Volkswagen - production strategies for the US market

Table of Content

1 INTRODUCTION FEHLER! TEXTMARKE NICHT DEFINIERT

2 INFORMATION ABOUT THE COMPANY - INTERNAL FACTORS
2.1 CORPORATE GOALS AND OBJECTIVES
2.2 CORPORATE STRENGTHS AND WEAKNESSES

3 INFORMATION ABOUT THE PRODUCT FEHLER! TEXTMARKE NICHT DEFINIERT

4 INFORMATION ABOUT THE TARGET COUNTRY - EXTERNAL FACTORS
4.1 TARGET COUNTRY MARKET FACTORS
4.2 TARGET COUNTRY ENVIRONMENTAL FACTORS
4.2.1 Political Environment
4.2.2 Economic Environment
4.2.3 Socio-Cultural Environment
4.3 TARGET COUNTRY PRODUCTION FACTORS

5 DESCRIPTION OF THE OPERATION MODES
5.1 JOINT VENTURE (JV)
5.2 WHOLLY OWNED SUBSIDIARIES (WOS)
5.2.1 Acquisition
5.2.2 Greenfield

6 ANALYSIS OF THE SUITABILITY OF THE OPERATION MODES
6.1 JOINT VENTURE (JV)
6.2 WHOLLY OWNED SUBSIDIARIES (WOS)
6.2.1 Acquisition
6.2.2 Greenfield

7 CONCLUSION

8 LIST OF REFERENCES

APPENDIX

1. INTRODUCTION

The German Volkswagen AG is the third biggest car manufacturer in the world. In times of the financial and economic crisis its sales in the world’s most important automobile market, the US-market, declined from January 2008 to January 2009 by 17.2%, which is still a relatively low amount compared to other competitors in this market (cf. appendixes 1 and 2). VW has never completely penetrated the US car market by achieving only ~ 2% market share in recent years. Since May 2009, Volkswagen builds a brand new manufacturing center in Chattanooga, Tennessee, which will be finished at the end of 2010. The 6,4km² large factory site contains an assembly building with a total capacity of ca. 150.000 cars a year as well as paint shops, carriages and administration buildings (Volkswagen 2009a). There, Volkswagen wants to construct cars which are customized only for the US-market to get out of the niche. For these reasons Volkswagen’s activity in developing a new model for the US-market can be seen as a new-market entry.

Stefan Jacoby, CEO of Volkswagen USA, justified the 1 billion € investment in this area by saying: 'The markets will come back and we are preparing for this!’ (Eberle 2009).

In the following part the Volkswagen AG and its products, the target market and different possible entry modes will be described.

2. INFORMATION ABOUT THE COMPANY - INTERNAL FACTORS

2.1. Corporate Goals and Objectives

‘This is an important day in our history. Today we build new roots in the USA. And we will go into a long term partnership with this community, this state and this country,’ said Frank Fischer, Chairman and CEO of Volkswagen Group of America, Chattanooga Operations, LLC.

Volkswagen wants to take advantage of the economic crisis by expanding its market share especially in the US automobile market. As shown in appendixes 1 and 2 the market shares of the four biggest car brands declined dramatically. Volkswagen has now seen its opportunity to return into the US with an entirely new strategy and a local manufacturing center in Chattanooga. In the US it will act decentralized and is therefore more flexible to respond to the needs of the US customers as quickly as possible. The Chattanooga project is based on the plants Volkswagen has recently built in Russia and India. By using standardized factory designs, common production equipment, modular tooling and shared components, they hope to develop and launch vehicles rapidly as opportunities arise. The overall objective of Volkswagen is to triple its sales in the US until 2018 (Reuters 2009). For more details regarding greenfield activities see 5.2.2 and 6.2.2.

2.2. Corporate Strengths and Weaknesses

Volkswagen's situation is unique: It is hiring in Chattanooga at the same time Nissan completes a downsizing in Smyrna, Tennessee. Nissan offered voluntary buyouts to its entire 6,000-person Tennessee workforce in 2008. For this reason it might be easy for Volkswagen to hire qualified workers in that area (Chappell 2009a: 17). Volkswagen seems to be in a robust shape: Its share price climbed 36% in 2008. Furthermore, holding ten different brands assures that Volkswagen is not dependent on just one segment. In the first Quarter of 2009 Volkswagen raised its spending on advertising in the US-market by 45.7%, which stopped their sales decrease.

