THEORIES ON ENTRY IN INTERNATIONAL MARKETS
Entry strategy for international markets is a comprehensive plan, which sets forth the objectives, goals, resources, and policies that will guide a company’s international business operations over a future period long enough to achieve sustainable growth in world markets (Root, 1994).
The interest in market entry mode choice originates from the theory of international investment.
It was studied as a problem with distinctive feature, extent, form and pattern of international
production (Southard 1931; Hymer 1960; Caves 1971 and 1974; Dunning 1958 and
1977). Then it was discussed as a critical issue in international marketing by many economists
and marketing experts. Wind and Perlmutter (1977) argued that the choice of market
entry mode has great impact on international operations and can be regarded as “a frontier
issue” in international marketing. Root (1994) claimed that the choice of market entry mode
is one of the most critical strategic decisions for MultiNational Enterprises (MNEs). It affects
future decisions and performance in foreign markets, and it entails a concomitant level of resource
commitment which is difficult to transfer from one to another, especially from high
level to low level. Kumar and Subramaniam (1997), Chung and Enderwick (2001), as well as
Nakos and Brouthers (2002) emphasized that the choice of market entry mode is a critical
strategic decision for firms intending to conduct business overseas.
Being such an important issue market entry mode choice became the object of numerous
theories and models developed to understand and explain associated phenomena. Among
these five basic approaches are particularly prominent and have been applied widely. They
1. the Stage of Development (SD) model (Johanson and Paul 1975; Brooke 1986),
2. the Transaction Cost Analysis (TCA) model and extensions (Anderson and Gatignon,
1986; Hill et al. 1990; Erramilli and Rao 1993),
3. the Ownership, Location and Internalization (OLI) model (Dunning 1977, 1980, 1988,
1995, 1998, and 2000),
4. the Organization Capacity (OC) model (Aulakh and Kotabe 1997; Madhok 1998),
5. the Decision Making Process (DMP) model (Root 1994; Young et al. 1989).
THE STAGE OF DEVELOPMENT MODEL
The stage of development (SD) model, which is also known as U model, was proposed by
Johanson and Paul (1975) while studying internationalization strategies of Small and Medium
sized Enterprises (SMEs). The model asserts that the internationalization of SME is a
long, slow, and incremental process with two dimensions: the geographical or rather cultural
expansion and the commitment. The original approach was enhanced and applied by Brooke
(1986) to explain market entry mode decisions. The author concluded that the entry mode is
dependent on the stage of a firm’s development. But also the enhanced model still has some
shortcomings: it provides a set of feasible entry modes but not the right ones (Young et al.
1989). Due to the fact that it is not capable of explaining why a newly established firm starts
entry with wholly owned venture but not export, the SD model does not dominate in existent
The TCA model
Transaction cost analysis (TCA) was proposed by Anderson and Gatignon (1986). The underlying
theory is based on transaction cost economics initiated by Williamson (1975 and 1985)
as a tool to explain economic problems where asset specificity plays a key role. Under the
hypothesis that organizational structure and design are determined by minimizing transaction
costs, they concluded that MNEs choose a specific mode of market entry which maximizes
the long term risk-adjusted efficiency. The choice depends on four constructs that determine
the optimal degree of control: transaction specific asset, external uncertainty, internal uncertainty,
and free riding potential. Entry modes are assessed by the level of control. Wholly
owned ventures, for example, are characterized by the highest level of control.
TRANSACTION COST ANALYSIS seems to be particularly useful in explaining vertical integration decisions, i.e how firms evaluate whether or not to estabilish a manufacturing subsidiary in market abroad(Erramilli and Rao,1993).
The TCA approach begins with the assumption that markets are competitive, there are many suppliers (agents/distributors).Under these conditions, low control modes are favored because the threat of replacement dampens opportunism and forces suppliers to perform efficiently. When the range of suppliers available to the firm is restricted there is little threat of replacement and the transaction costs associated with low-control modes are increased through the need for stringent negotiation and supervision of contractual relationships. Now the benefits of integration is compared with the cost of integration and according to TCA a firm should integrate when asset specificity is high,in order to retain the specific advantages they offer to market.
TCA can only offer very limited implications
for the managers in practice, and, what’s more important, transaction cost economy itself
has no connection with corporate governance.
The TCA framework has only limited explanation ability with respect to complex multinomial choices of market entry mode (Klein etal. 1990; Gatignon and Anderson 1988) .
?? neglects government regulations, which generally define the feasible set of entry
modes, and production costs (Anderson and Gatignon 1986),
?? fails to address the larger strategic and competitive context within which the firms are
operating (Madhok 1998),
?? assumes that the only objective of entry mode choice decisions of a MNEs is profit
maximization, which is not always true1 (Milgrom and Roberts 1992)
?? excludes non-transaction benefits (Anderson and Gatignon 1986).
