BEIJING — 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 — 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.
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.
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.
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.