Volkswagen has been having an unusually steep rise in profit and profitability in the Chinese market. VW has been selling cars more car in the emerging market more any other company in the world going by the volumes of the car and buses sales. VW also has the best product portfolio for all the market segments; for example, VW sold over 7.3 million units in the year 2010 and over 8 million units in 2011. Most companies have not been interested in volume sales. For example, general motors’ did not avoid chapter 11 and Toyota could have earned more than Honda over the past three years. According to, there are four main elements underpinning vw performance. For one, company has been one the trial platform for many years and is finally having growth in successful extraction of e economies of scale from the extensive brand portfolio. VW is combining high production volumes with cost reduction to realize higher efficiency benefits. VW has increased its component commonality through its modular toolkits. Secondly, VW Audi now stands a complete comparison with the BMW and the Mercedes Benz in the premium car sectors.
Audi his dominant division in VW, having for many years made the biggest contribution to Group profit. In the first nine months of 2011, its operating profit of €3.96bn was 74% higher than a year earlier, and its margin of 12.2% was 3.5pts ahead of the already respectable year-ago figure of 8.7%. The third key factors are the groups unprecedented success in china as the Chinese demand for personal cars, buoyed by the tourism sector is one of the riding tides lifting the boats in the Chinese market. However, the group has, has derived particular benefit through its strong presence in both the mass market and the premium sector, where Audi is the best-selling brand. It is also imperative to note that VW's two Chinese joint ventures, Shanghai-Volkswagen Automotive and FAW-Volkswagen Automotive, are not consolidated subsidiaries, but VW reports their vehicle sales in its consolidated totals. Finally, the acquisition of Scania; VW's diversification into the trucks sector might have been a mistake as it does not bring any particular competence that will enhance Scania's performance or value. However, in profit terms, including Scania in VW's scope of consolidation has boosted margins. It is remarkably clear that over the first nine months of 2011, the Group's 7.7% operating margin could have been extremely low in the absence of Scania.
Never the less, the group still has a room for improvement in key areas, the most outstanding of which is the relatively weak profitability of the central VW passenger car division. Though, it achieved a much-improved margin of 4.6% in the first three quarters in 2011, and recorded a higher than intended sales volume and market share acquisition, the group achieved these in favorable conditions with strong demand in domestic and overseas markets.
The SEAT is the continuing to drag VWs performance down, the current downturn is Spain might explain the groups loses in 2011, the newly introduced a brand in china is a car than promises a number of benefits to the customers such as enjoyneering, deign driven, dynamicity and young spirited. There are arguments that the SEAT, with its remarkable product performance, customized customer experience, and quality-focused dealer network is poised to excel in the Chinese market. VW worldwide sales are not acceptable as could have been expected. VW is showing poor growths in other markets. VW decided to introduce the brands in the Chinese market to boost their profits and increase sales
II. China, Volkswagen AG and the Rest
Overview of VW
History of the group
VW was founded during the Nazi dictatorship in Germany in 1937, Adolf Hitler was the brainchild behind the new car as he envisaged a new Germany in which two adults could travel comfortably in a new t=cabin at 100 km/h (62 mph). This was a basic car considering the fact that the German market was mainly composed of luxury models while most Germans could not afford more than a bicycle. He proposed the Volkswagen car the car of the people). The car that was originally designed by Ferdinand Porsche has since grown through the World War 2; and became both an economic and symbolically significant element. The vw beetle and bus helped turn VW into an international success story. In the early 70, VW embarked on mass production of both luxury and basic cars thereby breaking the world recode of passenger car production. With sales record of vw beetle surpassing the legendary model T produced by ford by almost 15709 300 units, VW started producing newer models such as the iconic golf, polo, Passat. VW also produces d successful products such as the Sirocco, the Golf GTI, the Lupo and the Touareg.
VW has been on the trail for success even after having failed in the western markets and coming to china to introduce its products with the belief that it has the right products for the Chinese roads. VW became the third largest automaker in the world in 2008 and the second largest in the year 2011, and might the largest in the world by end ofm2015 as predicted by many industry enthusiasts.
VW has two divisions of the automotive division and the financial services division. VW has many brands under its automotive division. Brands such as the Audi and Seat, which joined the Group in 1986; the luxury brand: Skoda acquired in 1991. While the Bentley, Lamborghini and Bugnato, belonged to the exclusive, elite brands. VW also has expensive brands made up of Scania, mainly trucks and buses. VW’s products range is remarkably wide from low-consumption small cars to luxury class vehicles. VW car also positioned as innovative, responsible, providing enduring value. Most customers associate this brand with quality, reliability and German engineering skills. VW’s financial Services Division combines dealer and customer financing, leasing, banking and insurance activities and fleet management.
2.1 Overview of the Chinese economic, demographic and infrastructure situation
China’s car industry
Just before the Communist Revolution, the only car that was common in the country included the Buicks and Model Ts. however, Buicks were for prestige, and not everyone could afford them. During the Mao era, the whole, market was made up of trucks, as the people did not have enough disposable income to buy cars. This was made worse by lack of tourism, which leads to low demand for taxis and other passenger cars as means of local transportation.
After the world trade and economic reform in the late 10970, the country embarked on producing car and modernization. This further lead to increase in tourism that letter necessitated the need to have passenger cars. The country has an increase in demand for car and the domestic production was overwhelmed with demand leading to the importation of cars. Import rose despite the 260% duty on imported cars. Most companies signed contracts with the country with in 1983; American Motors Corporation (later Chrysler Corporation) signed a 20-year contract to produce their Jeep-model vehicles in Beijing. Volkswagen signed a 25-year contract to make passenger cars in Shanghai, and France agreed to another passenger car project to make vehicles in Guangzhou. As late as 1985, the country produced only 5,200 cars.
Economic situation and industry regulations
The country has experienced an economic expansion following Deng Xiaoping’s actions to speed economic expansion. Consequently the GDP increased by 4% from 1992 to
1995. During those years, the car production and imports rose dramatically. Low import tariffs contribute to a rise in cars crossing China’s borders. Reduced import duties for small cars, quotas on the number of cars entering the country with legal import licenses for foreign made vehicles. The country also has an industrial policy that was designed in 1994 to secure 90% of domestic car demand for domestic manufacturers; therefore, leaving only 10% for imports, this made the import business unattractive and locked the established manufacturers within the country's market framework. Additionally, the country also entered into the world trade organization agreement in 1999 that changed the course of marketing and the economic environment for the auto cars manufacturers:
- Reduction of tariffs in passenger cars by 2006, tariffs of import products would reduce as a maximum 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.
VW in China
The Volkswagen group recognized an unusually 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. VW, Shanghai Automotive Industry Corp and China National Automotive Industry Corp. established it in March 1985.
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 the production process and to passing on the necessary management expertise to the locals.