Introducing a Product to a Developing Country - Assignment Example

INTRODUCING A PRODUCT TO A DEVELOPING COUNTRY Name: University: Tutor: Date: Executive summary Holden is one of the fastest growing vehicle producers in Australia. Their output sales have grown to compete with other producers in Germany, Korea and France. Australian auto industry has grown extensively due to new models of cars manufactured by the company. As a matter of fact, Klier and Rubenstein (2010) indicate that Holden dominates major markets across Europe and Asia. However, by contrast, the company wants to introduce its product in China where auto companies are already flooded and these companies now attempt to make inroads in other countries. With this in picture, this paper will critically carryout analyses of key risk factors Holden is likely to encounter in its attempt to introduce some of its car models in China. The paper will also provide recommendations on every risk factor as well as how such factors will impact on the product(s). These will be done through feasibility study including statistical data from key ministerial reports and auto companies in China. Table of contents 1.0. Executive summary 2.0. Key risk factors in the Chinese market 2.0.1. Current market trends 2.0.2. The government objectives for 2006-2010 2.0.3. China is currently on the verge of replacing gasoline cars with Compressed Natural Gas (CNG) cars 2.0.4. China Compulsory Certification 2.0.5. Conclusion 2.0.6. References 2.0. Key risk factors in the Chinese market 2.0.1. Current market trends One of the key risk factors the company ought to give consideration to is the current market trends of other cars supplied by other companies. Statistical analyses suggest that China is critically vital point and offers good market for other auto companies to invest in. Report by China Association of Automobile Manufacturers (2007), indicates that there currently exist five large players who supply the already insufficient cars to the country. These players are: VW, Honda, Toyota, Hyundai and Nissan. According to the same statistics, in 2004 alone, the market share of the country based on VW, Honda and Hyundai was stated to be above their global market share. The figure below explicitly demonstrates the growth in sales among leading auto companies in the country. However, Holden need to ignore the above statistics as there are more risks to this market than opportunities available for investments. In other words, Chinese market share is not prudent for this company. To begin with, there has been enormous investment of new model of cars over the past 5 years beginning from 2005. Giving the statistics, (James, 2006, p.50) explains that arrival of new models by Chinese based companies has led to intense price cutting and thus affecting net profits previously enjoyed by foreign companies. In a separate research, figures presented shows that there was increase in total net earnings by leading auto producers (Fourin Auto China Weekly, 2010, p. 1). This stands at 45.3% between 2007 and 2009 however, profits dropped by 7% by the end of 2010. To make it more visible to this Holden, European based companies have been the one adversely affected. The article explains that European based companies such as Citroen, Volkswagen and Fiat saw their annual sales dropping by 6.6, 24.5 and 34.5% respectively. Knowing that such trend did not take place many years ago, it will be correct to argue that market in china is still very volatile for Holden to introduce their products. We can also consider a very interesting statistics related to market trends in China. First, whatever risk factor(s) is going to be discussed here, it is important for Holden to appreciate the fact that China is already a powerhouse in car manufacturing. Secondly, recently introduced regulations requiring that import duties be paid when foreign Companies have their vehicles in the port rather than when they are delivered to the buyers will make it harder for Holden to enjoy continuous supply unless they have firm orders. Based on this crucial risk factor, I would recommend the company to seek a partnership with any of the largest state-owned auto companies in China. Let us for instance consider Donfeng and Nissan-Renaullt. Donfeng is one of the largest track manufacturers in China. And Nissan-Renaullt was a foreign auto company trying to introduce its products in China. Rawski (2009, p.20) gives a typical example of such scenario by explaining that Nissan-Renaullt and Dongfeng had to enter into partnership because of the predicaments faced by Nissan-Renaullt in attempts to introduce its products in China. Because Nissan-Renaullt could not deal with increased competition and political waves in the country, its partnership enabled it to yield more authority than its foreign competitors. As a result of its partnership, Rawski adds that Nissan-Renaullt announced new cost reduction and a plan to introduce new model within the first five years of its partnership. The second recommendation this Holden need to weigh before introducing their product is to cut cost and consider other available options within the country. Every company around the world is targeting China and thus has become very competitive and unfortunately not all foreign companies will survive. Holden thus must achieve cost competitiveness. Secondly, targets set by this company must be realistic. Just like unrealistic objectives made it to stumble in United States, (Fisman et al., 2007) the potential of China as a market should not be allowed by this company to blind what is likely to be a normally clear-headed vision of its competitive weakness and strengths in China. 