The OLI model
The ownership, location and internalization (OLI) theory was introduced by Dunning (1977)
The OLI theory stated that entry mode decisions are determined by the composition of three
sets of advantages as perceived by enterprises:
a) ownership advantages (i.e. advantages that are specific to the nature and the nationality
of the owner)
b) internalization advantages (i.e. advantages arising from transferring ownership advantages
across national boundaries within own the organization)
c) location advantages (arising from the fact that different locations feature different resources,institutions and regulations affecting the revenue and the cost of production).
The more OLI advantages a firm possesses the greater the propensity of adopting an entry
mode with a high control level such as wholly owned venture.
Inspite of itseclecticism, its improved measurability, and its great explaining power the OLI model issolely a static one. It intends to explore all important factors impacting entry mode decisionsbut in fact fails to do so due to the neglect of strategic factors, characteristics of and situationalcontingency surrounding the decision maker, and competition.
The OC model
The organization capacity (OC) model was developed by Aulakh and Kotabe (1997) and
Madhok (1998) and it is based on organization theory. It regards a firm as a bundle of capabilities and knowledge where individual skills, organization and technology are inextricably woven together (Nelson and Winter 1982). The model argues that entry mode decision, the firm’s boundary issue, is a capability related one, and it is made under a calculus governed by considerations related to the deployment and development of a firm’s capabilities. For the first time firm or rather organization capacity is taken into account for entry mode choice decision making. However this model has some limitations. The traditional assumption that the capacity of an individual firm is limited to ownership is invalid when a firm’s efficiency related decisions are significantly influenced by collaborative agreements which might change its capacity strongly. Adopting that a strategy is not only dependent on the organization capacity but also on the organization efficiency, measures of organization efficiency have to be developed. This model also neglects the impact of the decision maker as well as of sociological and political factors
The DMP model
The decision making process (DMP) model was proposed by Root (1994) and developed by
Young et al. (1989), Kumar and Subramaniam (1997), Pan and Tse (2000), as well as Eicher
and Kang (2002). It argues that entry mode choice should be treated as a multistage decision
making process. In the course of decision making diverse factors, such as the objectives of
the intended market entry, the existing environment, as well as the associated risks and costs,
have to be taken into account. Focusing on optimizing the process of decision making but not
on exploring which factors might affect and what their impact on entry mode choice is this
model might be more practical. However it is still not perfect because it ignores the role of
the organization itself and that one of the decision maker within the decision making process.
Some conflicting results
As could been seen from the discussion above most of the existent studies aim to explore the
factors which are related to market entry mode choice and their impacts. In fact there are a lot
of factors that have to be taken into account in relevant research and practice. Root (1994)
altogether identified 22 factors influencing market entry mode decision, but one has to suppose
that there are still more.
One of the main problems regarding the market entry mode decision is the fact that it is illdefined,
complex and dynamic (Kumar and Subramaniam 1997; Young et al. 1989). It is a
function of various factors and their interactions. And of course not all factors have equal importance.
Moreover, the same factors may play a different role in different contexts. People
studying the problem with different expectations may arrive at different conclusions. Different
samples selected, different time period analyzed, different methodologies used, or even
different skills of the analysts may also induce conflicting results, especially in empirical
studies. In the following subsections we are going to offer some examples to demonstrate this
phenomenon, of course it is easy to find some other cases.
Conflicting results of theoretical studies
Researchers failed to find great congruence on the impact of international experience. Some
have argued that a firm’s level of international involvement is positively related to internationalexperience, i.e. the more international experience a firm possesses the more efficient itis to adopt an entry mode with a higher level of control. This theory is based on humanity offirm, i.e. the assumption that a firm behaves humanlike and matures as it acquires experiencein international markets (Stopford and Wells 1972). Nakos et al. (2002), Anderson and Gatignon(1986), as well as Davidson (1980 and 1982) supported this idea explicitly. The
counter-argument is that international experience is negatively related to international involvement,i.e. the more international experience a firm has the more efficient it is to adopt
entry mode with a lower level of control. This theory is based on the ethnocentric orientation
of many international neophytes. Ethnocentrism leads inexperienced firms to demand high
ownership first in order to explore its advantages by holding key positions. Later on when the
firm has acquired local knowledge and when it has adapted to local conditions shared ownershipor a low degree of ownership is preferred. This theory was supported by Weichmann andPringle (1979). However, some others argued through empirical studies that international experiencehas no significant relation with the choice of entry mode (Brouthers 2002; Chungand Enderwick 2001).Cultural distance was another arguable factor. Some economists or marketing experts pointout that the cultural distance between the home and the host country discourages the ownershipinvolvement, i.e. it is negatively related to the level of control. This viewpoint was supportedby Erramilli and Rao (1993), Gatignon and Anderson (1988), as well as Kogut andSingh (1988), and may be explained
?? by managers shying away from ownership involvement when they have no or solely
inconsistent knowledge about local values or operation methods (Root 1994; Davidson
1980 and 1982), or
?? by managers undervaluing the investment due to uncertainty caused by cultural distance
(Root 1994), or
?? by high information collecting costs due to cultural distance (Root 1994), or
?? by high managerial costs, e.g. due to required trainings.
