Multinational enterprises (MNEs)
Introduction
Multinational enterprises (MNEs) are firms that operate in several countries around their globe. Their presence in the global markets plays a significant role in ensuring that products and services from one region are available in another region. Substantial economies of scale characterise MNEs, and they tend to amass market share as much as possible. However, the current competitive markets in the global environment are a threat to longevity, sustainability, and profitability of these firms (Pereira & Malik 2018). Because of this, MNEs initially targeted huge markets. Nonetheless, the continued shrinking of the enormous markets has enabled these firms to strategize on how to utilise the potential of emerging markets. As such, internationalization of MNEs is geared towards having their presence in different markets. They do this by using different internal capabilities and taking advantage of existing market opportunities.
The purpose of this paper is to critically analyse Volkswagen’s (VW) entry into the Malaysian automotive industry. The paper covers the VW company background. Afterwards, it details the Malaysian political environment. This is followed by a discussion of VW’s strategy in Malaysia. The strategy discussed is what VW is using currently, and the strategy it used before. Afterwards, the paper provides a suggestion of alternative actions that would be undertaken as well as the justification for the recommendation.
The findings show that VW is active in international markets. Its activeness makes it among the most competitive companies in the automotive industry. However, just like other MNEs in the industry, VW has concentrated in huge markets, and only in less than two decades that it has seen the importance of emerging markets such as Malaysia. The findings further indicate that VW first entry in Malaysia utilised the direct exporting since 2006. However, the company changed the mode of operations in Malaysia to a joint venture with Hicom Automotive Manufacturers Malaysia Sdn Bhd. In all, the suggestion made regarding the alternative approach to entry in Malaysia is operating a wholly-owned manufacturing plant through the localisation strategy.
Company background
Every successful global enterprise has its history. Many companies have struggled with creating an impact in their respective industries, and VW is one of them. VW is a German automobile manufacturer. The company has its headquarters in Wolfsburg, Lower Saxony, Germany (Volkswagen Group 2020). VW was launched in 1937, and currently, VW is the largest automaker in both Europe and Germany. In the top ten list of best-selling cars, VW has three vehicles. They include VW Beetle, VW Golf, and the VW Passat (Volkswagen Group 2020). Among the cars that are still being manufactured, VW has the most cars on this list. The name Volkswagen means “People’s car” in the German language, and its international slogan is “The Car”. Currently, VW operates in 21 countries, where it has 62 plants. The company sells its cars in 153 countries across the globe (Volkswagen Group 2020). VW’s many plants are vested with manufacturing or assembling plants in countries such as the US, Mexico, Germany, Spain, Portugal, Poland, Czech, Bosnia, and Brazil, among other countries. VW was crowned as the top 25 largest companies globally. As such, VW has continued to set up new plants in emerging markets such as West Java and Indonesia as well as Malaysia among other Asian countries.
Regarding operations, VW operates under the VW Group, which is also the founding and namesake member. VW Group is a large multinational corporation. It manufactures numerous cars and trucks brands such as SEAT, Audi, Lamborghini, Bugatti, Bentley, Scania and Skoda. As a unit, VW Group is the largest automaker in Europe and has a market share of not less than 20% (Volkswagen Group 2020).
Host Country Analysis
Volkswagen (VW) established its plant in Malaysia in 2012. Its production’s current location in Malaysia is operated by Hicon Automotive Manufacturers Malaysia Sdn Bhd (Azman 2015). The entry and location of VW in Malaysia were motivated by both political and economic factors. Ideally, Malaysia’s political environment stimulates economic viability that attracts companies from various countries to operate in numerous industries. Malaysia’s political situation and governance embrace semi-democratic regimes. Such regimes provide freedom on political management, which in turn stimulate relative political stability. Malaysia’s political stability for a long time has stimulated trade both locally and internationally. Politically stability in a country like Malaysia means that threats of war and internal rivalry are rare. As such, Malaysia’s political environment attracts foreign investment (Rashid, Looi & Wong 2017). Secondly, Malaysia’s political class shows multilateral relationships with other countries. This helps in developing foreign direct investment (FDI) policies that are friendly for foreign investment in Malaysia. Thirdly, the political environment of Malaysia helps in the development of laws and regulations that are favourable for foreign investment. Such include the government’s goodwill in supporting new entries.
