Partnership between Jaguar Land Rover and Chery Automobile Company - Assignment Example

Partnership between Jaguar Land Rover and Chery Automobile Company Name Institution Partnership between Jaguar Land Rover and Chery Automobile Company Introduction One phenomenon that has caught the attention of the world is globalization. Globalization is the process where different countries are incorporated into a single society (Glyn, 2004). It has led to the integration of economies due to trade and financial flows. Globalization has enabled local companies to expand into foreign countries and has promoted the world economy. It has therefore influenced the origin and strategic direction of businesses today. Due to minimal trade restrictions, which have resulted from globalization, companies can grow their market share by exploiting other countries (Banerjee, Carter and Clegg, 2009). One market that has been considered favourable by many companies is China. However, it has proven difficult to grab a sizable share of the Chinese market. In 2012, Jaguar Land Rover decided to form a joint venture with Chery Automobile Company in China (Wachman, 2012). China is Jaguar Land Rover’s third largest market with a potential to boom in the near future which led to the company forming a partnership with Chery Automobile. This report will analyze the external issues affecting Jaguar Land Rover and Chery Automobile. It will also describe the type of partnership between the two companies, the risks associated with it and its comparison with the earlier acquisition of Jaguar Land Rover from Ford. By using relevant theory, the report will analyze the national and corporate culture of the companies and their impact on the partnership. In addition, the paper will discuss the effects of exchange movement on the partnership and the challenges of doing business in foreign countries. Question 1 External Issues Driving Jaguar Land Rover and Chery Automobile Company Political Environment One political influence that drives Jaguar Land Rover and Chery Automobile is the Chinese government. The Chinese government is involved in the operations of multinational corporations because they influence the economy of the country (Lu et al., 2008). The government provides protection and incentives to automobile industry such as financial support for research and development projects and protection for intellectual property rights. The government has also subsidized the industry which is good for the future of automakers. The government has drafted favourable legislation for issues regarding intellectual property rights (Zhang, 2001). The laws in China support recognition of innovative ideas and validation of international contracts. Economic Environment The hasty growth of Chinese economy has positively impacted the automobile industry in the country (Zhang, 2001). The increase in the disposable income in China has positively affected Jaguar Land Rover and Chery Automobile since more people can afford buying personal cars. Also, the strong economic performance and the large population will see the success of Jaguar Land Rover in China. In addition, the last five years have seen a significant GDP growth rate in China. If this trend continues, the country might have high rate of savings, potential urban growth and abundant skilled labor. And in return, these factors could have a major impact on the partnership between Jaguar Land Rover and Chery Automobile. Also, the high GDP rate means that citizens are adding more value to the economy and in turn increasing their purchasing power (Zhang, 2001). Although the economic growth is impressive, China suffers from high inflation rate and high property prices which might affect Jaguar Land Rover. Nevertheless, the two companies will benefit in terms of high sales due to high disposable income and purchasing power of the customers. Socio-Cultural Enviroment Another external factor that would impact the partnership between Jaguar Land Rover and Chery is cultural differences between China and western world. The implication is that Jaguar Land Rover must acknowledge the cultural differences and look for ways to tackle them. In addition, China has high population which result to large number of potential customers. Also, with 90% literacy level, Jaguar Land Rover and Chery Company would enjoy cheap skilled labour in China which will translate into high profit margins (Zhang, 2001). Technological Environment The Chinese government has offered sufficient incentives to businesses towards technological development (Alle, Qian and Qian, 2005). And as such, many automobile companies have made huge investments in form of health and safety technology and unique car designs. In addition, the Chinese government has made investment and legislation towards ensuring that the economic development as well as the environmental protection laws is minimized to attainable levels (Cullen and Parboteeah, 2010). In addition, the technology in China keep on upgrading which gives a chance for automobile companies to design vehicles that are environmental conscious so as to protect the environment. The overall high levels of technological advancement in China will ensure that Jaguar Land Rover and Chery produce hybrid cars in order to stay ahead of the competitors. The technological environment in China will ensure the two companies benefit in terms of innovativeness and creativity which is paramount in the automobile industry (Zhang, 2001). Question 2 Joint Venture between Jaguar Land Rover and Chery Automobile The partnership between Jaguar Land Rover and Chery Automobile can be described as a joint venture agreement. According to Akmal and Ghauri (2000), a joint venture is formed when two or more businesses come together for shared ownership, returns and risks. These businesses decide to pool their resources in order to accomplish shared goals. A business may decide to form a joint venture as a market entry method for different reasons such as to divide risks, to exploit individual strengths, etc. Nevertheless, for a joint venture to be successful, companies should have common objectives such as the acceptable level of risks in the market, the joint product development, the market of entry, etc. (Ben et al., 2002). The advantage of a joint venture is that an organization is able it learn from the other without giving much control or intellectual property. The partnership between the two companies has led to a joint venture agreement where they have agreed to bundle resources and capabilities in order to offer a more comprehensive products. Through a joint venture, Jaguar Land Rover has been able to gain access to the Chinese market which it was previously difficult to succeed by itself (Massey, 2012). As mentioned earlier, the Chinese government has imposed favourable legislations on foreign investments which ensure long