Shanghai Volkswagen
When people think of joint ventures ( JVs) in China, they often think first of Shanghai Volkswagen. It is one of the oldest JVs by a Western company in China, having been established in 1985; the Chinese partner was the Shanghai Automotive International Company (SAIC). As econd JV was established with First Automotive Works in 1987, in the city of Changchun. Between them, these two JVs gave Shanghai Volkswagen a powerful presence in the market.Growth was slow at first, as there were few roads, few petrol stations and few people with the disposable income to buy a private car.
Instead, Shanghai VW’s managers concentrated on two markets; government car fleets and taxis. They were highly successful in both cases. The red Volkswagen Santana became a feature of Shanghai’s streets, and there were sales in other cities too. In 2000 the Santanas were replaced by Passats, a European design but made locally in China by the joint ventures. In 2000, Shanghai VW manufactured 53 per cent of all the cars sold in China.
However, its very success in these fields became Shanghai VW’s undoing. The newly affluent middle classes in China could now afford private cars, and they did not want a brand that had associations with either taxis or the cars used by civil servants. It was estimated that by 2004 there were 60 million people in China with the means to buy and run a private car, and they were not buying Volkswagens. Other competitors were crowding in. General Motors launched a joint venture in Shanghai in 1997, and its Buick brand became popular almost at once. Honda, Toyota and Peugeot were also on the scene with joint ventures or subsidiaries of their own.
More critically, the domestic car industry was surging, and local brands like Chery, Lifan and Geely were cheaper than cars made by the joint ventures. Chery’s QQ micro-car, costing the equivalent of around $4,000, sawsales increase by 130 per cent in 2006. Altogether, the Chinese brands had taken 28 per cent of the market by 2006, and Japanese imports another 27 per cent. Meanwhile, Shanghai VW had seen its market share slide from over 50 per cent in 2000 to just 15 per cent in 2005.
In October 2005 Shanghai VW announced a programme aimed at recovering its old dominant position. The plan was to roll out at least ten new models, aimed specifically at Chinese consumers, with the first to go on show by the opening of the Beijing Olympics in 2008. At the same time there would be a radical shake-up of its cost structures and supply-chain operations, including re-negotiating the two JV contracts to reflect the realities of the new situation. In particular, Shanghai VW wanted its two JV partners to collaborate more closely with each other in order to achieve ‘synergy’. This was a very ambitious programme, and not all observers believed Shanghai VW could achieve its goals in the short time it had allowed itself.
