AUDI AND THE CHINESE MARKET 1

Case Study: Audi and the Chinese Market

Name of Student
Institutional Affiliation
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1.Theories explaining VWs presence in China

Trade theories can be defined as the processes put in place to explain the prevailing patterns of
trade within a country and the impact that this trade has on the economy of that country. Also, it involves
the types of public policies that have to be implemented to improve the overall status of the country.
Considering VW and its trade activities in China, the following trade theories best describe its presence in
the country.
Absolute advantage trade theory perfectly describes the scenario of Volkswagen and its position
in the Chinese market. This theory dates back to the late 18th century, and its purpose is to describe the
notion of increased efficiency in the process of production. This theory mainly exists in a type of market
where two or more rivaling manufacturers produce similar products, but the difference is in the quality
and prices of the products. One producer offers better quality products and at a lower price as compared
to the other manufacturer. Therefore the manufacturer with better quality products enjoys the profits that
come with this.
Applying this theory to VW and the Chinese market, it is clear that Volkswagen is in a situation
where it is rivaling for the same market with other competitors who are reproducing the same products,
which is motor vehicles. It is also evident from the case study that VW is enjoying a fair share of the
market as compared to BMW and Mercedes. This advantage can be attributed to the fact that VW
consistently produces high-quality motor vehicle products than both BMW and Mercedes. Also, it can be
because it offers slightly lower prices for its cars. This is a direct reflection of the absolute advantage
trade theory.
Moreover, the case in China and VW demonstrates the Global Strategic Rivalry Theory. This
trade theory discusses the behaviors of rivalries that exist between multinational companies and the
challenges that these companies face to ensure that they achieve higher sales and market advantages
compared to their rival companies. In China, it is evident that three multinational companies are rivaling
for the attention of the Chinese motor vehicle market. That is VW, BMW, and Mercedes. It is also clear
that these companies are multinationals since they also have markets in the United States and in Germany.
Finally, the struggles of being the stand-out company are real since every company is trying to optimize
new factors that will lead the company brand into becoming the most successful brand in the region.
2.Key success factors for Audi in China
According to the case study, the success of Audi in China is attributed to key distinct factors.
They include the following:
Firstly, Audi was the first company to establish itself in the Chinese market early before its
competitors in Mercedes and BMW. Audi established itself in the Chinese market in 1988, and directly
aimed at creating a great relationship between it and the Chinese market. It did this through identity
advertisement, which made it possible for the native Chinese population to become conversant with the
premium vehicle company. For this reason, Audi had tremendously established itself significantly in
China before the arrival of both Mercedes and BMW in the market in the 21st century. It implies that
Audi always had the extra edge in advantage against Mercedes and BMW.
Also, during its inception in the Chinese market, Audi struck a mega-deal with the Chinese
government through the FAW company(First Auto Works ). It led to the birth of the FAW-VW(FAW
Volkswagen Automotive Company) cooperation. This cooperation acted as the primary tool for
infiltrating the Chinese market. At the time, it was impossible to impose oneself in the Chinese market,
especially if you were a foreign company. The joint venture acted as a perfect tool for having a direct
impact on the Chinese market. This meant that Audi, through its parent company Volkswagen, was the
first external company to impose itself on the market successfully. Moreover, the fact that Audi was the
first company to strike such a lucrative deal with a motor vehicle giant company of the Chinese people
implied that it would be the company that would end up enjoying the "first-mover" advantage in this
market. It will always be at the forefront of this competition, and time has shown that.
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Also, the Volkswagen company is globally famous for its ability to manage its finances
effectively. It has a team of well-abled employees who, time after time, has made financial decisions that
have seen the company grow effectively. Audi is one of the major child companies of the Volkswagen, it
has directly benefited from the services of these employees. As a result, Audi has not fallen into poor
financial management traps that most companies tend to fall in, especially during the growth phase of the
company. All the essential financial decisions have been made through the Volkwagen financial team,
which has enabled the brand to make wise decisions and conclusively promoted the growth of the brand
in China, which is its biggest foreign market.
3.Benefits and risks of increasing Chinese production
The Audi brand has set plans to expand its motor vehicle production in the Chinese market.
Considering this move, there are potential benefits and future risks as well that related to this idea. Some
of the benefits include improved profitability due to increased product output. It is already evident that the
Audi company is enjoying the market in China due to its dominance and vast sales of cars that it is having
in the country. However, this means that there is an opportunity to grow the market further through
increased productivity in the country. It is a plan the brand is aiming to achieve by focusing on improved
production at the two local production plants in the country.
