Macroeconomic Analysis Of Volkswagen In Germany And China, Essay.

A major multinational corporation has appointed you as an economic advisor. You are requested to compile a report regarding the macroeconomic environment in two countries where the firm operates and explain how it might affect the company’s economic activity.

1. You may choose to focus your analysis on any existing firm with international activity that can be of different types in the two

2. The two countries must be chosen from section C below as follows: one country from List 1 and one country from List

3. Your report must include:

a. A brief description of the company and the product/market it operates in for both

b. An analysis of the market structure in which your company operates for the two

c. A comparative analysis of all major macroeconomic indicators (see section D below, excluding 5 and 8) for the two countries and their overall impact on firm’s economic

d. An analysis of the monetary and fiscal policy (instruments) for the two countries and their impact on the firm’s economic activity. You must include here an analysis of the interest rates (Section D, indicator 5).

e. An analysis of the foreign trade policy instruments (international trade agreements) for the two countries and their impact on firm’s economic activity. You should include here an analysis of the exchange rates (Section D, indicator 8).

Background of Volkswagen

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 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.

Market Position of Volkswagen in Germany and China

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.

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 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 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).

Macroeconomic Environment of Germany and 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 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 (Hada?, 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.

Analysis of Market Structure in the Automobile Industry

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 (Hada?-Dyduch, 2015). In the year 1978 when the country launched an economic reform 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).

Evaluation of Current Economic Policies

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.

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 Germany have averaged 2.39% from 2017 to 2018. Increasing Inflation rates are known to lower the real incomes and that has directly affected the purchases of Volkswagen Company since the company deals with products which are not basic.

From the chart above, it is clearly evident that the unemployment rates for both countries as per the current statistics of September are low. For instance, we get to know that the unemployment rates in Germany have stood at 3.4% in 2018, which is a rate unchanged from the previous few months and which is the lowest mark for the last 38 years. The country’s unemployment rate has averaged at the mark of 5.58% from 2015 up to today. On the other hand, the rate of Unemployment in China has recorded a decline from 3.89% to 3.83% between January and September, averaging 4.10% between 2015 and 2018. Comparing the statistics of unemployment rates in these two countries with others, it comes out clearly that the unemployment rates in the two countries are low (Mügge, 2015). Low unemployment rates mean low dependency levels and that in turn means that citizens are able to satisfy their secondary needs like purchasing of vehicles and other luxuries. This can be attributed to the considerable expansion of the Volkswagen Company in the two countries.

Conclusion

In regard to the balance of payments, both China and Germany have recorded positive progress as evident in the chart above. For instance, China has recorded a Government Budget deficit of 3.50% of its total Gross Domestic Product as per the current statistics. The Government Budget of the country has therefore averaged at -2.08% of GDP between 2015 and 2018. On the other hand, Germany has recorded a budget surplus of 10.72 EUR Billion as per the recent statistics of 2018. Its Budget Value has therefore averaged -11.85 EUR Billion between 2015 and 2018. From these statistics regarding the balance of payments, it comes out clearly that the two governments have the ability to support their economic growth (Hada?, 2015). That means the government support through sectors like infrastructure and favorable economic environments are fully facilitated by the two governments.  Such a support can be linked with the growth and expansion of the Volkswagen Company as it was seen in the company overview.

From the above charts, it is clear that the trade surplus for the two countries, Germany and China has not been faring well. As it can be seen from the case of German, its trade surplus has decreased to a level of EUR 17.2 billion in August 2018 from its previous level of EUR 20.0 billion in the statistics of 2017 (Vega, 2017). This has led to a drop in exports by 0.1 percent. The same way, China's current account surplus has narrowed sharply. This resulted in a service deficit increment to 73.7 billion from 72.7 billion. The primary income deficit has also risen to 20.7 billion from 3.0 billion a year ago while the secondary income gap has widened up to 3.9 billion from 3.8 billion. From an economic point of view, trade surplus has direct impacts on government deficit (Feuerriegel & Gordon, 2018). And if the deficit is expanding, the government will have look at the ways to adjust the trend which entails measures like taxation. Increased taxation in both countries have made Volkswagen Company find it hard to meet its operational cost, that translates to increased prices of their products and which makes them unaffordable to citizens. 

Germany has been implemented a Fiscal policy of cutting taxes in order to create equality in its distribution of resources. For instance, in 2010 the country cut 14 million euros of the taxes.  In 2011 also, they cut 24 million euros in income taxes benefiting its low- and middle-income earners and families. This has been seen as an expansionary fiscal policy of the country. Through this expansionary policy, the recessionary gap in the country has been narrowed; unemployment rates reduced and stimulated the economy.  Reducing taxes has created an adjustment opportunity for the economy while government creating new jobs and this has contributed towards the reduced recessionary gap and economy stability in the country (Maier, Mönnig & Zika, 2015).

In regard to monetary policy, Germany doesn’t have its own money and that factor has made it impossible for it to use its own monetary policy.  It has been abiding by the ECB regulations.  ECB has been raising the interest rates which have affected the country largely resulting in unstable prices and altering the living costs within the country (Neaime, 2015). The two policies have had impacts in the manufacturing sector where Volkswagen Company belongs. For instance, the reduced taxes have impacted the company positively by reducing the operational costs of the company. However, on the other side, the monitory policy which has led to increased interest rates has impacted the company negatively by reducing its market. This is in consideration to the fact that consumers of the company products cannot access loans easily and which have been an approach to acquiring the company products before (Lee & Werner, 2018).

