VW Goes Abroad
The German Autobahn is coming to the United States, not in a literal sense but through
one Car Company making a very big leap. A one billion dollar operation began in Chattanooga
Tennessee the third week in May of 2011. That operation included Volkswagen (VW) producing
their German cars in the United States with over 150,000 VW sedans within the next year. This
has not been their first time in the United States producing their cars, they have had a factory in
Pennsylvania in the 1970’s and were going to expand to Detroit Michigan but the plan fell
through. Not only did the second plan expunge but the plant in Pennsylvania closed as well,
almost abandoning the United States from their market. VW officials did not want to give up
therefore they developed a ten year plan to build a factory in the States. By “Americanizing” the
VW Jetta it came in thousands of dollars below the original price, at $15,995. It showed that
they can possibly do well in the American market if they change their cars for the Americans
like the upcoming 2012 VW Passat model that was specifically made for the United States.
When VW’s plant in Pennsylvania closed, steady fights with the union increased salaries
and prevented some crucial steps in production. Their sales slipped below 100,000 units a year
which made them consider if the United States was a market they wanted to contend in
anymore. VW had the determination to compete with the domestic car makers when they first
came to the United States but when the Japanese makers like Toyota increased their quality
rather than just fuel economy VW fell off the pedestal. One reason that their company could
not stay in the game was that they, “didn’t really build cars for the American market” as analyst
Dan Gorrell of the consulting firm AutoStrategem stated. Since the United States does not have
the Autobahn like Germany they needed to change the gearing of its transmissions to adapt to
the slower speeds in the United States.
Three years ago they figured out they needed a 10 year plan to improve sales and create
a higher demand in the United States. Their goal is to become the world’s largest auto
manufacturer by the end of the decade but they needed to increase their Foreign Direct
Investments (FDI) and make some adjustments to sell their cars in the United States in order to
double their United States transactions. The German 2011 Jetta was transformed into an
“Americanized” Jetta. By switching to rear drum, rather than disc, brakes in the new 2011 Jetta
it caused a “non-German” step as analyst Aaron Bragman called risky. Although the car may not
be as “German” it has increased their sales tremendously and will hopefully continue to grow
especially after their 2012 Passat specifically developed for the United States is released. The
dimensions are closely related to the most popular mid-sized sedans sold in the United States.
The changes they made in the 2012 Passat has decreased the price to make it more affordable,
pricing it $8,000 less than the original model to become more competitive with Toyota and
Ford’s midsize sedans.
One reason they were able to cut costs was because the wages for its Tennessee
workers is less than half what workers cost at manufactures at the three major American
automotive companies which is known as the “Big Three Plant”. Even though VW plans to
increase their wages in the next few years it will still be much lower than much of its rivalry.
Another reason the costs are lowered is because they no longer have to pay for shipping from
Germany and the uncomplimentary exchange rates.
Many people believe that their European character was lost in that they needed to cut
costs to make the car cheaper and more “American”. If the VW plant in Pennsylvania continues
to grow they plan on building a second plant for Audi, which Volkswagen owns. Building an
Audi plant in the United States could almost double their sales as well, and follows the path of
VW’s success. Only time will tell if they can continue in the ever enduring race with Toyota,
Honda, Ford, and General Motors.
The race is on in the battle for the number one spot and we feel that the article shows a
need for VW to “Americanize” its cars. This would normally appear as a cultural issue, however,
we feel that the main issue here is globalization; due to the fact that other foreign competitors
might not have entered the United States car industry if it was not for the effects globalization
has had on the world. Now we will look at the trends that drive globalization and the effects
they have had on the world’s nations and Volkswagen.
The biggest impact globalization has had on the world can be seen in the two macro
factors that drive the way we do business today. The first factor, focused on by the advanced
industrial nations of the Western countries after World War two, is the decline of trade barriers
toward the free flow of goods, services, and capital between nations. This trend has been the
primary responsibility of the World Trade Organization and its predecessor GATT (General
Agreement on Tariffs and Trade). After World War two and eight rounds of negotiations among
its member states, GATT successfully lowered barriers to the free flow of goods and services.
Then in 1993 it completed the Uruguay Round, which further reduced trade barriers, and
extended GATT by establishing the WTO. The WTO was created to make sure nation-states
follow the rules laid down in the trade treaties signed by its 153 nations, and to help manage,
regulate, and enforce the policies of the international trading system. If it was not for these two
global institutions, it is unlikely that the globalization of markets and production could have
successfully developed into what it is today.
This trend has also created a view of the world as a single market place with world trade
growing faster than world output, FDI increasing significantly each year, and the roundabout
way to wealth becoming more evident as the importance of a competitive advantage has
increased. This trend has also allowed other foreign car manufacturers like Toyota and Honda
to compete with Volkswagen. Take a look back in the 1970’s where it was evident that VW was
not ready for foreign competition as it was only trying to compete with American
manufactures. VW eventually had to stop producing cars in America as they saw their annual
sales in units decline. However, this gave them time to rethink their strategy. They came back in
2011 ready to compete. This time they have Americanized their cars by reducing the price and
making its features more attractive to American’s. If it wasn’t for the roundabout way to wealth
and increased competition VW would probably still be producing cars similar to those in 1970.
The second factor of globalization looks at the role of technological change. This
includes the technological changes in communication, information processing, and
transportation technologies. The microprocessor is perhaps the single most important
innovation because so many advances in telecommunication technology depends on its ability
to encode, transmit, and decode the immense amount of information that flows along its
electronic highway. The Internet, which is probably the second most important innovation, has
countless purposes allowing businesses to expand their global presence and hence making the
world a true global marketplace. As for transportation technology, several major innovations
like the commercial jet, super-freighters, and containerization, have reduced transportation
costs and has simplified the transshipment from one mode of transport to another. Together
these three technological changes have significantly reduced the real costs of information
processing and communication, made it possible for a firm to create and manage a global
business, and finally low-cost transportation methods have made it more economical for
business to ship products around the globe. In effect technological change has facilitated the
globalization of markets.
Volkswagen is taking full advantage of these new technological advances in its new
Tennessee plant. An article by Nick Mokey says the plant is using computer-guided robot
welding, and lasers that check tolerances within 1mm. VW is also building its cars with smart
engines that use real-time driver, terrain, and climate data to make automated engine control
decisions to improve comfort and overall efficiency according to the VW website. Going back to
the roundabout way to wealth, due to increased competition people have created new
inventions and technologies that might not have otherwise occurred. In effect it was good for
VW to feel the impact of globalization foreign competitors entering the United States market
because of lower trade barriers and wanting to increase their FDI.
The article implied that the “Americanizing” of VW’s cars is the key to producing in
America again, but we feel it was due to globalization and its trends that have been the driving
force behind both the globalization of markets and the globalization of production. These
trends have led to reduced trade barriers and technological advances so foreign competitors
can enter new markets and therefore increasing competition. The increase of competition
forces nations to focus on their competitive advantage, and in effect the roundabout way to
wealth is created. So perhaps in the 1970’s as foreign competition was entering the United
States car market industry, VW’s Research and Development team should have noticed these
trends quicker and responded to Toyota’s focus on quality by doing the same to their cars.
In conclusion, we believe it is in VW’s best interest to continue their long-term plan and
increase their ability to “Americanize” their vehicles one at a time. It only makes sense in that
they prolong because of the increasingly amount in profits they have been making from our
American market. It gives them the ability to compete with the most successful car company’s
like Toyota and Ford, what automobile corporation would not want to beat out 2.5 Billion dollar
companies?