Business Schools have for some time now firmly been in the business of business. As commercial enterprises in their own idiom, they by rights, should be at the cutting edge of business learning; delving deeper and uncovering the truisms of commercial best practice across all spheres. From the high-brow philosophical such as innate structure of capitalism (as we see today) to the more everyday, directly applicable, such as the sector or company exemplar case-study; intended to illuminate understanding through best practice or abysmal failure.
The 2 obvious cases written into the annuls of the auto-industry being Toyoda/Toyota's Jidoka/Kaizen ethos encapsulated by the TPS system (that has supposedly become sector ubiquitous - though has it really?) versus Ford's painful business losses with Edsel.
Given its scale and capital intensiveness, the auto-industry has long been academia's hobby-horse, often used as a high-profile, publicly digestible, valid illustration for the theories behind the advancement of general management theory. Though to be candid, very little true, auto-industry specific, advancements have been made – possibly because many Masters and PhD researchers see it as a matured, yesteryear, smoke-stack industry which is endemically stuck in a paradigm. There are of course specialist research centres such as 'CAR' in Ann Arbor (led by David Cole) and Cardiff Business School's 'CAIR' (led by Paul Nieuwenhuis - since Garyl Rhys' retirement), but general dedication to progressing the automotive learning curve across other realms of academia seems largely absent – the auto-industry used as a case-study contextual backdrop for general theory rather than true conceptual advancement – a great shame given the spectrum of activity to be observed and critiqued.
The commercialisation of education – rightly most prevalent with business schools - was intended to generate market competition and so raise the bar of academic standards. The level of research publication has long been a primary measures of an educational establishment's prowess, its productive output which makes it a seemingly attractive proposition for new 'clients' (students) that in turn generate fees and growth. But in such an age where quantity over-rides quality, the very value and nature of post-graduate research is put in perilous danger as it gathers toward and rides populist or salable business concepts; the universities themselves caught between the tenants of true learning that aids industry and commerce versus the need to be seen to be current, news-worthy and so externally viewed as an attractive service offering.
This is perhaps especially so the case for the plethora of establishments that cannot boast the pedigree - and concomitant 'high-achiever centripetal attraction' - of the old-guard such as Harvard, MIT, 'Ox-bridge', LSE, INSEAD et al; but are forced by the very nature of the enterprise culture to grow. Especially so as supposed 'intellectual lights' across the developing regions of the world that are hungry for the western educational model.
Thus the inherent pressure leads Vice-Chancellors, Deans, Governors and commercially-orientated faculty to all to often create a research-base & structure erected by thematic popularism and corporate jargonism rather than perhaps the real enterprise issues of today, tomorrow, medium-term, long-term and far- future. Given the massive tide of investor, corporate, public and academic interest in BRIC+ Emerging Markets, and their influence on global economics, it is right that a large proportion of focus and effort is directed at the market, consumer and corporate behavior in EM regions. But, there is a world of difference between re-conveying age-old business learning concepts in a new EM setting and the reality of pushing the boundaries of truly progressive learning that has real-world application for general commercial and specific corporate-model advancement.
Sadly, this appears the case with a UK university research piece highlighted in a recent 'Emerging Markets' press pull-out item. [NB it is the press' remit to simply report what it considers useful academic intelligence, not to qualify the foundational basis of such].
In the desire to concoct an attractive and importantly salable research product, a research duo from an English & Scottish universities spend 5 years (as what must have been part of PhD) evaluating the fortunes of 30 renowned (Western) multi-national companies & brands within that most dynamic of BRIC+ economic whirlwinds - China. The duo use Volkswagen as their headline, illustrative test-case so as to try to prove their argument.
The argument set forward is that “rigidity” evident in 4 guises (corporate, strategic, operational & mindset) has been a prime contributor of “poor-performance” for the surveyed MNC's in the 2003-08 period. The central theme is that these corporations failed to stay aware of fast changing consumer and regulatory (environment) conditions, rendering existing beliefs and practices irrelevant.