But not all authors think so. Some economists argue that cultural distance encourages ownershipinvolvement. This can be explained by the fact that ownership makes it possible to dothings in its own way which is assumed to be more efficient and more advantageous (Hymer,1960). This viewpoint was supported by empirical studies of Anand and Delios (1997) aswell as Padmanabhan and Cho (1996).
EXTENTED MARKET SEGMENTATION MATRIX
This matrix includes the the two most factors necessary to decide the mode of entry in the international market which includes the COMMITMENT and the RESOURCES REQUIRED.
All the five theories discussed above implicitly includes these two factors in it’s explanation.
AUTOMOBILES COMPANIES AND THEIR MODE OF ENTRY IN INDIA
INDIA AS DESTINATION
The Indian automobile industry is still in its evolutionary stage. There is no widely
accepted method of segmenting the Indian market as yet. The segmentation provided in this paper is based on an understanding of the current state of the industry. These segments are quite different from the segments known in the US, European or Japanese markets.
This segmentation is largely based on price and reflects the fact that an automobile is currently priced at about 18 to 24 months salary for individuals in the target segments. This is in contrast to Western markets where prices are less than 6 months salary. However, middle class incomes are rising rapidly. A model sold in the West is likely to cost more in India for some time to come because of import duties. With progressive reduction in duties and increasing indigenization, prices are likely to come down in the future, at least in real terms.
The adverse price to income ratio will therefore come down, and is likely to further spur demand. Some automobile companies are also planning to use India as a manufacturing base to supply cars to other countries. This has the added advantage of eliminating duty payments for exported cars.
The entry strategies of new entrants to the Indian automobile market, in terms of the different measures of entry strategy identified. A close look at the entry strategies of the multinational companies in the Indian automobile industry points to some distinct patterns. Except for Audi, which is targeting a premium market niche, and Hyundai, the rest of the companies have set up joint ventures with Indian partners. Audi has announced plans for franchising automobiles. Recently. For most of the new joint ventures, management control lies with the MNCs. For example, though General Motors India is a 50:50 joint venture of GM and Hindustan Motors, ten International Service Personnel from Opel form theen tire top management team of General Motors India. Similarly, Daewoo in DCM Daewoo Motors, Ford in Mahindra Ford, Mercedes in Mercedes Benz India Limited, Honda in Honda Siel, and Volkswagen in Eicher Volkswagen exercise significant management control. All these companies have expatriate managers in top positions.
Incremental internationalization is the mode recommended by management scholars (Ansoff and McDonnell, 1990) and observed in a number of studies by researchers from Western countries (see Johanson and Vahlne, 1977; and Welch and Luostarinen, 1988). Initial involvement in a foreign market is conceived as a gradual and sequential process by most of the studies. This gradual pattern is thought to be the consequence of greater uncertainty, higher costs of gathering information, and the lack of experiential knowledge in international marketing activities. Several distinct stages are identified along the internationalization process for a firm in a foreign country, including pre-export stage, experimental involvement, active involvement, and committed involvement. However, the multinational firms cited here have directly gone in for active involvement. This could be due to high import duties for cars, inadequate existing capacity, and expectations of rapid demand growth. Most automobile companies have preferred joint ventures even though the government is not restricting foreign companies from setting up wholly owned subsidiaries. Joint ventures provide international companies with partners who understand local markets, government regulations and the supplier industry better, and also reduce initial risks.
There are 18 automobile companies jostling for a market whose size by the most optimistic estimates is around 1.7 million vehicles per year by the year 2000. Clearly, sufficient room for so many players is not there. This means companies will need to have clear strategies on what they will do if they are not able to establish a viable market presence. One alternative is to use India as a manufacturing base to supply cars to other countries in South East Asia, Middle East and perhaps the Eastern block countries.
The other major implication is that automobile companies need to pay attention to the development of the supplier industry. Rapid growth in assemblers’ capacity is possible only if suppliers are able to keep pace with them. The strategy used by Suzuki in 1980 of facilitating joint ventures between its major suppliers in Japan and some Indian companies is a good one.
However, the supplier industry needs to grow, acquire new technology, improve manufacturing practices, quality and productivity, and restructure itself into first, second and third tier companies. There is also a lot of pressure on suppliers from assemblers to acquire product design capabilities. Simultaneous, fast development on so many fronts is possible provided assemblers facilitate the process.
Automobile companies may also need to rethink their strategy of introducing models successful in developed economies into India. High quality roads allowing driving speeds of over 50 miles per hour over long stretches are still rare. These models are still perceived as high priced luxury cars by the middle class. For car sales to really take off, tailored products at lower prices may be an alternative. Automobile companies are also not paying enough attention to vehicles other than passenger cars. There is likely to be a lot of opportunities in products like jeeps, light commercial vehicles, buses and trucks. These markets are growing fast and there is relatively little competition.