Nevertheless, Volkswagen still trails Toyota, Mercedes, Nissan, and Honda in overall quality. Near Chattanooga, only a few suppliers have been identified so far, but the selections indicate that Volkswagen is open to new suppliers (Chappel 2009b: 21). Volkswagen’s image also suffers due to infantile advertising with Heidi Klum. Consequently, Volkswagen started an expensive advertising project in the US in October 2009 which should build up a more adult image (Dumitrache 2009).

3. INFORMATION ABOUT THE PRODUCT

Volkswagen has seen its opportunity to develop and produce a custom model of VW Passat in Chattanooga. Until today, there are only outlines of this new product available, temporary called ‘New Midsize Sedan’ (NMS), which appears to be a combination of the quite successful model Passat and the abortive Phaeton. A smaller version will be launched as well, called ‘New Compact Sedan’ (NCS), which is based on the NMS. The vehicles are designed just for this American market to compete against the dominance of Japanese and Korean car manufacturers. Both vehicles will be available with the latest generations of Volkswagen engines, which are supposed to be very economical. Moreover, the prices of the NMS will significantly be reduced compared to the Passat to be more competitive (Paukert 2009), which will probably attract more buyers.

Since the Passat’s sales in Europe are very good, both versions will probably not be exported out of America. Meanwhile, the future of the Passat in the American market is uncertain. There is a possibility to sell the Passat as a premium model slotted above the NMS. The second, most likely possibility is the replacement of the Passat through the NMS.

4. INFORMATION ABOUT THE TARGET COUNTRY - EXTERNAL FACTORS

4.1. Target Country Market Factors

With a volume of ten million cars sold in 2009 the American car market is the world’s most important and approximately five times bigger than the German market (Stern 2009). After Volkswagen gave up the production in Pennsylvania 22 years ago, especially Toyota, Honda and Nissan established themselves in the US-market and became the biggest foreign competitors there (cf. appendixes 1 and 2) (Pressemitteilungen-online 2009). Still, domestics like GM, Ford and Chrysler count 47.5% of new car registrations (Volkswagen 2009b). Toyota adjusts to localization and cooperation with foreign automobile companies. At present Toyota is planning to produce the Prius in the US as the second hybrid car fabricated in the USA after the Toyota Camry (Topnews 2008). With the Camry the Japanese car company has a comparable model to the Volkswagen model, which was sold more than 264,000 times in the US in the first nine month of 2009. Volkswagen managed with all models, however, only about half at the same time. Because of this a further expansion of production capaciies available in Chattanooga is planned (Pressemitteilungen-online 2009). Nevertheless, the settlement in the southern states could come at the right time. Having a strong reputation as a technology- and Know-How-provider Volkswagen has to strengthen its marketing infrastructure in order to increase sales. Especially during the current crisis there is a chance for Volkswagen to boost sales in the US due to the fact that Americans will demand more fuel-efficient and sustainable vehicles.

4.2. Target Country Environmental Factors

4.2.1. Political Environment

Since 2000, consumers are allowed to import vehicles on a duty free basis due to resolutions of the North American Free Trade Agreement (NAFTA). These trade- barrier-abolishments promoted exports from Canada and Mexico to the US (Osler 2002). Generally, the American government is stable with a tough democratic and established property protection system. The economic policy is liberal even though the current economic crisis forced the government to promote a certain protectionism (’Buy American’). This will probably support the affinity of Americans for cars made in their home country.

Since October 2007 the ‘Finsa Act’ allows the US-president to proof investments in the US made by foreigners regarding to acquisition and national safety. This does not include greenfield investments (OSEC 2009).

Nevertheless, the US still follows an open investment policy because private commitments of foreign investors are important for the economic growth of the country. Uncomplicated laws and requirements mak]e it comparably easy to set up new businesses in the USA.

4.2.2. Economic Environment

In the previous seven years the GDP grew 3% on average and counts more than 13 trillion US$. The inflation-rate is below 3% (WolframAlpha 2009). In course of the outbreak of the financial crisis in 2008 there was a recession of 1%. Therefore, the economic recovery is the main challenge for the future.

At the moment the economy and especially the automobile market is struggling. US customers have troubles getting loans. Moreover, they became more careful concerning larger private investments which affect the automobile sector directly. The recent development of the Dollar has an important impact on setting up production facilities. A weak position of the Dollar is an incentive for Volkswagen’s investment in a plant inside the market because a low value of dollar makes exports to the US more expensive.

4.2.3. Socio-Cultural Environment

In general, the Americans are willing to pay relatively much for new cars because without having well-developed public transportation systems they are dependent on them.

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