CNU Reasons Why Haier Group Expanded Internationally Discussion

The Haier Group began as a nearly bankrupt refrigerator company called Qingdao General Refrigerator in Qingdao, China. In 1984, Zhang Ruimin was appointed as plant director; he remains the company’s CEO today. In 1992, the company was renamed the Haier Group. Under the leadership of Zhang Ruimin, the Haier Group rose to become the largest home appliance manufacturer in the world, with over 80,000 employees in over 100 countries around the world. In the period 1995–2012, the company’s global revenue increased from RMB4.3 billion to RMB163.1 billion (see Exhibit B). 200 150 100 50 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 Exhibit B Revenue of the Haier Group (RMB billions), 1995–2012

Zhang Ruimin had an international outlook from the start. As early as 1984, soon after becoming the company’s director, he introduced technology and equipment from the German company Liebherr to produce refrigerators in China. In 1990, the company started exporting its products to Europe as a contract manufacturer for multinational brands such as Liebherr’s ‘Blue Line’ brand. Zhang Ruimin said: ‘We started exporting to developed markets first because if your products are good enough for consumers in Europe and in the US, you will have better products in developing markets.’ Zhang Ruimin’s ambition was to create China’s first multinational firm.

The company’s exports to the United States started in 1994. Michael Jemal, a partner in the import company Welbilt Appliances, contacted Haier in order to buy 150,000 refrigerators for the US market. All the refrigerators sold within a year, helping Haier to capture 10% of the US market for small compact refrigerators. Following on from this success, the company collaborated with Jemal to market a wider range of products in the US market.

In the 1990s, the company acquired many other Chinese companies. The product range expanded beyond refrigerators to include other home appliances such as washing machines, televisions, air conditioners, and telecommunications equipment. The company improved its products by acquiring foreign technology through joint ventures with companies such as Mitsubishi of Japan and Merloni of Italy. Zhang Ruimin said: ‘First we observe and digest. Then we imitate. In the end, we understand it well enough to design it independently.’

By 1998, the Haier Group had a market share of over 30% in refrigerators, washing machines, and air conditioners in the Chinese market. But the Chinese home appliances market was saturated and there were few opportunities for further domestic expansion. The Chinese government encouraged the company to expand internationally. Furthermore, the company faced greater domestic competition, as foreign companies began to expand aggressively in the Chinese market. In the mid-1990s, a fierce price war broke out among home appliance manufacturers in China. The Haier Group’s CEO, Zhang Ruimin, saw an urgent need for international expansion in 1996: ‘Only by entering the international market can we know what our competition is doing, can we raise our competitive edge. Otherwise, we will lose the Chinese market to foreigners.’ Therefore, the Haier Group began setting up operations overseas.

Zhang Ruimin pursued a different internationalization strategy from that of other Chinese companies, which were satisfied with exporting low-cost products from China as contract manufacturers for foreign firms’ multinational brands. In contrast to other Chinese companies, the Haier Group emulated the strategies of successful Japanese and Korean firms such as Sony, Samsung, and LG in terms of taking its own brand to foreign markets and in terms of establishing production in foreign markets. Zhang Ruimin believed that by setting up manufacturing plants overseas, the Haier Group could gain advantages from avoiding import tariffs and reducing transport costs. He also believed that the company’s products would appeal more to consumers in developed countries if the products were no longer regarded as Chinese imports. ‘All success relies on one thing in overseas markets—creating a localized brand name. We have to make Americans feel that Haier is a localized US brand instead of an imported Chinese brand,’ said Zhang Ruimin. The Haier Group started its international expansion in developing countries. In 1996, the company established a manufacturing plant for refrigerators and air conditioners in Indonesia. In 1997, further expansions took place in the Philippines, Malaysia, Iran, and former Yugoslavia. Once the company gained some international experience, it decided to expand to developed countries. In 1999, the Haier Group expanded to the United States: a refrigerator plant was established in South Carolina and a design centre in Los Angeles. The company’s investment of US$30 million was the largest foreign investment by a Chinese company in the United States. In 2001, the Haier Group purchased a refrigerator plant in Italy and opened research and development centres in Germany, Denmark, and the Netherlands. In 2006, the company expanded to Japan (see Exhibit C). Initially, the Haier Group expanded internationally through joint ventures with local firms in Indonesia, Yugoslavia, and other countries. Within three years, the company decided to expand through

