Question

The closing case explores Volkswagen’s activities in Russia over the last 15 years. Beginning in the mid-2000s, the company stated it would invest in production in Russia. In fact, automobile ownership per capita was low in comparison to other countries in Europe and predictions indicated that Russia would become the largest car market in Europe by 2020. The Russian government offered incentives that a variety of automobile manufacturers took advantage of. However, the advances in the Russian economy to 2014 were based on rising oil prices. Once the price of oil dropped in 2014, and sanctions imposed on Russia took effect after its invasion of the Crimea, the country’s economy weakened considerably. Volkswagen reduced production and faced excess capacity at its Russian plants. Despite this situation, it appears the company is committed to maintain its commitments in Russia for the foreseeable future. Discussion of this case can revolve around the following questions.

QUESTION-Volkswagen has signaled that it is going to stay the course in Russia, despite current political and economic headwinds. Why do you think it made this decision? What are the pros and cons of this decision? In your opinion, is it the correct decision? Why or why not?

Answer 1

Volkswagen made decision to stay the course in Russia, despite current political and economic headwinds because after Russia's invasion of the Crimea, although the country's economy weakened but the price of the oil were dropped. At the reduced oil price it becomes cheaper to run an automobile and hence the demand for the automobiles would increase.

Also with the invasion of Russia into Crimea the economy of Russia could become stronger in the future because Crimea is an important wine-producing region, having rich tobacco plantations and other agriculture also are produced. Also it is a popular tourist spot becuse its climate is so tourist friendly and also it has many seashore resort for the tourists.

Pros of the decision of Volkswagen:

1. Volkswagen already has invested in the Capital assets in Russia, if it continues production in Russia above the Break even point (Point where Total cost is equal to Total revenue) it would be abe to earn profits.

2. With the advantages Russia would get due to Crimea being a tourist spot and having good agricultural produces could stabilise the Russian economy in the near future.

3. Per capita ownership of automobile in Russia is low and would be the highest in 2020 as predicted, hence the Volkswagen would be able to increase its sales and earn huge profits in future.

Cons of the decision of Volkswagen:

1. With the sanctions imposed by European Union, in the next few Quarters or years, Russian economy will remain weak and Volkswagen would have to produce lesser automobiles than its capacity.

2. Lesser production than the capacity would reduce its profits.