Analysis of The UzDaewoo Auto Project - Assignment Example

The Uz-Daewoo Auto Project Uzbekistan - The environment Uzbekistan lies in the ical Silk Route of the central Asia. It has got a rich Muslim culture with more than 95% of the people being Muslims. The country had a population of 22 million out of which 95% were educated and 85% carried a driving license. The roads in the country were not particularly good and were really far off from luxury car class. While every country in the CIS noted a drop in their GDP after the split from 1991 onwards, Uzbekistan had the least drop of all about 18% and even showed a growth as early as 1996 by 1.6% annual rate. Though the inflation was higher at 5.6% in 19961, the country's unemployment did not raise much. Uzbekistan was and continues to self sufficient on the agriculture front. Uzbekistan is the fourth largest producer of cotton in the world producing more than 1.5 million tons every year. The country also produces 70 Tons every year of gold making it the leading producer in the region for the metal. It also produces 40 billion tons of natural gas. Uzbek remains one of the largest producers of molybdenum, tungsten, copper and zinc. Though the large desert lands in the middle of the country hurts the continuity of living space, the country boasts itself of a large natural resource and rich agricultural produce. We can possible conclude that there is immense potential for growth in the country with a high education background and an adult literacy rate of over 90%, this is going to be a major motivating factor for any investor. Political climate in the country was stable and was more for consistent economic and industrial growth which would result in better living standards of its people. Fourth reason that any investor should consider is, nearly 85% of the people hold driving license where as only one million cars were plying the roads of Uzbekistan in 1980s when the total population was 22 million and 85% of them could drive! PEST analysis chart2 Political Stable climate and environment No major catastrophe in the vicinity Legislation for foreign investments is friendly and political establishment clear in its direction. Government and trading policies are in place No major pressure groups except the government itself. Economical Economy is reviving Taxation policy is in line for swift growth Taxation for automobiles is nominal No major market or trade cycles in this industry Exchange rate is stabilizing Interest is higher than the rest of the world Social 2.2 billion people 85% educated Trend towards buying costlier cars Daewoo is known as a Korean company for technology products Consumers are friendly Technological Competition exists; everybody is vying for a share in the cake. Technology is stable with moderate innovations. Daewoo is a seeded player Market Entry The major competition in Uzbekistan market for cars was from Russia, other Korean companies, European companies and a few US companies like GM and Ford. Russians had positioned their low end model in the country and it was selling at around 6,000/- rubles and the Ford was selling its Escort as a C Class car at around USD 10,000/-. Taking all this into consideration3, Daewoo needs to position itself one at the lower end of the market where there is a huge market since the country has a huge population not having a car to drive but know driving4. There are also people in the market who already had a car but is in need of the luxury that only a better car could provide. There is also a requirement for Daewoo to position a van that would carry a larger number of people instead of the traditional four. Based on all these requirements and also on the fact that the climate and the road conditions in Uzbekistan is not congenial for standard low bodied and low chassis models, cars have to be redesigned to suit the conditions existing in that country5. Daewoo had to and did position a model for every one of these requirements faced by the company. There was a low end module, Tico, which was sold at around USD 6,790/- that catered to the needs described above. Much in the same, there were two other models launched to match the requirements, Nexia and Damus which is a van. Daewoo had to now evaluate and establish various options before entering the Uzbek market6. Let us look at them one by one. 1. Company Goals: The Daewoo had a visualization of a global organization, a multi product, multi national conglomerate. To pursue this goal, they have been expanding vigorously resulting in this expansion mission. Entering any new market, particularly the Central Asian market is very critical for the growth of the company's international business. Strategically, Uzbek7 is on the erstwhile Silk Route and can connect all Central Asian countries and can be the distribution hub for the company here. 2. This target can be achieved through any of the market entry strategies89. Let us consider various options, to evaluate them and suggest an appropriate option. We will look at10: a. Direct Export b. Indirect Export c. Marketing Subsidiary d. Licensing e. Joint Venture f. Wholly Owned Subsidiary 3. We will also use SWOT analysis11 on every option and then decide on the ideal choice for market entry. No Entry Type Description 1 Direct Export Strengths12: 1. Investments are low. 2. Uzbek is relatively a new market and it can be studied comprehensively before stepping into it fully. 3. Presence could be through agents and representatives or dealers who can sell the product across the entire Central Asian region. Weaknesses: 1. Will be dependent on the Korean plant where production costs were on the rise and could result in higher on road cost to the cars. 2. In order to accommodate the larger market of the Central Asian region the other units in Korea or in the regions need to be enhanced which could lead to additional investment. 