2.0.2. The government objectives for 2006-2010 This is another risk factor the company is supposed to consider. Holden is planning to introduce a unique product to a country where government is committed to developing indigenous Chinese auto companies. The Five Year Programme dubbed as FYP 2006 to 2010 intends to limit number of foreign cars into the country. During 2006, the National Development and Reform Commission circulated announcement that all auto companies should circulate three quarters of intellectual property of cars made in China and be of Chinese origin (Fourin China Auto Weekly, 2010, p. 7). The figure below can help the company understand what the government intends to achieve between 2006 and 2010. Table 1: 2006-2010 auto Sector Policy Objectives This is clearly an obstacle for Holden to introduce its products especially now that the implementation of this policy is at its peak despite efforts by World Trade Organisation trying to free multinational companies from onerous localisation requirements. And to make it worse for Holden, the objectives as stated in the table above have frameworks of implementations. An example of such framework is the idea of raising tariffs for imported cars from 20% between 1999 and 2004 to 28% in 2006. This framework negates requirements of multinational car manufacturers. And a point to note is that tariffs charged on complete vehicles are even higher as the percentage rate given as 28 in 2006 is just for parts and components constituting what the article terms as, “intellectual properties” (p.23). On 1st April 2008 central government of China issued administrative regulations on imported cars and parts of what are supposed to be complete cars characteristics. Dwight (2008) defines complete cars as those that have none of its body parts made from China while intellectual property as quoted above are cars or body parts made within china. The regulation requires imported cars to attain 65% or more of complete cars which will attract over 30% tariffs depending on the country of origin. And since Holden intends to introduce completely ‘complete cars’, competing with china based auto companies will not be feasible especially if they are intending to raise the cost of their cars with missions of mitigating expenditures and legal formalities. If the company insists on introducing their products in the Chinese market then a few recommendations need be proposed based on the above risk factor. Clearly, the formal obstacles to foreign engagement in Chinese auto sector are increasingly becoming complicated. However, arguing specifically on government’s objectives for 2006-2010, the details for the implementation are at early stage and indications are strong that the Chinese government is attempting to give the policy different interpretations so as not to be contravening World Trade Organisation commitments. Holden thus needs to team up with domestic companies so as to take advantage of tax incentives enjoyed by local companies. Another reason to strongly believe that this policy can only favour Holden if it partners with local auto companies is that in 2008 parties form Australia, Canada and United states launched dispute case against Chinese with Dispute Settlement Board of WTO and the resultant effect was that by February 2009 China agreed to bring its policies in line with what dispute settlement board had suggested but (Jianxi, 2009, p.35) 2.0.3. China is currently on the verge of replacing gasoline cars with Compressed Natural Gas (CNG) cars China joined World Trade Organisation about 10 years ago and since then, its automotive industry has witnessed tremendous accomplishment. Director of the Development Research Center, Liu Shajin during the state council at press conference released China Auto Blue Book 2011 on Compressed Natural Gas (Stefan and Glenn, 2011). One of the content of the blue print is the intention of Chinese government to construct production capacity, production management levels and development of related systems. To be precise, the blue print delegates department of industrial economics society of automotive engineers of China and Volkswagens with the mandate of designing cars using compressed natural gas. This will be a big challenge for Holden in its pursuit to introduce products that China is pushing to get rid of in the market. All vehicle models produced by Holden are designed with engines that cannot run on Compressed Natural Gas (CNG); something China is