They apparently simplistically state that in 2003 VW held 30% of the Chinese car market, yet in 2008 that figure fell to 17.3%, with an accordant slip in profitability to in 2008 “failing to reach break-even”, while sales & market-share by rivals (eg GM, Toyota, Honda) has increased.
VW it is claimed: “misjudged the market, assuming that China as an EM that previously accepted lower specification models would continue to favour cheaper VW cars that sold well in other international markets”. Thus, “the company failed to anticipate the dynamic patterns of local demand and under-estimated of the dazzling increase in investment by its global and local rivals”...”this rigidity to change casts shadows over the company's ambitious growth plans in China”
But just how plausible are these assertions, if Volkswagen Group China (VGC) is reviewed in the round and in situational context?
Yes of course VW has lost market-share as the veritable consumer revolution gained power over the 03-08 period. It was only to be expected, and well understood by VW, that its once overwhelmingly dominant (pseudo-monopolistic) position as the government's favoured JV partner would slowly fade as the potential promise of the economic & consumer revolution became reality thereby massively enlarging the TIV (total industry volume) for all players, old and new alike. The official automotive body CAAM states that between 2002-2007 production erupted from 1.09m units to 4.95m units; for that period representing an annual growth of 35%. However, post Q308 that growth has slowed to just below 20% as the Chinese economy continued to retract on the back of housing and stock-market contraction lag effects and the recent record 'pull-back' in exports.
But looking at those 'good years' and beforehand, VW grew its product portfolio from 1 car (the iconic 1984 Santana) to in 2009 15 models - 8 models from Shanghai-VW (covering VW & Skoda brands) and 7 from FAW-VW (covering VW & Audi brands). [NB VWC will claim 44 models but this figure bear relation to model variants, ie powertrain and trim variants – 26 of those produced in China). However, interestingly the original Santana in normal 'Classic' and face-lifted 'Vista' guise still a core product and a consistent top-2 sales ranked model for VGC.
Thus given its endemic history in the country and boasting that it responsible for 20% of all of China's automotive sector investment, VGC finds itself spanning the greatest consumer demand remit: from that robust, well loved Santana amongst taxi-drivers and value-seeking consumers to the offering of premium Audi cars giving European cache and in the case of LWB A6, limousine service that is part and parcel of a stratified society.
Thus the academics' central tenant that VWC has not kept apace with competition in terms of looks unfounded, and it must be stated that their prime-identifier of 'specification' as the competitive benchmark is overtly generalistic and somewhat naive given the very high market regard for price and reliability.
But of course the market itself is stratified across many types of buyer/user – functionality, life-stage, demographic and psychological orientation – creating a wide milieu.
To a large extent, it was the recently emergent, 'nouveau-riche' lower-middle class that many of those new domestic auto-producers – that the academics pitch against VW – sought out. Using older platform technologies from Japanese and Korean origins with low Cap-Ex and high labour content, they were able to create often simply face-lifted or copy-cat cars that had an appearance of modernity, with specificational 'bells & whistles', but little product integrity selling at low-end prices. To maintain long-term standing VW were correct in not chasing the ball of such a margin, profit & credibility de-basing game.
That 'gold-rush mentality' led to the expected consequence of eventual over-capacity taking effect from late 2007 onwards, the new squeeze of seeming ever-elastic, downward market-pricing chasing away the marginal cost economies of scale, and so diminishing the once highly attractive business model born from 'sparkly lower-end and even medium-priced' cars. Only those 'new domestics' that organically evolved their own strength, or well vetted 'bolt-on' acquisitions or were a sub-division of a financially conglomerate will continue to survive.
[But this period of domestic contraction and consolidation will have been closely observed by the investment community and trade-buyers with perhaps overt banker influence. Portfolio acquisitions throughout the value chain from suppliers to dealers will be eyed by PE and banking advisors, as will the opportunity for 'Value' and 'Growth' stock-picking as we've recently witnessed here in an 'Auto-Rebound' Europe on the back of national stimulus packages; which could pale in comparison besides China's allocation of its $5 trillion].