Exhibit C Milestone foreign direct investments by the Haier Group

Sources: Y. Du, ‘Haier’s survival strategy to compete with world giants’, Journal of Chinese Economics & Business Studies 1(2) (2003): 259–66; X. Yang, Y. Jiang, R. Kang, and Y. Ke, ‘A comparative analysis of the internationalization of Chinese and Japanese firms’, Asia Pacific Journal of Management 26 (2009): 141–62; G. Duysters, J. Jacob, C. Lemmens, and J. Yu, ‘Internationalization and technological catching up of emerging multinationals: A comparative case study of China’s Haier Group’, Industrial and Corporate Change 18(2) (2009): 325–49; K. Palepu, T. Khanna, and I. Vargas, ‘Haier: taking a Chinese company global’, Harvard Business School Case No. 9–706–401(2006); and Haier Group website at http://www.haier.com/.

wholly-owned investments (see Exhibit C). But the company’s executives are flexible when taking decisions on international market entry. The entry into the Japanese market through a wholly-ow

wholly-owned investments (see Exhibit C). But the company’s executives are flexible when taking decisions on international market entry. The entry into the Japanese market through a wholly-owned investment would be difficult, so the company set up a joint venture with the Japanese company Sanyo in October 2006 as a means for entering the Japanese market. However, the Haier Group completed the acquisition of Sanyo Electric in 2012 and has operated as a wholly-owned venture in Japan since then.

The Haier Group used its international expansion not only to sell products overseas but also to acquire new knowledge and skills in foreign markets. The company established research and design centres in the United States, Canada, Japan, and France, among others. It also engaged in strategic alliances with companies such as Mitsubishi, Philips, and Sanyo. Zhang Ruimin had the ambition to create a truly innovative global company that competes on the basis of new product innovations, not on the basis of low costs.

As a result of the Haier Group’s international success, the company faced global competitors. When the Haier Group expanded to the United States, it focused on niche markets such as small, compact refrigerators for students and offices, in order to avoid direct competition with companies such as Whirlpool and GE. But foreign competitors have formulated strategies to counteract the Haier Group’s international expansion. Whirlpool and Electrolux have invested tens of millions of dollars to establish a manufacturing and distribution base in China. These competitors were hoping that aggressive competitive moves in the Chinese market would prevent the Haier Group from earning more profits that the company would otherwise use to expand further internationally.

But global rivals such as Whirlpool and Electrolux were unable to stop the Haier Group’s ambitious drive to become a global leader. In 2005, Yang Mianmian, the company’s group president at the time, said: ‘We are number three in the world for white goods. We want to be number one.’ By 2009, the

Haier Group had become the world’s largest white goods company by sales. In 2012, the Haier Group had a market share of 8.6% of the white goods market worldwide, ahead of its key global rivals LG and Whirlpool (with market shares of 5.5% and 4.2% respectively). Even Yang Mianmian had not expected Haier to become the global leader in the industry so soon.

Discussion questions

1. Why did the Haier Group expand internationally?

2. To what extent did the expansion of the Haier Group follow the Uppsala Model?

3. Where should the Haier Group expand next?

Next question:

Shanghai Volkswagen

Shanghai Volkswagen Automotive Co. is a joint venture between the Shanghai Automotive Industry Corporation (SAIC) and Volkswagen Group. The two companies signed a trial agreement in 1982 for manufacturing the Volkswagen Santana model in Shanghai; the joint venture ( JV)—Shanghai Volkswagen (SVW)—was formally established in October 1984 and started operations in September 1985. The joint venture is located in Anting International Auto City on the outskirts of Shanghai. SVW was one of the first Western auto manufacturers in China and was a market leader for a long period of time.

In the early 1980s, the Chinese automobile sector was underdeveloped. The Chinese government had near total control over the sector, deciding who produced what and where. Not surprisingly, then, when the SVW JV was established, it needed the help of the regional government in Shanghai and central government in Beijing to operate in China. Indeed, the president of SAIC and SVW’s general manager’s offices were located directly underneath the office of Shanghai’s mayor.

Throughout the 1980s and 1990s, SVW worked closely with the Chinese government at the regional and central levels and helped SAIC develop a network of local suppliers. SVW worked patiently with its local suppliers, even when they were not able to meet Volkswagen’s stringent quality standards. It regularly dispatched German engineers to serve as technical consultants to local supply firms. By 1997, nearly 93% of the parts used in SVW’s cars were produced in Shanghai and about 50% were produced by suppliers belonging to SAIC.

