Case Study of Shanghai Volkswagen Presented by Uzma Azhar at WAPDA Staff College Islamabad Pakistan

1. CASE STUDY
Shanghai Volkswagen
Presented by:
Uzma Azhar – LESCO – 157th JMC

2. Background
1994-New Policy for Chinese Automotive Industry:
 Develop a home-grown passenger car industry and to make the automotive industry
on firm foundations by the end of century.
1986 China’s role in the automotive market
 Few people had thought it would be possible to produce a western-quality automobile
in China other than through the assembly of kits.
 China was not known for its ability to manufacture complex products with reliable
quality

3. BACKGROUND
Article 31
1994 policy for Automobile Industry
 Enterprise shall establish their own research and development infrastructure
and be capable of developing new generation products in China.
 Such enterprises shall demonstrate as ability to make “world class” high-
technology products.
 Such enterprises must balance their foreign exchange accounts primarily by
exporting their own products
 In selecting components, with all other things equal, local parts shall be
given preference

4. Background
Volkswagen
 On May 28, 1937, the government of
Germany–then under the control of
Adolf Hitler forms a new state-owned
automobile company. Later that year, it
was renamed simply Volkswagenwerk,
or “The People’s Car Company.”

5. Background
Shanghai Volkswagen (SVW)
 In October 1984, a joint venture (JV) was
established between Volkswagen Group
and Shanghai Automotive Industry
Corporation (now SAIC Motor), creating
Shanghai Volkswagen Automotive Co., Ltd.
(SVW).
 This a fixed term venture, of 45 years,
running until 2030.
 The first car-making joint venture since
China began its reform.
Figure above: The joint-venture agreement for SAIC Volkswagen
was signed at the Great Hall of the People in Beijing on October
10, 1984.

6. OBJECTIVE OF SVW
Dr. Martin Posth, Chairman and
President, Volkswagen Asia-Pacific
Ltd. decided to build the domestic
capabilities from scratch, to develop a
car with high local parts content-a car
that was truly “Made in China”.
Figure above: Dr. Martin Posth, Chairman
and President VW Asia Pacific Ltd.

7. Starting The Journey
 Volkswagen AG(VW AG), as part of joint
venture agreement, had transferred the
entire production line for the Santana
model passenger car from Brazil to
Shanghai.
 The production line was already tested
and life would have been easy if the parts
could have been sourced locally,
requiring SVW simply to assemble the
car on a proven production line.
Figure above: VW-Santana Model

8. Challenges faced by SVW
 Finding quality suppliers in China
 Development of suppliers who could make
components of Western standards
 Communication barriers
 Resistance to technology transfer
 Financial constraints

9. Overcoming The Challenges & Climbing The Ladder
VW-Balancing Foreign Exchange
 VW AG agreed to a type of counter trade by which the
new enterprise could balance its foreign exchange
accounts.
 VW AG agreed to purchase engines produced in
Shanghai to be used in cars manufactured in Europe.
 The earnings generated from such exports would support
the use of foreign currency by SVW for importing the
kits and later the foreign components, used for assembly
in China.

10. Overcoming The Challenges &
Climbing The Ladder
New JV : VW AG and FAW
In 1990, VW AG signed its second joint venture in China with
First Automobile Works (FAW) in Changchun.
The two Chinese plants, along with a third located in Taipei,
formed the vertices of “the Chinese Triangle”; three
production facilities for VW AG from which it would distribute
and sell cars to the Chinese market.
Figure 2 above : SVW Plant in Taipei
Figure 1 above: FAW-VW Plant in Changchun

11. Overcoming The Challenges & Climbing The Ladder
Building a Chinese Car
 Posth categorized manufacturing into three key elements:
1. Suppliers
2. Workforce
3. Production
 Germans Contribution:
1. Bringing the technology
2. Bringing modern management know-how.
 Chinese contribution:
1. Land,
2. Factory buildings
3. Labour force
4. The understanding of their society and recommendations on how to be most efficient
in that environment.

