Macroeconomic Analysis: Volkswagen Company in Germany and China

This report provides a comprehensive analysis of Volkswagen's operations in Germany and China, examining the company's business overview, market structures (oligopoly in both countries), and macroeconomic environments. The report compares key macroeconomic indicators such as GDP growth, inflation, unemployment rates, and government balances, and assesses their impact on Volkswagen's economic activities. It delves into the monetary and fiscal policies of both countries, analyzing how these policies influence the company's performance. The report also briefly touches on foreign trade policy instruments and their implications. The findings highlight the contrasting economic landscapes of Germany and China, and their respective influences on Volkswagen's global strategy and profitability. The report concludes by offering insights into the challenges and opportunities that Volkswagen faces in these key markets.

Running Head: REPORT FOR VOLKSWAGEN COMPANY, GERMANY & CHINA 1
REPORT FOR VOLKSWAGEN COMPANY, GERMANY & CHINA
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Table of Contents

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1.0 BUSINESS OVERVIEW..........................................................................................................4
2.0 PURPOSE OF THE REPORT...................................................................................................5
3.0 ANALYSIS OF THE MARKET STRUCTURE- GERMANY & CHINA..............................5
3.1 GERMANY...........................................................................................................................5
3.2 CHINA...................................................................................................................................7
4.0 MACROECONOMIC INDICATORS- GERMANY & CHINA..............................................8
5.0 ANALYSIS OF THE MONETARY AND FISCAL POLICY...............................................16
6.0 ANALYSIS OF FOREIGN TRADE POLICY INSTRUMENTS..........................................17
7.0 REFERENCES........................................................................................................................18
LIST OF FIGURES

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FIGURE 1.1: GDP GROWTH RATE, CHINA & GERMANY
FIGURE 1.2: GDP CONSTANT-PRICE, CHINA & GERMANY
FIGURE 1.3: INFLATION RATES, CHINA & GERMANY
FIGURE 1.4: UNEMPLOYMENT RATES, CHINA & GERMANY
FIGURE 1.5: GENERAL GOVERNMENT BALANCES, CHINA &GERMANY
FIGURE1.6: BALANCE OF PAYMENTS, CHINA & GERMANY

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1.0 BUSINESS OVERVIEW
Volkswagen is a major automobile manufacturer in Germany which was founded by the
government of Germany in the year 1937 to facilitate massive production of low priced people’s
vehicles. The headquarters of this company is in Wolfsburg in Germany. Originally, the
company was operated by German Labour Front (Deutsche Arbeitsfront). Ferdinand Porsche, the
original designer of the Volkswagen cars had been hired in the year 1934 from Australia by the
German Labour Front and left in the year 1938 to a new factory in Lower Saxony state. The
1939 outbreak of World War II occurred before the company picking up fully and that saw it
repurposed for production of military equipment and vehicles. Its military involvement, however,
acted as a disadvantage to it by making it a target for Allied bombers and by the time war ended,
it had been left in a devastated condition (Wei, Zhao,Wang, Cheng & Zhao, 2016). Later, it was
rebuilt by the British and mass production began in 1946. In 1949, the company control was then
transferred to West German government and Lower Saxony state. By that time, it had picked
because most of the passenger cars which were being produced within the country were
Volkswagens. Since the 1950s to today, the company production has been expanding rapidly
than any other automotive company in the country. This can be affirmed from its brands like
Audi and others like Porsche which have currently hit the market creating a lot of interest. Its
expansion has seen it establish branches in different countries like China as it will be seen
beneath (BoydUniversity, 2015).
History has recorded Volkswagen as the first German automobile company that entered
the Chinese market after opening policy and reforms were established. The company is recorded
to have entered the Chinese market through the joint venture of the two Chinese owned
enterprises, Changchun and Shanghai. The company has been considering doing well in China