SVW was rewarded handsomely for its cooperation with the Chinese government and, in particular, for helping SAIC build its supply network. Both regional and central governments provided SVW with preferential treatment in taxation, access to foreign currencies, government procurement, and access to institutional market. For example, in 1996, the Shanghai municipal government banned cars that had an engine capacity of less than 1.6 litres from city streets, a move conveniently ruling out cars produced by competing automakers, and, in 1998, it levied an extra US$10,000 licence fee on Citroe?n cars (ZX/ Fukang) made in nearby Hubei Province. SVW was also offered the lion’s share of the auto market for

Chinese institutional users—cars for government officials and public organizations—which, at that time, accounted for a large part of the sedan market. A good example of the preferential treatment of SVW is the decision of the Shanghai government, under Zhu Rongji’s leadership, to reserve the Shanghai city taxi market for SVW by requiring that every Shanghai city taxi be an SVW Santana model. As a result, SVW captured around 50% of the market share. However, most of its cars were sold to institutional organizations and taxi companies.

SVW’s early success, though, came at a cost. When the market for the car industry changed dramatically in the early 2000s, SVW was caught off guard. The capabilities that had made it successful in the previous decades suddenly turned into a liability. By the early 2000s, the institutional market had shrunk significantly on the one hand, while on the other hand, the number of private buyers increased significantly. Between 1996 and 2005, private auto ownership in China increased by 22% annually, and by the end of 2005, 58.5% of China’s vehicle fleet was privately owned. However, because SVW served a protected market, its products in terms of both price and quality were not able to serve private consumers, who were far more responsive to price than institutional consumers and were more concerned with quality and style.

In addition to changes in consumer profile, several new competitors, including General Motors, Toyota, Nissan, and Ford, entered the Chinese auto markets to serve the ever-increasing private market segment. The increase in the number of competitors caused prices to fall significantly. For example, the price of the basic Santana, which was 200,000 RMB (US$24,096) in the early 1990s, fell to 89,900 RMB (US$10,857) by 2004.

SVW realized that it needed to change in order to compete in the new business environment. Its market share in the passenger car segment declined by nearly two-thirds from 50% to 17% in just four years from 2001 to 2005.

SVW started by trying to change its supply operations by tightening quality and cost control through the supply chain. However, this was met with resistance by its partner—SAIC— and the regional government, as well as by its suppliers. Suppliers were used to being paid inflated prices for low-quality parts. For nearly two decades, suppliers within the SAIC group got used to supplying SVW, no matter how high their costs were, and therefore resisted SVW’s plans to move to a cost-efficient supply network. SAIC saw SVW’s move to change its supply chain operations as a threat to the development of its suppliers and resisted moves by SVW to obtain parts from outside its network of suppliers. The regional government also resisted moves to allow SVW to be served by suppliers located outside the Shanghai municipality. As competition intensified in the early 2000s, SVW had to deal with stiff resistance from its suppliers, local government, and its local partner. Tensions started appearing in a partnership that had worked perfectly well for over two decades. General Motors, which had signed a joint venture with SAIC, became the new market leader in China. Volkswagen and SAIC locked horns and blamed each other for a lack of flexibility. SAIC wanted more up-to-date technology and models and know-how transfer to the JV. Volkswagen asked for modernization of the supply network and the ability to source parts from outside the SAIC network when its suppliers did not meet its criteria. However, SAIC had more bargaining power as a number of multinational firms were waiting to take SVW’s place. To break the deadlock and help its JV in China to regain its competitive advantage, Volkswagen promised to transfer more technological know-how to SVW, to help the JV introduce new models, and to assist it to become a world-class car producer rather than a production plant for the Chinese market. SVW also convinced SAIC that an efficient supply chain would be good for all parties concerned. By the late 2000s, the changes paid off. SVW had developed a different relationship with its suppliers. The new relationship is based on hard bargaining and competition with suppliers from outside the SAIC group and the Shanghai municipality. On the production side, SVexecutive of Volkswagen China, reported that ‘we are practically sold out of many of our models’. The Shanghai Volkswagen joint venture eventually lost the pole position to Shanghai GM in 2011 and 2012 but regained it again in 2013. In the early 2010s, SVW launched its plan to significantly increase its production in China. The JV started new production plans in Anting, Nanjing, Ningbo, Yizheng, and Jiangsu provinces. On 15 November 2013, SVW celebrated the production of the ten-millionth vehicle produced by the joint venture. By the end of 2013, China had become the largest sales market of the Volkswagen group.