12. Overcoming The Challenges & Climbing The Ladder
Financial and management solutions:
 Issuance of catalogue of parts seeking tender offers from
domestic suppliers.
 Approaching vendors whose products paralleled those
required by SVW. For example, parts manufacturers from the
aeronautical industry
 VW AG worked simultaneously contacting their European
suppliers, trying to get them interested in coming to China
to manufacture their parts.

13. Overcoming The Challenges & Climbing The Ladder
Quality Assurance Program:
 Suppliers were subjected to a lengthy localization protocol to ensure the
ongoing of the item delivered which included strict quality testing.
 SVW initiated a continuous quality improvement program.
 SVW categorised its suppliers into A, B and C classes.
• A-class was export quality,
• B-class fit for domestic use only
• C-class was not fit for even domestic use.

14. Overcoming The Challenges & Climbing The Ladder
Managing Relationship with suppliers:
 Three departments within SVW managed the relationship with suppliers.
Department Activity
Product engineering
department
Specified the technical details such as tolerances and
clearances of the parts.
Supplies department Coordinated purchasing and commercial affairs between
suppliers and SVW.
Quality assurance
department
Sought feedback from the shop floor and from customers to
relate to suppliers.
 Santana Localization Community
This community initiated yearly “quality conference” to open broader
communications between suppliers and SVW.

15. Overcoming The Challenges & Climbing The Ladder
Trainings and courses for SVW employees:
Employees Training & Courses
Production workers Hiring of graduates of junior high schools
New manufacturing hires A three year training course which included
classroom lessons and practical training in
machinery, welding, and forging to be qualified as
line workers.
Secretarial and sales staff Two years included lessons in accounting and book
keeping.
Selective local managers,
accountants, and designers
Overseas training in either Germany, Japan or Latin
America
SVW actively sponsored adult education in night school programs.
Continuing engineering training to select employees at local universities

16. Overcoming The Challenges & Climbing The Ladder
Salaries:
Production line workers at SVW were paid an average of 1,300 RMB per month.
Conduct:
Handbooks on the ethics of SVW were distributed to the workforce based on 4 principles:
enthusiasm, efficiency, self-discipline, and self-confidence.
All components development in China
SVW did well having started with 5% locally source, 60% by
1990 and by the end of 1995, it was close to 90% locally sourced
components.

17. A New Challenges For SVW
By 1995, SVW introduced the Santana 2000, a
modified version of the Santana originally produced
by the joint venture. So the new requirements for
other models or part updates were not automatically
translated without technical support of VW AG or a
Western parts manufacturer.
The next frontier for the Chinese parts suppliers
An understanding of systems engineering and an
ability to respond to model changes by SVW.

18. Recommendations
There are six tips to help SVW or any automotive industry to improve Quality and reduce recalls:
1. Create a culture of quality
Quality departments and executive management should create a culture where suggestions for
improvements—large or small—are welcomed and praised.
2. Working with suppliers
Working closely with suppliers enables manufacturers to understand the supplier’s internal
processes and offer ways to improve the quality of the component parts so they meet the
manufacturer’s quality standards.
3. Use technology to connect the supply chain
With a global supply chain, it becomes increasingly difficult to know what is happening at each
facility or supplier. Utilizing leading technologies, such as the cloud or mobile devices, helps to
connect the supply chain, making it possible for operators and inspectors within a manufacturer’s
facility or the relevant supplier to input data from anywhere, using any mobile device.

19. Recommendations
4. Demand more than an inspection report
 Manufacturers must have visibility into supplier operations
 Real-time visibility created through cloud-based quality systems offers a complete view of
supplier operations, removing the need to re-inspect incoming parts.
5. Leverage manufacturing intelligence
• Data gathered in-process offer a second tier of information, or manufacturing intelligence, that
can be used to increase efficiency and quality across the enterprise and supply chain.
• Utilizing advanced data analysis software, it’s possible to compare site to site or supplier to
supplier, identifying areas for improvement.
6. Drill down through data to reduce warrantee claims and recalls
• If a product was returned within the warranty period because of a defective part, quality
software can be used to identify whether the return was due to a supplier or material
inconsistency. With the source of the issue identified, enterprises can put measures in place to
prevent the same issue in the future.

20. Thankyou
Questions please