Economy

What China Can Learn From The Volkswagen Fiasco

Doing business at home is always different than doing business abroad. Here are some lessons for Chinese firms from the German company's problems in the United States.

Volkswagens caught in the weeds in Tennessee
Volkswagens caught in the weeds in Tennessee
X. Rick Niu*

BEIJING â€" The Volkswagen "Diesel dupe" scandal is far from over. Revelations that the German automaker was selling cars with devices capable of detecting and changing performance accordingly when tested will of course lead to astronomical fines for VW. But it is also taking a toll on the German automotive industry as a whole, and potentially on the country’s entire economy.

Reflecting on the VW debacle, what are the lessons to be learned for Chinese companies looking to do business in the United States?

China is losing its traditional manufacturing advantages as U.S. manufacturing costs drop year by year. Coupled with China's overall economic downturn, the U.S., the world’s largest consumer market, is also becoming an important overseas investment destination for Chinese enterprises.

The "New Neighbors" report, put together by the Rhodium Group and the National Committee on U.S.-China Relations, found that as of last year, there were 1,583 Chinese firms present in the U.S. The bulk of the investment money (76%) comes from private sources. For these companies, however, the real challenge is not the amount of capital or courage required to do business there, but the management and operations strategies they employ after arriving on American soil.

Generally speaking, the Chinese firms that expand into the U.S. have already enjoyed considerable success at home. Their goal is to be even bigger and stronger â€" to lift their brands to new heights.

Operating in the U.S., however, means adapting to the country's highly developed legal system and free market economy. Foreign companies, in other words, must adhere to the laws and regulations, and focus on integrity and transparency. Unpredictable behavior may work when you're busy building out innovative ideas, but it's a bad idea when it comes to both American legal customs and consumer confidence.

Choose carefully

Despite the fraud, it must be said that Volkswagen started off with a very elaborate strategic deployment when investing in the U.S. Take the selection of its assembly plant as an example. The Chattanooga, Tennessee factory, the company’s only site in the U.S., employs 2,400 local employees. The firm’s ongoing construction of the SUV production line will create another 2,000 jobs. Some estimate that the German automobile giant has so far created some 13,000 direct of indirect job opportunities for locals workers.

Since the scandal broke, the governor of Tennessee and lawmakers representing Chattanooga have all expressed concerns that the affair might hurt VW car sales and thus affect local employment. For now at least, the plant continues to operate normally, thanks in no small part to the fact that Tennessee has no mandatory worker’s union and that the VW Chattanooga factory workers did not join one.

This demonstrates the importance of site selection. Volkswagen could have been lured by the up-front cash incentive policies offered by other states. Instead it was careful to focus on things like taxes and labor laws. Tennessee was a good option, in that regard. Had the company chosen otherwise, it would currently be facing a much worse situation.

Likewise, Chinese firms must take into consideration long-term cost advantages when choosing a destination for their direct investment rather than be dazzled by short-term, tempting incentives offered by local politicians.

Hire locally

Ability to execute is very often the competitive advantage in the U.S., a key fact that Chinese enterprises looking to do business there should know. Too often in China, smooth cross-culture communication is what makes the difference, particularly when it comes to developing high quality management. Executives need to effectively communicate their strategy goals to the front line. By the same token, front-line feedback needs to reach the management level in a timely manner so that company heads can adjust their decisions.

The view from Shanghai. Photo: forayinto35mm

Only local personnel will truly understand local customs, market needs and customer expectations. They are also better suited to communicate with the host country. For outside companies hoping to compete with local producers, in other words, it is crucial to use local talent. Doing so engenders trust in the host country, avoids managerial and operational losses caused by cultural barriers, and ensures relative stability at the management level.

Volkswagen has always sent a chief executive officer from Europe. And in terms of sales, it has trailed companies like Toyota, the top selling brand in the U.S., and Hyundai, which are both run locally by U.S. executives.

Many Chinese enterprises expanding abroad fail not at the initial transaction stage, but later on, at the cultural integration stage. The "fused talents" of people with a bi-cultural background would be ideal for Chinese firms, since someone who doesn’t understand Chinese culture would naturally fail to communicate effectively back with the headquarters; while a non-local Chinese executive who cannot integrate with mainstream American society, even if that person speaks excellent English, won’t be able to communicate well enough with the local political and business sectors.

Play nice

At a company’s initial development stage, it’s much easier for everybody involved to work together because they share a common interest and objective. Once the company enters a more mature phase, contradictions that existed in the development process are likely to be exposed and intensified.

