International Business Assignment: Strategic Alliance Of Volkswagen & Tata Motors In India
Question
Task:
Write a detailed international business assignment critically discussing the case of strategic alliance of Volkswagen and Tata Motors in India.
Answer
Introduction
The key purpose of the study prepared in this international business assignment is to focus on the international business operation that has been successfully followed by Volkswagen. The overall essay will be based on the case study' Volkswagen and Tata Motors: a strategic alliance in India''. Hence, based on all the topic that has been covered through the module of International Business that are international business trends in a globalized economy, international trade theory, internationalism and national sources of competitive advantage has been taken into consideration for the overall analysis. The overall essay will cover the expansion of Volkswagen into India, including the alliance with Tata Motors and their corporate-level strategy to enter into the Indian automobile market. In addition to this, all aspects of the venture related to local responsiveness, global integration, and regional expansions have been covered.
Volkswagen expansion into India
Volkswagen Group is commonly known as Volkswagen AG, which is one of the renowned automobile manufacturers established in 1937 by the government of Germany with an aim to offer low price cars to their citizens. The head office of the company is in Wolfsburg, Germany, and was originally run by the German Labour Front, a Nazi organization. The company operates its automobile business internationally as it is one of the major manufacturers of automobiles and commercial vehicles around the world. As per the case study, it has been found that the number of Volkswagen vehicles delivered to customers increased from more than 9 million in 2015 to 10 million in 2016. Volkswagen, with its potential program of TOGETHER-Strategy 2025, has aspired to be one of the worldwide leaders of sustainable mobility.
The Volkswagen Group has started its business in India for the last 18 years and began its journey in the Indian market with the introduction of their well-known brand, i.e., SKODA, in 2001. In 2007, Volkswagen and Audi were launched in the Indian market, followed by Lamborghini and Porche in 2012.
However, the reason behind the expansion of Volkswagen was due to the increment in the Indian economy and the opportunities for automobile business expansion. As per the study, it has been understood that the Indian economy was estimated to be the consistently and rapidly growing economy around the world. World Bank predicted that the GDP of the country was to grow at 7% in 2016 and the growth of population at more than 1.3% by 2021. On the other hand, the automobile industry of India was growing rapidly with the high demand and preferences of luxurious cars by the Indian consumers, and this had led Volkswagen to expand its business in the Indian market. Hence, the automobile industry of India played a crucial role in this economic growth, with India bringing up rear South Korea, Thailand, and Japan as the fourth leading automobiles exporter. The overall manufacturing of automobiles in India that includes passenger vehicles, two to four-wheelers, doubled at a CAGR of more than 9.% through the financial year of 2006 to 2016. Thus, all these factors had motivated the company to expand its automobile business in India, wherein it had to face several issues after the expansion.
As per the international business strategy, if a company is expanding their business to the host country, they need to adopt an international entry mode, wherein Volkswagen had adopted a direct entry mode. In this entry mode, they have to build a market and its target audience by themselves, and the sourcing will be based on direct mode, and the manufacturing process needs to be done on their own. Thus, it can be said that it will be challenging for any business if the market has been dominated by competitors and the manufacturing cost of the company goes higher. Nevertheless, Volkswagen expands its business in the Indian market but was not able to bear certain losses due to their strategies on international entry mode strategy. Moreover, it can be said that due to this reason, Volkswagen made a strategy to collaborate with Tata Motors, and this has helped them to increase its productivity and to generate its lost revenue. In addition to this, it can be said that if Volkswagen had adopted the partnership entry mode, then it would have helped them to expand their brand and improve their brand recognition in the Indian market.
Alliance with Tata Motors
As per the reports of Global Trends report that was imprinted by the National Intelligence Council during 2016, the economy of India was supposed to be the most swiftly rising economy in the globe. However, the Indian Automobile industry has been playing the most important role in the growth of the country’s economy, which indicates that the country would top in the automobile sector in the future with great increment in the revenue earned by the industry. The existing trend of the Indian automobile company indicates a huge success in the market that has a greater amount of contribution in the Indian economic growth.
