Embed Size (px)
Citation preview
An Analysis of Entry Modes In The
Chinese Car Industry
By
Liu Hu
Year 2006/2007
MSc In International Business
Abstract
Over the past decades, economic globalization is irresistible in the present world. In 2001,
China accessed into World Trade Organization (WTO), forcing Chinese companies to
reposition them to meet the challenges from oversea companies. Especially, Chinese car
industry will suffer a lot. To serve customers outside the existing domestic market, a firm
needs to choose the best mode of entry into the foreign industry. The choice of the appropriate
entry mode for a particular foreign market is of critical importance for a firm conducting its
business in the foreign market and has been identified as a “frontier issue” in international
marketing.
After several years of continuous growth, China is now the fourth-largest automobile market
in the world next to U.S., Japan and Germany. Auto executives, facing flat or falling sales in
their home markets, predict that China will become their biggest market on the next decade.
Thus competitions in the Chinese car market will become tough. How to compete with other
auto companies in Chinese market, selection of entry mode is the first and key step for those
foreign auto companies. Therefore, this paper will attempt to fill in the analytical gap by
examining the determinants of entry mode of multinational auto companies in China. The
objective of this paper is to identify and analyze conceptual framework, which presents the
entry modes used by multinational auto corporations in their entry to the Chinese auto
industry. This paper will also examine various factors that influence the entry mode decision
of foreign auto companies when they are entering Chinese car industry.
I
Contents
Chapter 1 Introduction.............................................................................1
1.1 General Information on Chinese Car Market ................................................ 1
1.2 Objectives of This Paper ............................................................................... 3
1.3 Research Methodology and Data Collection................................................. 3
1.4 Structure of This Paper.................................................................................. 4
Chapter 2 Literature review ...................................................................5
2.1 Entry Mode Theories..................................................................................... 5
2.1.1 Internalization Theory and Transaction Cost Theory .......................... 6
2.1.2 Eclectic Theory .................................................................................... 7
2.1.3 The Institutional Theory....................................................................... 8
2.1.4 Resource-Based Theory ....................................................................... 9
2.1.5 Competitive Advantage and Value Chain............................................ 9
2.1.6 Optimal Entry Mode........................................................................... 11
2.2 Entry Mode Classification........................................................................... 12
2.3 Factors Influencing Entry Strategies ........................................................... 14
2.4 Strategies Selection ..................................................................................... 16
2.4.1 International Market Entry Strategies ................................................. 16
2.4.2 Market Entry Stages ............................................................................ 17
2.4.3 Market Entry Strategies: Joint venture & wholly owned subsidiary .. 18
2.4.4 Entry Timing ....................................................................................... 19
Chapter 3 Methodology ..........................................................................20
3.1 Qualitative Research ................................................................................... 20
3.2 Secondary Data Collection.......................................................................... 21
3.3 Case Study Research ................................................................................... 22
3.3.1 Strengths of Case Study ....................................................................... 22
3.3.2 Weakness of Case Study ...................................................................... 23
3.3.3 Cases Selection.................................................................................... 24
3.4 Summary of Methodology ........................................................................... 24
II
Chapter 4 Case of Chinese Car Industries ..........................................25
4.1 Analysis of external and internal environments in Chinese car market .... 28
4.1.1 General External Environment Analysis............................................ 29
4.1.2 Internal Environment Analysis........................................................... 30
4.1.3 Before WTO....................................................................................... 31
4.1.4 After WTO ......................................................................................... 32
4.1.5 The Impact of The Reduction of Tariff .............................................. 33
4.1.6 The Impact of the Change of Car Import Quota ................................ 34
4.1.7 The Impact of Opening of Car Trade and Service ............................. 34
4.1.8 The Impact of Opening Chinese Car Market to Foreign Investment.35
4.2 ShangHai General Motor (GM) Case........................................................ 35
4.2.1 Brief Introduction to GM Auto Company.......................................... 35
4.2.2 Shanghai GM Auto - Company Overview......................................... 36
4.2.3 Analysis on Operation Performance of Shanghai GM Auto Co.. ...... 36
4.2.4 Bottle-neck Problems of Shanghai GM Auto Company.................... 38
4.2.5 JVs and WOFEs of Shanghai GM - Localization and……………......
Self Development ................................................................................ 39
4.2.6 Reflection on Development of JVs and WOFEs of Shanghai GM .... 40
4.3 ShangHai Volkswagen (VW) Case ............................................................. 41
4.3.1 Brief Introduction to VW Auto Company.......................................... 41
4.3.2 Shanghai VW Auto - Company Overview......................................... 42
4.3.3 Analysis on Operation Performance of Shanghai VW Auto Co.. ...... 42
4.3.4 Bottle-neck Problems of Shanghai VW Auto Company.................... 43
4.3.5 JVs of Shanghai GM - Localization and Self Development .............. 43
4.3.6 Reflection on Development of JVs of Shanghai VW ........................ 45
Chapter 5 Findings and Discussions.....................................................46
5.1 Weaknesses of Chinese Car Industry .......................................................... 46
5.1.1 Economy of Scale............................................................................... 46
5.1.2 Technology......................................................................................... 47
5.1.3 Price.................................................................................................... 47
5.1.4 Ownership .......................................................................................... 47
III
5.2 Strengths of Chinese Car Industry .............................................................. 48
5.2.1 Operations .......................................................................................... 48
5.2.2 Marketing ........................................................................................... 48
5.3 Joint Ventures, Mergers, and FDI ............................................................... 49
5.3.1 Reasons of Popularity of Joint Venture and FDI ............................... 49
5.3.2 Problems in Joint Ventures and FDI .................................................. 52
5.3.2.1 Organizational Control ............................................................ 52
5.3.2.2 Managerial Corporate Culture................................................. 53
5.3.2.3 Technology Dismissing........................................................... 54
Chapter 6 Conclusion.............................................................................55
References ....................................................................................................58
IV
Acknowledgment
This dissertation would be not achieved and completed without academic knowledge and
moral support in various aspects.
Primary, I would like to thank Dr.Chengqi Wang for his support and help as the supervisor
and personal tutor during the dissertation writing process. His suggestions, advice and
explanation were very significant and useful for this dissertation.
I would also like to thank my parents and friends for their perennial support and help during
this paper writing process, and throughout the whole degree course study.
1. Introduction
Economic globalization has been part of the modernized world over the years. When China
entered World Trade Organization (WTO) in 2001, Chinese companies were forced to reposition
themselves to meet the challenges from overseas companies. This action placed the Chinese car
industry to unstable situation.
To serve customers outside domestic market, a firm needs to choose the best entry mode to
penetrate the foreign market. Proper selection of the entry mode to a particular foreign market
is important for a firm and it has been identified as a “frontier issue” in international marketing
(Anderson and Gatignon, 1986). As more and more manufacturing companies, operating
internationally, face heavy domestic and global pressure and make increasing Foreign Direct
Investment (FDI) abroad, the research of the entry mode decision has caught the attention of
managers and academic scholars. In this regard, many theories, which identify and focus on
diversified variables that influence the entry mode decision, have been developed.
1.1 General Information on Chinese Car Market
After several years of continuous growth, China is now the fourth-largest automobile market in
the world next to U.S., Japan and Germany. Even the development continues at just half its
current pace, there is a possibility that China could leap into second place in 3-5 years.
Auto executives, facing flat or falling sales in their home markets, predict that China will become
their biggest market on the next decade. Thus competitions in the Chinese car market will
become tough, which will eventually mark down auto prices to a rational level and extend
competition in price, quality and after-sale service.
Since there is an increase in the number of wealthy Chinese yearly and that the recent statistics
reveals that Chinese private citizens have overtaken the government in the purchased of car units,
automobile giants both at home and abroad look at the Chinese car market as their prospect.
Unlike in the past in which purchases were made by the government, state enterprises and private
businesses, now private citizens composed the majority of car buyers. Probably the mounting of
2
sales is attributed to the car loan offerings of banks, series of price cuts for homemade cars
promoted by a tariff cut in January and the construction of additional roads.
There is immense untapped growth potential in China’s auto industry. According to government
statistics, last year car ownership was only 1.5 units per 1,000 persons over the global average of
more than 90 units. Besides, statistics also reveal that in the next five years about 32% of China’s
urban residents intend to buy a car.
These results bode well for car marketers both in China and abroad. Giant global automobile
industries now are either responding with vast investment or reforming models like mini cars that
most fit the Chinese family use. Following Volkswagen and Citroen, almost all of major car
manufactures, such as General Motors, Ford Motor, Honda, Fiat, Toyota and Mazda, made
investments in joint ventures with Chinese carmakers successively thus intensifying competition
for market shares.
Unlike the international auto giants, China’s auto industry is fragmented. Of the 118 car
manufactures in China, most are small, whereas its top five manufacturers produced 37 percent of
total output in 2001. However, with the current low labor cost which is only one-twentieth and
one-thirtieth of that in Japan, the government labeled China as a “pillar industry” that has great
room for development. But still it is expected to be a difficult process and the need for Chinese
government restructure the industry is yet to realize.
With the commitments to the WTO in 2003, China has agreed to implement another round of
tariff cuts for automobiles before ultimately reducing the tariff level for automobiles to 25
percent by 2006. Besides, China is also committed in issuing more car import quotas.
Now automobile makers have begun chopping prices which trigger to China’s first industry wide
price war. In an estimation of an analyst, by 2010 companies will be able to build 20% more cars
in China than they can sell there. And by 2020, China shall expect to have 140 million
automobiles playing on its roads, which is seven times more than now, fueling demand for
transportation infrastructure and services.
3
1.2 Objectives of this Paper
In spite of the rapid growth of manufacturing sector in developing countries, the extant literature
on entry mode decision of manufacturing firms has been mainly grounded in the national setting
of developed industrial countries and the experiences of transnational and multinational
corporations from these countries. In other words, only few studies identifying factors
influencing manufacturing and service companies’ entry strategies in the context of developing
countries, which generate different external investment environment for foreign investors, have
been done.
Therefore, this paper will attempt to fill in the analytical gap by examining the determinants of
entry mode of multinational auto companies in China. The objective of this paper is to identify
and analyze conceptual framework, which presents the entry modes used by multinational auto
corporations in their entry to the Chinese auto industry.
This paper will examine various factors that influence the entry mode decision of foreign auto
companies when they are entering Chinese car industry. To achieve the objective, there are two
case studies to be used in comparing and explaining the popularity of entry mode choice of joint
venture and FDI in present Chinese car industry. The advantages and problems that encountered
using these entry modes will be discussed as well.
1.3 Research Methodology and Data Collection
Denzin (2000) pointed out that, it was difficult to get access and to collect data about the internal
information of private organizations. Furthermore due to the time and financial constraint, it is
impossible to conduct comprehensive interviews to collect primary data pertaining to qualitative
factors discussed in proceeding literatures that may influence a firm’s entry mode decision.
Therefore to examine the impacts of these qualitative factors on foreign automobile companies’
entry modes in China, this paper is principally based on secondary research in which all the data
and information coming from second-hand sources.
The secondary data used in this paper are primarily collected from a wide range of published
4
books and journals, annual reports, current press information, and others numerous information.
Most statistics can be found from the news release, documentaries, government and firm-level
websites. Furthermore, some interviews with CEOs have been conducted by journalists and
presented through various means, including television and internet. Hence there are many
statistics which can be used as basis for detail.
Case study method is also employed in this paper. Case study is commonly place in journals but
the comparative case studies seldom appear. Case study method can provide rich information and
in-depth analysis of the business strategies and operations in most of the world’s auto
corporations. Data for this case study are obtained from two sources, website and printed
materials. The case studies focused on two multinational auto corporations, General Motor
Corporation and Volkswagen Corporation of USA and Germany respectively, entering Chinese
auto industries. These specific cases try to demonstrate the current situations of multinational
corporations in auto market.
1.4 Structure of this Paper
This paper consists of six chapters. The first chapter is the introduction section. The second
chapter, review of related literature, gives a general view about the subject of entry modes and
especially focuses some topics related to the main conceptions such as the entry mode
theories ,which include internalization theory, transaction cost theory, eclectic theory,
institutional theory, resource-based theory, competitive advantage, value chain and optimal entry
mode; entry modes classification; factors influencing entry strategies and strategies selection,
which include international market entry strategies, market entry stages, and entry timing.
General reviews on the concept of qualitative research method, the second data collection method
and the case study method are presented in the third chapter, the methodology.
The fourth chapter is an analysis of the present Chinese car industry. The case studies of the two
corporations will be scrutinized. These two auto manufacturers, General Motor Corporation and
Volkswagen Corporation, share commonalities and differences on their entry to the Chinese
market. The two automobile giants cover various auto industries including automotives, power
5
energy, gearbox, automotive finance and the likes. While GM Corp. focused on establishing the
automotive empire, VW Corp. dealt on the importance of customer relationship. In China for an
instance, VW Corp. has invested more in car diversification than GM Corp. Market expansion by
these two corporations is just one action done and some are still to take place in the coming years.
These two case studies identify the factors that influence the entry mode decision and will
analyze how and these factors help the corporations in the selection of the appropriate entry
mode.
The fifth chapter discusses the findings from Chinese auto industry that specialized in the case
studies and the analysis on the advantages and limitations of entry mode choices of joint venture,
mergers, and foreign direct investment.
The conclusion part gives the overall finding of the study and suggests the possibility for the
conduct of further study.
2. Literature Review
2.1 Entry Mode Theories
Since strategic decision selection has great impact on the competitive advantage of multinational
enterprises in entering a foreign market, Entry Mode Theories thus play a crucial role.
According to Contractor and Lorange (1998), knowledge on the different effects of these theories
influences a foreign investor’s ability to achieve control over local ventures, monitor local
operations, reduce operational risks, and fulfill strategic objectives. There are several theories
such as Market Imperfections Theory, Transaction Costs Theory, Internationalization Theory,
Strategic Behavior Approach, and the Resource-Based Approach that analyze entry mode
selection of investing firms (Shi, Ho, ad Siu, 2001). However Andersen (1997) argues that a
firm’s entry mode choice involves many factors and that one single theoretical perspective alone
cannot provide a comprehensive explanation.
6
2.1.1 Internalization Theory and Transaction Cost Theory
For they share similarity in some aspects, Internalization Theory and Transaction Cost Theory are
discussed together. As Ekeledo and Sivakumar (2004) stated, Internalization Theory explains why
many firms prefer to launch a subsidiary in a foreign market, and to establish connection with
local firms with regards to licensing or supply agreement. Besides, as Chen in 1999 mentioned, it
is a theory which provides reasons why a firm does it activities in organizational structure
internally than doing it externally. According to Johansson (2000), internalization is to retain
control over its firm-specific advantages either through domestic production, which is the export
option, or foreign investment, that is the FDI option. Johansson further said that licensing or
“externalization” option is not much attractive. The Internalization Theory is viewed that it
assumes perfect competition where any activity is perfectly performed, and disregards the
importance of location in choosing entry mode (Ekeledo and Sivakumar, 2004).