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since it entered the market. For instance, the sales volume of Volkswagen in China for the first
time exceeded those in Germany in 2011 (Li, 2018). During this year, its profit in China
accounted for 20% of its total profits worldwide. However, despite such an increase in sales
volume, the market share of Volkswagen Chinese car industry has declined from 40 percent to
17.7 percent between 2002 and 2018. The reason behind this decline in market share is the
entrance of other big international players like Toyota and Hyundai into the Chinese car market.
2.0 PURPOSE OF THE REPORT
This report will scrutinize the operations of Volkswagen Company in both its
headquarters at Germany and one of its main branches in China. The report will also make an
extra mile to examine the macroeconomic environments in the two countries, Germany & China
and determine how they might affect the company’s progress in the near future. Lastly, it will
also evaluate the current economic policies enacted within the context of the industrialization in
the two countries to back up the prediction of the company’s economic activities.
3.0 ANALYSIS OF THE MARKET STRUCTURE- GERMANY & CHINA
3.1 GERMANY
Germany automotive industry was inspired by British automotive industry in the 1860s
and following the development of four-stroke internal combustion engines by motor-car
pioneers Karl Benz and his colleague Nikolaus in 1870s, the modern cars have emerged. By the
year 1901, Germany automotive sector which comprised of two companies was producing
almost 900 cars per year. The existing automotive companies which belonged to Karl Benz and
Gottlieb Daimler merged in 1926 merged to and adopted the brand name Daimler-Benz and

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started producing cars under the marque of Mercedes-Benz. BMW had also been founded in
1916 but had not started its auto production until 1928 (Hertrich & Mayrhofer, 2016). The
American economist Robert Brady has documented the process of industrial revolution in
Germany, and although his model applies to the automotive industry as well, the sector indicates
to be under poor conditions in later years under Weimar republic. The slow development of auto
industry in Germany exposed the market to major auto manufacturers of America like General
Motors who ended up taking over one of the German company, Opel in 1929, and Ford Motor
Company which has kept the successful German subordinate Ford-Werke since 1925.
The Germany Automotive sector has been making progress from one year to another and
is also expected to even witness a stronger growth rate in the near term future according to
economic predictions. The current trends, as well as the future predictions, are being driven by
the surging market conditions as well as the technological advancements. In regard to investment
opportunities and product sales, this sector is posing strong growth prospects for both domestic
companies as well as the international ones (Kundnani, 2015). Also, new market trends keep on
emerging in the country’s automotive sector and which is mainly driven by improving economic
conditions. The technological advancements coupled with the foray of new firms continue to
shape the new market dynamics.
Despite the milestones which have been made in this industry as well as the anticipated
changes, the automotive industry in Germany has remained under the domination of just a few
companies. Currently, the industry is dominated by five major companies and other seven
marques. These are Volkswagen AG (with its subsidiaries, Porsche & Audi), Adam Opel AG,
Ford-Werke GmbH, BMW AG and Daimler AG (Whittall, Martinez, Sánchez, Telljohann &
Mustchin, 2015). Considering the small number of companies operating in this industry, it comes

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out without any reasonable doubt that this sector is under the Oligopoly type of market structure.
This is in consideration of the characteristics of this market structure: a large number of potential
buyers and few sellers, differentiated products and the presence of barriers to entry. A further
breakdown of this industry lands it to an impure oligopoly because the firms lack competition
and use product differentiation as the main source of market power (Goodwin, Harris, Nelson,
Roach & Torras, 2015).
3.2 CHINA
The history of China automobile industry has been traced back from the Soviet people;
the licensed auto designs which were founded in the 1950s by the USSR and which had small
volumes of between 100 and 200 thousand per year. The start of 1990 has seen this sector
develop very to exceed the production capacity of one million by the year 1992. By 2000, the
country was producing over two million vehicles per year. After its entry into the World Trade
Organization in 2001, the automobile sector of China’s economy has continued to accelerate
further (Feuerriegel & Gordon, 2018). Between the year 2002 and 2007, the sector grew by 21%,
or one million vehicles a year after the other. In 2009, the country produced 13.79 million
vehicles, of which 3.41 million were commercial vehicles and 8 million passenger cars, taking
the position which had been occupied States as the largest vehicle producer globally. In the
preceding year, both production and sells topped 18 million vehicles; 13.76 million being
passenger vehicles. In 2014, the total production hit a mark of 23.720 million, which was
approximately 26% of the world’s automotive production
The automobile industry in China has since then maintained its position as a ringleader,
exceeding the European Union or that of both Japan and US combined. Despite these interesting

