After considering a number of options, VW decided to consolidate its production for all North America in Puebla. The decision served in the right direction toward ensuring that the firm maintains its operation in this region. Consolidating production in Puebla is advantageous to VW due to the relative low cost of conducting business in Mexico. In addition to projected increase in cost efficiency and volume growth in the medium term, Mexico offered a more viable option as compared to the United States. VW market in the US is small with dwindling market share while in Mexico, VW is the market leader. This means that consolidating operations in Mexico will provide proximity to the most viable market while also serving the US market.
This decision offered the company the best option in its attempt to reduce the number of production units in this region. The Mexican trade policy made it impossible for the US to import vehicles while Mexico could not. The decision was appropriate since closing Mexican plant would result into terminating the Mexican market. However, this decision had its shortfalls. Some of the Mexican trade policies were not favorable to foreign investors. Production quotas limited number of vehicles that could be assembled by foreign auto makers. This limited the capacity that VW could produce in order to satisfy the needs of both the US and Mexican market. However, some of the Mexican policies favored auto industry. Auto makers enjoyed exemption from Mexico’s standard foreign investment policy restricting foreign firms to minority ownership. VW’s decision to consolidate production for all of North America in Puebla is the best means that the company could have applied to survive in the market forces.
The NAFTA auto provisions would eliminate majority of trade barriers among the three countries.
The NAFTA auto provision would eliminate the mandatory requirement that an enterprise attain a national value added in excess of 20% of its total sales in order to qualify as enterprise in the auto parts sector.
Reduction of trade tariffs among the member states would promote import and export of vehicles.
Disadvantages of NAFTA
The regional content requirements proposed by NAFTA ware more restrictive as compared to Mexico’s 1989 decree’s national content requirement.
Removal of restriction on used cars imports to Mexico would make the sales of new cars less competitive.
The trade agreement made it possible for auto manufacturers in the US to relocate to Mexico to enjoy lower labor cost thereby intensifying competition in the Mexico.
On of the major impact of NAFTA on VW is the reality of increased completion in Mexico from North American competitors. As such, VW could consider renewing its focus on North American market since NAFTA made it possible for North America firms to export to Mexico. VW had traditionally relied on a system of global sourcing but the introduction of regional content requirement of NAFTA will force the company to purchase firms from the US (AhlstromS & Bruton 65). The firm should consider developing a network of suppliers in North America and locating a new assembly plant in North America. The firm should also consider expanding its upscale market by developing image as a car maker rivaling Mercedes and BMW.
Ahlstrom, David & Bruton, Garry, D. International Management: Strategy and Culture in the Emerging World. NY: Cengage Learning, 2009. Print.
Hanson, Gordon & Shapiro, Helen. Volkswagen de Mexico’s North American Strategy (A). Harvard: Harvard Business School. 1995. Print.