Internalization theory is supported by the transaction cost analysis which is the combination of
the elements of industrial organization, organizational theory, and contract law (Anderson and
Gatignon 1986). “In principle, transaction cost theory explains the organizational preference
between firms and markets” (Chen, 1999). Anderson and Gatignon (1986) believed that the most
appropriate entry mode is through maintaining balance between control and the cost of resource
commitment or choosing a suitable mode by analyzing risk return and/or cost control trade-offs
effect . Transaction costs analysis provides four constructs that determine the optimal level of
control: transaction-specific assets; external uncertainty; internal uncertainty; and free-riding
potential. In choosing the best entry mode to a foreign market the challenge for the firm is on
how it will minimize the transaction costs. This theory is especially useful when many factors are
available; nevertheless it is difficult to gauge its effect’s direction.
For the last 20 years, the transaction cost theory has been broadly employed to illustrate MNC’s
international investment activities (Sun, 1999). It is in this theory in which firms’ selection of
mode of entry depends on the one that will provide the least cost solution (Masten, 1993).
Studies, which examined the theory of international entry mode on firm performance, show
significant differences in the performance levels of different types of entry modes, specifically
7
between wholly owned modes and joint ventures. Generally, transaction cost based entry mode
choices are efficiency-driven decisions focusing on the least transaction cost option. Chiles and
Mcmackin (1996) suggest that transaction cost based governance structure decisions may reflect
the optimal performance mode given the uncertainty at the time and decision was made. Poppo
and Zenger (1998) point out that transaction cost driven entry mode decisions greatly affect
firm’s performance. Willianson (1996) argues that the transaction cost solution to mode choice is
an efficiency-based decision, accounting for the hazards of each potential mode structure and the
safeguards needed to assure compliance. Since each entry structure has a different cost and
competency structure, their associated hazard and safeguard costs also vary. Firms using a
transaction cost solution select the mode that economizes on these costs.
Transaction cost theory is associated with business transaction with other parties in the market,
including the costs of drafting and negotiating contracts, and the observation of the behavior of
those who enter into the contract (Luo, 2001). The transaction cost propositions are complicated
under conditions of uncertainty. Uncertainty in a transaction takes two forms, behavioral and
contextual. Teng (2004) spells out the difference between the two forms of uncertainty such that
the former entails the opportunistic behavior of transacting while, contextual uncertainty bounds
rationality of decision makers and arises from changes in institutional conditions such as political
and economic stability, legal ground rules, and cultural and social relations embedded in national
environment.
2.1.2 Eclectic Theory
Dunning’s eclectic Theory of Foreign Direct Investment (FDI) gives explanation to the concepts
that the latter theory have missed. Dunning (1988) points out ownership advantage, location
advantage, and internalization advantage as three key determinants that a firm should look into
upon entering the market. Ownership advantage suggests that a firm must possess specific
advantages which are strong enough to compete with local firms. It can also be regarded as
competitive or monopolistic advantage. Market potential and investment risks that may grant a
firm chance to gain profit refers to second determinant. Meanwhile, the last determinant suggests
the degree of control over foreign affiliate is higher through FDI than licensing a local firm. The
8
eclectic theory indicates that several theoretical frameworks should be involved when a company
enters and serves international market.
However, Ekeledo and Sivakumar (2004) argue that, the eclectic model fails to explain and
predict the entry mode choice in a unified perspective. Furthermore, even Dunning (1993)
himself notices a shortcoming such that the model is not pertinent into the case when two firms
doing similar business and with similar ownership, internalization, and location advantages
would not select the same entry mode in the same target market. The eclectic models also set
aside variables such as broad product variables (goods versus services), home country factors,
and boundary variables (logistics or transportation costs and currency exchange rates between
home and host countries) affecting choice of entry mode. Both theories, internalization theory
and eclectic theory, focus on the influence of industry makeup (Goodnow, 1985) and overlook the
strategic alliances and the internal characteristics of a firm.
2.1.3 Institutional Theory
The common concept of institutional theory suggests that organizations are of “common
understanding of what is appropriate and fundamentally meaningful behavior” as a result of
pressures exerted by various types of institutions (Zucker, 1983 p105). In most cases, institutional
theorists converge on the role of external institutions in affecting organizational decisions and
behaviors. Olive (1991) enumerated regulatory structures, agencies, laws, courts, professions,
interest groups and public opinion as parts of the institution. Both the internal and external
pressures play a vital role on the entry mode decisions and structures that firms pursue. Recent
institutional theory presentations stress that in achieving legitimacy; organizations must conform
to the norms set by the firm’s institutional environment, whether the norm entails the local
market’s institutional environment or the internal isomorphism of the parent and subsidiaries
(Haveman, 1993). The central premise of institutional theory is that organizations should adopt
structures and practices that are “isomorphic” to those of the other organizations as a result of
their quest to attain legitimacy.
Researchers have identified several factors that give rise to isomorphic pressures. For example,
mentioned the three pillars of the institutional environment. The regulative pillar refers to rules
9
and laws that exist to ensure stability and order in societies; the normative pillar which includes
the domain of social values, cultures, and norms, and the cognitive pillar that has to do with the
established cognitive structures are taken for granted in society.
2.1.4 Resource-Based Theory
Resource-based theory considers a firm as the source of competitive advantage (Capron and
Hulland, 1999). The theory conveys the idea that assets and capabilities aside from being
imperfectly mobile are different in one firm to another. Conner (1991) as quoted by Ekeledo and
Sivakumar (2004), notes that, the resource-based theory recognizes the impact of context where a
firm performs as well as the ability of a firm to construct the environment on the way to seeking
success. As Johansson pointed out, the theory studies on technology, know-how, products, and
services which make the firm able to compete in the market.
Ekeledo and Sivakumar (2004) thought that resource-based approach is in sharp contrast to
transaction cost approach, because the former prefers solo ownership while the latter favors the
shared-control mode such as franchising, licensing, management or supply contract.
Furthermore, Johansson (2000) also mentions another approach versus resource-based approach,
market-based resource. Market orientation requires marketer’s concern on consumers’ need.
However, it is often abortive when market-based approach is applied in a country with less
developed market economies.
2.1.5 Competitive Advantage and Value Chain
The competitive advantage, which bolters understanding of entry mode strategy, is the core of a
firm’s positioning. Competitive advantages are of two types, the lower cost and differentiation.
Firms, which have obtained sustainable competitive advantages, can reach a success (Porter,
1998). In business, if the firm equipped value and quality in its products, the buyers are therefore
willing to pay for the products or services it provides. A firm gains, if the value is more than the
cost of activities required to perform otherwise it losses. Hence it is a prerogative for every
company “to provide comparable buyer value but perform activities more efficiently than its
10
competitors (loss cost), or perform activities in a unique way that creates greater buyer value and
commands a premium price (differentiation)” (Johansson, 2000). The term of “firm-specific
advantages (FSAs)” also mentioned by Johansson, shares similar view. He believed that the basic
question for a firm before it enters a new market is “how the company can get a reasonable
payoff or turn on its firm-specific advantages”. According to Shrikhande (2001), when a firm
successfully established audience’s loyalty to its differentiated product, the possibility for
competition will be less and that it will set a barrier for new entrants. However, he also added that
the process of product differentiation will enhance the cost that trades off the benefit form
differentiation.
Firms should try their best to enhance the competitive advantage. The activities involved can be
categorized in the value chain (Porter, 1998). The primary activities are ranked in terms of their
degree of importance. It can be noted that each of the primary activities employs infrastructure,
human resources, technology and procurement. In terms of value-added activities, firms should
take action internally. Chen (1999) argues that internalization and competitive advantages have
commonalities and differences. First, internalization aims at long-term benefits while competitive
advantage is within a given time period. Second, although the essence of the imperfection always
fails to spell out, competitive advantages exist in competitive market imperfectly. Finally, an
internalization decision, as a short run, can enhance competitive advantages.
The value chain can be used to understand a company’s cost position and to find how to facilitate
the implementation of its business-level strategy. It is a good framework to examine its resources
and capabilities to discover core competencies. A value chain can be divided into primary and
supporting activities. Primary activities deal with production, sale, distribution and service after
the sale. Activities which are to be accomplished before primary activities are to be realized are
part of the support activities. By analyzing the value chain, one can determine how a product
moves from the raw material stage to the final customer. “For individual company, the challenge
is to add as much value in the cheapest way possible, but not to sacrifice the quality of the
product.” (Hitt, Ireland and Hoskinsson, 1999).
Primary activities include inbound logistics, operations, outbound logistics, marketing and sales,
11
and services (Hitt, Ireland and Hoskinsson, 1999). Inbound logistics is composed of activities
such as materials handling, warehousing, and inventory control, which is used to receive, store,
and disseminate inputs to a product. Operations consist of activities necessary to convert the
inputs provided by inbound logistics into final product form, such as machining, packing,
assembly, and equipment maintenance. Outbound logistics refers to activities concern with
collecting, storing, and physically distributing the final product to customers, such as finished
goods warehousing, materials handling, and order processing. Activities completed to provide
means through which customers can purchase products and to induce them to do so are part of the
marketing and sales. To effectively market and sell products, companies can develop advertising
and promotional campaigns, select appropriate distribution channels, and select, develop, and
support their sales force. Services are activities designed to enhance to maintain a product’s value.
These activities include installation, repair, training and adjustment.
2.1.6 Optimal Entry Mode
Since each entry mode has its advantages and disadvantages, arriving at the one that is
appropriate is not an easy task. Anderson and Gatignon (1986) criticized the previous literature
mentioned as irrelevant and devoid help. One consideration was generally active in one case, but
literature failed to discuss how the consideration acts in other situation. However, optimal entry
mode still has been suggested which is thought as a means to maximize profit (Know and
Konopa, 1992). Johansson provides an optimal entry mode matrix (See Table 1).
Table 1 shows the three strategic postures of a company. Incremental means that the entry
strategy is stable for some time and other options are still open. When a firm has a well-protected
trade secret or patentable know-how, there is a large potential to explore the foreign market. The
“protected” posture refers to a situation when the firm with potential needs to learn how to for
abroad and get familiar to local market. The final posture is granted to those companies whose
competitive advantages are strong enough to overcome obstacles in local market.
12
Product/Market Situation Company
strategic
posture Emerging High-Growth Mature Services
Incremental Indirect
exports
Indirect
exports Direct exports
Licensing
alliance
Protected Joint venture Indirect
exports
Alliance/
licensing Licensing
Control Wholly owned
subsidiary
Acquisition/
alliance
Wholly owned
subsidiary
Franchising/
alliance/
exporting
Table 1: Optimal Entry Mode Matrix (Source: Johansson 2000, P171)
The table also classifies product/market conditions into four categories. Emerging markets are
those which recently open up due to political changes. They have minimal well-established
infrastructures and lack distribution alternatives. For markets which fall in this condition It is
rather difficult to accomplish market-based exchanges and there is risk of default on payments.
High-growth markets refer to high-technology markets in advanced economies and markets in
many fast-growing countries, including the newly industrialized states. The first-mover
advantage is notable in this market. If an entrant can establish a leadership soon, it will witness
manifestations on the growth of sales. Many markets in advanced economies are considered
“mature”. Instead of speed in penetration, presence establishment and loyalty maintenance
transpired as the significant tasks in the mature stage.
2.2 Entry Modes Classification
As Driscoll and Paliwoda (1997) state, no agreement has been done to classify entry methods and
each classification shares similarities, which are involved in three generic groups: export,
contractual and investment. This concept can be reflected in Root (1994) as shown in Table 2.
13
Export Contractual Investment
Licensing Indirect
Contract manufacture
Sole venture: new
establishment
Management contracts Direct agent or
distributor Construction or turnkey contract
Sole venture:
acquisition
Co-production agreement Direct branch or
subsidiary Technical agreement
Joint venture: new
establishment or
acquisition
Service contracts
Franchising Other
Other
Other
Table 2: Entry Modes Classification (source: Root, 1994, P6)
The export entry mode involves transfer of a firm’s products that are made in the domestic
country or a third market, either directly or indirectly to the host market (Driscoll and Paliwoda,
1997). The key difference which distinguishes export entry mode from the other two modes is the
final or intermediate product which is produced outside the target country (Root, 1994). The
indirect exporting can be conducted via home country agencies like trading companies and export
management firms. Direct exporting in the other hand takes place when a firm contacts buyers by
itself outside the local market (Johansson, 2000).
Root (1994) defined contractual entry modes as “long-term non equity associations between an
international company and an entity in a foreign target country that involve the transfer of
technology or human skills from the former to the latter.” They refer to a number of arrangements
including licensing, franchising, management and turnkey contracts, non-equity joint ventures
and technical know-how or co production arrangements. When a firm finds it difficult to exploit
its competitive advantage due to resource constrains, but can transfer the advantage to another
party, contractual arrangements are generally employed. In this situation, long-term relationship
between players is usually established. The arrangements can entail transformation of
intermediate goods such as knowledge and/or skills (Driscoll and Paliwoda, 1997).
14
Entry modes under the heading of investment mean that the ownership and control of facilities
belong to a firm wholly or partly in the target market (Root, 1994). Investments can be
materialized through acquisition, mergers or Greenfield investment (Driscoll and Paliwoda,
1997). It is common for companies to set up a sole venture from new establishment or by
acquiring a local company. Chen (1999) suggests that the preference to owning a co-operative
venture than transferring its capabilities through contracts, when a firm face following four
situations, say, first, the organizational knowledge is tacit and embodied in managerial routines;
second, exchange of personnel and responses to unproductive contingencies are required; third,
there exists the potential for externalities; fourth, investments in assets are specific to the
relationship.
2.3 Factors Influencing Entry Strategies
Entry mode links the firm’s products to foreign markets (Kwon and Koopa, 1992). Choice on
what entry mode to use is always equipped with complexity. In terms of internal or external
prospective, Goodnow (1985) groups corporate strength, competitive position, corporate policy,
and a product’s characteristics into internal factors and identifies the foreign market’s opportunity,
its economic development / performance, political environment, geo-cultural environment,
comparative host country costs, and a firm’s home government’s policies as external factors.