Most of the managers thinking about which market they should enter and how this should be
done might have a certain predisposition to decide in favor of a market with a culture which
is similar to the domestic one. If this is not possible they can be assumed to prefer a low equity mode for those markets with a high cultural distance. This is supported by Grant Thornton’s survey from which it is concluded, for example, that European firms are less active in exporting to China due to the assumed or existing cultural differences (Grant Thornton’s2003 IBOS). However, as shown above, there are many theoretical and empirical results supporting the opposite as well. There are also many firms that have been very successful by operating in new markets with quite different cultures, such as NOKIA, MOTOROLA, and SIEMENS, in China for instance. So cultural distance is a factor to be considered when entry mode decision is being made, but it is not a determinative one, and it should not be an obstacle of entering into a potential market with the right mode. But also some other factors such as firm size and international experience are not determinative unilaterally. Due to being a multistage decision making process (Root 1994) the choice of foreign market entry mode must be addressed in accordance to that. This means that at least near-optimum solutions are only attainable if the relevant factors as well as their interactions and tradeoffs are considered from a dynamic perspective.
GM IN CHINA
General Motors (GM) is an American-based multinational automotive manufacturer and is one of the world’s largest automaker. Today, its plummeting sales in the U.S. and the slowing economy in Western Europe have spurred GM to seek the emerging markets in the Asia Pacific. The increasing globalization and competition impetus have also driven GM to put a priority on moving into the emerging markets in the Asia-Pacific region, most notably, China, as it holds good potential in realizing the goal of establishing a sustainable source of profits for GM in the long term.
Thus, GM is looking most heavily to the rapidly growing market in China in order to shore up its declining market share in the U.S. GM has formed numerous joint ventures with the local manufacturers in China and with its strong early first mover advantage, it has managed to formed alliance with some of China’s best local automotive firms.
In this paper, we will examine the background and current position of GM’s expansion strategies and strategic alliances with its China partner firms and analyze the positive aspects as well as the problems. We will also suggest recommendations for how GM can maintain and expand on its current position in China and help GM to create a large sustainable source of profits. This would enable GM to improve its business and maintain its position as the automotive industry’s global leader.
General Motors (GM) is an American-based multinational automobile firm and is one of the largest automobile manufacturers in the world. Until the 1990s, GM had mainly operated in Europe and North America.(GMnext Historical Stories, n.d.) Today, the slowing economy and its plummeting sales in the U.S and Western Europe [Fig. 4] on top of its financial woes, have spurred GM to seek the emerging markets in the Asia Pacific.
The increasing globalization and competition impetus have also driven GM to move into the emerging markets in the Asia-Pacific region, most notably, China in an attempt to shore up its declining market share in the U.S.
China is currently the second-largest vehicle market after the U.S. GM has established itself as the biggest foreign automaker in China with a string of successful joint ventures in that country. (Global Operations, 2008)
Despite its strong market position in China, the company has recently begun to face challenges from the new competitors, as well as the decreasing growth rate in the Chinese market. All these issues are compelling GM to reinforce its market position through various means such as by collaboration with its partners in its China strategic alliances.
2. Research Questions
Firstly, we would like to examine the expansion strategies of GM in China. Secondly, we would like to examine the key issues that GM has to deal with in its strategic alliances as well as the opportunities that it can exploit in China. We will look at the issues in terms of the advantages and disadvantages related to the firm itself and the China market. Thirdly, geared with the above analysis, we would like to offer recommendations for how GM can master the challenges and benefit fully from its joint ventures.
We will conduct an extensive literature review, using a variety of sources such as newspaper and journal articles, company websites and reports. We will then adopt a thick descriptive style of case narration to present the case of GM’s joint ventures in China, together with analysis of the problems and opportunities in the alliances and the business environment in China. We will then propose recommendations on how GM can rectify these issues and defend its market position as a global leader in the automotive industry.
4. Background of General Motors
General Motors Corporation (GM) is the world’s largest full-line vehicle manufacturer and marketer. GM is structured into several regional groups and each has autonomy of decision-making and operations. This allows GM to target national and geographic markets effectively. The group’s arsenal of brands includes Chevrolet, Pontiac, GMC, Buick, Cadillac, Saturn, Hummer, and Saab. Opel, Vauxhall, and Holden comprise GM’s international nameplates.
With a system of international alliances, GM holds stakes in Isuzu Motors Ltd., Fuji Heavy Industries Ltd., Suzuki Motor Corporation, Fiat Auto, and GM Daewoo Auto & Technology, and other principal businesses including General Motors Acceptance Corporation and its subsidiaries. GM’s internationalization has a very long history since its founding in 1892. As its principal architect, Sloan was credited with creating a structure that saved GM. Fundamentally, the policy involved coordination of the enterprise under top management, direction of policy through top-level committees, and delegation of operational responsibility throughout the organization. This system of organization was crucial to its success.