W had been very aggressive and introduced a number of new models, such as the Tiguan sport-utility vehicle, the Audi Q5, and an upgraded Volkswagen Jetta that appealed to private buyers. In 2010, the China Association of Automobile Manufacturers reported that SVW had regained the number one position in the Chinese auto market by selling over 700,000 cars in China in 2009, and Winfried Vahland, president and chiefThe Haier Group began as a nearly bankrupt refrigerator company called Qingdao General Refrigerator in Qingdao, China. In 1984, Zhang Ruimin was appointed as plant director; he remains the company’s CEO today. In 1992, the company was renamed the Haier Group. Under the leadership of Zhang Ruimin, the Haier Group rose to become the largest home appliance manufacturer in the world, with over 80,000 employees in over 100 countries around the world. In the period 1995–2012, the company’s global revenue increased from RMB4.3 billion to RMB163.1 billion (see Exhibit B). 200 150 100 50 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 Exhibit B Revenue of the Haier Group (RMB billions), 1995–2012

Zhang Ruimin had an international outlook from the start. As early as 1984, soon after becoming the company’s director, he introduced technology and equipment from the German company Liebherr to produce refrigerators in China. In 1990, the company started exporting its products to Europe as a contract manufacturer for multinational brands such as Liebherr’s ‘Blue Line’ brand. Zhang Ruimin said: ‘We started exporting to developed markets first because if your products are good enough for consumers in Europe and in the US, you will have better products in developing markets.’ Zhang Ruimin’s ambition was to create China’s first multinational firm.

The company’s exports to the United States started in 1994. Michael Jemal, a partner in the import company Welbilt Appliances, contacted Haier in order to buy 150,000 refrigerators for the US market. All the refrigerators sold within a year, helping Haier to capture 10% of the US market for small compact refrigerators. Following on from this success, the company collaborated with Jemal to market a wider range of products in the US market.

In the 1990s, the company acquired many other Chinese companies. The product range expanded beyond refrigerators to include other home appliances such as washing machines, televisions, air conditioners, and telecommunications equipment. The company improved its products by acquiring foreign technology through joint ventures with companies such as Mitsubishi of Japan and Merloni of Italy. Zhang Ruimin said: ‘First we observe and digest. Then we imitate. In the end, we understand it well enough to design it independently.’

By 1998, the Haier Group had a market share of over 30% in refrigerators, washing machines, and air conditioners in the Chinese market. But the Chinese home appliances market was saturated and there were few opportunities for further domestic expansion. The Chinese government encouraged the company to expand internationally. Furthermore, the company faced greater domestic competition, as foreign companies began to expand aggressively in the Chinese market. In the mid-1990s, a fierce price war broke out among home appliance manufacturers in China. The Haier Group’s CEO, Zhang Ruimin, saw an urgent need for international expansion in 1996: ‘Only by entering the international market can we know what our competition is doing, can we raise our competitive edge. Otherwise, we will lose the Chinese market to foreigners.’ Therefore, the Haier Group began setting up operations overseas.

Zhang Ruimin pursued a different internationalization strategy from that of other Chinese companies, which were satisfied with exporting low-cost products from China as contract manufacturers for foreign firms’ multinational brands. In contrast to other Chinese companies, the Haier Group emulated the strategies of successful Japanese and Korean firms such as Sony, Samsung, and LG in terms of taking its own brand to foreign markets and in terms of establishing production in foreign markets. Zhang Ruimin believed that by setting up manufacturing plants overseas, the Haier Group could gain advantages from avoiding import tariffs and reducing transport costs. He also believed that the company’s products would appeal more to consumers in developed countries if the products were no longer regarded as Chinese imports. ‘All success relies on one thing in overseas markets—creating a localized brand name. We have to make Americans feel that Haier is a localized US brand instead of an imported Chinese brand,’ said Zhang Ruimin. The Haier Group started its international expansion in developing countries. In 1996, the company established a manufacturing plant for refrigerators and air conditioners in Indonesia. In 1997, further expansions took place in the Philippines, Malaysia, Iran, and former Yugoslavia. Once the company gained some international experience, it decided to expand to developed countries. In 1999, the Haier Group expanded to the United States: a refrigerator plant was established in South Carolina and a design centre in Los Angeles. The company’s investment of US$30 million was the largest foreign investment by a Chinese company in the United States. In 2001, the Haier Group purchased a refrigerator plant in Italy and opened research and development centres in Germany, Denmark, and the Netherlands. In 2006, the company expanded to Japan (see Exhibit C). Initially, the Haier Group expanded internationally through joint ventures with local firms in Indonesia, Yugoslavia, and other countries. Within three years, the company decided to expand through