Chen (1999) logs end-product market characteristics, negotiations and contractual factors,
technology transfer factors, organizational factors and general investment and risk condition as
variables influencing the international business mode choice. There are a variety of factors
influencing the choice. Driscoll and Paliwoda (1997) have classified them into three:
1) The variety of entry modes represents different dimensions. The remarkable dimensions are
reflected through the varying degree of control, dissemination risk, resource commitment, and
flexibility. Customarily company abides with the level of control over the market whenever it
makes its entry mode decision. (Root, 1994).
2) The firm’s standing affects the choice of entry mode. The situation consists of several factors,
like location such as country risk, socio-cultural distance, government regulations and
15
policies, and firms’ specific factors such as the essence of a firm’s know-how, product,
differentiation and international experience of a firm (Dunning 1988).
Kwon and Konopa (1992) note that socio-cultural distance was the only variable that
significantly influences the choice of entry mode. There is a great possibility that a firm will
be more likely to choose contractual modes instead of investment modes if the social-cultural
distance between a firm’s home country and its host country increases. A number of
international communication literature published reveal that audiences prefer national over
international product. Shrikhande (2001) claims that, audience response actively to the choice
of viewing international or regional programmers and they usually choose the regional ones
due to cultural relevance or proximity. The localization for auto includes products localization
and personnel localization. The previous refers to manufacture and organization programs
that fit to Chinese predilection. Personnel localization is the utilization of local talents who
are capable of relating the domestic market and foreign culture.
3) Along with rapid pace of globalization, as a result of technological change, the economic
expansion of newly industrialized countries and the transition of centrally planned economies
into more market-orientation ones, the international market competition becomes more fierce.
Therefore, the international strategies should be designed under a thorough consideration of
long-term profitability and growth opportunities.
Driscoll and Paliwoda’s three groups can well present a firm’s market entry strategy. The first
one shows the desires of a firm with regard to its own standpoint. The second looks on the
reality. Sometimes, what a firm wants might go against what the actuality permits. The final
one reveals the aim of a firm. It is the blueprint of a firm’s survival and development in a
foreign market, which is the long-term goal rather than the short-term one. To some extent,
the three groups, covering a great number of factors, might simplify the influential factors and
the real strategies selection is rather complicated.
16
2.4 Strategies Selection
2.4.1 International Market Entry Strategies
Factors such as similarity of product needs, addition of manufactured mobile and informed
buyers, increase economies of scale and geographic scope, boost on the mobility of product
personnel, increase ability to interact with remote buyers, continuing wide disparities among
nations in the cost, quality, and range of product available from local firms make the
internationalization of competition in services in becoming intensive (Porter, 1998). Therefore,
those which are available for manufacturing sectors are only contractual and investment entry.
However, some argue that it is possible to separate production and consumption of some services.
The empirical study shows that entry methods of manufacturing firms are varied and diverse, and
exporting is very common especially in computing and engineering (Erramilli, 1990).
Based on the entry mode classification, it is suggested that international trade and foreign
investment are those chosen by MNCs. According to Porter (1998), “a manufacturing firm
competes internationally by spreading activities on a regional or worldwide basis and
coordinating activities dispersed in different nations”. The nature of most production services
requires that the activities, which are part of a firm’s value chain, should be conducted where the
buyer is. As a consequence, firms have set up offices or units in various nations to provide
service.
There are three pure types of international service competition. The common case is that one firm
is intertwined with another in a particular service industry. The first type takes place when mobile
buyers go to a country to have service performed. The next type is when firms provide services
from home country to other countries by using domestically based personnel and facilities. Final,
the last part takes place when a nation’ s firms provide service in other countries through setting
up foreign service locations and recruiting either expatriates or local people. The first two are
categorized in international trade, while the third one is regarded as foreign investment. Due to
different competitive advantage of different nations, the activities composing of value chain tend
to be. Furthermore, the protectionism which is very widespread gives international competitors
17
more hindrances.
Some academicians propose other means when it comes to the dimensions of each mode, such as
trade-off between control and risk. Palmer (2001) believes that, in the case of separable service,
to provide the target market from domestic base can avoid most risks. Even for financial and
information services, the business can be done through post or telephone. Local facilities are
necessary for those companies which are involved inseparability of services. To establish
temporary facilities is viewed as less costly and risky way to transfer physical and human assets
from one place to another. This strategy is called “market-entry risk reduction”. However, to
really reduce the risk, the methods suggested should be closely related to a time dimension. Root
(1994) believes strategies designed for future development are two aspects: content supply and
distribution. Content production is important since it serves as the means in the spread of the
content. To generate profit from differentiating products is a good way; however, the cost of
distributing content cannot be underestimated. In order to diversify risks, it would be better to
develop both content and distribution network concurrently.
According to the research (Pan and Chi, 1999), there are three common modes for multinational
corporations performing in China. The most popular one which makes up more than 50% over
total operations in the last 20 years is equity joint ventures. Wholly foreign owned companies are
the second most popular followed by cooperative operations such as contract manufacturing.
Therefore, the role of local partners is very important for foreign MNCs. Furthermore, those
local-market oriented MNCs are often more profitable than those export-oriented ones.
2.4.2 Market Entry Stages
If the choices of entry modes give a rough idea about how to enter the market, the stages are
more concrete access to go on foreign market. Literature rarely discusses the entry stages to
Chinese auto industries. Auto internationalization in China is employed here which can reflect the
activities of foreign companies. Auto internationalization in China includes five major stages
(Chen, 2002):
18
1) Offering of sponsored products is a mode is most preferable especially in manufacturing and
service industries when the regulation over trading is comparatively tight.
2) Regulated trade is a mode done officially through formal agreements and recognized brands.
The presence of foreign auto promotions on Chinese market can catch multinational
advertisers’ attention and the business reputation and fill up the market time.
3) Competition is the result of the pressure coming from foreign auto promotions on the
recipient country. Chinese car market out that it was urgent to flight for the market with
foreign rivalries.
4) Demonstration is done in response to the intensive competitive from foreign auto companies,
the host country auto companies consider the foreign fare as successful models. The formal
trade between foreign auto companies and adopters enhanced the demonstration effects.
5) Cooperation materializes through cooperative approaches such as co-production or joint
venture. The foreign partner generally provides capital and expertise while the Chinese
supply general personnel and local support.
As Keegan (2001) notes, with the steady increase of export, a foreign office to deal with the sales
and services of its products are established, this is quite flexible and highly independent. When
the market grows mature and the competition between local and foreign firm tends to be intensive,
more comprehensive global strategy is required. Kwon and Konopa (1992) notes, although
exporting is generally the initial step, firms are more willing to set up a producing subsidiary in
the target market to seek maximum profits after some time.
2.4.3 Market Entry Strategies: Joint Venture & Wholly Owned Subsidiary
Deresky (2003) suggests that managers must have a global vision for the company and it should
start with the skills and tools of managing in a global environment. In the growing globalizing
market, expansion becomes an essential strategy for multinational companies. “Technology,
culture, market needs, cost, free markets, economic integration, peace, management vision,
strategic intent and global strategy and action” are the driving forces for companies to go global
(Keegan, 2001). Meantime, it is important for these multinational companies to choose an entry
mode when they make a determination to invest in one country. A well-chosen mode can enable a
19
firm to gain competitive advantage, while poor model choices can lead to “sinking the boat” or
“missing the boat” (Dickson and Geglierano, 1986). A variety of mode choices exist for a firm,
which range from no international involvement, to exporting, licensing, to direct investment via
joint venture or by wholly owned subsidiary (Holt and Karen, 2002).
A joint venture is a particular form of strategic alliance involving the formation of a new joint
organization (Killing, 1983). It is one of the most popular strategic tools employed by MNCs to
enter into new markets by establishing relationship with local partner, to achieve significant
economies of scale for development of a strong competitive position, to secure access to
additional raw material, to acquire managerial and technology still and to spread the risk
associated with operating a foreign environment. Joint venture is also considered as an effective
way of managing the increasing competitive and technological challenges of volatile international
environment (Hu, 1996). Wholly owned operations’ are subsidiaries in another nation in which
the parent company has full ownership and high control over operations, high mobilization of
resources, and low technology dismissing risk, but bearing high risk (Lasserre, 2003).
2.4.4 Entry Timing
The proper entry timing entry is crucial for MNCs. According to Erramilli (1990), early entrants
are regarded as “Client Followers” .The latter refers to the firms primarily intend to serve the
domestic clients overseas while the later entrant is described as “Market Seeker” who wants to
attract foreign customers. Generally, a government opens up an industrial sector when it is
confident about the domestic companies’ competency. Sometimes, even if the internal factors are
not ready, many external forces may force the government to open up the industry. In this case,
foreign companies are able to “enjoy the monopolistic opportunity to develop the market,
promote the product, and tap into a variety of strategies to preempt the future entry companies”
(Li, 2000).
Johansson (2000) suggests that, first mover advantages are striking in emerging market: higher
brand recognition; more positive brand image; more customer loyalty; more distribution; longer
market experience. In addition, to get into a market early, the MNCs can have adequate time to
20
choose partners (Li, 2000). “Being first provides the opportunity to establish a market presence
and sign up potential customers while others are still getting started” (Keegan, 2000). The earlier
MNCs entered into Chinese market, the more profit they could gain. The late entrants have to
catch up quickly and possibly will be forced to survive at the margins of the industry (Pan and
Chi, 1999).
3. Methodology
In order to understand the theories from literature review, qualitative research method was
introduced in this paper.
In making this research persuasive, two real case studies in Chinese car market has been chosen
as part of the research. The main approach for information gathering is second data collection.
The following sections would tell the reason to choose this qualitative research method and
explain the data analysis methods.
3.1 Qualitative Research
Research methodologies are divided into two categories, qualitative research and quantitative
research. Denzin and Lincoln (2000) define qualitative research by indicating that qualitative
research is a situated activity that locates the observer in the world, which consists of a set of
interpretive, material practices that make the world visible. Another definition given by Preissle
(2004), which seems more specific, suggests that “qualitative research is a loosely defined
category of research designs or models, all of which elicit verbal, visual, tactile, olfactory, and
gustatory in the form of descriptive narratives like field notes, recordings, or other transcriptions
from audio-and video-tapes and other written records and pictures of films.” In a word,
qualitative research is basically an investigative process where the researcher explains a social
phenomenon by collecting and interpreting “a variety of empirical material – case study; personal
21
experience; introspection; lift story; interview; artifacts; cultural texts and productions;
observational, historical, interactional, and visual texts – that describe routine and problematic
moments and meanings in individuals’ lives” (Denzin and Lincoln, 2000:8).
3.2 Secondary Data Collection
This paper is, to a large extent, principally based on secondary data research, where in all the data
and information came from second-hand sources. This is done due to several reasons related to
the characteristics of this research. To begin with, the dissertation mainly studies the issue of the
situation of China’s automobile market after the WTO accession, especially from the perspective
of foreign automobile corporations, which is a very broad topic on macro level. If the primary
research is conducted, only those in high management level of a firm, even government officials
will be appropriate to be involved in the research. However, ordinary people in China lack access
to those high level managers and officials, and they will often be reluctant to offer any relevant
information by themselves. Secondly, while the researcher finished this dissertation in UK, it will
cause much difficulty and bias to conduct any primary research such as interview. Electronic mail
and telephone interviews are prone to misunderstanding, and will hardly be easy to get deep
understanding of the interviewees. Lastly Hollifield (2001) has studied 73 books and journals
related to transnational media companies in overseas markets from 1978 to 2000. He found out
that nearly half of the studies did not involve primary data collection, which indicates the
secondary sources such as news accounts and the trade media, were widely used.
Comparing with primary data, secondary data, resulting from a wide and deep scope of issues,
have a broader range of cover on the research questions. However, it should be admitted that the
wide use of secondary data incurs some problems. Some data might be outdated and unreliable
in many cases. In order to reduce such problems the study carefully selects the latest data, which
reflect the present market and predict the trend of investment. Despite of choosing up-to-date
information, data have been filtered according to the priority of reliability. The important data is
usually from corporations’ annual report or official websites, including the Ministry of
Commerce Development webpage, the Ministry of Information Industry (MII) webpage, the
WTO official website, the websites of each main Automobile Corporation and major foreign
22
companies in the Chinese market.
Therefore, the main research method adopted in this dissertation is to make in-depth analysis of
large amount of secondary data related to the topic. Huge amount of data have been reorganized
and carefully analyzed to formulate the arguments in this paper. Several frameworks, namely
Case Studies, PEST Analysis and strategic group analysis are used in order to study the Chinese
car market and its environment and the automobile corporations’ entry strategies.
3.3 Case Study Research
Yin (1994) identifies the case study research method as an empirical inquiry that investigates a
contemporary phenomenon within its real-life context that is when the boundaries between
phenomenon and context are not clearly evident. And in which multiple sources of evidence are
used. The case study inquiry copes with the technically distinctive situation in which where there
will be many more variables of interested that data points, relies on multiple source of evidence,
with data requiring converging in a triangulating form, and benefits from the prior development
of theoretical propositions to guide data collection and analysis.
Therefore, the case study is not “either a data collection tactic or just a design feature, rather a
comprehensive research strategy. It is a systematic way of finding out what is happening,
collecting and analyzing related data, and reporting the results. Rather than using large samples
and following a set routine to examine a limited number of variables, case study methods involve
an in-depth examination of a single case or event.
3.3.1 Strengths of Case Study
1) In-depth understanding
Researchers can understand as much as possible about the single subject or a small group of
subjects, and obtain information based on particular contexts (Hammersley, 1995). Moreover,
because of the universality and importance of experiential understanding and their compatibility
with such understanding, case studies can be expected to continue to have an epistemological
23
advantage over other inquiry methods as a basis for naturalistic generalization.
2) Flexibility
Case study is usually projected with the emphasis on exploration rather than prescription or
prediction (Yin, 1994). Hence the researcher has more freedom, comparatively, on addressing and
uncovering problems as they found in their experiments. Moreover, there is no settled format for
case studies. It allows researchers to start from a broad topic, and narrow down as their
researches progress.
3.3.2 Weakness of Case Study
1) Narration
Normally, case studies are narrative constructions by nature (Gerring, 2007) because they use
chronology as a mina organizing device.
2) Generalization
A common concern about case study is that they provide little basis for scientific generalization.
“How can you generalize from a single case?” is a frequently heard question. In fact, scientific
facts are rarely based on single experiments; they are usually based on a multiple set of
experiments, which have replicated the same phenomenon under different conditions. The same
approach can be used with multiple case studies but requires a different concept of the
appropriate research designs. The short answer is that case studies, like experiments, are
generalizable to theoretical propositions and not to populations or universes. In this sense, the
case study like the experiments does not represent a ‘sample’, and the investigator’s goal is to
expand and generalize theories and not to enumerate frequencies (Marschan-Piekkari, 2004).
