of a country includes natural phenomenons such as natural disasters, weather patterns, climate etc. Australia mainly comprises of semi arid or desert areas. The climate of Australia varies largely from one place to the other. The climate ranges from below 0^o C to place nearly 50^oC.  

Legal – The legal factors of a country includes the laws for employment, favouritism, biasness, health and safety and antitrust. The host country has a very well structured legal framework.

CAGE Analysis

Cage analysis is an analysis tool which is used by organisations in order to develop international strategies. Whenever a company looks after the opportunities to undergo international expansion factors such as cultural difference, geographical distance, economic factors are taken into account and thorough analysis is taken up for the mentioned factors. Therefore to analyse these factors CAGE analysis is the most appropriate tool. CAGE stands for cultural, agricultural, geographic and economic forces. The analysis mainly determines how the similar markets act differently in foreign countries. It also assesses the risks and other barriers of the host country.

Cultural factors – Cultural factors plays an important role in the international expansion of an organisation. It helps to generate a better connection with the customers of the host country. Geert Hofestede has proposed five dimensions namely Power distance, Individualism, Masculinity/Femininity, Uncertainty avoidance and Long term orientation. In this respect both Germany and Australia are almost exhibit similar characteristics.  Therefore Volkswagen will not face many difficulties in the cultural aspect. The statement can be justified with the following diagram.

Figure 1: Comparison of Cultures

(Source:  Geert Hofestede, n.d.)

Administrative – The Australians follow a federal constitution monarchy. The country maintains a positive outlook towards foreign companies. However the government of the country also takes measures for safeguarding its domestic industries. Therefore for Volkswagen to enter the Australian market, they should abide by the rules and regulations of the country.

Geographic factors – Geographically Australia is situated at the southern hemisphere. Australia is the world’s 6^th largest country on the basis of its area. Australia offers world class infrastructure such as Rail, dockyards and international airports. The infrastructures will help the companies looking to set up their business in the country. As for Volkswagen availability of docks and international airport will help them in supplying the raw materials as well as the final products.

Economic factors – Economically Australia is among the top developed countries of the world. The GDP per person is nearly $44,000. The GDP is almost $1.6 trillion. It represents 1.7% of the world’s economy. Australia’s economy is mostly dominated by its service sector. However the country depends highly on agricultural and mineral resources for the development of its economy. Therefore foreign companies like Volkswagen hold an excellent opportunity for successful operation in the country.

Choice of Foreign Market Entry

In order to enter foreign soil a company must choose a suitable mode of entrance. The mode of entry is the way a company enters a foreign market. There are different modes of entry namely Exporting, Licensing, Direct investment and Joint ventures.

Exporting – Exporting is the marketing and direct sales of commodities from one country to the host country.

Licensing – Licensing is the way by which the company permits another company of the host country to use its intangible properties such as logo, trademarks, patents and the technique of production.

Direct investment – Direct investment is the direct possession of amenities in the host country. The company transfers the technology, property and employees.

Joint Venture – A joint venture is the mode of entry by which the company and an organisation of the host country jointly does the business operation.

In this context the company must go for a Joint venture mode as this mode will help the company in the following way:-

• It provides more flexibility while entering the market.
• Risk gets shared between the two companies.
• Technology and product development process also gets shared.
• The political turbulence can be minimized by the presence of the organisation from the host country.

Conclusion

The research has been conducted in order analyse or to look after the possibilities of Volkswagen’s expansion in the Australian market. In order to do the study different types of analysis have been conducted namely PESTEL analysis and CAGE analysis. After conducting the research processes and analysing data it can be easily concluded that Volkswagen has all the favourable conditions for entering the Australian market. The Australian market offers all the necessities in the form of infrastructure, technology, political scenario etc. for a foreign firm to enter their country. It is highly recommended that the company must enter the market with joint venture mode. This mode of entry will offer them large benefits as compared to the other available modes.

Reference

• Aswathappa. (2010). International Business. India: Tata McGraw-hill Education.
• Geert Hofestede. (No Date). What about Australia. [Online]. Available at:  http://geert-ofstede.com/australia.html. [Accessed on 01 May 2012].
• Milward, B. (2003). Globalisation?: Internationalisation and Monopoly Capitalism: Historical Processes and Capitalist Dynamism. UK: Edward Elgar Publishing.
• Turner, C., & Johnson, D. (2009). International Business: Themes and Issues in the Modern Global Economy. UK: Taylor & Francis.
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