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Module Title: Global Business

Academic Tutor: Dr Fragkiskos Filippaios

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Submission Type : Individual

Word Count (if applicable): 4126

Page Count: 16

TABLE OF CONTENTS
1.
2.
3.
4.
5.
6.

7.

8.
9.

Introduction
Overview India
Overview China
SWOT analysis
a. SWOT analysis of Volkswagen in India and China
Porters five forces model
Challenges in India
a. Cultural Challenges
b. Political Challenges
c. Macroeconomic Challenges
Challenges in China
a. Cultural Challenges
b. Political Challenges
c. Macroeconomic Challenges
Conclusion
Bibliography

INTRODUCTION
The company that I have chosen for my critical reflective assignment is the
Volkswagen group (VW AG). It is a German based car manufacturer which is
headquartered in Wolfsburg, Germany. VW AG is the second largest producer of
motor vehicles in the world just behind Toyota. It sells passenger cars under the
banners of Audi, Bentley, Bugatti, Lamborghini, Porsche, SEAT, Skoda and
Volkswagen. The company has operations in almost 150 countries and has
production facilities across 27 countries.
Emerging economies can be defined as the markets which are transitioning from a
developing to a developed economy. Emerging economies usually give high rate of
returns at potentially larger risks and show characteristics like rapid growth and
sudden inclusion into the world economy. Investors and multinationals want to put
their money in emerging economies due to the potential of rapid economic growth.
(10)
The emerging economies that I have chosen are India and China.
Overview India
For major part of last 2-3 decades India was seen as a destination where
multinationals can find cheap labour and companies outsource to reduce their cost
base by transferring some part of the work to the country but this approach to India is
changing at a fast pace due to the increasing middle class population who are highly
educated and know what they want as consumers. The demand for consumer
goods, infrastructure and financial services are rising and therefore presents huge
opportunities for companies to expand (6). India is one of BRICS nation and
according to a recent survey by World Bank it is the fastest growing economy of the
world at 7.6% surpassing China. According to me India is a strategically correct
place for an automobile giant to set up a production plant because of the following
reasons; the most obvious reason is the availability of high skilled cheap labour.
India being a democratic nation would not have sudden changes in policies which
could hurt the business; the recent initiative by the government under the "Make in
India" scheme to encourage manufacturing in India provides various benefits to
companies setting up manufacturing units. Also the automobile market is growing at

a rapid rate in India so, it would be beneficial for Volkswagen to manufacture cars
locally to cater to the local demand rather than importing them. 2.79 million
Passenger cars were sold in India in April 2015-March 2016 and this number will
keep on increasing at a constant rate for the foreseeable future. (1)
VW AG has 2 production facilities in India, in the western state of Maharashtra. The
one in Aurangabad district opened in 2001 and headquarters Skoda India and Audi
India. The other plant was inaugurated in 2009 in Pune district and headquarters
Volkswagen India; it has a production capacity of 110,000 fully manufactured cars.
VW AG invested around 580 million Euros for the plant (2). One of the reasons for
setting up the plant in India was despite the economic crisis the desire for individual
mobility remained high and it was predicted that the automobile market will grow to
2m vehicles by 2014.
Overview China
Since the reforms of 1978 China has evolved and grown beyond recognition. It is
one of the most powerful economies of the world and is currently ranked at number 2
after United States. In 2013 Chinas GDP was growing at 8% way above all the
competitors. China has taken 600 million people out of poverty which responds to
about 70% of the population taken out of poverty between 1985-2010. Reduction of
poverty has increased the consumption patterns and made China a very attractive
industry for automobile market. China is most famous for its manufacturing powers
due to its cheap labour and high quality infrastructure. People in tier-2 cities in China
have also increased their expenditure on automobiles. The Chinese government is
increasing the road network at a tremendous pace which means more connectivity
and is beneficial for Volkswagen. (14)(15)
VW AG had entered into the Chinese market more than 30 years back and has
delivered more than 20 million cars to Chinese customers since then. Due to the
large manufacturing capacity in China, VW has about 14 production facilities in the
nation which include Car production plants, component plants and Headquarters of
Volkswagen group in china. VW AG is represented by more than 40 entities in China
which includes all the local beneficiaries as well. Volkswagen has the largest market
share in the Chinese market which amount to 21%, apart from the cheap
manufacturing facilities due to the large population and high market share it is

essential for VW to have local manufacturing plants. It is estimated that there would
be 32m passenger vehicles by 2020. As China is a huge country and most part of
Southern and Western not being as modernised as the east, VG plans to bring in a
new strategy go south and go west. Volkswagen also expanded to 2700
engineers which are doing R&D in China. (15)
SWOT ANALYSIS
Originated by Albert S Humphrey in 1960s SWOT analysis is used for understanding
the strengths and weaknesses, finding the opportunities open to your company and
the possible threats that you face. SWOT analysis is useful because with a little
thought you can discover new opportunities and by understanding the weaknesses
you can eliminate the possible threats, it also helps you in distinguishing yourself
from your close competitor.
The following questions a company needs to answer when answering each
component of SWOT analysis.
Strengths:

What are the advantages your organization having?