24
3.3.3 Case Selection
Case study method can provide rich information and in-depth analysis of the business strategies
and operations in most of the world’s automobile corporations. The comparative case study
method can identify organizational behaviors across corporations. Therefore, two automobile
multinational corporations are chosen as basis for comparison and discussion. The case
selection is based on the above features of case study method. General Motor Corp. and
Volkswagen Corp. are selected as the case sites. Because these two corporations have entered into
Chinese car industries, and there are similarities and differences on the entry strategies which are
driven by these two corporations.
The following chapter will discuss the Chinese car market first, and then turns to specific cases,
which is trying to demonstrate the current situations of automobile MNCs in China. Given that
this is a case study and comparable data across corporations were not available, the analysis
remains descriptive.
3.4 Summary of Methodology
This chapter gives an overall description and explanation of the methodology adopted in order to
conduct this study. Reasons have been given in detail for choosing qualitative research method
and pure secondary data as the source of information. Admittedly, using qualitative research on
its own will cause some problems, such as lack of rigidity and biases are also likely to happen.
Furthermore, using secondary data makes it more difficult to conduct the analysis, because the
previous analysis and arguments may affect the present study. Due to the lack of access to the
information, there seems to be no sufficient data to support that the future research will more
convenient and be better developed with access to large amounts of data as more foreign
automobile participants entering the Chinese car market.
25
4. The Case of Chinese Car Industries and Foreign Direct
Investment
The flow of Foreign Direct Investment (FDI) in developing countries has been tremendously
increasing since in the 1990s. Its role and impacts of Foreign Direct Investment in these countries
have led to the development of a number of controversial theories. These theories discuss the
positive consequences as well as some negative consequences of FDI in the growth and economic
development of developing countries. Before this can be addressed, however, it is important to
understand more about foreign direct investment.
The issue of foreign direct investment is one that has been misunderstood for many years.
There are individuals that study it and discuss how significant it is, and there are others that see it
as some kind of made-up problem that is really not important enough to focus on. Both of these
are valid points of view but, in recent years, it has generally been accepted that foreign direct
investment is growing, and that the study of it is important. While this particular paper deals
with the experience of foreign direct investment when it comes to the auto industry in China, it is
important to remember that this is not the only area of the world or the only industry that is
affected by it.
Sovereign ratings are also important, as they help to show the credit ratings of countries and
whether they are strong credit risks where investment is concerned. Sovereign ratings have only
been around since approximately 1979, but they have begun to rise dramatically in recent years
and the demand for them is only going to increase (Altman & Kao, 1991; Billet, 1996; Lamy &
Thompson, 1988; Ederington, Yawitz, and Roberts, 1987). These ratings help to reduce the
uncertainty that investors have regarding their exposure to risk and so getting a strong sovereign
rating has enabled quite a few governments to get access to ratings on an international scale
(Kaplan & Urwitz, 1979; Weinstein, 1977; Wakeman, 1984). This is particularly important to
developing countries that still have relatively strong economies (Saini & Bates, 1984). However,
the sovereign ratings, while significant, will not be the purpose or the topic of discussion here.
26
The purpose of this paper is to not only show the seriousness of the problem in question, but to
come up with ideas that will help to show how this problem can be reduced in size. The best
way to do this is to first analyze the problem in question to determine just how serious it actually
is, and then use that seriousness as a wake-up call for those that have been looking the other way
and avoiding dealing with the issue. There are many of these individuals, and it is time that this
is changed.
These developing countries are not able to provide the local companies and businesses that they
have with as much growth and development potential as developed or industrialized countries can,
because they simply do not have the resources available. This is unfortunate, but it is also
somewhat offset by the FDI that is sent to these countries from developed countries. Were it not
for this FDI, the developing countries in this world would not have a lot of chance of rapid
development, because the availability of funds would not be there.
After the Asian financial crisis of 1997, many countries are still somewhat nervous about
providing funding for businesses in these developing countries, because they are worried that
their economies could collapse again. While this is always a possibility, it is not likely that this
will take place. The governments of these countries have been changed and adjusted, and this
has helped to avoid the problems that were seen in the past. In addition to this, the governments
in these developing countries are also more aware now of what could happen, and they can take
steps to stop this from occurring again.
While not all investors feel safe yet, there are many that do, and this has helped contribute to the
FDI that is seen flowing to these developing countries, especially China, where the economy is
growing more rapidly than other developing countries. The longer that this goes on without
large economic problems the safer that other investors will feel, the more money will go to these
countries and the faster the development will be seen. This is encouraging for both the investors
and the countries that are beginning to rely on this money to fund their economies and build their
countries.
This research will analyze the role of FDI in the economic development of China’s car industry. It
27
will also discuss both the positive impacts and negative impacts of FDI in order to determine
whether the positive impacts will outweigh the negative consequences or vice versa. The main
question for those that want to invest in China’s auto market is: Does Foreign Direct Investment
(FDI) promotes economic growth and development?
The answer to this question is crucial not only for policymakers and governments of the host
countries but also for multinational corporations, investors, workers, and individuals, and it is
important to understand why this is the case. If it is seen that FDI does actually promote the
economic growth and development of these countries overall, than the policymakers and
governments of these host countries will want to attract more FDI as quickly as possible to
continue that growth. These governments will also likely change some of their policies toward
investment so that investors from foreign countries would be more likely to send money to that
country and develop their businesses to some degree in that country.
For corporations and investors, whether FDI promotes growth and development is also important.
These are the companies and the people that will be providing the money to these countries, and
they certainly want to get something back for their investment. They do not want to simply
hand money to another country and make it a gift. If investing in developing countries does not
help the growth and development of those countries, there would be little point in investing in
them in this way. The growth and development is necessary for the business to grow in that
country and a return on investment to be seen. These kinds of issues must be studied thoroughly
before a corporation or an investor can actually determine whether it is wise to invest money and
human capital into a particular developing country, or whether that money would best be spent
elsewhere.
For workers and other individuals in the developing country, the FDI that comes into that country
could potentially allow for more jobs, higher income, and more goods and services that can be
easily acquired. Naturally, this is also seen as significant, because these individuals wish to
have many things and they have many goals and dreams, although these may not be the same as
the goals and dreams of those in already developed countries. This is especially true in China,
where many of the younger people like to try new things and would therefore be very interested
28
in the goods and services that could be brought into their country from the developing nations
through FDI and multinational corporations.
It is necessary and pertinent to discuss benefits, and this particular study is important to many
people across the world. Not only does it have importance for those that are involved in FDI
now, but it also has importance for those that are considering FDI in the future, especially where
developing countries are concerned. The reason behind this is that foreign direct investment is
something that is continuing to grow, and companies that wish to grow and expand should
examine in more thoroughly as a potential for that expansion as the world becomes more of a
global society.
An important part of the rationale behind this study is that there have not been any other studies
done specifically like this one. Doing a study like this therefore provides new and unique
information, but it can also be difficult, since there is really no strong precedent for this type of
study that the researcher can thoroughly follow.
The further benefits of a study such as this one indicate that other countries can learn from what
is discovered here where FDI is concerned. All developing countries are involved with FDI to
some degree, with some countries being much more involved than others. When it can be
determined exactly what effects FDI has on developing countries, then it is quite likely that these
countries' governments and policymakers will be better equipped to handle the ideas and plans of
investors and multinational corporations when they want to move into a particular country.
4.1 Analysis of External and Internal Environments in the Chinese Car
Industry
In general, an auditing of environmental influences that affect the organization needs to be
undertaken so that reasonable competitive strategies can be put forward. This indicates that a
strategist should try to get a feel for the environmental factors that are currently or that will be
important to a specific organization. The process would then need to continue so that the changes
that can be seen in the environment can also affect the changes in entry strategies.
29
Environmental factors, economic factors, political/legal factors, social/cultural factors and also
technological factors should all be considered. The legal factors that need to be addressed include
issues in employee law, monopolies and mergers legislation, environmental protection laws, and
wider issues such as foreign trade regulations. The political factors refer to the stability of the
government. The taxation policy, the government spending, the relationship that the government
has with other countries, and the industrial policy and all issues should be considered.
The economic factors that need to be addressed refer to inflation, disposable income,
unemployment, business cycles, GNP growth rates, interest rates, exchange rates, energy, and the
basic prices for raw materials. Factors from cultural and social standpoints include population
demographics, the income distribution, what levels of education are seen, lifestyle changes that
are being made or that need to be made, attitudes toward work and leisure, consumerism, and the
social mobility of individuals in that area. The technological factors addressed include new
discoveries and developments in the industry or in related industries, that speed at which
technology transfer (diffusion) takes place, that amount of money that the government spends on
research, and the rates of obsolescence that are seen. An analysis of all of these issues is called
a PEST analysis.
4.1.1 General External Environment Analysis
Where the Chinese car industry and its external environment is concerned, the political
environment should be the first one to be addressed. In 2001, China was declared a member of
the World Trade Organization (WTO). China’s entry into the WTO indicated that there would be
a gradual opening of the Chinese market where cars were concerned. Some protection from the
government will be gradually cancelled so that the responsibilities of a WTO member can be
undertaken.
The development of the Chinese car industry will also help to accelerate the development in
various industries such as raw materials, electronics, automation, transportation, financial
services, tourism, and insurance. “In the US, Japan and Germany about 10% of the population is
employed by car or related industries. Taxes related to cars occupy 10% to 18.6% of total
30
financial income of government. Export of car ranges from 10% to 24% of total export” (Chen,
2002). The global market for cars has not yet reached saturation. In some countries, especially in
China, the potential demand for cars is very large as the population continues to grow. According
to Chen (2002), “1 percent increase in gross national income may result in 1.3% increases in the
demand of car”. In more recent times, many foreign investors have hurried into the Chinese car
industry, as they sense the huge potential demand that could result from the rapid increase in the
GDP. It is very attractive for foreign investors.
4.1.2 Internal environment analysis
In China, consumers were starting to demand better quality cars, and as this was taking place
there was increasing pressure on the domestic products that were available, while doors were
being opened for foreign companies that were able to offer higher quality. “I see a watershed
point in the auto industry here,” said Michael Duune, who is the managing director for
Automotive Resources Asia LTD, a consulting firm based in Beijing and Bangkok. Many auto
companies such as Volkswagen, Audi, Honda, Citroen, Daihatsu, Suzuki and Subaru have
manufacturing plants located within China as part of their growing companies.
In addition, Japanese car makers have been selling their vehicles within China since the 1970s.
Toyota has decided that China is beginning to prosper and has begun selling trucks, buses, luxury
cars, taxis, and motorcycles to consumers in that country. Soon after, Nissan, Daihatsu, Suzuki,
Mitsubishi and other car companies followed that lead. In 1983 and 1984, Japan’s car exports to
China increased by seven times, from 10,800 to 85,000. In addition, China became Japan’s
largest market for foreign cars, excluding the United States. Because there were so many massive
imports of all types of autos, foreign currency reserves were rapidly depleted and further licenses
for importation were cancelled. The government of China also established various incentives,
including taxes, bank loans, and foreign exchanges, in order to encourage more foreign
companies to operate in China and to reinvest their earnings and/or export their products. For
example, there is a new law which allows joint ventures to avoid tariffs on imports when at least
40 percent of the value of a specific vehicle has been produced within China.
31
In 2000, the car industry in China was very fragmented. There were approximately 136 domestic
producers of vehicles within the country. However, around 40 percent of the capacity was idle,
and half of all of the car manufacturers were simply losing their money (Hitt, Ireland &
Hoskisson, 2003). The firms that remained tried to improve their efficiency; however, because it
was believed that there was going to be a major consolidation within the car market in the next
few years because import tariffs were being reduced and economies of scale were changing. In
July, 1999, the State Council of the Central Government made an announcement that it intended
to take steps to speed up a restructuring of the vehicle sector. Once China’s entry into the WTO
seemed more likely, the government planners began to realize that China’s domestic auto industry
was not prepared for the global competition that it received. It was hoped that a new plan would
therefore reinvigorate the ongoing efforts which were used to eliminate duplication of
investments and accelerate consolidation. This new plan also coincided which a promulgation of
China’s 10th “Five-Year Plan” and an announcement for a new “Guiding Catalogue for Foreign
investment” which was designed to be released in 2000. Both of the documents would then
reportedly be very critical in setting a future course for the auto industry.
4.1.3 Before WTO
“Until 2000, Chinese car tariff items are totally 165 and car-related tariff items are 99. The
average tariff of car products is 38.89%. Average tariff of 65 tariff items about integral car is
55.94%. The highest tariff ranges from 80% to 100%. The highest tariff of part is 50%. On 1st
January, 2001, the tariffs of cars are reduced to about 70%-80%, while the tariffs of car parts are
reduced to 30%-40%” (Guo, 2003).
Before WTO, several non-tariff regulations are applied in the import of cars. The first is quota
permission regulation. In 1998, 85 car products are listed in <Quota Product Catalogue> and
<Special Product Catalogue> that are issued by trade administration. Secondly, Chinese
government put limit on import of car products through import ratification process. Annual
import must be compatible with national car manufacture plan. At that time, only trade
companies can do the trade business, more convenient for government to control car imports.
Thirdly, import ports are confined to specific ports. Finally, made-in-own-country encouragement
32
policy was applied. According to those policies, the import tariffs on parts of a car depended on
how many percent of parts in a car are produced in China. This policy aimed at reducing car or
car-related parts imports. In addition, there were regulations on foreign direct investment in
Chinese car market. In the car joint venture or cooperation companies, Chinese side must hold at
least equal to or more that 50% shares. One foreign car company can not establish two joint
ventures or cooperation companies in China to produce the same integral car.
Before China entered the WTO, there were several non-tariff regulations that were applied to the
import of various cars, and those have been adjusted now because of the WTO entry.
4.1.4 After WTO
“According to WTO agreement, the average import tariff on cars will reduce from 80%-100% in
2000 to 25% in 2006. Especially, on 1st January, 2005, the average import tariff on cars should
reduce to 30%. On 1st January, 2006, the average import tariff on cars should reduce to 28%. The
average import tariff of car parts must reduce to 10% on 1st July, 2006” (Guo, 2003).
The adjustments of both non-tariff and investment policies are significant, and they include (Guo,
2003): from 2002 to 2004, the import quota of integral cars and car parts annually has increased
15% based on a figure of $6 billion. In 2005, the quota was cancelled, and the
made-in-own-country requirements for car parts were cancelled immediately after China entered
the WTO.
