Global competitiveness of the car industry

A double diamond approach of Volkswagen and Toyota


Scientific Study, 2009
13 Pages, Grade: 1,3

Excerpt

1. INTRODUCTION

1.1. Company Profile

Volkswagen AG was founded in 1937 in Wolfsburg, Germany. After World War 2, VW started the production of the world famous “Beatle”. Nowadays it is Europe’s top car manufacturer and the third largest in the world after Toyota and General Motors Company (Automobilproduktion 2009).

Ten brands of seven countries (Audi, Bentley, Bugatti, Lamborghini, Porsche, SEAT, Skoda, Scania und Volkswagen Nutzfahrzeuge) belong to VW. Each brand has an independent character and operates autonomously. VW’s product range varies from small and efficient cars to premium cars. Its commercial vehicles consist of SUV’s, Busses and Trucks.

VW is at the top of the game where efficient diesel technologies are concerned. With their introduced BlueMotion line, VW established one of the world’s most efficient and economically car engines based on diesel and liquefied petroleum gas engines.

Toyota Motor Corporation is the world largest car company seated in Tokyo, Japan. It too was founded in 1937. As Toyotas revenues dropped sharply in 2009, it is currently the tenth largest company of the world, after rank five in 2008 (Fortune Global 500, 2008, 2009).

Toyota is formed of the brands Daihatsu, Hino Motors, Lexus, Scion and Toyota. It introduced one of the first mass-produced hybrid gas-electric vehicles in the world and is market leader in this area. Toyota’s product range is also as diversified as VW’s.

1.2. Reason and Concern of this Research Study

Despite VW’s official goal being the world’s largest car manufacturer by 2018, there are numerous experts stating that this target will be achieved earlier. In the first nine month of 2009, VW halved the gap of sold cars between Toyota to one million. Reason being that VW’s sales shrunk only 5.5% due to the crisis, but Toyota lost about 20% (Financial Times Germany, 2009). Volkswagen benefited mainly of strong growth rates in China and the “cash for clunkers” schemes in Germany and Great Britain. Moreover, this year VW acquired the German sports car manufacturer Porsche[1] and is looking into acquiring Suzuki and the German commercial car company MAN.

Due to these circumstances, the oversupply in the car industry and varied and diverse analyzes of experts, I think we need the generalized double diamond model (Moon, Rugman and Verbeke 1995, 1998) to analyze all determinants of competitiveness for both VW and Toyota.

2. DETERMINANTS AND DESCRIPTIVE DATA

This study is based on Porter’s (1990) diamond model with the four determinants firm strategy, structure and rivalry; factor conditions; demand conditions; and related and supporting industries. Porter (1990) argues that domestic rivalry and clusters are more important than foreign competitors. Since multinational firms operate across the world and much of their revenues are generated abroad this state of affair lacks. This concern may only be right in very big economies like the United States (Rugman and D’Cruz, 1993). However, Moon and Lee (1995) rebutted also this state of affair.

I selected several domestic and international proxy variables for each determinant. They are distinguished and weighted to demonstrate their relative importance.

2.1. Firm Strategy, Structure and Rivalry

2.1.1. Domestic Firm Strategy, Structure and Rivalry

For the domestic firm strategy, structure and rivalry the determinants are strategy and rivalry. The proxies representing strategy are the increase of domestic sales (unites) in the last three years and future technologies. The latter tries to examine the development of future technologies as there will inevitably be a change from oil to renewable energies in the future. The rivalry variable has main domestic competitors as proxy (Table 1 goes about here).

2.1.2. International Firm Strategy, Structure and Rivalry

Since both VW and Toyota have a mature domestic market and selling most of their cars abroad, they have to consider international rivalry. In addition their operations are spread around the world, hence the international strategy and structure is also part of their competitiveness.

In this case I incorporated the variables global strategy and global rivalry. In addition to the rivalry proxies mentioned in section 2.1.2., I added the respected German ADAC quality ranking. For the global rivalry the number of main international competitors is taken (Table 1 goes about here).

2.2. Factor Conditions

2.2.1. Domestic Factor Conditions

In this study I took firm size, workforce and productivity as basic factor conditions. Firm size represents the company’s total revenues and assets in 2008, workforce contains of the number of employees and its average costs in 2008. Productivity will give us the two-year average of ratio of profits to sales and the return on investment (ROI) from 2007 and 2008.

Advanced variables are R&D investments and research facilities. First is described by a five-year average of R&D expenses over total sales and second by the number of research facilities (Table 2 goes about here).

2.2.2. International Factor Conditions

The variables for basic international factor conditions are international sales and overseas factories. International sales has the proxies international sales in 2008 and the three-year average of the international sales ratio. Overseas factories is given through the number of factories abroad.

The determinants for advanced international factor conditions are research facilities and new models. Research facilities is described through the number of overseas research facilities and the proxy for new models is the number of new cars launched in 2008 and 2009 (Table 2 goes about here).

2.3. Demand Conditions

2.3.1. Domestic Demand Conditions

In this study demand conditions are distinguished by size and sophistication. Size is presented through the determinant market size and sophistication by customer sophistication and customer satisfaction. There are four proxies for the market size. First, the population of the age group of 15 to 64. Second, the three-year average of GDP. Third, the four-year average of real GDP growth rates and finally the sold car unites in 2008.

Customer sophistication has an OECD student assessment and a three-year average of GDP per capita as proxies. Customer satisfaction is reflected through the JD Power Customer Satisfaction Index (Table 3 goes about here).