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facts about the sector in China, the industry is still controlled and dominated by just a few
companies. The traditional “Big four” manufactures still control the market. These are
Dongfeng, SAIC Motors, Chang’an and FAW. There are also other small manufacturers who are
in their initial steps of the establishment. Those include Brilliance, Beijing Automotive Group,
Geely, Jianghuai, Chery, BYD and Great Wall. In addition, there are several other multinational
manufacturers which have partnered with domestic manufacturers (Hadaś, 2015).
Based on the evidence from the number of manufactures in this industry, it is without any
reasonable doubt that the industry fits under the category of Oligopoly market structure. This is
in consideration of the characteristics of this market structure: a large number of potential buyers
and few sellers, differentiated products and the presence of barriers to entry. A further
breakdown of this industry lands it to an impure oligopoly because the firms lack competition
and use product differentiation as the main source of market power.
4.0 MACROECONOMIC INDICATORS- GERMANY & CHINA

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Figure 1.1: GDP Growth Rate, China & Germany
From the two comparison graphs above, it comes out clearly that China and Germany
stand in totally different positions as far as the world economy is concerned. China seems to be
growing and developing extremely fast and would be expected to have a very large trade deficit
with time. By contrast, Germany seems to be advancing in a very slow phase and with both
stagnant and declining labor force and is expected to have a very large trade surplus as it sends
capital to countries where it can be better use.
The economy of China has been experiencing astonishing GDP growth in the last few
decades and that has catapulted the country to the level of second largest economy in the world
(Hadaś-Dyduch, 2015). In the year 1978 when the country launched an economic reform

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program, it was ranked ninth in the nominal gross domestic product (GDP) globally. 35 years
later it moved up to be the second after the US with a GDP of $9.2 trillion. It’s also due to the
reforms of 1978 that China has become the largest manufacturing hub globally, where the
secondary sector (which comprises construction and industry) made the largest GDP
contribution. China’s modernization has however propelled the tertiary sector to bypass the
secondary sector in terms of GDP contribution and with a share of 46.1% (Maier, Mönnig &
Zika, 2015). Meanwhile, the primary sector has shrunk dramatically in terms of GDP weight
following the exposure of the country into globalization trends. In average, the GDP growth rate
of China as per the 2017 statistics was 6.9%. These trends in the GDP growth of China has
enabled Volkswagen Company to continue expanding because the citizens can afford to purchase
the vehicles enabling the company to explore more opportunities in the world market (Bekaert &
Hoerova, 2016).
On the other hand, the German economy has been also advancing seasonally although at
a very low phase. Mainly, positive GDP growth rates have come from domestic demand, in
particular, household consumption, government spending, and gross fixed capital. Exports have
however contributed negatively to this trend and that sheds light on the fate of Volkswagen
Company within the country. This is in consideration to the fact that the company is operating
mainly on the domestic market which cannot be considered enough to facilitate the growth of an
established manufacturing company like Volkswagen (Mügge, 2016).

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Figure 1.2: GDP Constant-Price, China & Germany
Constant-price GDP entails the calculation of the country’s economic activities in
current-day dollars. By comparison, it factors out the impacts of inflation and allows easy
comparisons by altering the dollar value in other time periods to current-day dollars. When the
GDP decreases for two successive quarters or more, then the economy is said to be in crisis,
meanwhile, when GDP expands too quickly also the chances of inflation increases (Pang &
Siklos, 2016). From the above chart, the GDP Constant Prices of both China and Germany have
been increasing although that of Germany has been doing so in a slower pace compared to the
one for China. I.e. 650899 CNY HML for China and 746.09 for Germany according to the
statistics of 2015-2018. This is an indication that Volkswagen Company expansion pace has been
facilitated by the Constant-price GDP in both countries.

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Figure 1.3: Inflation Rates, China & Germany
In both countries, the consumer price inflation has indicated a rising trend as indicated in
the chart above. For instance, the inflation rate in China has recorded an upsurge of 2.5% rose as
per the statistics of September 2018 from 2.3% where it stood in the month of August. The
Chinas Inflation Rate has, therefore, averaged 5.22% from the year 2017 to this year. On the
other hand, although at a slower phase compared to that of China, Germans inflation rate has
been confirmed at the rate of 2.3% as per the same September statistics from 2% where it stood
in August (Li, 2018). In Germany, this is the highest inflation rate which has been encountered
since 2017 as prices of energy; services and food have increased at faster rates. Inflation Rates in