After China’s entry into WTO, any limit on share percentage held by Chinese side must be
cancelled. Meanwhile, the establishment of foreign car companies should be allowed in China.
Any limit on car models produced in joint ventures or cooperation companies should be cancelled
in two years. Technology transfers should not be imposed as the precondition of ratifying car
import and investment from foreign companies. Trading and distribution fields will be
completely opened in 2004.
33
4.1.5 The Impact of the Reduction of Tariffs
Price differences have had an impact on the Chinese car industry. After the tariffs on cars were
reduced, foreign cars gained price advantages and the prices of domestic cars categorized in the
same grade were significantly higher than the prices of foreign cars in the same category. Overall,
the higher the category and price of car, the larger the gap in price between foreign and domestic.
Comparing prices is also very complicated. The domestic car market has been regulated by the
Chinese government for such a long term that it is insufficient where competition is concerned.
Under these types of circumstances, domestic car profits are much higher than foreign car profits.
Because of this, comparing the sales prices of the cars does not accurately reflect the changes that
the tariffs have created.
It is found that price determines the competitiveness of a car model. If the average price
differences between domestic and foreign cars are less than the tariff on foreign cars, the
competitiveness of domestic cars is weakened, vice versa. For example, in 2001 the average
import tariff on cars are about 80%, the domestic cars will not be influenced in the price
competition only if the difference between domestic and foreign cars in the same grade is less
than 80%. After 1st July, 2006, the tariff on cars will reduce to 25%, if the average difference
between domestic and foreign cars in the same grade is bigger than 25%, foreign cars will have a
great import on domestic cars in the price. It means the domestic cars’ competitiveness depends
on not only tariff but also the total cost of a car.
In addition, the impacts on domestic high-grade and low-grade cars are different. When average
tariff is reduced to 25% in 2006, it is possible that high-grade cars are at a disadvantage while
low-grade cars are still competitive. The tendency may be that the competitiveness of domestic
low-grade cars will improve through intensive competition while the reduction of cost and price
of high-grade cars can not be compatible the reduction of tariff. Consequently, foreign cars
dominate high-grade car market and domestic cars dominate low-grade car market.
34
4.1.6 The Impact of the Change of Car Import Quota
Between 2002 and 2004, the quota of import cars and car parts increased yearly by 15% based on
a figure of $6 billion. In 2005, the quota was cancelled, meaning that the import quota of 300,000
to 400,000 cars per year will no longer be in effect. “However, car production volume is just
605,000 in 2000. The import quota is about 50%-70% of annual car production volume” (Guo,
2003). Because of this, the import quota on cars in China has produced a strong challenge for the
domestic automobile companies.
Because the average tariff on cars is still high before 2005, the prices of foreign cars are still
higher in Chinese domestic car market. Even though foreign cars are expensive, as a whole
foreign cars are superior to domestic cars in terms of performance and integral quality, including
model, style, rate of gasoline consumption, rate of fault, environment protection, production life,
and coziness. It can be deduced that quality improvement will not as quick as the reduction in the
cost and price. Domestic cars may be at a disadvantage in the quality competition. Only with
good quality, foreign cars can not have a great impact on domestic cars, even if import quota is
cancelled in 2005. Under that circumstance, because of the price advantage of domestic cars
caused by high tariff, the impact of quality advantage of foreign cars is limited. However, when
the average tariff on foreign cars reduces to 25%, foreign cars have an impact on domestic ones
in terms of both price and quality, domestic cars without protection from import quota will be
heavily pressured. Especially, in the high-grade cars market, the market share of foreign cars will
boost. The influence of cancellation of quota will appear.
4.1.7 The Impact of Opening of Car Trade and Service
After China entered the WTO, foreign companies could distribute and trade cars themselves.
Because of this, financial companies were challenged in two different ways. On one hand, the
rapid opening of trade availability helps to accelerate the importation of cars from other countries.
On the other hand, Chinese cars lag significantly behind oversea counterparts in terms of service,
products and other areas.
In a long period, car companies were characteristic of small production volume. Trade service
35
industry was separated from manufacture industry. All these lead to the immature of Chinese car
service industry. The car service was featured by incomplete sale service system, weak after-sale
service and non-standard car repair service. In addition, car credit, car insurance and car lease are
underdeveloped. In an intensive competitive car industry, foreign car companies will challenge
domestic car companies not only in products but also in service.
4.1.8 The Impact of Opening the Chinese Car Industry to Foreign Investment
Because the tariff was gradually reduced and some of the non-tariff limitations were cancelled,
foreign car companies have been required to make choices between exporting more cars to China
or directly investing in Chinas and having cars produced there. In 2006, the average tariff on cars
was 25% and the average tariff on car parts was 10%, which is still considered to be high. Under
the circumstance that the supply in international car market heavily exceeds the demand, the
growth of the Chinese car market is very important to manufacturers in foreign countries.
Through direct investment foreign car manufacturers can avoid high tariffs, employ low-cost
labours and establish the well-functioned sale and service networks. In order to gain cost
advantage over others, foreign car companies will be inclined to invest in China directly. The
multinational car companies that have established joint ventures in China will increase
investment. Consequently, the direct investment will increase rather than decrease.
4.2 ShangHai General Motor (GM) Case
4.2.1 Brief Introduction to GM Auto Company
General Motors is the world's largest automotive company. It operates in more than 70 countries
and has a presence in over 200 countries. In addition, the company has more than 260 large
subsidiaries, and employs 395,000 people throughout the world. The company was founded in
1908, and GM has been a global sales leader since 1931. GM has operations in over 32 countries
and vehicles that carry the company name have been sold in over 190 countries. General Motors
is also involved in Telecommunications, Aerospace, Defense, Financial Services, Insurance
Services, Trains, Automotive Systems, and Heavy Duty Transmissions. In all that GM does, their
36
philanthropy and their commitment to helping better the environment in which they live, work,
and play is completely unsurpassed within the auto industry.
4.2.2 Shanghai GM Auto - Company Overview
Shanghai General Motors is a 50-50% joint venture (JV) between General Motors and Shanghai
Automotive Industry Corporation Group. The joint venture is the largest passenger manufactures
in China, with a market share close to 10%. The Shanghai GM factory in the city of Shanghai
was set up in 1990 and it measures around 550,000 square meters and an annual production
capacity of 100,000 vehicles, 180,000 engines and 100,000 transmissions (GE FAIC, 2005) and.
The JV operates 3 production facilities with a total production capacity of 450,000 vehicles per
year, in Shanghai, YanTai and ShenYang.
4.2.3 Analysis on Operation Performance of Shanghai GM Auto Company
Increasing trade liberalization will definitely help to spark growth within the automotive industry,
and this is particularly true within the growing Asia Pacific region, which is a critical region for
future growth in the auto industry worldwide. China's entry into the WTO and the
implementation of the AFTA will intensify competition among players in the auto industry. The
growth in the automotive industry will also stimulate growth in other industries such as
automotive components. Generally, most automakers are very optimistic about future
opportunities in the Asia Pacific region, and it is anticipated that vehicle sales throughout the Asia
Pacific region will continue to grow at a rate that is greater than the rates in Europe and North
America combined.
In areas such as China, the rest of the Asia-Pacific Region, South America, and also in Eastern
Europe, the strong demand for the emergence of economic areas is on a rapid increase. Because
of the increase in economy in these specific areas, they are becoming very important within the
economic market. The largest of the car-producing countries – Germany, Japan, the United
States, Italy, and France – all are looking for investments, cooperation, and networks that they
can use for parts, service, and creation of vehicles in other areas of the world. China is by far
37
one of the most developed of those countries, and its rapid growth ensures that the enormous
potential that is seen for automakers in that country will turn into increased demand for vehicles
of all types. So far, all of the large auto companies throughout the world have been able to work
with the domestic car companies in China (Kbizzle, 2005).
General Motors has become one of the largest players within the automotive market in China.
Currently, about 8.6 percent of the passenger car market in China is owned by GM. As of 2002,
that equaled 1.1 million vehicles. In addition, GM has over 3,800 employees, two enterprises
that are wholly-owned, and three joint ventures in that country. The achievements that GM has
had within the Chinese market show that the strategy of globalization that GM has been involved
with has been successful. Because of this, the company has located a new and rapidly-growing
target market, which generally has one of the largest potentialities in the world (Kbizzle, 2005).
China, with a population of 1.3 billion and growing, an abundance of many important natural
resources, and a rapidly expanding economic vitality, has heavy importance in the global
economy of today, and should not be ignored. From a more commercial perspective, however,
China is representative of the importance of emerging markets for a large number of products and
services that can now be offered much more globally. Where motor vehicles are concerned,
China is still considered to be a very small part of the auto market in the world (about 7%), but
China is also expected to account for over 25% of new global demand for vehicles through the
next 10 years. Because of this, and influenced by an economic environment, China has now
become a very attractive new market for carmakers around the world (Kbizzle, 2005).
General Motors has also developed very rapidly within the market in China. In 2002, for
example, sales were up over 40 percent when compared with sales from 2001. The rapid
growth that has been seen in Chinese sales indicates that General Motors is doing very well in
China. “GM has engaged itself in a series of positive ideas and activities in order to adapt and
hold onto the car market in China” (Kbizzle, 2005). For example, in 1997, GM had a fifty-fifty
joint venture company with Shanghai Automotive Industry Corporation (SAIC), and it also built
Shanghai GM (SGM)'s plant. This plant consists of assembly operations for vehicles, engines,
and transmissions, and also has headquarters for administration and marketing. The total
investment that was made into this venture was approximately 1.5 billion dollars. The plant is
38
capable of running two shifts a day for 100,000 cars, and in 2002 the company exceeded this in
sales (Kbizzle, 2005).
In 2005, the JV’s vehicles sales volume reached 320,000 vehicles. The market forecasts are very
promising, pointing to a boom in vehicle sales for the Asian region. GM’s sales accounted for
12% of automotive industry sales in this region in 2005 and the Asia-Pacific markets represented
28% of the worldwide sales in the same year (GM, 2005).
In terms of product line, Shanghai GM is manufacturing a few Buick models and Xin Shi Ji (New
Century) and the manufacturing system is the top in the industry. The company adopted SAP
Advanced Planning & Optimization to ensure lean manufacturing in 2005 to “help reduce
volumes and long shipment times” (SAP, 2005).
Contrary to the operation performance worldwide, GM’s operations in China started to payoff in
2003, when the profit per vehicle sold was $1,200. The results reflect sales in the local markets
because the exports are restricted to a given number at this point. US concerns are that the unsold
cars in the Asian markets will be exported eventually, following the Japanese and Korean export
patterns (ITA, 2004).
4.2.4 Bottle-Neck Problems of Shanghai GM Auto Company
China has a restrictive policy regarding the construction of diesel engines, in particular for cars.
The oil consumption grows larger as the market demand for vehicles increases and diesel engines
are more efficient from the fuel consumption point of view. In China’s case, given that the
resources are limited and scarce, the policy on diesel engines is basically restricting the demand
and therefore the consumption. A restricted consumption is synonym to restricted production
growth. The studies suggest that if China has 20% of its cars running on diesel engines, it would
save up to 19 million tons of oil per year (Te Kan, 2006).
Even thought the Shanghai GM joint venture was set up to serve the Chinese market, some of
components end up in the American market. However, before doing so, they spend a lot of time
39
on the way to the American shore and in its ports. These waiting times affect the company’s
speed to respond to the market’s demand and all the suppliers along the value chain (Terreri,
2004).
One other bottleneck that can be quoted is the documentation needed to manage the supply chain.
China is not only a consumption market, but also a production market and many companies go
there to manufacture their products for a lower cost and sell those back to their home countries.
This makes the logistics activity crucial for the business performance.
4.2.5 JV and/or WOFE of Shanghai GM - Localization and Self-Development
By competing throughout the world in America, Europe, and Japan, various automotive leaders
have been trying to keep their market shares in domestic markets while still moving into foreign
markets. By dealing with growing markets such as the Asia Pacific region, Eastern Europe, and
South America, the leading companies are actively starting to look for ways to collaborate with
local and national industries while still competing for higher market share.
Shanghai GM managed to set up 250 dealership stores in only 4 years. The way to do so was by
allowing all dealers with a weak financial position to sell sedans. Given that most of the dealers
are in such a position, the network expanded really fast because this was a very good business
opportunity for dealers (Yuann, 2006).
To insure production growth, Shanghai GM followed a strategy of several subsequent
acquisitions of spare parts state-owned companies that were later turned into profit. The market
demand is growing very fast, but so is the competition. There are 3 major automotive “players”
on the Chinese market: Shanghai Automotive Industry Corporation (SAIC), First Automobile
Works (FAW) and Dongfeng. They are all trying for the same customer and the market is not
regulated as it should be. Thus, a lot of companies face difficulties due to an inefficient copyright
protection that ranges from music CDs to car models. GM was put in the situation of suing the
Chinese automaker Chery because the latter manufactured a car model similar to Daewoo Matiz.
To ensure workforce talent, GM entered a very convenient JV with SAIC that owned a very large
pool of talents at the moment when the venture took place. On the financial side, the company
40
beneficiated from a lot of bank loans that with the help of a local partner became easier to reach.
In terms of brand management, the JV manufactured vehicles under Buick brand for the domestic
market that targeted low and middle class population and for the external market, spare parts
were produced for a wide range of GM brands. However, the latter ones had to have the assembly
done in US due to market regulations.
Shanghai GM managed to hold the sales record on the Chinese market in 2006 in terms of units
sold. The company is permanently trying to expand its production capacity to cope with the
increasing market demand.
4.2.6 Reflection on the development of JVs and/or WOFEs of Shanghai GM
The idea of forming a JV with a local company was very fruitful for GM. The local “player” –
SAIC was well established in the automotive market and therefore familiar to the specific market
characteristics in China.
Given the large cultural differences and implicitly the large business practice differences, GM
minimized the “liability of foreignness” (Zaheer, 1995). The theory suggests that companies
internationalize gradually and first enter markets that are culturally closer and as they gain more
knowledge about these markets, they internationalize further to culturally more distant markets
(Johanson & Vahlne, 1990; Johanson & Wiedersheim-Paul, 1975).
GM’s joint venture with SAIC was first of all beneficial because the Chinese partner helped the
American one to deal with the local authorities more efficiently. Thus, SAIC enabled GM to
acquire state-owned spare parts companies, to get bank loans in a record time and to get
preferential government treatment on a given number of issues. SAID came with a well prepared
work force that helped the joint venture compete on the automotive market successfully. The
talent pool was already in place and familiar to the industry activity.
The JV managed to acquire more plants than a foreign company normally is allowed to. However,
the American manufacturer trusted SAIC enough to give up shareholder majority in order to
make the acquisitions that were available only for local companies/major shareholders.
