CASE STUDY ON COUNTRY RISK OF SOUTH KOREA AND BUSINESS EXPANSION OPPORTUNITIES OF VOLKSWAGEN FOR EXPORTS

Table of Contents
Title ............................................................................................................................................................... 3 Executive Summary....................................................................................................................................... 3 Introduction .................................................................................................................................................. 3 Company Profile............................................................................................................................................ 4 Automobile Industry Korea ........................................................................................................................ 4 About South Korea ........................................................................................................................................ 4 Country Risk Assessment South Korea....................................................................................................... 5 Conclusion ..................................................................................................................................................... 9 References .................................................................................................................................................... 9

Title
Assessment of Country Risk of South Korea and Business Expansion Opportunities of Volkswagen for Exports

Executive Summary
South Korea as a country has become favorite destination for global business investment destination. South Korea is one of the fastest growing electronic and automobile markets in the world. South Korea is a market led economy and developed country. The export oriented economy and open market policies of the country have made South Korea favorite country especially for automobile companies like Volkswagen. South Korea has stable political and financial system that makes foreign business players to invest heavily. South Korea is away from any sort of country risk from so many years and this is the reason country is among top 12 countries in the world in terms of GDP. This report has mainly discussed the Volkswagens strategic business expansion in South Korea in order to make this country as major hub for exporting its automobile products to South-East Asian countries and Australia. Volkswagen is a global automobile brand and it does not need to start its venture through any other mean rather direct investing and opening its manufacturing plant in South Korea. In this report, various country risks and its assessment will be discussed in the context of South Korea for investment by foreign automobile players like Volkswagen. This report has also discussed the feasibility of business in the country and the export opportunities in intended countries both South-East Asian countries and Australia.

Introduction
This case study will discuss about the future investment plan of Volkswagen in South Korea and the country risk assessment of South Korea for foreign investment. This case study will discuss the automobile industry in the country then country risk assessment of South Korea. There will be three major country risks political, economic and financial system risk will be discussed and will evaluate the feasibility of business expansion plan by Volkswagen in the country for developing business relation with South East Asian countries and Australian through exporting automobile products.

Company Profile
Volkswagen is a European leading automobile company and worlds third largest automobile manufacturing company. It has worldwide presence with more than 75 countries across the world. It has wide range of vehicles and brands manufacture under Volkswagen Group. Some of most popular brands of Volkswagen Group are Audi, Skoda, Lamborghini, Volkswagen and Bentley. Volkswagen is known for its high end technological automobile vehicles and based on their technology, company is ruling in the world from last 7 decades. It offers high technology as well as low maintenance vehicle.

Automobile Industry Korea

The automobile industry in Korea is one of the fastest growing industries in the world and in last 3 years company has been able to reach record level production of vehicles especially after global depression. Korea has been able to take the full advantage of restoration of global auto market and has been able to meet the domestic as well as global automobile demand. Korean automobile market is highly dominated by automobile players like Hyundai, Kia motors, GM Korea, Renault Samsung and Ssangyong motors. Korean automobile reached the record vehicle production over 4.3 million in year 2010. Korean government and economic conditions are highly favorable for automobile companies and even labor-relation of automobile industry has been smooth over the years. Korean automobile market is worlds 7th largest in terms of production. Use of high end technology and high productivity makes Korea one of the hottest destinations in automobile sector of the world (Lynn, 2001).

About South Korea

South Korea is a market based economy where market is made liberal and free for the foreign investment. South Korea is worlds 15th largest economy in terms of GDP. South Korea is also known as Asian Tiger. South Korea is an active member of G-20 major economies. South Korea is a high income developed country and its economy is one of the fastest growing economies in the world. South Korea is a developed country and it posses lot of investment opportunities for the foreign players (Ray, 2008).

South Korea lacks abundance of natural resources and suffers from small territory with large population. The growing population with growing internal demand for consumable products makes difficult for government to survive. But South Korea has adopted export-oriented economic strategy to run its economy. South Korea is worlds 8th largest exporter and 10th largest importer in the world (Lynn, 2001).

Country Risk Assessment South Korea

All business consist some sort of risks and it can be in different forms. All financial transaction happens across the international boarder carry some additional risks in comparison to domestic financial transaction. These additional risks are generally known as country risk that mainly includes the differences in political, economic, social, currency and geographical factors. These risks have to be measured in order to identify the investment feasibility by the foreign player in other country. The country risk analysis assess the three major categories of risks: Economic, Financial and Political system risk. Problem in any one of the area may have major impact on investment decisions of the company (Coplin et al, 2005).