The academics also cite the market-share growth success of peer foreign firms such as GM, Toyota and Honda as evidence of VWC's malaise. But it must be stated that GM, whilst in situ for some years with the Buick brand consciously maintained a relatively low profile for some time instead of 'taking-on' VW earlier, waiting until the consumer boom to sell its Buick cars and latter-day utility orientated Chevrolets. Whilst the Japanese were relative late-comers to the market, specifically waiting for a point of market maturity to slowly satiate the consumer demand and maintain pricing.
Thus in actuality VWC has had to play a much more complex game compared to the niche ploys of the majority of domestic new comers and the entry-timing ploys of its MNC peers. As such, given the consistent rise in sales for VW, Skoda and Audi brands it has done so successfully. It has grown Chinese sales from 910,000 units in FY07 to 1,024,000 units in 2008; thereby up 12.5% YoY - according to Hans Dieter Potsche's recent presentation at the corporation's Citigroup London Roadshow on 16.03.09.[Of these 844,000 were VW, 119,000 were Audi, 59,300 were Skoda]
Looking forward the Chinese and Global market is heavily down YoY, so all manufacturers – domestic and foreign – will be adjusting capacity to re-align. But for VW the important introduction of the Lavida mid-sized saloon at end-08, and roll-out of eco sub-branded variants will add marketing fire-power. But perhaps of real consequence and advantage to VW is the 'de-frothing' of the car-market as the 'momentary joy-rider' consumers fall-away and it returns to its previous normative characteristics set by YoY core customers that seek trusted brands, value for money at purchase / through life / residual value and not necessarily cheapness and gimmicks. And importantly a trusted brand. This return of conservatism will mean flatter but more stable sales growth for which VW is well positioned.
This very basic analysis suggests that VWC has not lost its way, instead using recent times and the current period to re-strengthen its hold on the Chinese market via greater localised parts sourcing and assembly, improved product management (as with Lavida's development story as a China only car), the use of its 3 brands Skoda-VW-Audi to target core segment [and importantly re-highlight that the public] aswell as maintaining R&D & plant investment
Thus, from academia's perspective, a research focal-point that juxtaposes the audience interests of a Blue-Chip firm and EM market evolution is undoubtedly alluring. But our concern is that VW as a case-study seems to have been 'back-fitted' into a pre-determined hypothesis – to prove that its 'commercial gold' had lost its lustre. Even though brief, closer inspection undermines the evidence set forth.
From a big-picture perspective, there is very probably an argument that can be favourably presented that highlights that the 'structural shape' of large-scale heavy-industry enterprises born from statist-roots should be assessed; to ensure that the commercial creature naturally evolves 'in-tune' with emerging consumer market demands and is not inadvertently stifled and constricted by an endemically bureaucratic culture yields painfully slow transformation.
Thus as China as a country transforms from a production-led culture to a market-led culture, so the pros and cons of the Joint-Venture enterprise system which VWC, its 14 sub-holdings, and many other MNCs are founded upon should be rightly questioned. Does such an enterprise culture befit a 21st century China?
Of course there will always be the notion that such reports are used as political propaganda, as 'intellectual mechanisms of leverage' to engender structural change within the very heart of Chinese 'Command-Capitalism'. Whether orchestrated or not, there seems just cause for a continued liberalisation of China's industrial structure, because it in turn serves as the vehicle for the evolution and maturation of its domestic financial markets framework; an area which even with recent examples of 'exploring burned fingers' [ie Blackstone * US Banks]must be developed to create a fully fledged 'free-market' economy that is entwined with the global finance infrastructure.
However, whilst the efforts of such academics are undoubtedly meant to serve as platforms for discussion and progress, there simply must be greater constructs of argument if the hypothesis is not to be discredited by a sound antithesis. Instead in the best academic tradition the 2 must be conjoined to provide sound progressive synthesis.