running away from. China is currently either working on how to develop engines designs that can run on Compressed Natural Gas (CNG) with modest conversions or supplies of the same. Analysis of the above key factor can negatively impact on the introduction of the product in Chinese market. There are recommendations the company need to analyse before the decision. First, Holden must include Compressed Natural Gas (CNG) engine models in the range of cars they want to introduce in this market. In doing so, I would recommend that Holden come up with CNG options on their cars and forget about conversion issue out of question. This must be done at no extra cost so that Chinese citizens will take away price component when they have to make decision between CNG and petrol fuel. At the same time, the company needs to strategise on how to come up with countrywide CNG fuelling facilities because people will be expecting to fuel up their CNG cars at the same point they do gasoline and diesel. The other recommendation is that the company needs to come up with two different types of gas vehicles; bi-fuel NGVs and dedicated NGVs. Bi-fuels are able to operate on either traditional gasoline or gas. The company will have to develop selectable flip of switch in the sense that drivers will either manually or automatically switch between fuel operation and on-board natural gas supply. With dedicated NGVs the company will have to develop better performing low emission engines since it will only run on natural gas. 2.0.4. China Compulsory Certification Holden will find it extremely difficult to introduce new models of cars in China amid its compulsory certification. The procedure is supposed to see foreign companies file their application with respective organisation for the products they intend to introduce in the Chinese market.1 After this submission the company is also required to submit samples of these products for testing at EMC and safety tests. In the view of foreign companies, these procedures are not transparent and have been seen as disproportionate burden to foreign auto companies because nobody is aware whether the regulations are applied retrospectively. The certification process is softer and smoother for domestic auto companies and there is suspicion that extension of product catalogues requiring CCC marking is influenced by need to create obstacles for foreign companies2. It is unfortunate that Holden can do little to challenge this policy. However, there is still a leeway the company can use to overcome this risk factor. First, major stakeholders including European Union, Japan and United States are negotiating this policy to ensure that it is not biased. Therefore it will be prudent for the company to hold while negotiations go on. Secondly, Holden should consider this policy as a minor risk since United Nations Agreement Concerning the Adoption of Uniform Technical Prescriptions for Wheeled Vehicles, Equipment, and Parts reached consensus that CCC should not be imposed on situations where international standards already exists. And since the mentioned international standards already exist in Australia, this policy might not hamper the introduction of its products in Chinese market. 2.0.5. Conclusion Holden has every reason to ignore its plans of introducing its products in China. Though recommendations provided sound convincing, China though a developing country, its technology in terms of motor vehicle speaks volumes. For instance, China is getting rid of cars Holden is imagining of producing within the next five years3. And as this stands, we wonder when Holden will start replacing gasoline cars with Compressed Natural Gas (CNG) cars. Looking at the official website of Holden4 price comparison with any of similar model produced by Chinese companies then it will force Holden to incredibly price their models high to meet cost of legal formalities. In addition, British experts Graeme Maxton and John Wormald as cited by Rawski (2010) rate China as dominant country that can sustain its market with locally produced cars. Holden is already doing fine in other markets and they should concentrate on expanding it elsewhere rather than in China. References China Association of Automobile Manufacturers (2007), (CAAM) China Economic Quarterly, vol. 7, no. p. 20. China’s Independent Automakers, (2010), Fourin China Auto Weekly. Dwight, H. P. (2008), Industrial and financial policy in China and Vietnam: Oxford University Press. Fisman, T., Raymond, P., Moustakerski, M. and Shang-Jin, W. (2007), Outsourcing Tariff Evasion: A New Explanation for Entrepot Trade. James, A.C., (2006), Under the Hood. The China Business Review: Automotive News Guide to China’s Auto Market. Jianxi, L. (2009), The Growth of Independent Chinese Automotive Companies: International Motor Vehicle Program. Klier, M. and Rubenstein, H. (2010), Competition and Trade in Auto Parts, quoting from a report in the Automotive News 2010 Guide to China’s Auto Market. Rawski, H. (2010), Recent Developments in China’s Labor Economy: China Economic Quarterly, vol. 7, no. 3. Read More