What is the one thing your organization is better at than anyone else?
What are the resources which you can get at lower prices than others?

Weaknesses:

Things to avoid.
What factors are getting your sales down?
What areas you can improve upon?

Opportunities:

What do you think are the new market trends?

What new areas and segments can you tap into?
What are the best markets for your product?

Threats

Is the advancement in technology threatening your product?

What new obstacles can you face in the foreseeable future?
How and what are your competitors doing?

Some further tips when using SWOT analysis are to accept only precise statements,
know how to prioritize the list of your factors and all the opportunities that you
thought of were checked for all the pros and cons. It is also important to use SWOT
analysis at the correct step of the way and along with other tools like USP analysis
and core competence analysis. (9)
SWOT analysis of Volkswagen in India and China
Strengths

It has a strong brand Image in both the nations and has 13 famous brands

coming under the Volkswagen banner.

It has strong research and development unit which caters to public demand
i.e it can produce cars which appeal particularly to people of both the

countries.
It has covered 20% of the market share in China which is the worlds largest
producer of cars.

Weaknesses

Volkswagen has got a very weak position in the Indian market it only has 3%

market share.
The cars they manufacture are not eco friendly and emit huge amounts of
carbon dioxide. They are prone to action by government of any nation which

would harm the company massively.

As per popular opinion in India the service and spare parts of Volkswagen
cars are very expensive as compared to companies like Hyundai, Honda and
Suzuki.

Opportunities

It can modify its technology to cars which are more environment friendly and

avoid uncertainty.
It has the potential to grow into a big market like India
It can get stronger through acquiring companies in China and India

Threats

Other brands like Toyota, Ford, Hyundai and Honda have been gaining larger
market share in India.The prices of raw materials are rising which will hamper

the economies of scale and in turn offer a higher price.

The fuel price has been decreasing since 2014 which is reducing the demand
for hybrid cars. (11)

PORTERS FIVE FORCES MODEL:

It provides a simple perspective for assessing and learning the competitive strength
of an organization.
The five forces described by Porter are:
1. Existing competitive rivalry between suppliers
2. Threat of new market entrants
3. Bargaining power of buyers
4. Power of suppliers
5. Threat of substitute products
This model can be used for good analysis of competitive position and can also be
used for making business decisions, strategies and plans on how to take the
business forward. (17)
Applying the five forces model on Volkswagen we get the following result.
1. Competition- There is high competition in both India and China among the
automotive market. With Maruti Suzuki having the biggest market share in
India and Volkswagen only having 3% of the market share currently. In China
though Volkswagen has the largest market share 15% but is very closely
followed by General Motors at 14.5%.
2. Barriers to entry- Entering the automobile industry have both high barriers and
insurmountable start-up costs along with difficulties in acquiring licences and
trust from the general public.

3. Bargaining power of buyers: A consumer generally never buys cars in bulk

quantities therefore have almost negligible amount of bargaining power, large
organizations or government agencies can have bargaining power because of
the sheer volume of vehicles they purchase.
4. Power of Suppliers: VW being a huge company and suppliers generally
providing them one product they do not have any bargaining power and it
would be a huge loss for the supplier if they lose a contract with a company as
big as Volkswagen.
5. Availability of Substitutes: Due to increasing gas prices and increasing
pollution in both the countries government is promoting more eco friendly
ways of travel and is constantly upgrading the public transport system. (18)
Challenges in India
To successfully establish business in India it is essential to navigate through the
challenges that the country is going to offer.
Cultural challenges: It is imperative to understand how Indians respond to authority
and how that has an impact on business. Companies will struggle to device change
as quickly as required and fail to gather the valuable experience of its employees if
they do not understand the culture and background of its employees. Attitude
towards punctuality is relaxed depending on the importance of the priorities, most
organizations require fast paced decision making along with obedience to deadlines.
Most of the companies fail to understand that when doing business in India time is
not in your hands and cannot be controlled. One way to deal with this is cultural
awareness training which can help know Indian concepts of time and come up with
strategies for dealing with them. Indian society runs on the basis of a set of
assumptions, it is more open to accept social etiquettes rather than adhering to rules
and regulations which makes it difficult for companies setting up base here.
Communication style for Indians is usually indirect which means that they want to
see the complete picture and place greater importance on relationships, body
language and they usually do not like saying 'no' for an answer. It can be difficult for
people who usually communicate in direct and low context manner. (3)
Understanding the cultural differences is the first step and devising strategies to
overcome the challenges is the more important and harder of the two steps.