term prosperity of the companies. Since Jaguar Land Rover wanted to enter the Chinese market with maximum presence, entering using other modes was not logical. Joint venture was the best method since it allowed maximum potential rewards and exposure. This partnership has allowed the two companies to reduce their total costs of operation and inherent liabilities. Risks associated with Joint Venture The partnership between Jaguar Land Rover and Chery Automobile has established a limited liability agreement. The two companies operate with the understanding that their operation will suffer risks of liability (Barrell, Gloet and Wright, 2002). The joint venture has exposed each company to liability inherent to a partnership. This means that both Land Rover and Chery have responsible claims against the joint venture irrespective of their level of involvement in the partnership. In addition, according to Luo and Tung (2007), joint ventures often limit the ability of involved companies to pursue outside opportunities. The businesses involved in a joint venture often sign an exclusive agreement that may not permit them from taking on outside opportunities while the project is in progress. The purpose of such agreement is to minimize potential conflicts between partners and maximize focus on the joint venture. Another challenge that comes with joint ventures is uneven division of resources (Dacko, 2002). In any joint venture, partners often share control over the new venture but the resources used to complete the project is not divided equally. In many instances, one partner may be expected to contribute technology, production facility and workmanship while the other may only provide personnel which place a heavier weight on one partner. Comparison with Acquisition There is a huge difference between acquisition and joint venture. Acquisition is a process where a company purchases another company with the purpose of making the acquired firm a subsidiary business (Ben et al., 2002). On the other hand, a joint venture involves forming a temporary partnership with the intent of maximizing strengths and taking advantage of market opportunities. The joint venture between Jaguar Land Rover and Chery and acquisition of Land Rover by Ford differ in different ways. The acquisition involved total purchase of Jaguar Land Rover while the joint venture only entailed a temporary agreement between the companies (Wachman, 2012). Also, Ben et al. (2002) argue that joint ventures are formed in order to achieve specific objectives while acquisitions are formed to enhance instant growth and development. In the case of Chery Automobile and Jaguar Land Rover, the two companies formed a partnership in order to explore the Chinese market while the acquisition of Land Rover by Ford was meant to enhance competitiveness by expanding the company’s size (Massey, 2012). The joint venture was an agreement to share control and profits by pooling their resources without the risks of a full-blown acquisition. On the other hand, the acquisition of Jaguar Land Rover led to the transfer of assets from Ford Company to Tata Motors in exchange of the buying price. Question 3 The National and Corporate Cultures involved According to Hofstede’s cultural dimension theory, the society’s culture is determined by its members and the values they hold (Hofstede, 2001). There are four dimensions that describes the culture of countries; individualism/collectivism, masculinity/femininity, power distance and uncertainty avoidance. Jaguar Land Rover has its origin in the United Kingdom while Chery Automobile is from China which represents countries with different national and corporate culture. The United Kingdom has low power distance which means that people believe in equal power and opportunities among people. China has high power distance which means that the members of the country accept that power is unequally distributed (Hofstede, 2001). Also, the United Kingdom ranks higher in individualist score. And as such, people have loose ties and believe in personal fulfilment. China is highly collectivist society with high degree of interdependence among members. People are taught to look out for the interests of the group rather that their own (Moon and Wooliams, 2000). China has a high score on masculine dimension which means that members are success-oriented and driven. People can sacrifice family and leisure to work. On the other hand, the United Kingdom is a masculine country where people live to work and achieve success. In regards to uncertainty avoidance, both the United Kingdom and China have low scores on uncertainty avoidance. The countries are more acceptable to new ideas and the society imposes fewer restrictions creating free-flowing environment. Generally, China has diverse culture that is different from the western world. Therefore, the decision of Jaguar Land Rover to form a partnership with Chery Automobile in China requires some adjustment and acceptance of the differences in culture. In a business setting, Chinese companies use authoritative and directive management style since the leaders are expected to make decisions and pass it down the hierarchy (Ferraro, 2010). Also, businesses in China operate under the concept of “guanxi” which is different from the corporate culture of U.K’s companies where businesses and employees are inclined to chase individual goals. These differences may become huge obstacle between Jaguar Land Rover and Chery Ltd resulting into conflict between employees and managers. Cultural patterns in businesses often reflect the culture of the wider society (Moon and Wooliams, 2000). For instance, Jaguar Land Rover promotes individualism by valuing individual achievements while Chery Automobile promotes collectivism by valuing group efforts. Also, having small power distance, Jaguar Land Rover promotes free communication between managers and employees while Chery promote central authority where managers give orders and employees follow them. If these differences are not addressed, the partnership between the two companies will be unsuccessful. Question 4 Effects of Exchange Rate Movements Exchange rate movements often affect international deals since they influence the amount of cash inflows that are received from investments and outflows that are needed to pay for operations. According to Gord, Holger and Wakelin (2002), currency often appreciate and depreciate in regards to the market conditions. Such exchange movements influence interest rate that may reduce FDI levels and joint venture deals. The purchasing power parity theory argues that without international restrictions, consumers’ demands shift to where the prices are low. Therefore, prices of the products in different countries must be equal in regards to a common currency. The increase in capital movements has made the exchange rates the main determinant