There have been gradual changes in China when it comes to the liberalization of trade policies since 2013. This has seen the economy of China surpass that of US to become the leading trade nation. This has been associated with the implementation of several policy decisions by this country which includes but not limited to tax incentives, price controls and subsidies with an aim of  fostering growth and encouraging country-level investments. Additionally, the country has been a committed member of World Trade Organization (WTO) since 2001 which has allowed it to reap the benefits of being part of such a highly integrated global trading system (Mügge, 2016). China has also engaged herself in a number of bilateral and multilateral trade agreements which have facilitated her access to new and potential markets for its products. On the other hand, Germany has also not been left behind because it is also a member of World Trade Organization which has also allowed it to reap the benefits of being part of such a highly integrated global trading system (Wu, Dai, Geng, Xie, Masui & Tian, 2016). It has also engaged itself in a number of bilateral and multilateral trade agreements which have facilitated her access to new and potential markets for its products. Through these and other trade policies, Volkswagen Company in both two countries has been able to explore new markets for its brands like Porsche and Audi (Stüber, 2016).

The differences between the exchange rates in both China and Germany have also played major roles in the different growth paces of the Volkswagen Company. For instance, in Germany where the currency is highly valuable, selling the manufactured vehicles abroad has been hard because the prices tend to be high. A good example can be selling Audi to an African country like Kenya whose currency value is low (115 Kenyan Shillings= 1EURO). In this scenario, a potential buyer in Kenya is likely to perceive the price to be high compared to importing from China whose currency is low valued (14 Kenya Shillings= 1 Chinese Yuan). This initializes one of the reasons behind Volkswagen  Company in China at one point having bypassed its main branch in Germany (Koesler, Swales & Turner, 2016).

References

Bekaert, G., & Hoerova, M. (2016). What do asset prices have to say about risk appetite and uncertainty?. Journal of Banking & Finance, 67, 103-118.

BoydUniversity, I. L. (2015). Volkswagen and the road to Paris. Nature, 526, 640.

Feuerriegel, S., & Gordon, J. (2018). News-based forecasts of macroeconomic indicators: A semantic path model for interpretable predictions. European Journal of Operational Research, 272(1), 162-175.

Goodwin, N., Harris, J. M., Nelson, J. A., Roach, B., & Torras, M. (2015). Macroeconomics in context. Routledge.

Hada?-Dyduch, M. (2015). Polish macroeconomic indicators correlated-prediction with indicators of selected countries. In Proceedings of the 9th Professor Aleksander Zelias   International Conference on Modelling and Forecasting of Socio-Economic         Phenomena (pp. 68-76). Foundation of the Cracow University of Economics, Cracow.

Hertrich, S., & Mayrhofer, U. (2016). Audi and the Chinese Market: A Success Story. In Market Entry in China (pp. 37-44). Springer, Cham.

Kundnani, H. (2015). Leaving the west behind: Germany looks East. Foreign Aff., 94, 108.

Koesler, S., Swales, K., & Turner, K. (2016). International spillover and rebound effects from increased energy efficiency in Germany. Energy economics, 54, 444-452.

Li, Z. (2018). Defining mega-platform strategies: the potential impacts of dynamic competition in China. International Journal of Automotive Technology and Management, 18(2), 142-159.

Lee, K. S., & Werner, R. A. (2018). Reconsidering monetary policy: An empirical examination   of the relationship between interest rates and nominal GDP growth in the US, UK, Germany and Japan. Ecological Economics, 146, 26-34.

Maier, T., Mönnig, A., & Zika, G. (2015). Labor demand in Germany by industrial sector, occupational field, and qualification until 2025–model calculations using the IAB/INFORGE model. Economic Systems Research, 27(1), 19-42.

Mügge, D. (2016). Studying macroeconomic indicators as powerful ideas. Journal of European Public Policy, 23(3), 410-427.

Mügge, D. (2015). Fickle Formulas. Towards A Political Economy of Macroeconomic Indicators. Draft research agenda article presented at Brown University, 5.

Neaime, S. (2015). Sustainability of budget deficits and public debts in selected European Union countries. The Journal of Economic Asymmetries, 12(1), 1-21.

Pang, K., & Siklos, P. L. (2016). Macroeconomic consequences of the real-financial nexus: Imbalances and spillovers between China and the US. Journal of International Money and Finance, 65, 195-212.

Stüber, H. (2016). The real wage cyclicality of newly hired and incumbent workers in Germany. The Economic Journal, 127(600), 522-546.

Vega, G. (2017). Volkswagen: Business as Usual. Business and Professional Ethics Journal.

Wei, J., Zhao, M., Wang, F., Cheng, P., & Zhao, D. (2016). An empirical study of the Volkswagen crisis in China: customers’ information processing and behavioral intentions. Risk analysis, 36(1), 114-129.

Whittall, M., Martinez, M., Sánchez, F. R., Telljohann, V., & Mustchin, S. (2015). Volkswagen Transnational Company Agreements. The meaning of international corporate regulation   at work. The Transnational company agreements, 71.

Wu, R., Dai, H., Geng, Y., Xie, Y., Masui, T., & Tian, X. (2016). Achieving China’s INDC through carbon cap-and-trade: Insights from Shanghai. Applied energy, 184, 1114-1122.