Moreover, with increased production, there will be the benefit of reduced operating costs for the
the brand. There is always an advantageous relationship between huge productions and the utilization of
employees and other production assets. Most of the input assets are usually efficiently utilized, and a
higher profit margin is experienced when considering the input-output ratio. When a company decides to
raise its production substantially, it will get the most from their input investment and assets, and the Audi
company is not an exception while considering this concept. Audi will have lower operating costs due to
increased efficiency as a result of improved production. Also, with raised production activities, the brand
will be able to experience a more significant competitive advantage due to the cost structure and response
time. Mercedes and BMW will not be able to experience this benefit because of their comparably lower
production abilities.
On the flip side, some risks are also associated with the activity of increasing productivity. These
risks include the loss of design and specificity. Often increased production only succeeds at the expense
of design and individuality. It is impossible to produce individualized products in large bulks. A choice
always has to be made between the two. If Audi chooses to increase their productions, it means that the
individual design will have to be lost. Another risk that is involved is that both its competitors are gaining
substantial steps in establishing themselves within the market. For instance, in recent years, as shown in
the case study, BMW has recorded the most improved sales of cars in China. So the risk is that the
company can decide to improve its production and then later find that there is no enough market for the
new cars. However, it is just a risk, and the company needs to decide on what to do.
4. Challenges for developing/sustaining unique competitive advantage sources
Audi's and Volkswagen's success in the Chinese market has been due to the fact that the company
works tirelessly to establish and maintain its unique competitive advantage sources in the market.
However, these advantages have some problems related to them. For instance, a broad product portfolio is
one of the key strengths of Audi's brand. It prides itself on producing diversified products within the
market. It has an effect on capturing a huge bracket of the market. However, there is a direct competition
to this market advantage, as brands like Mercedes are also producing other diversified motor products like
motorcycles and differently designed vehicles.
Also, Audi and its Volkswagen brand are one of the significant assets of the company. As a brand
in the automobiles industry, Audi has been able to maintain its prestigious brand standards by ensuring
that its motor products are customer-centered, innovative, and full of quality. It has led to improved
customer services and, as a result, improved the popularity of the brand and its products. However, in
recent markets, other competing brands have realized the secret to a successful business lies in developing
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an effective company brand. As a result, these companies are spending a lot of their resources to establish
their brands. It is a massive challenge for Audi to retain its spot brand-wise.
Furthermore, customer loyalty is one advantage that every major player in any industry values a
lot. Audi has done a remarkable job of maintaining strong customer loyalty over a long period. Even
though maintaining strong customer loyalty requires a lot of customer specifications in a variety of
aspects. To do this, Audi ensured that it has focused on adequate marketing activities, technology, and in
the safety of its customers. However, other competing brands are also mimicking these activities by
ensuring that their customers have great riding experience. Especially with the presence of technology
and the internet, it is so challenging for Audi to maintain its customer loyalty base consistently.
Moreover, Audi's ability to consistently conduct research and innovation about its product is one
of the key strategies that has enabled it to stay ahead in the competition. However, as seen from the case
study, a brand like BMW has a substantial ability to innovate and invent newer products in the market
continuously, and it is also important to acknowledge that this is one of the main reasons why BMW has
been recording improved sales in recent years.
5. Location and market
From the case study, it is evident that Mercedes, BMW, and Volkswagen all operate with different
processes per investment and location. Beginning with VW, it is clear that the business is looking for
ways to invest close to their market, and that is why it decided to open two of their branches in China,
specifically in Changchun and in in Beijing. It is still aiming to improve its production in these cities. On
the other hand, BMW and Mercedes prefer operating from their countries of origin, which is Germany,
and then export their products to China. They, therefore, prefer investing far away from their market. Both
approaches have their advantages
In the case of VW where the company is situated very close to the market, both the market and
the company benefit. For instance, the company would have the advantage of directly being in contact
with the market. As a result, the company would easily get access to the complaints of its customers and
then aim to produce the products that easily suit the needs of the customers. Moreover, the costs of
production for these companies is substantially reduced. For example, the cost of transporting the
produced commodities to the customers would be minimal because the business is very close to the
customers. Finally, it would be very easy to create awareness concerning the brand of the company since
the cots would be low due to the close proximity between the business and its market.