of profitability (Gord, Holger and Wakelin, 2002). According to the theory, foreign exchange movements affect commodity prices which in turn affect the value of a company. One main reason for the decision of Jaguar Land Rover to enter China is the appreciation of the Chinese Currency. The joint venture between the two companies promises higher short-term returns as a result of high interest rates in China as opposed to the United Kingdom (Wachman, 2012). The appreciation of the Chinese currency promises a fruitful future for the joint venture deal since it increases the return by a larger amount. In addition, although foreign exchange movement brings positive effects, it can also lead to undesirable results. In an event of an adverse exchange movement, there may be a decline in value of asset, portfolio as well as legal entity. For instance, in the case of the joint venture between Jaguar Land Rover and Chery Automobile, the partnership necessitates a regular transaction between China and the United Kingdom and covert multiple currencies to comply with their contractual obligations (Wachman, 2012). With such practices, the joint venture is at risk of suffering serious financial losses. For instance, the deal may incur huge losses due to the expenses required to meet the obligation of importing raw materials from the United Kingdom to manufacture new cars (Chen, Rau and Lin, 2006). Also, foreign exchange movements can result in the reduction in profit margins. For instance, the joint venture between Jaguar Land Rover and Chery Automobile may suffer a reduction in profits resulting from fluctuations in the Chinese currency. The contractual obligations of the joint venture deal are in Euro while the income they receive from selling cars is in Chinese currency. This means that the new venture will need to spend more Chinese currency to meet the contractual obligations in Euros. Question 5 Challenges of doing Business Internationally Doing business internationally often offers new opportunities for companies to grow and earn more profit. Nevertheless, these opportunities are accompanied by numerous risks and challenges that affect the ability of these companies to survive in a foreign market (Buckley, 2011). Three major challenges of doing business internationally include cultural and language barriers, legal issues and political risks and currency risks. Many companies that explore foreign markets often face political risks due to negative government actions that result in negative business consequences. Every country has rules and regulations that international companies are expected to comply with. For instance, some products may be illegal in some nations and companies may be in trouble shipping those products (Bernard et al., 2007). Political and legal risks may be in from of corruption practices. Some countries have high level of corruption which may interfere with business practices. An organization may lose a contract as a result of unethical dealings in a given market. Also, political risks may take the form of tariff barriers, procurement policies, environmental regulations and consumer protection policies. In addition, international business presents cultural and language barriers. Different countries have different cultures, language, norms and beliefs. Business partners may use different languages that could be a huge barrier to a partnership (Day, 2007). For instance, expatriates sent to China by Jaguar Land Rover may face communication challenge due to the differences in languages used by employees. Personally, I believe that communication is one of the most important elements in any business and without it; an organization is bound to fail. Therefore, differences in languages are a huge barrier to successful partnership between different companies in different countries. Also, the differences in culture between countries may affect international business (Bernard et al., 2007). For instance, cultural differences including attitude towards work, management style, power structure and communication style may affect relationship between people of different cultures. It is therefore significant for businesses to recognize cultural differences before doing business in a foreign country. Additionally, international businesses are affected by fluctuating exchange rates. Locally, companies often know their targets and the budget of their expenses. Nevertheless, when expanding internationally, it is often challenging to predict expenses due to fluctuating exchange rates (Chen, Rau and Lin, 2006). Companies operating overseas are often at the mercy of currency fluctuations. Many companies have been affected by unpredicted changes in currency conversion rates which may affect profit margins. Therefore, companies should evaluate currency conversion risks before making the decision to go overseas. Political, cultural and foreign exchange risks are significant since they can result into total failure of an international business. Having the knowledge of these challenges will enable international businesses to monitor international changes and find the best option to minimize their risks for future success. Conclusion The partnership between Jaguar Land Rover and Chery Automobile can be described as a joint venture agreement that was formed specifically to ensure a successful entry into the Chinese market. The partnership is influenced by numerous external issues such as the economic environment, the political factor, the socio-economic factors and the technological environment. Although the joint venture has brought about a number of benefits, it has led to numerous challenges such as uneven resource allocation and limitation of outside opportunities. Just like other international businesses, the partnership between Jaguar Land Rover and Chery Automobile is also faced with cultural challenges. Jaguar Land Rover values individual achievements while Chery Automobile values group efforts. Also, Jaguar Land Rover promotes free communication between managers and employees while Chery promote central authority. With such differences in cultures, numerous problems are bound to happen. Another huge challenge facing the partnership between the two companies is foreign exchange risks which may result in low profit margins. In light of such challenges, the two companies should consider mitigating them in order ensure long-term success. References Akmal S. and. Ghauri P. (2000). Managing International Joint Venture Relationships. Industrial Marketing Management, 29:205–18. Allen, F., Qian, J. and M. Qian. (2005). Law, Finance, and Economic Growth in China. Journal of Financial Economics, 77: 57-116. Banerjee, S.B., Carter, C. and Clegg, S. 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What Attracts Foreign Multinational Corporations to China? Contemporary Economic Policy, 19(3): 336–346. Read More