Economic Risk: South Korea automobile market is open market where foreign investment is welcomed but it has biggest disadvantage that openness makes their economy highly vulnerable to global economic fluctuations. Global financial crisis in year 2008 had made country with almost zero GDP growth rate and high impact on the automobile industry. The demand for automobile vehicles in the country as well as from other neighboring countries had gone down to lowest possible level in last one decade. South Korea has over dependence on export because it is export oriented economy. This may be beneficial for Volkswagen to invest because company is majorly looking to export its automobile products to South-East Asian countries like Indonesia, Thailand and Malaysia etc. where the demand for South Korean automobile products is very high. Volkswagen has chance to explore its market in South-East Asian by opening its manufacturing plants in South Korea. Volkswagen will be highly beneficial by exporting its products in countries like Australia where demand for luxury cars is very high and Volkswagen is specialist in that field (Clark & Bernard, 2006). South Korea has restructured its financial and economic practices after the South-East Financial crisis during 90s and has made their economy robust and strong to meet the best practices at

international level. The economic risk of country is very low according to World Economic Outlook Report 2010. South Korea automobile market is highly stable and majorly encouraged by liberal governments policies and high GDP of country (GDP/Capita $20591).

Figure: South Korean Economic Situation Source: IMR World Economic Outlook, 2010 Report

Political Risk: Political risk in a country is the change in political environment, social issues and non-economic factor etc. There are various reasons for political risk such as instability in political environment, no control over government power, unhealthy and discouraging outlook of government and extremism by the government bodies. Political risk has bad impact on decision making process of government and it has adverse impact on economic and investment policies of the country (Coplin et al, 2005). South Korea is politically stable country where government is running sustainable democracy. Political environment for the development of infrastructure and human development is positive and even encouraging too. There is still some scope for de-regulation in order to improve the overall infrastructure and efficiency of the system. The labor market of the country is little inflexible for foreign players which might be a major drawback for the foreign investors. But labor market has improved lot in last few years which has made comfortable situation for foreign

investors. South Korea and North Korea has some strained relationship which has led some social and political controversies in last one decade. Considering the above factors, it is evident that Volkswagen has good opportunity to set its Greenfield plant in the country as there seems to have no political obstruction and roadblock especially for the foreign players. Even the labor market is highly favorable for the foreign investors because labor is not costly like US or other European nations which is important for manufacturing companies. Low labor cost and highly efficient workforce lead to low input cost and hence high profitability to the company in the end (Clark & Bernard, 2006).

Figure: Political System in South Korea Source: A.M. Best Financial System Risk: This risk is associated with change in financial system regime in a country and adaptation of unaccepted financial rules and regulations by the country. Such risk

creates hindrance for capital movement in a country invested by the foreign players. This risk mainly arises due to instable regulation system in a country because regular change in financial system creates obstacles for investors and business (Coplin et al, 2005). South Korea has robust and stable financial system and each financial division is regulated by regulatory authorities. For example, Insurance sector in the country is regulated by Financial Service Commission (FSC) and this FSC has separate division for insurance. There is another body Financial Supervisory Service also regulates the finance and other financial activities. South Korea has a highly effective legal framework and committed to perform international accepted best practices in reporting standards and regulations. Though South Korea was badly affected by global recession but its financial system was able to regain countrys economic situation back on track (Ray, 2008). Such highly robust and well positioned financial system is highly encouraging for foreign investors because foreign companies like to invest in such countries where financial system has the ability to take care the financial activities in much effective way and keep motivates its capital flow in the system. Volkswagen has better opportunity to invest in such supportive and effective business environment and company can expect to grow in future (Clark & Bernard, 2006).

Figure: GDP per Capita Income of South Korea

Location or Neighborhood Risk: This risk is majorly caused by problems with other countries or in a region; trading relation with neighboring countries or unfriendly economic and political with neighboring countries. This risk has caused major impact on import-export activities with neighboring countries that cause adverse impact on economy of country (Coplin et al, 2005). South Korea has good relationship with its neighboring countries like Japan, Taiwan, Indonesia, Malaysia and China. The only country with which South Korea has sour relationship over the years is North Korea. But relationship between these countries has been improving. All neighboring countries of South Korea have good political and economic relation. Volkswagen has advantage of such situation because Volkswagen will have to get the necessary raw material and other components required for manufacturing cars from neighboring countries of South Korea and the final automobile vehicles can be export to these neighboring countries easily.

Conclusion
It can be concluded from the above discussion on country risk and investment type of Volkswagen in South Korea that it is feasible for company to go ahead with future investment and business expansion plan in South Korea because this country is highly favorable for foreign investors and all economic, political and financial system factors are highly supportive for the foreign investment. Even Volkswagen should look for starting their Greenfield project in South Korea because Volkswagen has good brand image in the world and enter in the market without looking other alternatives such as joint-venture or subsidiary.

References
Coplin, William D. and & OLeary, Michael K., editors, The Handbook of Country and Political Risk Analysis, East Syracuse, New York: Political Risk Services, International Business Communications, 2005. EPHRAIM, Clark, and MAROIS, Bernard (2006). Managing Risk in International Business. International Thomson Business Press. GOLDMAN SACHS (oct.1999). Portfolio Strategy A long-Term Perspective on Short-Term Risk.

GOLDMAN SACHS INSTITUTE OF INTERNATIONAL FINANCE (apr.2000). Capital Flows to Emerging Market Economies. LYNN, Robert (jan.2001). Trends in Global Economy. Presentation at Minerva Program. Institute of Brazilian Issues. The George Washington University. STANDARD & POORS (2001) Rating Actions. RAY, Debraj (2008). Development Economics South Korea. Princeton University Press.

Korea Automobile Manufacturers Association Report, 2010