41
Jinbei GM was probably the only GM business in China that turned out not to be profitable
because the management team was inexperienced and the company had a weak financial position.
The lack of experience on behalf of the management team had a fatal effect on the dealership
network and the weak financial position forced the company to borrow all its capital. At this
point it is obvious that a joint venture with a strategic qualified local partner is essential to have a
successful performance.
The GM Company has also created some partnerships and other initiatives within China that
allow for benefits above and beyond those that are seen as a direct result of their business.
General Motors has played an active part in the Chinese government by addressing both current
and future potential challenges on an environmental level. These concerns include a research
project between the Chinese and United States environmental protection agencies so that air
quality can be sampled. By doing this, the primary sources for pollution can be located.
Through this vein, GM has shown its interest in how to advocate benefits toward the use of
unleaded fuel within China. General Motors has also created a partnership with the regulatory
and safety communities in China so that research and development on safety and health standards
can be ensured (Kbizzle, 2005).
The cooperation that is seen between Chinese partners can help GM to develop within China both
rapidly and steadily, especially where technological development is concerned. General Motors
has also helped China to develop in other fields. GM is considered to be a geocentric car
company, and all of the decisions in the Chinese car market indicate that the GM Company thinks
globally but acts locally. These kinds of positive activities show that GM is able to adapt to and
hold the car market within China (Kbizzle, 2005).
4.3 ShangHai Volkswagen (VW) Case
4.3.1 Brief Introduction to Volkswagen Auto Company
The Volkswagen Auto Company is a German-based company that has been around for many
years. The company sells its vehicles in Germany, the United States, and other countries. Because
42
of this, the company continues to grow and expand. This includes moving into markets where
expansion is important and desired, or where expansion is simply needed. This is the case with
the auto market in China, because there are many more people in that country today and the
region needs more options for car makers.
4.3.2 Shanghai Volkswagen Auto - Company Overview
The Shanghai Volkswagen Auto Sales Corporation has been a joint-venture of three partners,
affiliated with China and Germany. There was a unanimous agreement among the partners to
penetrate into the automobile market of China, and explore the possible and available
opportunities within the Chinese, and regional market. The Volkswagen, German unit has been
serious in the progress and development of the automobile market of the region, 'through
deepening its cooperation with Shanghai's auto industry'. Initially the organizations titled
Shanghai Auto Industry Group, Volkswagen (China) Investment Co. Ltd and Shanghai
Volkswagen Co. Ltd. invested more than thirty million dollars, under distribution of fifty percent,
thirty percent, and twenty percent respectively (Yao, 2006).
4.3.3 Analysis on Operation Performance of Shanghai VW Auto Company
Initially there has been a rumor that German Volkswagen intended to purchase more number of
shares towards acquisition of Shanghai Volkswagen and FAW Volkswagen, another joint venture
by German Volkswagen in northeast China. However, such rumors have been refuted by the
officials from the German Volkswagen, rather the officials have stressed over the need to secure
market shares and achieve customer satisfaction. The company has adopted and implemented 'the
use of operational ideas and successful experiences from German Volkswagen' (Jonathan. 2005),
and has integrated the after purchase services with the sales network, aimed at the establishment
'of a comprehensive and high-efficiency sales-service network' (Mark, 2006).
The Chinese-German automobile venture has recorded sales of more than twenty thousand units
on monthly basis, which is forty percent greater than the previous solo performance of the
automobile company, excluding Volkswagen. Presently, the Shanghai Volkswagen has
43
manufactured more than 2,000,000 units of cars. The special event was commemorated by Chen
Xianglin, Chairman of SAIC, Mr. Weissgerber from German Volkswagen, Mr. Tang Dengjie,
director of Municipal Economic Commission, Mr. Chen Xianglin, Chairman of the board and
Secretary of Party Committee of SAIC, Mr. Hu Maoyuan, the President, and other leaders of the
Group and the Party Committee and Chinese at final assembly workshop of Shanghai
Volkswagen No. 3 Plant. The event was the reflection of the fact that the members of the
company are deeply associated with each other, and it’s more like a family of professionals
serving the company. Recalling the events of the past, when the company first launched Santana
i.e. Shanghai Volkswagen’s simple and crude production line, the critics were reluctant to
welcome and honor the company for the milestone, it observed that the company has 'produced
cars in a ruined, unsupported and isolated island, the experiment was doomed to fail' (Mark,
2006).
4.3.4 Bottle-Neck Problems Shanghai VW Auto Company
Volkswagen has felt victim of the sociolinguistic challenges within China market. The
multinational companies including Volkswagen have been accused for their involvement in such
practices which generate 'creativity-driven shock values, controversy and extreme individualism
commonly accepted in the North American and Western European markets'. Volkswagen has
experienced severe tribulations due to its “advertising language as culture-blind and bona fid”,
and Chinese market created great hurdle for the Volkswagen industry. It has been important for
the company to implement congruence of the values, and avoid the existence of the cultural
values in the organization in an implicit manner. It has been observed that the categorization of
the organizational, departmental and employee values and behaviors on the basis of the cultural
affinity has generated satisfaction among the employees, and has developed positive impact on
their 'commitment, absenteeism, turnover, morale and perception of feeling involved in an
organization’s decision-making process' (David, 2002).
4.3.5 JVs of Shanghai VW - Localization and Self-Development
The unexpected success of the Shanghai Volkswagen is credited to the Shanghai Municipal Party
44
Committee and government and under wise leadership of SAIC, Shanghai Volkswagen staff. The
entire unit as a team worked hard in order to achieve 'series of glorious accomplishments' (Eric,
2006). The efforts of the professional family materialized and resulted in the 'localization of
Santana from the initial 2.7% to 95% and above, and localization of Passat, Polo and other new
versions was 40% at the beginning; the model was developed from the only Santana to Santana
2000, Passat, Polo, totally four production platforms, with more than 10 varieties'.
The company took considerable measures towards after-sales service, and implemented a
network which was spread all over the country. The company achieved another milestone after
the establishment of 'first class technical center including test drive park and laboratory' (Richard,
2005). All these efforts brought unprecedented fame and success to the company, 'and the
registered capital increased from the initial RMB 160 million to the current 63 billion' (Birgit,
2004), ‘Shanghai Volkswagen’s technical development, management and equipment capability all
achieved a new level which was closer to the world leading standard, and it emerged as the most
competitive pioneer of auto industry in China’ (Richard, 2005).
Volkswagen dominated the China auto market with about 55 percent of sales. The company was
bringing on production of five modern vehicles over the next three years, including the luxury
Audi A6 and the VW Passat and Jetta. The No. 1 German automaker was doubling its investment
in China to six billion makers ($3.28 billion). Still, Volkswagen was not resting on its laurels.
“China is becoming much more competitive, with demand more like it is western marker”, said
Stefan Jacoby, the VW vice president in charge of the Asian-Pacific region.
Much of Volkswagen’s success had been in supplying China’s demand for taxicabs, as anyone
who visited the mainland in 2000 could determine; most of the taxi in use in the urban areas were
Santanas or Jettas. Shanghai Volkswagen catered to this large market segment. For example, in
June 1999, Shanghai Volkswagen began a new policy to expand its sales to the taxi service sector.
Under the new policy, any local taxi company that bought 100 units of Santana cars or 50 units of
Santana 2000GLS would get an extra unit of the same model. Also, the sales corporation offered
a 15,000 kilometre, third class, free maintenance warranty in addition to the 7,500 kilimetre, first
class, free maintenance for any Santana 2000GLS used as a taxi. Approximately 40 percent of
45
Santanas made in 1998 went to the taxi sector. VW Santanas accounted for over 80 percent of the
taxis in Shanghai. Volkswagen did not offer a sports utility vehicle, and thus did not compete
directly with the Cherokee or BJ models.
4.3.6 Reflection on the Development of JVs of Shanghai VW
SAIC Motor is the local associate of the General Motors Corp and Volkswagen AG in China,
whereas the Shanghai Automotive fabricated the parts for the joint ventures. In 2005, the
company 'posted a 44 percent drop in net profit for 2005, posted a higher first quarter earnings
due to the buoyant auto sales of its parent's two joint ventures'. The Shanghai Automotive, a
branch of the China's second largest automaker SAIC Motor Corp achieved the net profit of more
than fifty percent, and reached the mark of 223 million Yuan, from the initial figure of 152
million Yuan last year.
According to the Shanghai Stock Exchange, the company 'generated revenue of 2.08 billion Yuan,
up 39 percent year on year'. Unfortunately, the performance of the shanghai Automobile industry
exhibited the profit decline of in five years in 2005 i.e. 'net profit slumped 44.16 percent to 1.1
billion Yuan last year' (Nicholas, 2002), the justification for such declination was attributed to the
competitive forces which the company was subjected to, 'the company was struggling with
soaring prices of raw materials, price discounts and intense competition'. The performance and
the financial results of the company were contributed by the 'Shanghai General Motors in which
Shanghai Automotive controls 20 percent' (Richard, 2005).
The management of the Shanghai General Motors was successful to topple 'Shanghai VW to be
China's top auto seller for the first time in 2005' (Nicholas, 2002), the sales of the company rose
significantly by '104 percent to 81,200 units in the first quarter, and profit totaled about 1 billion
Yuan'(Nicholas, 2002). The performance of the Shanghai Volkswagen, a joint venture of SAIC,
was successful in the securing the market share in tangible proportion, and rise of 115 percent
was materialized through consistent efforts and comprehensive strategy. According to the
National Bureau of Statistics, the investment and the interests of the Chinese automobile
companies resulted in the estimated profit of 3 billion Yuan during the first two months of the
46
current year, which is relatively 300 percent more than the results marked in the last year.
5. Findings & Discussions
5.1 Weaknesses of Chinese Car Industry
The Chinese car development has recently been through a long and difficult time. Until now,
however, China has been among the ten biggest car manufacturing countries. In the last five years,
however, the Chinese car industry has found itself in a bit of a golden age. Manufacturing and the
portfolio of offered products have largely improved. Some types of technologies have reached
higher levels in the 1990s. However, there are many gaps still within the technologies and
management issues between the Chinese car makers and the foreign car makers. Overall,
therefore, it is a rather immature industry, and gaps still exist in areas such as technology, price,
and scale of the economy.
5.1.1 Economy of Scale
Since the 1980s, the economy of scale that is seen within international car companies has
continued to improve rapidly. There are two reasons for this. One of these is that globalization
has affected the car industry. Another is that there have been mergers and acquisitions within the
car industry internationally. Because the car industry is both a technology industry and a capital
concentrated industry, the scale of economy is very critical to the survival of the Chinese car
industry. However, there is also a very large gap between the Chinese car industry and the foreign
car industry within the scale of economy. According to the international rules, the scale of
economy for a car company to operate must at least equal 300,000 per year. Until now, there has
not been a car company within China that has been able to reach this criterion. In the United
States and Japan, all of the car companies are able to reach this goal. A poor scale of economy in
China helps lead to higher costs of fixed assets per unit, which lowers the advantage of having
low cost labor within that country. “In 1998, the total production volume of the biggest six car
47
companies was only about 1/4 of Toyota’s. The total fixed assets are only about Volkswagen’s”
(Guo, 2003). There are, however, three main problems with this: there are too many different car
companies, a low concentration of manufacturers, and low productivity.
5.1.2 Technology
Overall, the technological development that is seen in the Chinese auto industry is well behind
what is seen in the auto industries of other countries. With the exception of a couple of companies,
most are not able to develop new cars. Mostly, the Chinese auto industry imported and imitated
techniques, and it did very little on its own. Such a low investment in creating new techniques
and ensuring that cars were keeping up with the times lead to the large gap between Chinese cars
and foreign cars.
5.1.3 Price
At the present time, excluding issues such as quality, performance, and branding, the average
price of the domestic cars in China is 40-100% higher than the prices for foreign cars.
According to prices listed on www.sina.com, both Audi and Jetta were sold at almost 370,000 and
170,500 in China, while similar Korean cars were sold at 20,000 and 10,000 dollars in Korea.
Buick was also sold at nearly 44,600 dollars in China, while in the United States it sold only at
20,000 dollars. The price of Chinese cars is so high, however, that they cannot compete with
foreign cards, even when considering service and quality.
5.1.4 Ownership
In car companies that are operated by the state, the ownership is often unreasonable and it
prevents a lot of the healthy development that would otherwise take place. China is a communist
country, and much of what they have is characteristic of planning economies that took place and
were created before 1980. Although China began transferring from a planning economy to more
of a marketing economy, many of the regulations that are put into place never disappear, and this
is especially true within the auto industry. Many of the companies in this industry are state-owned
48
because of a policy in the past where private enterprises were not supported. Because of this
policy, the development of the Chinese car industry was slowed significantly. Top management
could largely do nothing, and generally they only added or adjusted policies that were created by
the government.
5.2 Strengths of Chinese Car Industry
5.2.1 Operations
In operations within this industry, the most obvious advantage that is seen is the low labour cost.
According to a report on www.chianren.com, the average salary in the Chinese auto industry was
around 36,000 per year (4,700 dollars). In the United States, the average salary for a person with
the same type of job is thought to be around 36,000 dollars. This is obviously a very large
discrepancy, and it can be detrimental to those that work in Chinese car companies, because they
make so very little compared to their competitors.
5.2.2 Marketing
Within their marketing and sales departments, Chinese auto companies have a few characteristics
that are very important. First, the retail channels of the Chinese car companies are both wide and
short. Generally, every one of these channels only has two layers, which leads to low sales costs
and higher levels of efficiency. For the bigger companies such as Shanghai Volkswagen, these are
able to cover over 70% of China. These powerful types of channels help smooth the sales and
they allow the Chinese auto companies to very easily learn about the demands that the market has.
For the foreign car companies, the lack of sales channels can be extremely problematic.
In addition, because of the long-term cooperation that has been seen between the Chinese car
companies and the sales agencies, a very stable relationship featuring a sharing of both risks and
profits has been created. Agencies will generally only sell cars that come from specific car
companies, and they exclude cars that are available but come from companies that they do not
work with. For the Chinese car companies, a large number of sales agencies help to save a great
49
deal of money, which is necessary in order to build strong channels. If foreign companies wish to
sell cars within China, they have to spend a lot of money and time on the establishing of
channels.
5.3 Joint Ventures and FDI
Joint ventures are only part of foreign direct investment (FDI), and they are becoming more
popular throughout the world, thanks to the fact that they are much more beneficial for both
parties than many other arrangements. It is important, therefore, to analyze the various issues that
come along with these things.