In the early 1990s, GM began to recapture the automotive vanguard from Japanese carmakers, with entries in the van, truck, and utility vehicle markets. GM also gained an advantage in the domestic market because the weak US dollar caused the price of imported cars to increase much faster than domestics. Market conditions along with the management’s strategies effected a stunning reversal in 1993, when GM recorded net income of $2.47 billion. Despite the improved financial performance, GM’s share of the U.S. car market continued its steady decline. GM’s North American operations continued to be criticized for its inability to produce innovative models and the slowness of its new product development.
GM remained profitable through the end of the decade, but its U.S. market share dipped below 30 percent by 1999. While continuing to attempt to reverse the now three-decades-long fall, GM began looking for future growth from Asia, where the growth in car sales was expected to surpass both North America and Europe. Instead of attempting to directly sell its own models, GM began assembling a network of alliances with key Asian automakers, aiming to increase its market share across Asia from its late 1990s level of 4 to 10 percent by 2005.
5. GM’s Expansion Strategy in China
5.1. How General Motors established itself in China
In the early to mid nineties, General Motors raked in huge profits mostly due to the boom in the SUV and light truck markets in the U.S. This gave the company the capital it needed to invest in the Chinese market. When GM began exporting Buicks to China in 1912, they established a name for themselves in the Chinese auto market. In 1929, GM China was formed in Shanghai. At that time, GM was very popular and the Buicks brand was a symbol of luxury when foreign businessmen were based there (Normandy, 2008). When GM re-sought the Chinese market in 1998, they built their entry and expansion strategy around its early foundational history.
But it was not always smooth sailing for GM to enter the emerging Chinese automobile industry.
The government, in trying to protect its home industries, had tight regulations in place. It did not want its homegrown automakers to be driven out of competition. The local Chinese firms did not have the engineering expertise, the years of experience, or the capital strength that GM boasted. In order to ensure that its own companies survived amid the tough competition from foreign companies, the government enacted a policy that every foreign automotive corporation that enters the Chinese market must partner in a joint venture with one of China’s domestic manufacturers (Krebs, 2006). This move was set both to protect the domestic companies and possibly to give them a boost in research and development. Two of GM’s joint venture partners, Shanghai Automotive Industries Corp. and Wuling have both learned from GM. In addition, the domestic manufacturers have been able to reap the benefits of superior engineering strategies and technology information from GM. (Bradsher, 2006).
6. GM’s Strategic Alliances in China
Forming alliances strikes as a more efficient way to grow in developing markets, as it could utilize its capital base on more productive development programs rather than taking on more risky acquisitions. This would allow them to get greater return on investment without spending too much on whole acquisitions. (Jones, 2000) A key partnership is formed with China’s SAIC.
6.1 Shanghai Automotive Industry Corporation (SAIC)
In order to globalize their efforts successfully, GM created a strategic partnership with Shanghai Automotive Industry Corporation (SAIC) in 1998, forming Shanghai General Motors. SAIC is a government-owned company as well as one of the leading automotive firms in China; making it a logical choice for a GM alliance in the form of a 50-50 joint venture (Shanghai, 2008). This alliance created partnerships for the two companies in the Pan Asia Technical Automotive Center (PATAC) and in GMAC-SAIC Automotive Finance Company (Webb, 2005).
Since the alliance was created, the two companies have expanded further into China by acquiring plants throughout the country (Webb, 2005). The most significant acquisitions in China have been the Shanghai General Motors Corporation, SAIC-GM-Wuling Automobile Co., Shanghai GM Dongyue Motors Co., and Shanghai GM Norsom Motors Co..(Webb, 2005). By using the new production space in these plants, GM can capitalize on their “One GM” strategy which focuses on producing vehicles that are identical globally (Muller, 2004). Not only does this strategy create a brand image for the company, it also saves them millions of dollars. The result of the alliance between GM and Shanghai Automotive has been profitable. Shanghai GM produces Buicks and Cadillacs, and has already earned its spot as the number two automobile producer behind Volkswagen (Muller, 2004).
6.2 GM’s history of failed alliances
GM has numerous failed alliances in the past which it should learn lessons from to avoid repeating its mistakes, especially in view of its numerous alliances formed in China as well [Fig. 5]. They are due to several problems: First is GM’s failure to maintain control over relationships in defense of its own interests and second is its failure to develop long-term partnerships built on a high level of trust. Often, these alliances have generated greater benefits to GM’s partners than for GM itself. It was found that its failed alliances were due to GM’s unsuitable partners,
in terms of short-term and misaligned vision and goals, and partners who look to gain upper hand in the alliance for their own agenda. Furthermore, GM has exposed its knowledge and technology to its alliance partners whose loyalty is questionable. In some cases, GM held little managerial control over its ventures, resulting in its partners benefiting from GM’s financial investments and knowledge at the expense of GM’s short term gains. All these are signs of a lack of understanding of the potential partner and also its failure to establish a strong foundation for mutually beneficial relationships. (A case study, n.d.)