Exhibit C Milestone foreign direct investments by the Haier Group

Sources: Y. Du, ‘Haier’s survival strategy to compete with world giants’, Journal of Chinese Economics & Business Studies 1(2) (2003): 259–66; X. Yang, Y. Jiang, R. Kang, and Y. Ke, ‘A comparative analysis of the internationalization of Chinese and Japanese firms’, Asia Pacific Journal of Management 26 (2009): 141–62; G. Duysters, J. Jacob, C. Lemmens, and J. Yu, ‘Internationalization and technological catching up of emerging multinationals: A comparative case study of China’s Haier Group’, Industrial and Corporate Change 18(2) (2009): 325–49; K. Palepu, T. Khanna, and I. Vargas, ‘Haier: taking a Chinese company global’, Harvard Business School Case No. 9–706–401(2006); and Haier Group website at http://www.haier.com/.

wholly-owned investments (see Exhibit C). But the company’s executives are flexible when taking decisions on international market entry. The entry into the Japanese market through a wholly-ow

wholly-owned investments (see Exhibit C). But the company’s executives are flexible when taking decisions on international market entry. The entry into the Japanese market through a wholly-owned investment would be difficult, so the company set up a joint venture with the Japanese company Sanyo in October 2006 as a means for entering the Japanese market. However, the Haier Group completed the acquisition of Sanyo Electric in 2012 and has operated as a wholly-owned venture in Japan since then.

The Haier Group used its international expansion not only to sell products overseas but also to acquire new knowledge and skills in foreign markets. The company established research and design centres in the United States, Canada, Japan, and France, among others. It also engaged in strategic alliances with companies such as Mitsubishi, Philips, and Sanyo. Zhang Ruimin had the ambition to create a truly innovative global company that competes on the basis of new product innovations, not on the basis of low costs.

As a result of the Haier Group’s international success, the company faced global competitors. When the Haier Group expanded to the United States, it focused on niche markets such as small, compact refrigerators for students and offices, in order to avoid direct competition with companies such as Whirlpool and GE. But foreign competitors have formulated strategies to counteract the Haier Group’s international expansion. Whirlpool and Electrolux have invested tens of millions of dollars to establish a manufacturing and distribution base in China. These competitors were hoping that aggressive competitive moves in the Chinese market would prevent the Haier Group from earning more profits that the company would otherwise use to expand further internationally.

But global rivals such as Whirlpool and Electrolux were unable to stop the Haier Group’s ambitious drive to become a global leader. In 2005, Yang Mianmian, the company’s group president at the time, said: ‘We are number three in the world for white goods. We want to be number one.’ By 2009, the

Haier Group had become the world’s largest white goods company by sales. In 2012, the Haier Group had a market share of 8.6% of the white goods market worldwide, ahead of its key global rivals LG and Whirlpool (with market shares of 5.5% and 4.2% respectively). Even Yang Mianmian had not expected Haier to become the global leader in the industry so soon.

Discussion questions

1. Why did the Haier Group expand internationally?

2. To what extent did the expansion of the Haier Group follow the Uppsala Model?

3. Where should the Haier Group expand next?

Next question:

Shanghai Volkswagen

Shanghai Volkswagen Automotive Co. is a joint venture between the Shanghai Automotive Industry Corporation (SAIC) and Volkswagen Group. The two companies signed a trial agreement in 1982 for manufacturing the Volkswagen Santana model in Shanghai; the joint venture ( JV)—Shanghai Volkswagen (SVW)—was formally established in October 1984 and started operations in September 1985. The joint venture is located in Anting International Auto City on the outskirts of Shanghai. SVW was one of the first Western auto manufacturers in China and was a market leader for a long period of time.

In the early 1980s, the Chinese automobile sector was underdeveloped. The Chinese government had near total control over the sector, deciding who produced what and where. Not surprisingly, then, when the SVW JV was established, it needed the help of the regional government in Shanghai and central government in Beijing to operate in China. Indeed, the president of SAIC and SVW’s general manager’s offices were located directly underneath the office of Shanghai’s mayor.