On the other hand, Malaysia’s political environment is characterized by impediments for future attractiveness of foreign investments. Firstly, changes in political leadership make the future of Malaysia’s peace unknown. For instance, the political Islam aspect in Malaysia; the 1951 break up to form the Islamic State puts, the country at a political rivalry and possible civil strife (Habibullah, H.Din & Abdul Hamid 2016). The non-Muslims in Malaysia are easily disenfranchised, which also puts at risk foreign investors who are not affiliated with Islam. Secondly, the political environment in Malaysia has failed to combat corruption. Corruption becomes an impediment to foreign investment as increased kick-backs requirements make an initial investment and continue business maintenance expensive. Thirdly, Malaysia has not had elections to change the top political leaders for a long time. However, the emergence of partial democracy in this country comes with many changes. As such, the expected 2020 elections shake both economic and political environments. As such, when foreign investors fail to predict the political stability of a country in future, they become sceptical about investing. Malaysia occasionally experiences political insurgencies with rival groups causing havoc to the management of the country. With the increased uncertainty in the country’s political stability, many foreign investors end up snubbing Malaysia for other ASEAN countries like Singapore.
VW’s Strategy in Malaysia
Entry strategy
There exist many entry strategies that a company can utilize while entering a new country. Some of the major ones include direct and indirect export, licensing agreement, online sales and foreign assets, as well as a joint venture. Kumar et al. (2020) observe that selecting the appropriate mode of entry strategy is determined by many parameters. Such parameters include the nature of products to be sold, nature of the market, and geographical distances between the country of origin and host country. Among these reasons, Menkinoski, Toshevski and Nikolovski (2016) advise that a company has to select the not only cheap but also sustainably profitable and safe mode of entry strategy. VW has used many entry mode strategies in many of the countries the company operates in. Typical of Malaysia, when VW entered Malaysia in 2012, it strategized to be performed by Hicom Automotive Manufacturers Malaysia Sdn Bhd. This entity is a unit of DRB-Hicom. DRB-Hicom, on the other hand, is controlled by Tan Sri Syd Mokhtar Al-Bukhary. Al-Bukhary made an initial investment of RM1.6 billion. Currently, the plant assembles four of VW’s 15 models available in Malaysia. They include Jetta, Polo Sedan, Polo Hatchback, and Passat.
Given that VW only operates four of its products in Malaysia out of 15, the kind of MNE VW is included Home-Region oriented MNE. VW has 68% of its total sales originating from the European market. Based on this understanding, VW has embraced direct export for many years. The dir export strategy entails exporting finished products from the country of origin to another country (Liu, Shi & Ferrantino 2016). Utilization of this strategy, based on the experience of VW and other MNEs has the advantage of cheap manufacturing per unit. Besides, a company experiences more control of the company over exports, which earns potentially higher profits and closer relationships overseas. However, Bozkurt and Kemer (2014) observe that with an increasingly competitive environment, direct exporting is not sustainable. Due to this, the strategy of VW’s operation, which it started to intensify since 2012, is through the use of a joint venture.
Nonetheless, VW displays characteristics of a transnational company with the geocentric approach. The strategy of entry into Malaysia started by direct exporting. VW began to importing the cars to the Malaysian market in 2006. However, due to lack of sustainability of this model, VW as of 2012, it operates a joint venture. According to Aguelakakis and Yankelevich (2019), the essence of a joint venture is for two or more companies to perform a business project by combining their efforts. Based on the joint venture of VW with Hicom Automotive Manufacturers Malaysia Sdn Bhd provides the utilization of win/win collaboration. The firms attain the win/win situation through sharing of resources and solving everyday problems and achieve the intended goals. For instance, through the joint venture, VW utilizes the host company’s internal capabilities, reputation and market share.
Advantages
Given that VW utilizes the joint venture in Malaysia, it enjoys several advantages. Firstly, VW has managed to enter the Malaysian market with its existing product lines. This advantage ensures that VW’s market share has increased in Malaysia than it was during the direct exporting strategy. The second advantage that VW enjoys through the joint venture is access to increased resources, improved expertise and technology. Whereas the technology of VW is indisputable, the Malaysian customers’ preferences likely to determine technological changes in the cars that VW sells to the host country’s local market. The third advantage is the credibility of the partner in the host market. VW has built its credibility to the Malaysian market through partnering with a reputable company. This means that VW incurs less cost when it comes to marketing.