On the other hand, Mercedes' and BMW's choices to locate and invest away from the market is
also valid. First, this approach gives the companies a rare opportunity for privacy and protection of their
trade secret. It is difficult for the market to crack and imitate your trade secret when you are located away
from them geographically. Moreover, this approach saves the company from the government's incentives
for foreign companies. It is usual for market governments to take the opportunity and collect revenue
from any international company that is aiming to operate within its soil. This would not be possible if the
company locates itself away from the market. Another advantage is that skilled labor that is needed by the
company to manufacture its products may not be sufficient within the market's country, and that is why
some companies decide to locate itself in their native countries where the labor can easily be acquired.
6.Strategic trade policy intentions from China
Strategic trade policy is defined as the policies and regulations set up by the government of a
particular country to prevent excessive profits from living the country into the residential countries of
international companies that are operating within its country. Throughout the case study, China has been
the center of all activities of VW and its proceedings. China has been involved in every activity since the
inception of VW in the country. Even though it is not that evident, the Chinese government has been
implementing its strategic trade policy intentions through VW. Its intentions can be summarized into three
major subsections. These subsections include Liberalism strategic trade policy, Protectionism strategic
trade policy, and Bilateralism strategic trade policy.
Liberalism strategic trade policy
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This is a type of strategic trade policy that involves, where the government of a certain country
puts up a measure that is intended to promote international trade, which has an effect of fuelling the
economy of the residential country. Some of these measures that promote international trade include the
reduction of tariffs and the removal of trade barriers. Within the case study, China has collaborated with
Germany, where three huge German companies are free two establish company branches within Chins.
These are VW, BMW, and Mercedes. These companies produce and sell cars to the Chinese people. It is
clear that these transactions directly promote the economy of China.
Protectionism strategic trade policy
This is a type of economic policy where the government tries to restrain trade between two
countries, through methods like tariffs and restrictive quotas. The Chinese government has applied this
policy in its country by offering restrictions on how much shares VW could own in the cooperation of
FAW-VW. This way, it was able to control how much power VW could exercise within the business and
within the Chinese economy.
Bilateralism strategic trade policy.
It is the type of strategic trade policy, where two countries mutually agree to promote trade and
investment between them, to improve the economy of each country. Some of the activities that may be
done to promote this business include the reduction of import quotas and export restraints. Moreover, they
may decide to reduce tariffs between them. Within the case study, it is evident that Germany and China
had reached this type of agreement, and that is why three major German motor vehicle companies can
easily transact businesses in China.
7. Buyer power of consumers
Buyer power of consumers is defined as the pressure consumers of a product can impose to a
comp [any or business to persuade the company to offer a higher quality of services and goods, improved
consumer services, and at the ideal prices to the consumers. Considering the emission scandal that
Volkswagen was involved in, the buyer power of the consumer is applied in the following ways:
First of all, the company (Volkswagen) was forced to offer high-quality products after the scandal.
Initially, it was discovered by the West Virginia Ph.D. students together with their professors that
Volkswagen engines couldn't emit a little amount of exhaust gases while still operating at standard
conditions. Later an investigation proved that indeed the cars emitted vast amounts of gases that were
hazardous to the American population. After this was discovered, the company (Volkswagen) was forced
to redesign its engines and to develop cars that do not emit gases in huge amounts that could be harmful
to the consumer.
Also, the company was forced to compensate all its customers who had bought the vehicles
during this period. The compensation was supposed to act as a remedy for the danger that the vehicles
exposed its users to. It is another evidence that the buyer power can cause a company to respond and
consider the welfare of the consumers.
Another repercussion that Volkswagen faced is that it was forced to replace all the engines that
were currently on the market. This operation was aimed at ensuring that no more consumers would be
exposed to the danger of the vehicle's engines.
Generally, it was reported that after the scandal, Volkswagen devoted itself to creating legitimate
cars that were healthy and safe to the consumers. It was marked through drastic actions like the resigning
of the current company CEO to a new one. Volkswagen was desperate to assure its customers that despite
the scandal, it was still devoted to ensuring that it offers quality products as it previously claimed to do.
Through this experience, the consumers benefited a lot as they were also offered reduced prices for
Volkswagen cars. This reduction of costs was aimed at ensuring that the customers do not entirely
abandon the company because of the scandal.
These examples are a real-life demonstration of the consumers' buyer power upon the Volkwagen
company.
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