Throughout the 1980s and 1990s, SVW worked closely with the Chinese government at the regional and central levels and helped SAIC develop a network of local suppliers. SVW worked patiently with its local suppliers, even when they were not able to meet Volkswagen’s stringent quality standards. It regularly dispatched German engineers to serve as technical consultants to local supply firms. By 1997, nearly 93% of the parts used in SVW’s cars were produced in Shanghai and about 50% were produced by suppliers belonging to SAIC.

SVW was rewarded handsomely for its cooperation with the Chinese government and, in particular, for helping SAIC build its supply network. Both regional and central governments provided SVW with preferential treatment in taxation, access to foreign currencies, government procurement, and access to institutional market. For example, in 1996, the Shanghai municipal government banned cars that had an engine capacity of less than 1.6 litres from city streets, a move conveniently ruling out cars produced by competing automakers, and, in 1998, it levied an extra US$10,000 licence fee on Citroe?n cars (ZX/ Fukang) made in nearby Hubei Province. SVW was also offered the lion’s share of the auto market for

Chinese institutional users—cars for government officials and public organizations—which, at that time, accounted for a large part of the sedan market. A good example of the preferential treatment of SVW is the decision of the Shanghai government, under Zhu Rongji’s leadership, to reserve the Shanghai city taxi market for SVW by requiring that every Shanghai city taxi be an SVW Santana model. As a result, SVW captured around 50% of the market share. However, most of its cars were sold to institutional organizations and taxi companies.

SVW’s early success, though, came at a cost. When the market for the car industry changed dramatically in the early 2000s, SVW was caught off guard. The capabilities that had made it successful in the previous decades suddenly turned into a liability. By the early 2000s, the institutional market had shrunk significantly on the one hand, while on the other hand, the number of private buyers increased significantly. Between 1996 and 2005, private auto ownership in China increased by 22% annually, and by the end of 2005, 58.5% of China’s vehicle fleet was privately owned. However, because SVW served a protected market, its products in terms of both price and quality were not able to serve private consumers, who were far more responsive to price than institutional consumers and were more concerned with quality and style.

In addition to changes in consumer profile, several new competitors, including General Motors, Toyota, Nissan, and Ford, entered the Chinese auto markets to serve the ever-increasing private market segment. The increase in the number of competitors caused prices to fall significantly. For example, the price of the basic Santana, which was 200,000 RMB (US$24,096) in the early 1990s, fell to 89,900 RMB (US$10,857) by 2004.

SVW realized that it needed to change in order to compete in the new business environment. Its market share in the passenger car segment declined by nearly two-thirds from 50% to 17% in just four years from 2001 to 2005.

SVW started by trying to change its supply operations by tightening quality and cost control through the supply chain. However, this was met with resistance by its partner—SAIC— and the regional government, as well as by its suppliers. Suppliers were used to being paid inflated prices for low-quality parts. For nearly two decades, suppliers within the SAIC group got used to supplying SVW, no matter how high their costs were, and therefore resisted SVW’s plans to move to a cost-efficient supply network. SAIC saw SVW’s move to change its supply chain operations as a threat to the development of its suppliers and resisted moves by SVW to obtain parts from outside its network of suppliers. The regional government also resisted moves to allow SVW to be served by suppliers located outside the Shanghai municipality. As competition intensified in the early 2000s, SVW had to deal with stiff resistance from its suppliers, local government, and its local partner. Tensions started appearing in a partnership that had worked perfectly well for over two decades. General Motors, which had signed a joint venture with SAIC, became the new market leader in China. Volkswagen and SAIC locked horns and blamed each other for a lack of flexibility. SAIC wanted more up-to-date technology and models and know-how transfer to the JV. Volkswagen asked for modernization of the supply network and the ability to source parts from outside the SAIC network when its suppliers did not meet its criteria. However, SAIC had more bargaining power as a number of multinational firms were waiting to take SVW’s place. To break the deadlock and help its JV in China to regain its competitive advantage, Volkswagen promised to transfer more technological know-how to SVW, to help the JV introduce new models, and to assist it to become a world-class car producer rather than a production plant for the Chinese market. SVW also convinced SAIC that an efficient supply chain would be good for all parties concerned. By the late 2000s, the changes paid off. SVW had developed a different relationship with its suppliers. The new relationship is based on hard bargaining and competition with suppliers from outside the SAIC group and the Shanghai municipality. On the production side, SVexecutive of Volkswagen China, reported that ‘we a

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