Disadvantages
Whereas VW’s joint venture strategy in Malaysia enjoys several advantages, there are also limitations that the company has to deal with. One of the notable disadvantages is that when companies enter into a joint venture, the participating organizations may experience specific threats—for instance, the reputation of companies entering the partnership agreement matters. Taking the example of VW’s emission scandal, it may jeopardise the integrity of Hicom Automotive Manufacturers Malaysia Sdn Bhd. On the other hand, where Hicom Automotive Manufacturers Malaysia Sdn Bhd does not have a significant market base, VW may have to incur additional costs in marketing. Another disadvantage that VW is likely to face in the joint venture strategy is the limitations that come with differences in cultures. As explained by Dinu (2018), culture if the country of origin and host country have different cultural orientations, it affects significant aspects such as human resources management, marketing strategies and future development plans. Besides, cultural differences may cause lack of cooperation and coordination in the long run. Thirdly, given that Hicom Automotive Manufacturers Malaysia Sdn Bhd may not be as versatile as VW in matters automotive expertise. As such, it may create an imbalance in investment or assets that they bring together for the venture of the partnership.
Alternative actions
Apart from VW forming a joint venture in Malaysia, the sustainability of this strategy is not guaranteed. As such, the international strategy that VW should adopt is targeting the whole of ASEAN countries with its independent manufacturing plants in China. It is from China that VW will target other countries like Malaysia. The suggested target of VW in these markets should be the enhancement of efficiency, flexibility, and learning. For instance, looking at the ASEAN automotive industry competitiveness, companies like Toyota are highly competitive. However, the strategy of entry and operations of VW in Asia will determine the competitiveness of the Malaysian market. Because of this, having a manufacturing plant wholly owned by VW in Malaysia will help eliminate some of the disadvantages of the joint venture (Williams & Vrabie 2018).
Meanwhile, the application of a wholly-owned manufacturing plant in Malaysia has to be determined in terms of its viability against the existing joint venture framework. However, a balance has to be attained in terms of strategy and integration. Using the Barlett and Ghoshal model, VW, as an MNE, will face two kinds of forces. The first one is the forces of global integration. These forces include technological, buyer behaviour, cost, competitive, and regulatory (Ricart 2020). These forces have to integrate with the effects of local responsiveness. Local responsiveness denotes the degree at which VW must customize its products and methods to meet the conditions of Malaysia. Based on this dimension, VW has to utilize the opportunities created by multi-domestic, standardization and transnational forces that affect the local market. For instance, with the need to attain low cost while maintaining the quality of VW cars, cost-reduction pressure has to apply in the manner that the company integrates value-chain activities in all the countries it operates. Similarly, it has to maximize the efficiency of the value chain activities on a global scale. These approaches will deal with local responsiveness pressure, such as the pressure to come up with cars and practices that resonate with the needs of the local market. This entails customizing the locally made cars to respond to what the local market demands such as vehicle space, fuel consumption and related technologies such as creating hybrid or electric VW cars.
Conclusion
To conclude, the paper has discussed a strategic entry of VW in Malaysia. VW entered Malaysia in 2006 through direct exporting strategy. However, due to limitation of this strategy such as inability to understand the local market better, VW opted for a joint venture with Hicom Automotive Manufacturers Malaysia Sdn Bhd in 2012. VW has been operating using this model since then. This model has the potential of making VW understand the Malaysian market better. On the other hand, it has been identified that Malaysia has a conducive political environment that fosters foreign direct investment (FDI). However, the propensity of the FDI strategy in Malaysia is threatened by the prevailing political environment, which is likely to result in governance problems. This situation makes investors like VW sceptical about engaging in this market fully. Because of this, the paper identifies that VW should examine the Malaysian market in the broader perspective of the larger ASEAN market. Given its competitiveness, it has been advised that VW sets up an independent manufacturing plant in Malaysia. Doing this will enable VW to fully capture the market through localisation strategy by addressing the demands of the local market.