Relationships are very important to a successful business across the globe and this
is never truer than in India. It is important for companies to understand that
relationships are primary focus and transactions secondary. "Having said that, do not
expect Indian business people to lack basic business acumen for this reason. "Chris
Halward. It is very important to build trust which requires both persistence and
patience and being recommended by a trusted third person is also of significant
value. One of the problems discussed above was the inability of Indians to say "no",
the key here is observe body language and look for phrases like "I will try", "possibly"
etc. It is up to the managers on how to train their employees on politely declining a
request which they think cannot be completed within the designated time. It is
important to understand the hierarchy of the firm when you are dealing with an Indian
team, it is highly likely that the most senior person will be the only person talking to
you. Make it a point to greet the senior most people in the room first even if you
know the others. Employees do not usually disagree with their senior colleague, this
also makes it difficult for all the employees to express their ideas and opinions
immediately. It is important to try to understand and respect their culture, learning
their behaviours and mannerisms can go a long way is setting up a happy and
successful relationship with the Indian counterparts. (4)
Political challenges: India is a democracy with a nationalistic sentiment and with
the belief that political environment is prone to become unstable and erratic for the
firm investing money in India. There have been plenty of examples from the mid-90s
when projects have been launched with much fanfare but the end results have been
not satisfactory. Institutional environment may have been difficult in India and the
investors doing no good by pursuing agreements that were totally one-sided in
favour of them. According to me the political environment has changed drastically in
the past 5-10 years and especially after Modi government coming into power. The
government has been doing extra efforts to bring FDI into India and also make sure
that the investors also benefit from their ventures (5). One of the reasons for volatile
political environment has been corruption, it affects India's business and political
environment hindering the economic growth of the nation. Many scandals have
damaged the government's credibility, have led to major losses in tax front and
increased the income inequality. India ranks 87 out of 178 nations in Transparency
Internationals Corruption Perceptions Index (CPI) in 2010. Due to corruption India is

losing out to its competitors China and Brazil which rank lower to India on World
Bank's list on ease of doing business and are more efficient. The cost of doing
business is increased because of corruption and it also adds to the problem of
regulatory uncertainty which in turn leads to a fall in FDI and fall in significant tax
revenues. (7)
The best method for multinational companies to cope with challenges of operating in
a volatile environment is that the stakeholders, clients and shareholders all must be
convinced that the actions of the firm are not only benefitting themselves but also
India. A good example is Hindustan Unilever, the subsidiary of Anglo-Dutch Giant,
Unilever which has garnered large acceptance from the people in India by helping
the government promote socioeconomic objectives in the states it operates. A bad
example is Coca Cola and Pepsi both of these big cola giants were accused by a
local NGO of selling drinks that had 11-70 percent higher pesticide margin as set by
the EU norms. After independent testing the results came out in favour of the NGO.
(5) To fight corruption India government has taken a series of steps which include
drafting a new bill to set up an anti-corruption watchdog. Some of the top
government officials have been arrested for corruption and government has
accepted the first draft of Jan-lokpal bill (anti-corruption bill) put forward by activist
Anna Hazare. Economic growth in India will continue to increase due to the rising
middle class and their strong demand for consumer products, it is in hands of the
government to address the issue of corruption and political volatility to enhance and
improve investor confidence. (7)
Macroeconomic challenges: The economic situation in India looked good heading
into 2016, the fiscal deficit fell to 1.3% of the GDP as compared to 4.8% in 2013. The
growth was up to 7.4% over third quarter and industrial production also expanded.
The major challenge India faces on the economic front is high population growth.
Population in India is growing at 20% per decade which further leads to shortage of
food and water, ever increasing pollution and sanitation deterioration. Even though
statistics show that India is growing but living condition for most people is not
changing still 30% of the people live below poverty line which indicates the massive
difference between the rich and poor. India is still using coal for 80% of its power
requirements which is one of the biggest contributors to pollution along with car
emissions. The other biggest challenge for Indian economy is its crumbling

infrastructure, India has not yet succeeded in improving infrastructure in education,