6.3. Recommendations for improving GM’S strategic alliances in China
Strive to build stronger, long-term and mutually beneficial partnerships
GM should strive to build strong, long-term and mutually beneficial partnerships with firms which share its goals and commitment. GM’s early entry into China has enabled it to form solid partnership with an ideal partner (SAIC) which led to its success. However, GM needs to continually reevaluate itself and its partnerships in order to remain competitive. GM can do this by looking at the following factors when choosing a partner: whether the partner can help GM achieve its strategic goals, whether the partner share GM’s vision, and whether the partner will try to exploit the alliance for its own agenda.
Secondly, GM should consider carefully in its future alliances the suitability of the potential partners in China through thorough appraisal and reliable information collection before a commitment is made.(A case study, n.d.) However, the greatest challenge is in overcoming the cultural barriers to form good relationships with its business partners in China, which would take a long time and great effort to achieve. But once accomplished, GM would be well-rewarded with a strong business presence in China.
Establish greater control in the alliance to better protect its own interests
Firstly, GM should insist on holding a level of managerial and executive control over its joint ventures that is commensurate with its amount of investments of time and resources. Secondly, GM should take measures to protect its proprietary knowledge and technologies, such as by implementing stricter controls or avoiding high-risk partnerships. (A case study, n.d.)
7. Advantages and Disadvantages that GM faces in China
7.1a Country-SpecificAdvantages for GM in China
China is one of the fastest growing automobile market in the world
China has become one of the world’s largest car markets and further, it was forecasted that the Chinese market would surpass the North American market by 2020.(McCormick, 1999). Despite the hordes of new competitors in China’s automobile market, which led to reduced prices and decreased profits, China is still the world’s fastest growing automobile market with great potential in sales and complementary services.
The expected double-digit percentage sales growth in China and the sales decline in the U.S. spurred GM to grab this opportunity. China’s healthy economic and political outlook and automobile industry growth [Fig 9] are also encouraging factors. China’s entry into the World Trade Organization in 2001 which removed barriers to foreign trade and investment, and also in 2006, China’s further reduction of import tariffs on some vehicles parts, made the market more conducive for GM (Industry Update, 2008).
7.1b. Country-SpecificDisadvantages for GM in China
Slowing growth of China market
In recent years, the total number of foreign investors in China has started to decline. China is no longer seen as a fresh, new market. The automotive industry, in effect, has started to decrease overall investments in China (Chappell, 2006). Despite GM’s stellar performance with its record vehicle sales in China in 2007, the declining market growth rate and the dwindling sales in China have become critical problems for GM. [Fig 7]
This was attributed to the slowing economy as well as the saturating automotive market. (McIntyre, 2008) The slowing sales growth has also been attributed to a lack of new models by GM, compared with its competitors who have been consistently bringing in new models. (Webb & Yang, 2008).
Rising material cost
The high cost of materials in China has also proven to be a pressing issue for GM. The materials in China make it 5% more expensive to produce a Buick in China than in the US (Muller, 2004). Rising raw material prices could lead to higher costs of production, and in turn could reduce GM’s profitability. China is no longer seen as a source of inexpensive parts for GM’s global operations.
China’s labor costs, shipping and other logistics costs are rising too, and other Asian countries like India and Vietnam are competing with China as a source for cheap components. (Webb, 2008) GM would thus have to turn to India to source for cheap components when China is no longer an ideal source.
Competition from local and foreign players
Companies such as Toyota, Fiat, Chrysler and Hyundai have entered into the picture (Chappell, 2006), pushing the market to overcapacity. But they have not had to deal with the extremely uncertain market conditions and the stricter regulations that the government had enacted previously. Many of the corporate and managerial structures set up by GM and VW created because of these tough regulations, now lend them a disadvantage to their new competitors as they have been able to examine both their successes in the market and spot the inefficiencies in their strategies (Roberts, 2005).
GM also has to face competition from China’s local players who could afford slimmer margins and are well-versed in doing business on their own homeland. Most of these domestic brands are in partnership with foreign giant automobile firms, but they have become increasingly independent in their ability to produce and push their own products into the car market and allowing them to capture a substantial share of the small and mid-sized car segments which are more popular among the growing middle class in China who prefer affordable models to expensive ones. (Shenzhen Daily, 2005)
The price reduction across all brands as a result of the stiff competition and the demand for low-cost wheels has decreased profit margins for the firms. (Roberts, 2008) GM is now faced with the crucial task of maintaining its ability to quickly react to changes in its environment and to continually re-evaluate its position in the market. As GM continues to restructure its corporate strategies focusing more on the future quality product development, it must continue to consider the China market in the mix if it desires to continue to be major global player.
Safeguarding Intellectual Property (IP)
One of the issues that arose for GM’s joint venture with SAIC is Intellectual Property rights (IPR) which acts as a firm’s competitive advantage. Alliance in China encompasses R&D to adapt its technology quickly to the domestic market, which brings up the importance of protecting its know-how. China does not have adequate safeguards against IP theft and does not require companies to include “non-competitive clauses” in their contracts for joint ventures, which leaves the foreign company vulnerable. SAIC has joint ventures with Volkswagen, which is GM’s largest competitor in China (Shanghai, 2008). This could easily be a scenario where IP theft may occur.