3. Agents or dealers might not be pushing the market as well as our presence. Therefore markets may not tapped fully. Opportunities 1. Uzbek is a growing market. This is an opportunity to take. 2. Presence in Uzbek means presence in Central Asia and for all CIS countries. 3. The population is highly educated and drives cars. A marketing strategy is required to tap this market. 4. Size of the market is over 100,000 cars every year. Threats 1. There are already a number of Russian cars in the market. So are Fiat and other European, Japanese and Korean cars in the market. 2. Class A cars are sought after and needs to be modified to suit the country's conditions. 2 Indirect Export Strengths: Same as in the case of Direct Export. Additional strength factor will be that the investment will be lesser. Will be employing local people and therefore marketing could be easier. Weaknesses and Opportunities: Same as in the case of Direct Export. Threats: 1. Since there will be an intermediary person before the cars are sold in Uzbek market, there will not be any loyalty to Daewoo products13. 2. Competition from the other car manufacturers in the region is to be taken into account. 3 Subsidiary - Marketing or wholly owned Strengths: 1. Own infrastructure would result in more committed sales force and better gains to the company. 2. If wholly owned subsidiary then production done in Uzbek would reduce the cost of production and hence profitability of the product will be higher. 3. Closer to the Central Asian and CIS market and could respond to the market situation much more swiftly. Weaknesses: 1. If it is only marketing setup, the cost of the Korean unit will get reflected in the pricing policy at Uzbek. 2. In case of fully owned manufacturing facility, the involvement of the local government will be under question. Opportunities: As in the case of the earlier two options, we have similar opportunities. Here we are trying to capitalize entirely on the opportunity. Threats: 1. Changes in Government or in Government policies resulting in an environmental change or in an operational change14. There could be favoring of imported components or disfavor them. 2. Competition 3. Trained manpower will be expatriate and could result in a foreign company perception locally which could affect the way markets behave. 4 Joint Venture Strengths: 1. Involvement of the local government or industry will help in taking care of the local issues. 2. Will be able to get cheaper labor and raw materials that are available locally. Land cost will also be cheaper. 3. Will be able to tap the complete market15 that is available as of date. Weaknesses: 1. Larger investment resulting in more stringent RoI calculations and closer monitoring. 2. Train and cultivate people which could be a time consuming and an ongoing process. Opportunity: As listed in the earlier case. Threat: Competition. Based on the comparisons done above, we are clear that it would be better if the company went for a Joint Venture with a local Government or Industry, which they did16. Daewoo needs to address the following issues before deciding on the mix of products that they will launch in Uzbekistan17: 1. The buying power of the people which has come down after the splitting of the Russian federation into CIS. It is clear that though there are more people the cars on the road are less. This could be the basic deciding factor on the cost of the cars that is to be launched. 2. Is the target a family, small and cozy or business houses, small or large Daewoo needs to decide whether they are targeting their product to any of these types of people. This will decide on the average seating that would be required in a vehicle. 3. How many people could really be buying large and luxury cars in the country 4. What is the market size in the neighboring countries18 Specifically the ones in and around Uzbekistan. All these issues need to be identified19 and sorted out. Based on this, the product mix can be decided. Daewoo need to look at various factors with regard to people and their skills are concerned. At Uzbek, the high percentage of literate people would help the company to rope in people from the local city. In order to support, implement and understand management policies they should be requiring their own staff to be in the management team at Uzbek. As already discussed the price of the product to be sold in that country and the nature of distribution network they might have will depend exclusively on the penetration they plan to achieve. This will have to be from the local businesses who will be able to distribute, sell and support / service the product better and understand and respond to their needs in a better way. Looking at all these factors the policies adopted by Daewoo needs to be inline with all these points raised and the take into account the results of the SWOT analysis done earlier. The most problematic areas in the entire business spread would be the initial marketing push that might be required and positioning of the product appropriately in the Uzbek market20. This would mean that we have clearly understood the need of the market and the pricing that would go with it. Our analysis of the market reveals that a competitive pricing on par with the low priced Russian car would be the right one for the low end market and a van at an equivalent price would be attractive to people to go in for transporting men or material. Once this approach is taken then the issues that rises from such areas will get sorted out and should be able to lead the company to a consistent growth path. Read More