As of now, the overall production of automobiles that includes passenger vehicles, commercial vehicles, their wheelers as well as two-wheelers has doubled at a compound annual growth rate (CAGR), amounting to 10% approximately throughout the financial year from 2006 to 2016. Among all the above-listed automobile products, the passenger vehicle has shown the fastest growth of CAGR of 11% approximately. As such, the current trend of the automobile sector or industry in India has involved higher investments in the electric space with an approx investment amounting to $30.75 million in order to acquire a stake in the technology. The companies of the automobile industry have enabled the overall industry has enabled the country to be on top with most of the developed countries and with the higher economy. However, for the future trend of the automobile industry in India, it can have been identified that the sensitivity in the Indian consumers with regards to product price, needs of the producer to maximize the cost, the increasing price of fuel, and an augmenting emphasis on the ecological issues have the highest possibilities to result in the significant changes in the demand of the automobile products.
Moreover, in the future, the alliance of Volkswagen with Tata Motors would include a significant share of the resources and technologies. Since Tata Motors wanted to utilize the far greater and low cost electrical and structural design that was owned by Volkswagen in their AMP products, Tata Motors would be able to create value in their business through alliances and large economies of scale. Therefore, the alliance of Volkswagen with Tata Motors will provide a certain level of capability to Tata Motors for dealing with increased expenses of developing the AMP products.
However, during the alliance of Volkswagen, Tata Motors was convinced that it would help both the companies to leverage the strengths of one another in order to create the power of synergy and design progressive techniques for both the Indian as well as the international market. The main motive of the company for aligning with Tata Motors was also to be prepared for the forthcoming financial years with the help of adoption of new technologies that encouraged the use of higher skills on its platform and by enabling the availability of the products, which is associated with the needs and requirements of the consumer.
With the thorough analysis of the Indian market, Volkswagen found it beneficial to enter into the Indian market through a strategic alliance with Tata Motors. This was an international corporate-level strategy of Volkswagen because Tata Group was one of the most trusted car brands in India at the time of its entry. They were one of the top-selling car brands in India, which made them an appropriate ally of Volkswagen. Volkswagen had to adopt this strategy because when they entered the market as a sole trader, they had to face several challenges such as high manufacturing cost, poor service quality, decreasing confidence of the customers, failure to meet the needs of the Indian consumers. With these many challenges, Volkswagen became increasingly challenging to maintain a consistent market share in the Indian automobile industry. They were gradually becoming non-competitive in the Indian market, and the demand for cars was rapidly decreasing. This led Volkswagen to adopt an aggressive marketing approach so that they can ensure a high volume of sales and gain a considerable amount of consumer base in the Indian automobile market. This aim and objective of Volkswagen led them to seek an alliance with Tata Motors so that they can win the confidence of the Indian consumers. This was because Tata Motor was one of the most trusted companies in India, and they had a substantial amount of market share in the automobile industry. This led to the signing of a memorandum between Tata Motors in January 2017 so that they can develop products jointly.
Figure 1: Outcomes and Opportunities of International Strategy
Sources- (Chapter 9)
The strategic alliance with Tata Motors allowed Volkswagen to increase their market share and also gain the trust of the consumers in the Indian market. The alliance turned to be a beneficial strategy for both companies because, with the creation of the alliance, they were able to share their resources and capital, and this gave them the power of synergy. With the help of corporate synergy, both Tata Motors and Volkswagen were able to gain financial benefits, and they could create additional values for their brands. The companies could share their capitals and assets that helped them and ensure economy of scale, and they could produce cars at lower costs than they were incurring in individual production. After the terrible failure of Skoda in the initial launch, Volkswagen, with the alliance with Tata Motors, launched the car again in the Indian market. This time, both the companies combined their capital and resources for the development of the product that best suited the needs of the Indian consumers. The companies could share their value chain and increase their efficiency so that their consumers can be delivered the best product at a lower cost. With the alliance, Skoda was launched in the Indian market and was appointed as the representative of Volkswagen, and they could gain useful insights into the partnership. Along with that, the alliance has also allowed both the companies to introduce multiple car models and indulge in the mass production of cars.
Local Responsiveness
The international strategy of Volkswagen to form an alliance with Tata Motors included the aspect of local responsiveness. This is because, with the alliance, Volkswagen aimed towards customizing their cars so that they can meet the conditions and needs of the Indian customers. With Volkswagen first launched in India, being a German company, it could not tap the needs and requirements of the Indian customers, and this created several challenges for them. However, with the formation of an alliance with Tata Motors, Volkswagen was able to gain helpful information about the taste, preferences, and needs of the consumers so that they can design their cars accordingly. Since Tata Motors was a successful Indian company, an alliance with them helped Volkswagen to understand the trends of the local market, and they also gained an idea regarding what kind of cars they need to develop.