Rumors of Volkswagen’s high-level infighting have existed for a long time. The rumors mainly involve quarrels between the group’s former board chairman, Ferdinand Piech, and Martin Winterkorn, the CEO who resigned after the diesel scandal went public. The lesson, therefore, is that a company with longstanding, high-level disagreements will have difficulty ensuring consistency in developing an external strategy.

The basic model multinationals use for multi-product output is a cross-organizational "matrix management" structure. In this kind of structure, product lines form a vertical axis while geographic divisions form a horizontal axis. The approach is flexible, efficient, and convenient for resource sharing and internal communication.

In the case of Volkswagen, the company blurred these two axes by having, for example, management departments in charge of diesel vehicles both in Germany and the U.S. Its failure to adhere to the matrix management structure helped foster internal contradictions and conflict, and led to a scandal that is now affecting the entire German automobile industry, which has had a reputation for quality and durability.

For Chinese firms, the situation facing Volkswagen right now is a sober reminder that even in an important Western industrialized country with prestigious brands, strategic errors can have major and lasting consequences. A fall like this isn't something a company gets back up from quickly or easily, no matter where they are from.

*The author is the Senior Managing Director of Starr Strategic Partners.

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Society

Debt Trap: Why South Korean Economics Explains Squid Game

Crunching the numbers of South Korea's personal and household debt offers a glimpse into what drives the win-or-die plot of the Netflix hit produced in the Asian country.

In the Netflix series, losers of the game face death

Yip Wing Sum

-Analysis-

SEOUL — The South Korean series Squid Game has become the most viewed series on Netflix, watched by over 111 million viewers and counting. It has also generated a wave of debate online and off about its provocative message about contemporary life.

The plot follows the story of a desperate man in debt, who receives a mysterious invitation to play a game in which the contestants gamble their lives on six childhood games, with the winner awarded a prize of 45.6 billion won ($38 million)... while the losers face death.


It's a plot that many have noted is not quite as surreal as it sounds, a reflection of the reality of Korean society today mired in personal debt.

Seoul housing prices top London and New York

In the polished streets of downtown Seoul, one sees endless cards and coupons advertising loans scattered on the ground. Since the outbreak of the pandemic, as the demand for loans in South Korea has exploded, lax lending policies have led to a rapid increase in personal debt.

According to the South Korean Central Bank's "Monetary Credit Policy Report," household debt reached 105% of GDP in the first quarter of this year, equivalent to approximately $1.5 trillion at the end of March, with a major share tied up in home mortgages.

Average home loans are equivalent to 270% of annual income.

One reason behind the debts is the soaring housing prices. In Seoul, home to nearly half of the country's population, housing prices are now among the highest in the world. The price to income ratio (PIR), which weighs the average price of a home to the average annual household income, is 12.04 in Seoul, compared to 8.4 in San Francisco, 8.2 in London and 5.4 in New York.

According to the Korea Real Estate Commission, 42.1% of all home purchases in January 2021 were by young Koreans in their 20s and 30s. For those in their 30s, the average amount borrowed is equivalent to 270% of their annual income.

Playing the stock market

At the same time, the South Korean stock market is booming. The increased demand to buy stocks has led to an increase in other loans such as credit. The ratio for Korean shareholders conducting credit financing, i.e. borrowing from securities companies to secure stock holdings, had reached 21.4 trillion won ($17.7 billion), further increasing the indebtedness of households.

A 30-year-old Seoul office worker who bought stocks through various forms of borrowing was interviewed by Reuters this year, and said he was "very foolish not to take advantage of the rebound."

In addition to his 100 million won ($84,000) overdraft account, he also took out a 100 million won loan against his house in Seoul, and a 50 million won stock pledge. All of these demands on the stock market have further exacerbated the problem of household debt.

42.1% of all home purchases in January 2021 were by young Koreans in their 20s and 30s

Simon Shin/SOPA Images/ZUMA

Game of survival

In response to the accumulating financial risks, the Bank of Korea has restricted the release of loans and has announced its first interest rate hike in three years at the end of August.

But experts believe that even if banks cut loans or raise interest rates, those who need money will look for other ways to borrow, often turning to more costly institutions and mechanisms.

This all risks leading to what one can call a "debt trap," one loan piling on top of another. That brings us back to the plot of Squid Game, "Either you live or I do." South Korean society has turned into a game of survival.

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