2.3.2. International Demand Conditions

As VW sells its products in 151 countries and Toyota in 171, international demand conditions are necessary to measure competitiveness accurate in this framework. For the international size of demand, I use market size as variable. It contains of the two-year average of sold units overseas in 2008 and the three-year average of international sales ratio.

International sophistication is composed of customer satisfaction and diversification of markets. The proxy customer satisfaction is composed of the world’s best corporate reputations. Diversification of markets is explained through the ratio of numbers of countries of sales over the two year average of total export amount. A high ratio of diversification of markets may indicate a highly sophisticated international market (Moon and Lee, 2004), (Table 3 goes about here).

2.4. Related and Supporting Industries

2.4.1. Domestic Related and Supporting Industries

Porter (1990) defines related and supporting industries as those where companies coordinate and share activities in their value chain or involve products that are complementary. In addition through a smooth interaction with suppliers (forward and backward linkages), firms can raise their competitiveness. Moreover, sharing information between end-users and suppliers can create innovation and upgrading (Moon and Lee, 2004).

As domestic determinants I chose infrastructure and international competitiveness of education. Infrastructure is measured first by the ICT Development Index. It examines the quality of information and communication technologies. Secondly, it is measured by the World Economic Forum overall infrastructure index. This index describes the quality of physical infrastructure, such as railroads or streets. The international competitiveness of education is composed of the OECD student assessment of 2006 (Table 4 goes about here).

2.4.2. International Related and Supporting Industries

For international related and supporting industries I took the determinants credit, international competitiveness of education and internationalization. Credit is comprised by the S&P long term ranking and the firms’ equity ratios. The international competition is measured again by the OECD Student Assessment. The grade of internationalization is composed of the number of countries with branches and the number of component complexes (Table 4 goes about here).

3. EMPIRICAL RESULTS

3.1. Calculations

For each determinant of the generalized double diamond model I took descriptive data to describe the competitiveness of VW and Toyota (Table 1-4). For both the domestic and the international diamond I translated the quantitative data into scores (Table 5 goes about here). Therefore I weighted every proxy due to its importance. The proxy with the higher amount, according to the descriptive data, is given full score and the other proxy is given a relative lower score. In order of making a score scale from zero to ten, I have multiplied a value of ten to each weight.

For instance, there is the domestic market size proxy sold car units in 2008. As Japan has the higher amount with 3.2 million and the weight for this proxy is 0.1, Toyota gets the full score of 1 (0.1 x 10). In Germany there were 3.09 million sold cars in 2008. This is 97% of Toyotas score and therefore Germany gets the lower score of 0.97 (0.097 x 10).

After drawing the domestic and international diamonds I merged both to explain the global competitiveness of VW and Toyota. The scores for each determinant of all three diamonds are summarized in Table 5.

To keep in mind, it is not possible to separate national and international activities completely as most operations of companies are interrelated (Moon and Lee, 2004). Moreover the weighting has to be considered. In my calculations I weighted each proxy in the way it seems to be important. Hence, the weighting is the only subjective part of this research. Furthermore I think the weighting differs from case to case and I am not sure, if all four determinants of the diamond should be weighted equally.

3.2. The Domestic Diamond

The domestic diamonds of VW and Toyota differ except related and supporting industries. Concerning this determinant, both have a high level of education. Japan is stronger in information and communication technologies, Germany strikes in physical infrastructure. For domestic factor and demand conditions Toyota has advantages. Analyzing the factor conditions Toyota has benefits from its bigger size (e.g. assets, employees, revenues). Nevertheless VW has a higher productivity and a higher R&D ratio of total sales. For demand conditions Toyota has one more time advantages due to its higher population. GDP per capita, growth rates and the customer sophistication do not differ significantly. VW’s domestic strength is firm strategy, structure and rivalry.

Both are leading car companies concerning future technologies. VW has benefits with highly fuel-efficient diesel engines, Toyota is market leader in hybrid cars. However, in the medium term hybrids with diesel engines will be the key technology. At the current car show in Los Angeles VW presents its new model “Up Lite” which will enter the market in 2011. It has a hybrid diesel engine and needs only 2.44 litres on 100 kilometres. Toyota is going to launch its first hybrid diesel car (Prius3) in 2010.

Lastly, VW gains advantages due to a higher competition in Germany (Figure 1 goes about here).

3.3. The International Diamond

For the international diamond VW has again advantages for firm strategy, structure and rivalry. Nowadays VW is very competitive concerning the quality. After a long period of Toyota’s leadership in quality VW caught up and even outpaced Toyota. Determining the other corners of the diamond Toyota performs better. Coming to the demand conditions, a special focus should be placed on the brand recognition. Toyota has a much higher reputation. Therefore VW should try to further improve its image as one of the main goals. To keep in mind, Toyota has a higher long term credit ranking and higher ratio of equity. (Figure 2 goes about here). An ongoing aggressive international strategy will be necessary for a further catch-up.

[...]


[1] Porsche’s sales were not added to current calculations concerning VW’s sales.

Excerpt out of 13 pages

Details

Title
Global competitiveness of the car industry
Subtitle
A double diamond approach of Volkswagen and Toyota
Course
International Business Relations
Grade
1,3
Author
Year
2009
Pages
13
Catalog Number
V168107
ISBN (eBook)
9783640850068
ISBN (Book)
9783640850358
File size
613 KB
Language
English
Notes
Seoul National University
Tags
VW, Toyota, future, competitiveness, competition, double diamond model, car, industry, volkswagen, international, sales
Quote paper
Bachelor of Arts Lukas Brinkmann (Author), 2009, Global competitiveness of the car industry, Munich, GRIN Verlag, https://www.grin.com/document/168107

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