Fortunately, the Chinese government has recognized the potential for IP theft and has taken steps to alleviate the problem. China has established courts dedicated to dealing with IP theft. Foreign companies entering China can protect themselves from IP theft by establishing clearly who owns what in the deal and having their own people embedded in the Chinese company. (MacFadyen, 2008)
7.2 Recommendations for GM’s position in China
1. GM should continue to expand further in China.
The Chinese market has proved to be a very profitable one for GM and the company should continue to operate in China. GM, which has already established a relatively strong foothold in the China market with 12.8% market share [Fig 8], holds an advantage over other foreign automakers which have been slow to enter, as well as China’s domestic firms which are less experienced. This gives GM an edge over the other firms and enables it to move ahead of them to dominate new segments of the booming Chinese car market.
The Chinese market will continue to grow and GM should grow along with it. By building up the strategic alliances in China, GM can increase its knowledge of the market and presence in the country. GM will have to create more alliances with key companies which already have a good standing in China and alliances should be formed quickly to ensure no competitor can take away key information and partnerships first. Contracts should be very specific when forming these alliances, so that GM can protect its intellectual property and trade secrets. As long as GM constantly adapts to market changes and competitors, the company can continue to grow and maintain its advantage in the Chinese market.
2. General Motors should also monitor the political and social environment of the country.
The main objective for GM should be constant awareness of the environment. No company can keep an advantage in a market unless they are aware of all aspects and can react to changes quickly. This includes any new trends in consumer tastes, population changes, political instabilities, or government policy changes. When these changes are noted early, the company can then improve their product accordingly. The company has already had to deal with such issues when gas and materials costs rose. GM should come up with new cost saving ideas in other areas of the company which can cancel out the increases in materials.
The company should also try to create more fuel efficient cars and increase marketing efforts to emphasize an image that appeals to the Chinese consumer. A key challenge for GM is building of awareness among China’s consumers who are mostly first-time buyers. The automaker has to fine-tune its product and marketing to the different demands of the geographically-diverse Chinese customers, and to deliver a clear message of its brand promise to the customers to retain customer loyalty. GM has to anticipate the China customers’ changing tastes to a preference for small and low-to-medium-sized passenger cars as well as increased demand for luxury vehicles. (McIntyre, 2008)
3. GM should target new market segments
GM can develop strategies to establish its position in the small car market since this is where the increasingly important Chinese middle class buyers will be interested in.[Fig. 6] GM had entered the small car market with its Chevrolet Spark through its joint venture with SAIC and Wuling. (R. Preston McAfee, 2006) However, GM is facing immense competition from the domestic brands such as the Cherry QQ which sells as very low profit margin. Although GM has tried to offset its price disadvantage by emphasizing on higher quality, what the Chinese consumers really look for is affordability (Shenzhen Daily, 2005).
GM can tackle this problem by targeting the middle class buyers with small cars which are even cheaper than the Spark under its Chevrolet brand. Although the profit margins will be small, GM would be able to build brand recognition among this consumer segment for long-term benefits. GM should also look further ahead of the small car market to the potential compact and subcompact car markets. As the consumers’ price sensitivity decreases, GM would be able to introduce its existing subcompacts and compacts without having to redesign lower cost ones for China. (R. Preston McAfee, 2006)
Another strategy that GM can undertake is to enter the commercial vehicle segment in China, which actually has the second largest commercial vehicles market in the world, behind the U.S. (KPMG, 2006). However, the obstacle is that GM lacks reputation for its commercial vehicles among the major construction firms in China. GM can overcome this problem by expanding on its existing relationship with Wuling, which actually specializes in small industrial vehicles, and has broad reach in the commercial vehicle sector. GM can form a partnership with Wuling and utilize its existing brand recognition, production capabilities and market connections to sell its commercial vehicle models under a joint brand with Wuling. (R. Preston McAfee, 2006)
4. General motors needs to take action to protect itself from competitors
The number one concern in China is the sheer number of Foreign Direct Investors entering the market. GM needs to take action to protect itself from these competitors to maintain their competitive advantage. Although the number of FDIs in China is decreasing, this does not mean that there is any less competition for GM. This fact is reinforced by the larger market share that Volkswagen holds in China. GM should constantly monitor the Chinese market so that it can re-evaluate their current policies and products to adapt to their competition. If GM can think creatively in reaction to their competitors, they will gain a competitive advantage over them. GM may be a leading company in China for now, but the fast paced market there makes it hard to sustain an advantage for long.
7.3a Firm-Specific Advantages of GM in China
Entering the Market Early
Many believe that the timing of GM’s market entry was crucial to gaining a foothold. GM chose to move into China early and fast, which allowed GM to partner with the leading players – Shanghai Automotive Industries Corp, Wuling Automotive as well as Volkswagen. Arriving early also enabled GM to establish its manufacturing and distribution infrastructure and brand recognition ahead of other foreign competitors, as well as to capture dominant market share. The partnerships have also performed well, partly due to the fact that the partnerships have been allowed to develop and flourish rather than either partner taking one-sided benefits.
