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From humble beginnings to the largest automotive market in the world

Exclusive interview with the former Global CEO of Volkswagen Group

· mobility

{{{Gian Marco Brizzolara and Daniel Kilimnik}}}

One of the focus areas of our blog is mobility. Before turning our attention to the future, we had the unique opportunity to sit down with a luminary of China's early days as an automotive market. Prof. Carl Hahn served as CEO of Volkswagen Group in the 1980s and led the car manufacturer's entry into the People's Republic.

Carl Hahn

Establishment of the first Volkswagen Joint Venture in the Great Hall of the People in Beijing, taken from Prof. Carl H. Hahn website

Short Biography of Prof. Hahn

On October 31st, Prof. Carl Hahn, who served as CEO of Volkswagen from 1982 to 1992, visited Schwarzman College for a lecture to share reflections on his career and experiences as a pioneering manager in the automotive industry. As part of this visit, we had the opportunity to conduct a personal interview with Prof. Hahn. Under his leadership, Volkswagen was among the first foreign car companies to establish a presence in China in 1984. At the time, annual car sales in China totaled less than 2,000, with Volkswagen selling several hundred cars. By 2017, the annual Chinese automobile market had grown to 23.89 million cars with Volkswagen contributing sales of 4.18 million vehicles. Next to paving the way for Volkswagen’s success in China, Prof. Hahn was instrumental in building up Volkswagen North America, positioning Audi as a premium brand, and in directing the acquisitions of Spanish automaker SEAT and Czech Automaker Skoda.

In his lecture, Prof. Hahn explained the benefits of Volkswagen’s early entry into the Chinese market. As one of the first major foreign companies in China, Volkswagen was able to build trust with the government, local enterprises, and Chinese consumers. In the 1980s, Prof. Hahn invited high-level Chinese government officials to visit Volkswagen’s factories in Brazil and Mexico to display the company’s business practices in developing economies and provide a glimpse into what commitment China could expect from Volkswagen. By entering early, Volkswagen was able to build up a support organization and attract partners, laying the foundation for decades of dramatic growth. Under Prof. Hahn’s direction, Volkswagen undertook over 350 social projects in China to build trust with Chinese consumers; today, Volkswagen is one of the most-recognized brands in China.

Volkswagen Group China Sales

Why did you decide to enter China (especially at a time when no other major automotive company had done so)?

After Deng Xiaoping’s political aim to deeply reform and open China economically became clear, it was logical for us to take a closer look at China. Deng stood out as a pragmatic leader who went to other countries to identify the best opportunities to aid the development of his own country. In my initial talks with the Chinese government, which included the Chinese Minister for Engineering, I sensed that the Chinese leadership consisted of competent realists, many of whom were engineers by training, who would understand what it would take to create new industries. As a result, there was very cooperative and fruitful dialogue right from the start. Our translator, a Chinese development engineer from our headquarters in Wolfsburg, Germany, further played an important role in facilitating our exchange early on. Beyond the fact that I believed in the economic rise of China, operating a Chinese subsidiary did not pose a significant risk for the company due to the limited scale of our initial commitment. During that time Volkswagen operated around a dozen similar subsidiaries in other developing countries.

What was your strategy to enter China?

The managers who built up our operations in China worked wonders. They entered the country with the aim of avoiding mistakes they saw in Europe and contributing to China’s economic development. Thus, as one of the first foreign automotive companies in China, Volkswagen attracted numerous foreign suppliers to China while also supporting domestic companies to improve their operations. Our operations in China went very well. As the scale of production was relatively small, we could experiment and try things out without incurring meaningful risk for Volkswagen overall. During the first few years, sales doubled every year, but were still far below 100,000 after three years of operating in China. When I retired in 1992, Volkswagen still sold fewer than 100,000 cars per year in China, but was already operating profitably in the country. The fact that many taxis were Volkswagen cars also provided a great marketing tool for us. It was not challenging to convince American suppliers to come to China, and they brought additional capital and know-how with them. As a result of our efforts and the automobile ecosystem Volkswagen helped develop, the entire industrial landscape of China began to develop.

35 years ago, Volkswagen came to China because the Chinese automotive market needed a strong partner to further develop. What can we learn from China today?

Today, China is a life insurance policy for the world of tomorrow. No other country provides the volumes which the Chinese market does. Companies not seizing on this opportunity are missing a major chance to lower their costs, and are further limiting their ability to invest in research and development. In a disruptive, ever-changing world, R&D is becoming more and more important in the automotive industry. Technologies such as electrification, autonomous driving, an improved combustion engine and new materials all require immense efforts in R&D. There is an explosion of technological progress with vital creative impulses emanating from China. The intense competitive pressure and scale economies of operating in China further discipline firms and make them more competitive in other markets as well.

What can we learn from Professor Hahn’s experience?

The experience of Volkswagen China shows that the potential pay-off of an early market entry can be enormous. While most other car companies avoided China as it seemed a small market (less than 2,000 cars sold annually) and a challenging political environment to navigate, Prof. Hahn was willing to take a calculated risk based on his interactions with Chinese leaders. The opportunity to shape the automotive and industrial landscape of China allowed the Volkswagen to build the necessary ties with policymakers, Chinese companies and civil society, which was crucial for the remarkable growth the company enjoyed in the 1990s and 2000s.

With open markets and increasing global competition, companies cannot afford to think locally. Next to the United States, China has become the key consumer market globally. The health of most multinational companies to a significant degree depends on their performance in China. Accessing the Chinese market allows firms to achieve economies of scale, which provide the profits needed to invest in new technologies. Today, already two trillion USD is spent globally on R&D, marking an increase of 11% from 2017 to 2018.

The case of Volkswagen China highlights that a longer-term approach to entering new markets that includes broad stakeholder engagement might be a more promising market entry method than a focus on short-term profitability. In the first decades of its operations, the financial contribution of Volkswagen China to the firm’s overall performance was negligible. Yet the company still invested in philanthropic efforts and played an active role in developing the industrial landscape of the People’s Republic. Instead of only pursuing its own short-term interest, Volkswagen China regarded itself as a part of the local society and business landscape.

China has become the second biggest economy globally. A low-investment entry such as the one of Volkswagen back in 1984 has become virtually impossible. Every industry has become a large competitive space serving hundreds of millions of consumers. For precisely this reason, however, competing in China has become crucial for most multinational companies. China’s domestic market is simply too important to ignore, as are the rapid technological advances being made in the Middle Kingdom.

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