Furthermore, the primary objective of the alliance was to use the shared knowledge and shared technology for the development of products as per the local expertise. The localization of the cars was possible through the alliance because Tata Motors was able to overcome the challenge of minimizing the high production cost of Volkswagen. Along with the decreased cost, the allied companies were also able to provide quality products to the customers, which increased their reputation in the Indian market. When Volkswagen was not able to operate successfully in their initial days, they had realized that they were required to think locally so that they could increase their local responsiveness and give products that suited the customers in India. With the alliance with Tata Motors, Volkswagen was able to increase the localized production of their cars, and also, they became commercially competitive in the Indian automobile market. Therefore, this is how local responsiveness became an essential aspect of their international level strategy.
Regional Expansion
One of Germany's popular automobile companies is Volkswagen, which means that the company has been successful in achieving a higher level of growth in its region. As per the research, it has been identified that Volkswagen started introducing a series of new models after the appointment of new CEO, i.e., Bernd Pischetsrieder, in 2002. During 2005, Volkswagen preserved North American sales of 224,195 and continued throughout the financial year 2006 wherein the sale volume of the product increased up to 235,140 vehicles. The increased rate from 2005 to 2006 was 5% approximately.
The further expansion of the company was that Volkswagen merged with Daimler AG in a partnership along with other few companies in order to promote the Blue Tec, which was a car with diesel technology and trucks from Volkswagen, Mercedes-Benz, and the brand of other car brands. As per the United States Environmental Protection Agency, Volkswagen has powered at least four out of ten fuel-efficient vehicles that are available for purchase by customers in the United States. Furthermore, the company provided a varied number of its products with the TDI engine, which provides class-leading fuel economy to various levels.
However, with the help of the alliance with Tata Motor, the company will be able to expand its business because Tata Motors is already one of the most successful automobile companies in India. The analysis of the expansion of Volkswagen in Germany indicates that the company has heavy potential in expanding in the Indian automobile market as well. Therefore, the regional expansion of Volkswagen after the alliance seems to be high because India is said to be one of the most successful countries in the automobile sector across the world. This would be a beneficial factor of expansion for the company wherein they will be able to launch the most advanced features and technologies in their car products with the expectation of increment in the profitability of the firm.
Global Integration
The international corporate-level strategy was used by Volkswagen for their global integration in the Indian market so that that could measure the degree to which they can able to practice the same methods and products in other nations. Thus, it can entail the processes that focus on standardization of products and centralization of technology development. However, due to the maximum business operation of Volkswagen internationally, the company facilitate a high level of vertical integration in several of its manufacturing plant around the globe. Hence, it not only involves the manufacturing process but also includes the axle, engine and steering, and suspension manufacturing. Thus, an example of vertical integration is the dominant technology company Apple that has locations of retail to sell their branded products along with manufacturing services around the globe.
Through the alliance with Tata Motors, Volkswagen was able to ensure a global integration as the alliance proposed a merger that was focused on the creation of multiple entities in India that would produce multiple car models. With the alliance, Volkswagen was able to merge three entities that produced passenger cars in India. However, on the initial entry day, Volkswagen had opted for vertical integration for entering into the global market (India). This integration model applied by Volkswagen was most of the modern approach that, however, failed, and then they opted for an alliance with Tata Motors. Through allied global integration, Volkswagen was able to successfully gain market shares and increase its market size in the Indian automobile market. Along with that, they were able to gain economy of scale as they were able to indulge in mass production through shared capital and resources with Tata Motors.
Conclusion
The overall assignment is based on the alignment of Volkswagen with Tata Motors in India. The assignment has initiated the discussion of the expansion of Volkswagen in India, including the alignment with Tata Motors as part of the international corporate-level strategy. In this section, the assignment has presented a discussion of the trend of the automobile sector or industry in India in order to analyze the changes that the company might have to face after it is aligned with Tata Motors. The further discussion will include the entire aspects of the venture associated with the regional expansion, local responsiveness, and international incorporation.