5.3.1 Reasons of Popularity of Joint Ventures and FDI
In China, the economy is growing very rapidly. Much of this is believed to be due to the large
percentage of FDI that has been coming into that country in recent years. Once the Asian
financial crisis was over, many companies and investors started to bring their money to China and
other Asian countries, and this allowed for rapid economic growth.
Where China is concerned, however, the economic condition is the most important issue. It can
be seen by the data that has been presented throughout this study that China is the most
rapidly-growing of the developing countries that are receiving FDI, with the country receiving
approximately 25% of the FDI dollars that are flowing into developing countries, and it can also
be seen that China is the country that receives the largest portion of FDI. This is very helpful
for China's economy for many reasons. The most important reason is that, when companies
bring their FDI to China and does well; other companies notice this and also bring their FDI to
China. Soon, more and more companies are bringing their FDI to China because they see how
well other companies are doing in that country. This is, naturally, very good for these
companies from a financial standpoint, but it is also very good for China and its economy.
This growth is important, because it indicates strong interest in China where FDI is concerned,
and also indicates that China is not limited to one type of growth. Indications from studies have
50
shown that the service sector is what is growing the most rapidly in both already developed and
still developing countries, but the industrial sector (both light and heavy) has also shown strong
growth in China. Those companies that are interested in investing in a developing country will
wish to analyze this type of information based on what is occurring in other developing countries
as well, in order to determine which country would be the strongest choice where their
investment dollars and type of business are concerned.
China is a very strong country where macroeconomic factors are concerned, in that its overall
economy is growing rapidly in virtually every sector that could be addressed and that a company
would be interested in. However, the microeconomic factors in China are also very important,
because specific businesses in China are performing well, and viewing the economy on a smaller
level helps specific businesses to determine how well they will perform, should they decide to
send their investment dollars into the Chinese economy. The main areas that can be seen to
have contributed to microeconomic growth in China are: a high degree of education, a high
growth rate for productivity, a high rate of savings, and an income distribution that is judged to be
relatively equitable.
Economic growth is achieved through an influx of money and other capital, proper tax rates,
proper exchange rates, low rates of unemployment, and other factors. The FDI that has been
coming into China so strongly in recent years has helped to produce all of these things, and this
has allowed for the strong economic growth that has been seen. China has generally done well
economically anyway, because it exports so many goods to the United States and other countries,
but the FDI that has been seen has only further boosted an already growing economy, and made
that economy's growth rate almost explosive by comparison to what it used to be and by
comparison to other countries.
A strong economy is not the only issue, however, where FDI is concerned. The investment
climate is also very good in China. The investment climate is the 'gauge' of whether investing
in a particular country is welcomed or not welcomed during a certain time period. Right now,
investing in China is strongly welcomed by that country, so therefore it has a good investment
climate. This is very important, because a country that does not welcome FDI is certainly not
51
the country that a company wants to try to move into, as there would be too many problems
associated with this type of move.
The policies that governments have toward FDI are also significant when it comes to whether a
company moves into a particular country or decides to relocate somewhere else where the
restrictions are not so strong. Where China is concerned, the government policy is very friendly
toward FDI at this time, especially for companies in the United States and other developed
countries. China exports so many things to the United States and imports from that country as
well, so there is a good trade agreement seen between the two countries.
China also has a good trade agreement with many other developed countries, and this allows for a
comfort level between the governments of these countries that encourages the idea of
multinational corporations bringing FDI to China. There are, of course, no guarantees that this
will continue indefinitely, but for right now there do not appear to be any barriers to trade and
investment, and there are no government policies at work in China that would slow down the FDI
that has been pouring into that country. The Chinese government realizes the benefits that it
gets from the FDI that it allows in, and therefore also acknowledges the idea that creating
government policies that would restrict FDI would be harmful to the Chinese economy in
general.
Car makers are by far not the only multinational companies that have some of their service sector
in developing countries, however, and it is important to realize that more and more companies are
outsourcing much of what they do to these other countries. When these companies outsource to
China, that country's economy gets a strong boost from the FDI that comes into it, as well as the
money that it receives through the purchase of land, buildings, materials, and so on, and the
people of that country have jobs that pay better than what they could have found elsewhere, but
yet still pay much less than the company would be required to pay individuals within a
developing country. It appears to be a 'win-win' situation for both the company and the country,
making it very beneficial to all involved.
The economic performance of the company is important, as well. In China, there are so many
52
people and so many businesses that almost any business that is good and fair can survive.
While the economic performance of some of the local businesses may go down slightly, it may
also go up (as in the case of a corner store located next to a new FDI-created business, for
example). The economic performance of the multinational corporation also rises, because it is
paying less money for the same work and therefore making more of a profit than it would
otherwise have done. However, in some of the smaller countries that are less-developed than
China, have less money and resources, and have a smaller population, the economic performance
of a large, multinational corporation can come at the severe expense of many of the smaller,
locally-owned and operated businesses.
5.3.2 Problems in Joint Ventures and FDI
5.3.2.1 Organizational Control
In a joint venture, many control issues are found at the heart of the management conflict that is
seen between partners. Schaan (1983) defines joint venture control as: “the process through
which a parent company ensures that the way a joint venture is managed conforms to its own
interest”. Management control plays a very crucial role in the performance of any joint venture
because the partners differ in many areas such as experiences, strategy, social background, culture,
and objectives. There is a 60% international joint venture rate of failure, which indicates that
most partners in joint ventures generally do not spend enough time considering monitoring and
control decisions (Kogut, 1988). Often, there is both insufficient and ineffective control in an
international joint venture, and this can easily limit a company’s ability to coordinate activities.
When this happens, the company is not able to utilize resources efficiently and implement
strategy effectively (Geringer and Herbert, 1989).
The main problems that are seen where managing joint ventures are concerned come from one
main cause: there are too many ‘parents’, or people/companies that are trying to remain in control
(Killing, 1983). According to Vanhonacker (1997), one of the key problems is a conflict of
interest between the foreign investors and the Chinese partners. The different managerial styles
that foreign investors have when compared to their Chinese counterparts are often problematic,
53
and clashes are seen over how the joint venture should be operated. In addition to this, most
joint ventures are also characterized by definite differences within the strategic objectives of the
partners. The primary motivation, therefore, for firms that are in developing countries is to
collect technology, capital, expertise, and success in the short-term from their joint venture. The
aim of those that are foreign investors, however, is to collect market access to more markets that
have long-term growth potential. Because partners share the same company but have different
goals, ideas, and dreams, the expectations that they have and the approaches to doing business are
usually very different, which leads to tensions in most joint ventures (Deng, 2001).
Killing (1983) says that a joint venture that has a dominant control partner is much more likely to
succeed, because it will be much easier to manage. For the investing partners, they are usually
willing to have control over the company. However, some countries have very unfamiliar and
complex rules and conditions. If this is the case, allowing a foreign partner to have dominant
control might end up having a negative effect on performance, because society and culture will
be very different from what that company is used to.
5.3.2.2 Managerial Corporate Culture
Cultural differences, in both nations and organizations, can lead to strong conflicts in culture, and
therefore have many negative effects on an organization’s involvement within a joint venture
(Cullen et al., 1991). International joint ventures are much more susceptible to problems with
cultural distance than other creations such as wholly owned subsidiaries, because the
international joint venture generally must deal not only with corporate culture, but with national
culture. Because of this, the global diversity of a large number of companies is a challenge for
the foreign investor in trying to integrate its national culture and its organizational culture with
that culture of its local partner. One is left wondering how managers can address this problem.
It is without a doubt important that a business have a strong and stable culture, as this allows for
the organization to perform well and strive toward excellence.
The problem of a conflict between cultures is also very complex, because there is such a large
cultural difference between Western countries and Eastern countries. According to research
54
done by Hofstede (2001), there are four main aspects to this issue. One of these aspects
(individualism and collectivism) will be analyzed here in order to show what differences there are
between these cultures. In societies where individualism is prized, people focus on the “I”
(Bochner, 1994), managers are generally assigned to individual tasks, individuals are held
accountable for their own performance, and group work is minimized, since that could lead to
poor efficiency and a tendency to pass responsibility off to others. On the other hand, collective
societies have people that are working in strong and cohesive groups, it is generally seen as wise
for managers to cooperate and communicate with others to solve problems, and solutions are
implemented that are designed to use teamwork for task accomplishment. In Western countries,
management focuses on regulations, criterion, and systems for efficiency. In Eastern countries,
much more emotion is taken into account when management goals are set. Because managerial
styles are so different between the two, they are often difficult to integrate into one, and because
of that conflict is difficult to avoid.
5.3.2.3 Technology Dismissing
Since one of main objectives of forming a joint venture is transfer of technology and managerial
know-how. In such a firm, it provides a best opportunity to acquire a foreign partners’ intangible
and tacit knowledge, which is so difficult to keep secret when working in the same place, thus
their losing long-term competitive advantage. The firms with a global strategy would favor high
control entry mode. They also argue that the more tacit the know-how, the more favored is a high
control mode. In most developing countries, because of lack of well-established intellectual
property law system, there is a high risk of misuse of transferred proprietary know-how by a local
partner. Hamel (1991) suggests that technological and marketing know-how are the core
competence to long-term competitive advantage of many multinational firms. In this case, to
some extent, technology dismissing means loss of competitive advantage in long term. Actually,
the investing structure of foreign firms become optimizing and the quality and level are
improving step by step. According to the relevant information, in 2000, the percentage of foreign
investors use most advanced technology of parent company occupy 42%, and use rather
advanced technology account for 45%. With the changing of invest, multinational firms shifts
from labour denseness with low technology to high added value with technology denseness and
55
capital denseness. Then, foreign investors have to prevent technology dismissing. On the other
hand, these companies begin to shift the core department to China, from produce to brand,
showing localization. In joint venture, it is almost impossible to avoid Chinese partner obtaining
core technology by means of learning and working, as a result, there will be competition for
foreign investors.
6. Conclusion
In this dissertation, through out case studies, findings and discussion are confined to how can
foreign auto companies select the entry mode to compete with other auto companies in Chinese
car industry. Chinese GDP had increased for over 20 years and will continue increasing. The
Chinese car market had become a giant latent target. Every large auto company wants to get enter
of this market. How can they defeat to Chinese auto companies and other similar foreign auto
companies in the Chinese market, selection of entry mode is the first and key step for those
foreign auto companies.
The external environment of Chinese car industry includes governmental, economical, social and
technological factors. In political environment, Chinese accession to WTO was one of the most
important events. The accession facilitated China to give up the protection policy of car industry.
This affair completely changed the environment in Chinese car market. Average tariffs on foreign
cars were reduced to 25% by the end of 2006. Because of the protection circumstance of Chinese
car industry in a long run, the competition in Chinese car market is insufficiently severe so that
the costs and prices of domestic cars are significantly higher than that of imported ones. The
reduction of average tariffs on cars can have an evidently positive impact on the competitiveness
of foreign auto companies. Other factors such as stable economic environment significantly
improve consumption confidence, resulting in booming of car demand. Therefore, the external
environment the fast development of Chinese car market provides a good chance to exotic
companies.
56
Moving to the internal environment of Chinese car industry, it is found that the history of Chinese
car industry is rather short comparing with foreign car industries. In the findings part, the
weakness and strengths of Chinese car industry and market are analyzed. The gap between
Chinese and foreign car industry is formed by many aspects including economy of scale,
technologies, price and ownership. Economy of scale can not be reaped. Even though Chinese car
industry is incompetent in many aspects, it also has some competitive advantages such as low
cost labours, accumulator techniques and complete marketing channels. Compared with foreign
car industries, Chinese car industry is an immature industry as a whole.
On the basis of the case studies and the analysis of Chinese car industry, in the discussion part,
the reasons why joint venture and FDI were so popular at the beginning of implementation of
opening policy until last century will be analyzed through the theories of transaction cost, FDI
and institutional environment. There is a big cost for foreign investors when they just entered into
Chinese market, which is an unfamiliar place, such as culture, negotiation style, Chinese
managerial method. Further, as the result of legal barrier, it is little chance for foreign companies
to establish wholly foreign owned enterprise in a great number of fields. Again, the particular
culture in China – Guanxi, is also a great barrier for foreign investors to do business. Thus,
foreign investors were like to find a Chinese partner to entry a new market, decrease its
transaction cost, and deal with conflict of culture and managerial style. It is a great opportunity
for multinational companies to establish joint venture and gain their profits. There are a numerous
successful examples in China, such as Shanghai Volkswagen and GM.
According to the intrinsic reasons of lessening popularity of joint venture are analyzed through
three points. Control issue is the key problem in joint venture, since control plays a crucial
important in performance of a joint venture due to the partner differences in objectives, strategy,
culture, and experiences. Benefits conflict pricks up this issue. The place is managerial corporate
culture. The big different national culture makes it a hard conciliating point, and this conflict
plays a negative effect on the operation of joint venture. The last and most important is
technology dismissing. In recent years, the interesting of foreign investors investing China has
shifted from producing products in low cost and export to occupying Chinese market by means of
high technology. In order to take the place of inside track, foreign firms use most advanced
57
technology. Then, to avoid conflict of control and managerial style, which lead to low efficiency,
and technology dismissing, which causes losing competitive advantage. Therefore, some foreign
investors prefer wholly owned foreign enterprise.
Through doing business in China, foreign investors have, to some extent, understood the Chinese
market. In most cases, they can do business in Chinese way. Thus, to decrease the transaction
cost which in caused with conflict of control and managerial style, multinational companies
prefer to choose wholly foreign owned enterprise. Further, with doing business in China, a
Sino-foreign managerial team has already established which can help foreign company to relieve
cultural barriers.
In Chinese car market, joint ventures are still playing leading role in this area. Currently, although
there are 130 auto producers in China, a few Sino-foreign joint ventures control over 90% of the
market share. MNEs may find the acquisition mode increasingly attractive as well, since the
Chinese government realizes that 130 auto producers cannot all survive after WTO accession.
Although joint ventures are the only mode permitted, MNEs’ equity position will be allowed to
increase gradually. China will allow 49% foreign ownership in all services by 2007, and 50%
foreign ownership for value-added and paging services by 2006 (Zhu, 1998). In terms of MNEs’
entry mode, wholly owned subsidiaries will not be allowed even six years after China’s WTO
accession. The other three modes will be viable choices. Joint venture will be continuous to
flourish, and it will now expand to the newly opened segments.