7.3.b. Firm-Specific Disadvantages for GM in China
GM’s inefficient and short-sighted strategies
It can be seen from its home base market North America, that GM has lagged behind the competition for too many years. Its inefficient and short-sighted strategies have been raking in record-breaking losses bringing the corporation to the point of unsustainability. GM was caught up in establishing exorbitant pension and employee benefits during the heydays of the high profit SUV boom. Now these pensions are draining GM’s capital resources-another example of short-sightedness, and any attempt to change this policy would be met with strong resistance from the large labor unions.(Loomis, 2006)
GM has too long been riding on the waves of past successes without bringing innovative and new products and strategies to the playing field until absolutely necessary. Management has been sloppy and tough competition from Japan, Korea, and now China has been taken into account at too late a time. It seems that GM has had the right solutions to these problems, but they have been implemented only when the damage has already begun to be felt. Another major problem is GM’s increasingly unfocused product line, to the extent that the number of brands exceeding the number of distinct market segments. The brands are becoming further diluted by GM’s corporate management bad decision to blur the demarcation among GM’s numerous divisions. (R. Preston McAfee, 2006)
GM is lagging in the alternative energy movement
The rising fuel costs have caused fuel economy vehicles and alternative fuel vehicles to become more popular. (Webb, 2006). But while the Chinese are pushing for smaller, more fuel efficient cars, GM has been lagging behind in its research and development in producing alternative energy vehicles. This has caused loss of market share and decrease in company profit for GM. GM must develop hybrid and fuel efficient cars in order to be successful in China.
7.4 Firm-Specific Recommendations
1. GM needs to catch up to its competitors
It seems that many of GM’s problems have stemmed from its lack of foresight. Perhaps this can be compared analogously to preserving a part of the environment. When looking at damage done to the environment, most of the time restoration can fix this damage. However, it would have been much more efficient, cost effective, and publicly amenable to have prevented the damage in the first place. What GM needs to do is to catch up to its competition-in both implementation of product, market and economic foresight. Aforementioned,
GM seems to have hit the jackpot and have rode on that wave of success until it is dry. But GM should not to take these successes for granted. For instance, the SUV boom brought GM some of its highest profit margins in years. However, the company continued to produce the same product and to implement the same market strategies while not only consumer demand was changing, but also while tight competition was increasing. This caused GM to fall behind in a niche that it once had an advantage. GM needs to make strides to step beyond its competition rather than being complacent with where it is at. For instance, GM should constantly develop new vehicle styles and models to try to stay ahead of competitors and avoid becoming outdated.
2. General Motors must be flexible and must make decisions with confidence
GM is known for taking its time in management decisions and executing business plans lethargically as well as responding slowly to fast-changing consumer tastes (GMnext Historical Stories, n.d.). However, in China, sluggishness is not an option due to the rapid rate of market fluctuation. To be competitive, GM must be flexible and make decisions with confidence rather than drag them over long periods of time. For instance, GM would need to make decisions fast to target the fast-growing market segments quickly to position itself well, including by introducing a focused product line in China with careful selection of suitable vehicles to be pushed into the car market.
GM should implement its expansion in the China market on a smaller scale and with more precise focus in view of strong competition from both the domestic and foreign automakers. Complacency is the last thing GM needs in a market as unforgiving as China’s. Holding true to the core principles that brought initial success in China is the key to bringing GM success in the future. That is, by maintaining a solid foundation in what GM stands for while bringing the flexibility to act and respond quickly in a market that is ever changing.
Dangers are arising on GM’s Chinese horizon with major challenges confronting GM. With automobile giants eager to take a bite off the Chinese fortune cookie, the increased competition would bring about further price reduction and profit margin squeeze. Not only might the Chinese government change its regulations on short notice, it is also difficult for GM to manage its size of operations in such a huge and complex market.
Also, GM China has to guard against using foreign executives who are not open-minded to learning from the Chinese and impose on the Chinese with their way of doing things. In addition, there are serious consequences attached to any failure or retreat from China. As one of the first MNCs to enter the China market, GM had already rooted itself deeply into the Chinese soil. Any retreat from the Chinese market will lose the partnerships and trust from local firms that were established by GM in its early expansion. Not only would competitors step in to form new partnerships with the local firms, the re-entry barrier for GM to ever step into the Chinese market would be raised by a great deal.
Chief Executive Officer Rick Wagoner said that “the U.S. is in an automotive recession. It’s not likely to end this year” and GM has only to depend on the Emerging Asia markets to buffer against the slowing North American Markets. With China currently being GM’s second largest market behind the U.S., no one now doubts that China will be the world’s largest market for vehicles soon (Bill Koenig 2008). However, too much of many things could result in a pitfall for GM China. In order for GM China to maintain its success in the China, it needs to learn from the lessons of GM North America and to steer clear of them (Michelle Krebs 2006).
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