Volkswagen Case Study
The case illustrates Volkswagen’s activities within the Russian territory in the past 15 years. From the mid-2000s, the firm mentioned it would massively invest in Russia. Actually, auto ownership per capita was small in contrast to the other countries in the west. The study implied that Russia would likely become the biggest auto manufacturer in Europe by 2020. The Russian government proposed motivations and incentives that other competitors to their advantage. Nevertheless, the growth Russia Experienced in 2014 were as a result of increase in oil prices. Afterward oil prices tanked, and Russia got suspended because of their invasion of Crimea. Volkswagen cut production and experienced excess capacity at it’s plants in Russian. However, this predicament didn’t prevent the company’s future projects in the country. The Case deals with the following questions.
What factors underlay the decision by Volkswagen to invest directly in automobile production in Russia?
* Economic Growth in Russia and standards of were rising
Will Vladimir Putin still be president of the Russian Federation in 2024, almost a quarter of a century after succeeding Boris Elstine? With 75% of voting potential and no serious competitor, it is difficult to see today what could prevent him from winning the presidential election next year, his fourth, and thus become the master of the Kremlin remained in power the longest since Stalin … Yet, if he cleverly muzzle the opposition and put Russia back to the forefront on the international scene, the internal report of Vladimir Putin, in three presidential terms (2000-2004, 2004-2008 and 2012-2018) and a mandate as head of government (2008-2012) is not rosy. This Growth probably as a result of the global economic growth at the time but was really deceiving. When Putin comes to power for the first time in 2000, Russia has a growth rate of 10%. Sixteen years later, the giant Russia has, lower than ever, (-0.22% growth in 2016). The economy rose a bit in times of global growth (more than 8% growth in 2006 and 2007) and tremendously collapse in times of recession (-7.8% in 2009), Russian growth, has long been ensured by an oil that has been falling, oil that has been` extremely vulnerable for ten years. The promise made in 2012 by Vladimir Putin to make his country the 5th economic power of the world in 2020 will be difficult hold: Russia has since fallen from 10th to 12th worldwide!
* Car ownership grew in Russia and Europe
During the Transport Revolution in the twentieth century, the automobile quickly became the main means of travel in major cities of Western countries. Thus, since 1983, in the Île-de-France, walking is no longer the predominant means of travel, it’s by car! (Global Transport Survey – EGT, 2001-2002)
In 2005, nearly 890 million vehicles traveled the world (CCFA, 2005). In 2007, 1 billion in sales was exceeded. From 1955 to 2005, they were about three times faster than population growth!
The United States remains the most motorized in the world with 844 vehicles per 1000 inhabitants in 2007! Fortunately, the trend is down.
Similarly, the number of vehicles has stabilized or weakened in the following countries, as they have been, France, Japan and Canada. 3.8 million cars in China in 2000, 43.2 million in 2011, the third-largest fleet after the United States and Japan. At the same time, Russia rose from 20.4 million to 365.4 million units; Brazil from 15.4 million to 27.4 million. Volkswagen certainly found an interest in investing in Russia looking at the trends.
* According to forecast Russia will overtake Germany in Car Manufacturing
By 2020, the majority of the world’s population will be in the middle class. Asia will be leading the population growth of the middle class, while the middle classes are stagnating in the West, ‘said Madhur Jha, researcher at Standard Chartered.
Standard Charted is not alone in being optimistic about Russia’s prospects. The World Bank said in its economic outlook that it expects GDP growth in Russia to accelerate to 1.8 percent in 2020 and 2021, up from 1.6 percent last year. It attributes this growth largely to ‘relatively low and stable inflation and increased oil production’. The IMF also revised up its forecast of Russia’s GDP growth in 2019 to 1.8%, and predicts that the impact of higher oil prices will outweigh the impact of sanctions.
* Competitors like GM and Toyota were getting into Russia as well
Why was FDI preferable to exporting from existing factories in Germany?
At first, all vehicles at the plant were amassed from semi-thumped down units and imported from Germany. In October 2009, nonetheless, the plants were propelled full-scale production, including welding and painting of vehicles. So, from economies of scale point of view, to utilize the current industrial facilities that were used in Germany and not to additionally build the manufacturing plant/stockroom cost in Russia, Hence, FDI is used instead of using the processing plants in Germany.
Which theory (or theories) of FDI best explain Volkswagen’s FDI in Russia?
Push and pull strategy justifies FDI from Wolkvagen
- • falling interest in Russia, Volkswagen to cut its production upon Kaluga plan to 120,000 vehicles in 2014 from an adjusted 150,000.
- • Possibility of expanding assembly lines
- • VW would have directed market study and anticipated appropriately
How do you think FDI by foreign automobile companies might benefit the Russian economy?
The Russian Government incentivized car production by using flexible tariffs or any taxes. In 2011, the legislature likewise declared that it would keep duties on imported segments at 0.3% if an outside automaker manufactured and stored inventories close to 300,000 in the nation by 2020, and created 60% of the estimation of the vehicle locally. This change in the financial atmosphere in Russia influences the variables that conveyed Volkswagen to Russia.
Lately, particularly 2014, 2015 drop in oil industry influenced its economy and US sanctions on Russia also influenced its financial development. All these lead to its cash decrease against the $.
Russian motorists are unhappy: fuel prices have been rising steadily since the beginning of the year. If the country is not yet to go down in masse in the street, as in France, grumbling goes up – and the government is in sight.
What impact do you think this will have on FDI into Russia?
Russian motorists are unhappy: fuel prices have been rising steadily since the beginning of the year. If the country is not yet to go down en masse in the street, as in France, grumbling goes up – and the government is insight.
The price of fuel in Russia flew last March, just after the victory of Vladimir Putin in the presidential election. In just one month, gasoline has increased by 13%. Almost immediately, protest movements were launched, notably in Omsk and Novosibirsk, in Dagestan or in the Irkutsk region.
In order to stem the discontent, the government then reached an agreement with the big Russian oil companies, which agreed to block prices in the domestic market. But for a time only. As of the fall, the price of fuel has started to rise again. The Federal Statistical Agency, Rosstat, has seen a 0.1% increase between August and September. In total, since the beginning of the year, prices at the pump have increased by 8.9%.
Why do you think it made this decision? What are the pros and cons of this decision? In your opinion, is it the correct decision?
There is positive monetary, financial and political problems in Russia but the economy is still good for the automobile Industry.
Volkswagen doing abundant corporate activities in Russia. All the other brands associated with the company are made available to the Russians like Audi,
Pros of the decision of Volkswagen:
- 1. Volkswagen already has invested in the Capital assets in Russia, if it continues production in Russia above the Break-even point (Point where Total cost is equal to Total revenue) it would be able to earn profits.
- 2. With the advantages Russia would get due to Crimea being a tourist spot and having good agricultural produces could stabilise the Russian economy in the near future.
- 3. Per capita ownership of automobiles in Russia is low and would be the highest in 2020 as predicted, hence Volkswagen would be able to increase its sales and earn huge profits in the future.
Cons of the decision of Volkswagen:
- 1. With the sanctions imposed by European Union, in the next few Quarters or years, the Russian economy will remain weak and Volkswagen would have to produce lesser automobiles than its capacity.
- 2. Lesser production than the capacity would reduce its profits.