Due to the limited time and materials, this dissertation only generally discusses about the Chinese
car industry’s environment and entry mode selection of foreign auto companies before entry into
Chinese car industry. In reality, before the implementation of entry mode and competitive
strategies, more details of external and internal environment of Chinese car market will be
considered. Entry mode selection and competitive strategies are not static. Even during the
implementation, entry mode selection and competitive strategies can be amended due to the
change of environment. The dynamics of entry mode selection and competitive strategies can be
discussed further. This dissertation just gives readers a hint of further research and discussion.
58
References Altman, E. & Kao, D.L. (1991). Corporate Bond Rating Drift: An Examination of Rating Agency Credit Quality Changes Over Time. New York University-Salomon Brothers Working Paper
S-91-40. Anderson, E. and Gatignon, H. (1986) ‘Models of foreign entry: transaction cost analysis and propositions’, Journal of International Business Studies, Fall, pp.1-25. Anderson, O. (1997) ‘Internationalization and market entry mode: a review of theories and conceptual frameworks’. Management International Business Studies, Vol. 17, No. 2, pp.1-26. Billet, M. (1996). ‘Targeting Capital Structure: The Relationship Between Risky Debt and the Firm's Likelihood of Being Acquired’. Journal of Business. Birgit, Zinzius (2004) Doing business in the new China: A handbook and guide. Praeger/Greenwood. pp. 65-78. Bochner, S. (1994) ‘Cross-cultural differences in the self concept: a test of Hofstede’s individualism/collectivism distinction’. Journal of Cross-Cultural Psychology, Vol. 25, No. 2, June, pp.273-83. Capron, L. and Hulland, J. (1999) ‘Redeployment of brands, sales forces, and general marketing management expertise following horizontal acquisition: a resource-based view’, Journal of
Marketing, Vol.63, April, issue 2, pp.41-54. Chen, J. H. C (1999) ‘Strategies and performance of Taiwanese oversea direct investment
1987-1993 with special reference to location and entry-mode choice’. PHD Thesis, University of Nottingham. Chen, Z. B. (2002), WTO and Chinese car industry: Policy and Strategy. Mechanism industry publishing company: 22 Bai Wan Zhuang Avenue, BeiJing, P.R. China. Chiles, T. H. and McMackin J-F. (1996) ‘Integrating variable risk preferences, trust, and transaction cost economics’. Academy of Management review, Vol. 21, No. 1, pp.73-99. Contractor, F. J. and Lorange, P. (1988) ‘Competition vs. Cooperation a benefit/cost framework for choosing between fully owned investments and cooperative relationship’. Management
International Review, Special Issue, pp.5-18. Cullen, J. B.; Johnson, J. I. and Sakano, T. (1991) ‘Cultural congruency in international joint venture: does it matter?’ Proceeding of the Fourth International Conference, Easern Academy of
Management. CERAM, SophiaAntipolis, June, pp.9-13.
59
David, Kiley (2002) Getting the bugs out: the rise, fall, and comeback of Volkswagen in America. John Wiley and Sons. pp. 23-34. David, Kiley (2004) Driven: Inside BMW, the most admired car company in the world. John Wiley and Sons. pp. 187-190. Deng, Ping (2001) ‘WFOEs: the most popular entry mode into China’. Business Horizons, Jul/Aug, Vol. 44, issue 4, pp.63. Denzin, Norman K. and Lincoln, Yvonna S. (2000) The handbook of qualitative research. Thousand Oaks, Calif., London : Sage. Deresky, Helen. (2003) International management: managing across borders and cultures 4thed. Prentice Hall: Upper Saddle River, N.J. Dickson, P. E. and Giglierano, J. J. (1986) ‘Missing the boat and sinking boat: a conceptual mode of entrepreneurial risk’. Journal of Marketing, Vol. 50, No. 3, July, pp.19-38. Driscoll, Angie M. and Paliwoda, Stanley J. (1997) ‘Dimensionalizing international market entry mode choice’. Journal of Marketing Management, Vol. 13, pp.57-87. Dunning, John H. (1988) Explaining international production, Unwin Hyman Ltd: London. Dunning, John H. (1993) Multinational enterprises and the global economy, Addison-Wesley: Harlow. Ederington, L., Yawitz, J., & Roberts, B. (1987). The Information Content of Bond Ratings. Journal of Financial Research Vol. 10, No. 3, Fall, pp.211-26. Ekeledo, Ikechi and Sivakumar K. (2004) ‘International market entry mode strategies of manufacturing firms and service firms: A resource-based perspective’. International Marketing
Review, Vol. 21, No. 1, pp.68-101. Eric, Thun (2006) Changing lanes in China: Foreign Direct Investment. Cambridge University Press. pp. 65-68. Erramilli, M. Krishna (1990) ‘Entry mode choice in service industries’. International Marketing
Review, Vol. 7, No.5, pp.50-62. GE FAIC – Fanuc Automation Information Centers. 2005. Shanghai GM Designed for Success. http://www.gefanuc.com/ GM – General Motors, 2005. The World’s Largest Carmaker. Global Operations Media. http://media.gm.com/eg/gm/en/company/c_global_operations/ Geringer, J. M. and Hebert L. (1989) ‘Control and performance of international joint venture’.
60
Journal of International Business Studies, Summer, pp.236-254. Gerring, John (2007) Case study research: principles and practices, Cambridge University Press: Cambridge. Goodnow, J. D. (1985) ‘Development in international mode of entry analysis’. International
Marketing Review, Autumn, pp.17-30. Guo, K. S. (2003) Chinese industry after accession to WTO. Economy and management publishing company: 8 Hong Yuan Lane, Kou Liu Tiao, Xin Jie, BeiJing, P.R.China. Hamel, G. (1994) ‘Competition for competence and inter-partner learning within international strategic alliances’. Strategic Management Journal, Summer special issue, pp.83-103. Hammersley, Martyn and Atkinson, Paul (1995) Ethnography : principles in practice, 2
nded.
Routledge: London. Haveman, Heather (1993) ‘Follow the leader: mimetic isomorphism and entry into new market’. Administrative Science Quarterly, Vol. 38, pp.593-627. Hitt, M. A. and Ireland, R. D. and Hoskisson, R. E. (1999) Strategic management competitiveness
and globalization. South-Western College Publishing: Cincinnati, Ohio. Hofstede, G. (2001) Cultures consequences: Comparing values, behaviours, institutions, and
organizational across nations, 2nd
ed. Sage Publicatios. Hollifield, C. Ann. (2001) ‘Crossing borders: media management research in a transnational market enviroment’. Journal of media economics, Vol. 14, Issue 3, pp.133-146. Holt, David, H. and Karen W. Wigginton (2002) International management, 2
nded. Fort Worth:
Harcourt College Publishers. Hu, M. Y. and Chen, H. Y. (1996) ‘An empirical analysis of factors explaining foreign joint venture performance in China’. Journal of Business Research, Vol. 35, pp.165-173. ITA – International Trade Administration. 2004. China Market – 2004. Aerospace and Automotive
Industries' Automotive Team. http://trade.gov/index.asp Johansson, Johny K. (2000) Global marketing: foreign entry, local marketing, and global
management, 2nd
ed. McGraw-Hill: Boston. Johanson J. and Vahlne J. E. 1990. The Mechanism of Internationalisation, International
Marketing Review, vol. 7: pp. 11-24. Johanson J. & Wiedersheim-Paul F. 1975 The Internationalisation of the Firm: Four Swedish Cases. Journal on Management Studies: pp. 305-322.
61
Jonathan, Reuvid and Yong, Li (2005) Doing Business with China. GMB Publishing Ltd. pp. 234-256. Kaplan, R. & Urwitz, G. (1979). Statistical Models of Bond Ratings: A Methodological Inquiry. Journal of Business Vol. 52, No. 2, pp.231-61. Kbizzle (2005) ‘Case study of Automobile industry: General Motor (GM) Focus’ http://www.echeat.com/essay.php?t=27560 Keegan W. J. (2001) Global Marketing Management, 6
thed. Tsinghua: Prentice Hall.
Killing, J. (1983) Strategies for Joint Venture Success, New York: Praeger. Kogut, B. and Singh, H. (1988) ‘The effect of national culture on the choice of entry mode’. Journal of International Business Studies, Fall. Kwon, Yung-Chul and Konopa, Leonard J. (1992) ‘Impact of host country market characteristics on the choice of foreign market entry mode’. International Marketing Review, Vol. 10, Issue 2, pp.60-76. Lamy, R., &Thompson, G. R. (1988). Risk Premia and the Pricing of Primary Issue Bonds. Journal of Banking and Finance, Vol. 12, No. 4, pp.585-601. Lasserre, P. (2003) Global Strategic Management, Palgrave: Macmillam. Li, Xiaolian (2000) ‘Foreign direct investment in China: the importance of market entry timing’, in Yigang Pan eds, Greater China in the Global Market, pp.111-127. International Business Press: London. Luo, Yadong (2000) Multinational corporations in China, Copenhagen Business School Press: Copenhagen. Luo, Y. D. (2001) ‘Determinants of Entry in an emerging economy: A multilevel approach’. Journal of Management Studies, May, Vol. 38, No. 3. Mark, Norcliffe (2006) China. GMB Publishing Ltd. pp. 76-89. Marschan-Piekkari, Rebecca and Welch, Catherine (2004) Handbook of qualitative research
methods for international business. Cheltenham: Edward Elgar. Masten. S. E. (1993) ‘Transaction costs, mistakes, and performance: assessing the importance of governance’. Managerial and Decision Economics, Vol. 14, pp.119-129. Mechem, R. M. (2004) ‘Strategies for investing in China’. China Business Review, Vol. 31, No. 5, September, pp.6-7.
62
Nicholas, R. Lardy (2002) Integrating China into the global economy. Brookings Institution Press. pp. 76-89. Olive, Cristine (1991) ‘Strategic responses to institutional processes’. Academy of Management
Review, Vol. 16, pp.145-179. Palenzuela, V. A. and Alfredo, M. Bobillo (1999) ‘Transaction costs and bargaining power: entry mode choice in foreign markets’. Multinational Business Review, Spring, pp.62-75. Palmer, Adrian. (2001) Principles of services marketing, 3
rded. McGraw-Hill: Maidenhead.
Pan, Yigang and Chi Peter S K. (1999) ‘Financial performance and survival of multinational corporation in China’. Strategic Management Journal. Chichester: April, Vol. 20, Issue 4, pp.359. Poppo, L. and Zenger T. (1998) ‘Testing alternative theories of the firm: transaction cost, knowledge-based, and measurement explanations for make-or-buy decisions in information services’. Strategic Management Journal, Vol. 19, No. 9, Porter, Michael E. (1998) The competitive advantage of nations. Basingstoke: Palgrave. Preissle, Judith and Tesch, Renata (1993) Ethnography and qualitative design in educational
research, 2nd
ed. San Diego: Academic Press. Primo Braga, Carlos (1996) ‘The impact of the internationalization of services on developing countries’, Finance and Development, Vol. 33, No. 1, pp.34-37. Republished in Buckley P. J. and Ghauri P. N. 1999, editors, The Internationalization of the Firm
- A Reader, 2nd Edition, International Thomson Business Press: pp. 27-42. Richard, Johnson (2005) The six men who built the modern auto industry. Motor Books/MBI Publishing Company. pp. 121-134. Root, Franklin R. (1994) Entry strategies for international markets revised and expanded, Jossey-Bass Publishers: San Francisco. Saini. K, & Bates, P. (1984). A Survey of the Quantitative Approaches to Country Risk Analysis. Journal of Banking and Finance, Vol. 8, No. 2, pp.341-56. SAP – Customer Success Stories Automotive. 2005. Shanghai General Motors Company. http://www.sap.com/services/ Schaan, J. (1983) Parent control and joint venture success: the case of Mexico. Ph.D. dissertation. University of Western Ontario. Shrikhande, Seems (2001) ‘Competitive Strategies in the CNNI and BBC World in Asia’, Journal
of Media Economics, Vol. 14, Issue 3, pp.147-168.
63
Shi, Y. Z.; Ho, P. Y. and Siu, W. S. (2001) ‘Market entry mode selection: the experience of small Hong Kong firms investing in China’. Asia Pacific Business Review, Autumn, No.1, pp.19-41. Sun, H. H. (1999) ‘Entry modes of multinational corporations into China’s market: a socioeconomic analysis’. International Journal of Social Economics, Vol. 26, pp.5. Te Kan. 2006. Diesel Drive. China Daily, http://www.chinadaily.com.cn/english/doc/2006-03/13/content_533383.htm Teng, Bing Sheng (2004) ‘The WTO and entry modes in China’. Thunderbird International
Business Review, Vol. 46, Issue 4, pp.381-400. Terreri A. 2004. China: The Dragon Awakens. The Inbound Logistics.
http://www.business-in-asia.com/search_asia5.html Vanhonacker, W. R. (1997) ‘Entering China: an unconventional approach’. Harvard Business
Review, Mar/Apr, Vol. 75, Issue 2, pp.130. Wakeman, L. (1984). ‘The real function of bond rating agencies’. In Michael Jensen and Clifford Smith, eds., The Modern Theory of Corporate Finance. New York: McGraw-Hill. Weinstein, M. (1977). ‘The effect of a rating change announcement on bond price’. Journal of
Financial Economics, Vol. 5, No. 3, pp.329-50. Williamson O. E. (1996) ‘Economics and organization: a primer’. California Management
Review, Vol. 38, Issue 2, pp.131-146. Wong, Y. H. and Chan, R. Y. K. (1999) ‘Relationship marketing in China: guanxi, favoritism and adaptation’. Journal of Business Ethics, Vol. 22, pp.107-118. Yan, A. and Luo, Y. (2001) International Joint Ventures: Theory and Practice. New York: M. E. Sharpe. Yan, Y. N. and Child, J. (2004) ‘Investors’ resources and management participation in international joint ventures: a control perspective’. Asia Pacific Journal of Management, Vol. 21, pp.287-304. Yao, Shujie and Chen, Jian (2006) Globalization, Competition and Growth in China. Routledge. pp. 212-234. Yin, Robert K. (1994) Case study research: design and methods, 2
nded. Sage: Thousand
Oaks; London. Yuann J. 2006. China’s Balanced Scorecard: A Corporate Perspective on Modern Business. Center for New Institutional Social Sciences: Washington University in St. Louis.
64
Zaheer S. 1995. Overcoming the liability of foreignness, Academy of Management Journal, vol. 38(2): pp. 341-363. Zhu, G. and Zhao, H. (1998) ‘Determinants of ownership preference of international joint venture: new evidence from Chinese manufacturing industries’. International Business Review, Vol. 7, pp.569-589. Zucker, L. (1983) ‘Organizaitonal as institutions, in S. B. Bacharach ed’. Research in the
Sociology of Organizations. Greenwich, CN: Jai Press. pp.1-47.