business and health care. The transportation facilities have not grown at a similar
pace as the population growth. Education infrastructure is not up to the mark and still
around 280 million people are illiterate. India's healthcare services have not
improved either, more than 70% of the population has limited or no access to health
care. (8)
Implications for Volkswagen from the above stated problems could be: they could
face trouble hiring skilled work force for specialised jobs. Lack of great infrastructure
and transportation facilities can slow the processes down. Power outages can also
hamper the process of manufacturing. There is a list of challenges that Volkswagen
will have to face. But according to me if they face the challenges with the correct
strategies and attitudes they would be able to come on the winning side with all the
problems. For example the problem of lack of skilled workforce can be easily
resolved by hiring the brightest of students from best colleges of the nation at good
pay packages. Infrastructure and transportation facilities have been improving at a
rapid rate, the biggest example for that would be Delhi Metro which in 15 years' time
has become the 12th largest metro system in the world both in terms of length and
number of stations. India has already taken stringent actions on corruption and since
the new government coming into power
Challenges in China
Like India there are a number of challenges that come your way in China as well.
Cultural challenges: The biggest challenge faced when doing business in China is
misunderstandings due to miscommunication. Although Chinese people are
becoming more fluent in English language but it is still difficult to find someone who
understands subtleties of the language and also understands both western and
Chinese culture in and out. Things get difficult when business gets more complex
and the Chinese counterparts find it difficult to explain the current situation. Another
common problem is that Western employees tend to delegate their work, Chinese
people follow a strict line of hierarchy and each person has a well defined role. This
leads to differences and tensions at work because Chinese are trained to take orders
from the top and Western employees follow their own initiatives. It is also very
important to realise the fact that you cannot follow the same business model as in

Western economies, the need for being flexible and understand Chinese traditions is
important to succeed. As in India, Chinese also give significance to relationship
building.
First of all to reduce the gap between the Chinese and Western culture it is essential
to have an international team which can understand cultures of both the sides. It is
important for company to have a clear set of actions that each employee has to
follow. In addition employees should be divided into smaller groups with one clear
leader to which all the members of the team report. Along with this the Chinese
employees should be encouraged to be creative and take their own risks. To ensure
best interests of the company close monitoring of the employees is essential and
being humble enough to learn the nuances of the new culture. To build relationships
it is vital to meet the clients outside the boardroom as well, it may take longer time
but it is essential to cultivate relationships in China. (12)
Political Challenges: Foreign firms in China work under an unsure environment due
to the political instability and uncertainty. The local firms have much better protection
and are able to navigate through the rules and unique business environment. The
financial system is murky, the legal protections are not imposed properly and the
copyright laws are not protected properly at all. In addition to all of this there is
always a threat of government favouring local companies to foreign ones.
To avoid political risk in China the companies can take the following steps they
should work their home government to press the Chinese government to stay true on
its commitment to open markets, protect the intellectual property rights and follow the
regulations it does have. The senior most member of the term responsible for
operations in China should have strategies and plans ready for situations causing
disruptions like health crisis, large scale public unrest and environmental disasters.
Transferring of proprietary information to Chinese firms should be done extra
carefully because there is a huge possibility of it being stolen. Forming contracts with
Chinese government officials and stakeholders can also be beneficial. Another way
to hedge the risk could be by creating a pool of lobbyists of all the foreign investors
which would have a larger influence on the Chinese government. It is also important
to not base all your business from one location in china. It might not come to that but
it is definitely worth putting an exit strategy in place if things actually go downhill. (13)

Macroeconomic Challenges: China has been moving from an economy based on

agriculture to manufacturing and services based one. Similar to India the biggest
problem plaguing China is high population. Also due to one child norm that was
introduced in 1979 China has a massive percentage of elderly population. The
economists have predicted by 2035 70% of the population would be living in urban
areas which means government will have to face social issues also take care
employment of such a large population. China is also having major problems due to
imbalance in social and economic development between urban and rural areas and
also in income generation. China also has an ever increasing middle class
population which means more demands for consumer goods which though has good
impacts on the economy but if the manufacturing is not equal to the demand it can
cause inflation in the nation. (16)
CONCLUSION
It is essential for Volkswagen to understand the cultures of both the nations to be
continuing in a successful manner in both the emerging markets. Most of the issues
that Volkswagen faces in both the nations are similar like high corruption, large
population and more time required setting up new business as compared to western
economies. Advantages in India are that it is a very young nation as compared to
China with average age of 29 in 2030 as compared to 38 in China. Also English
being taught from at earlier stages in life communicating with Indian employees is
much easier as compared to Chinese counterparts. India being a democratic nation
has more political stability as compared to China. China on the other hand has a
much improved infrastructure and Volkswagen already has the largest market share
in the country. China also has a proven record in manufacturing plants and can be
counted upon.

For Volkswagen both countries offer a huge population base to target. With middle
class population increasing the demand will be increasing and Volkswagen will have
a bigger segment of population it can target. With smart marketing strategies
Volkswagen can make a fortune from both the nations. For example the popular
trend in India currently is sub 4 metre SUVs basically mini SUVs which is the new
craze in the country. Companies like Hyundai, Suzuki, Honda, Renault and Nissan

all have cars catering to that sector, to increase market share VW also needs to
launch a car to attract customers for that sector. Also it has to eliminate peoples
concern of Volkswagen charging a higher service charge as compared to its
competitors. Volkswagen in China already has the highest market share and which is
coming mostly due to the modernised Eastern side, Southern and Western sides
being relatively untouched. VW expanding their can turn their venture in China more
profitable.

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