Business Opportunities in Chinas Automobile Industry - Case Study Example

City

Business Opportunities in China’s Automobile Industry

Introduction

China is one of the leading economies in the world, with the rapid growth rate of its Gross Domestic Product (GDP) being attributed to a number of factors, key among them being the growth in its export and import markets. The rapid growth of China's economy has attracted many foreign investors from the United Kingdom, United States, and many other countries around the world. Health and Safety Engineering Limited, a United Kingdom Company, is one of the foreign investors that have set base in China. This company understands that rapid growth in Chinese industrial sector creates a good opportunity for it to sell its products, for example, central vacuum systems, exhaust and oil filters, as well as offer engineering consultation services there. This paper analyzes the business opportunities in the automobile industry in China and the projected growth rate of the industry. Since 2009, China has remained to be the world's largest market for automotive products and the biggest manufacturers of automobiles. This provides an ideal business environment for both large scale and small scale automobile investors and related industries within China.

Market profile and implications

In 2014 alone, the number of vehicle units manufactured in the China market exceeded 20 million, with the market projected to expand further in the future. According to a 2015 official report by the European Union Small and Medium Enterprises (EUSME), the automobile market of China is estimated to have had a Compound Annual Growth Rate (CAGR) of 11.4% between 2004 and 2014 (EUSME, 2015, p.3). The report projects that by 2020, the automobile industry in China would have grown to 22 million vehicle units produced per annum, an aspect that will make the country’s market larger than a combination of European and North American markets. Other companies that provide engineering products and services, for example, Health and Safety Engineering Limited, are also taking advantage of the rapid growth of the Chinese automobile industry. The rapid increase in the number of registered automotive businesses that are recognized internationally provides an excellent business opportunity for manufacturers of original auto parts, also known as Original Equipment Manufacturer (OEM) traders who are mostly large-scale traders (EUSME, 2015, p.3).

According to the report by UESME, there also exists a great opportunity for Small and Medium Enterprise (SMEs) in the European Union who may choose to supply the leading car manufacturers with automotive equipment and various automobile technologies (EUSME, 2015, p.3). Health and Safety Engineering Limited as well as other companies that provide engineering services can also benefit. Some products and services that Health and Safety Engineering Limited can provide include Reverse Pulse Bag Filter Unit, Complete Turnkey Project, and central vacuum systems. Statistics by the EUSME report indicate that in 2014, the total number of automobiles sold in China was 23.7 units (EUSME, 2015, p.5). This represented a percentage increase of 7.3% from the previous year, 2013. Out of the total vehicle units manufactured and sold in 2014 in China, the number of passenger cars was the highest, accounting for 19.7 million units (EUSME, 2015, p.5). The number reflected an increase of 9.9% as compared to 2013. From the statistics, the automobile industry in China has been steadily rising since 2009 compared to the same industry in different regions. For instance, Europe as a regional market sold only 12.2 million automotive units (nearly half of China) in 2014 (EUSME, 2015, p.3).

The number of automotive units sold in Europe in 2014 accounted for an overall increase of 5.7% from the previous year, 2013, which is still way below China’s statistics (EUSME, 2015, p.7). Table1 indicates the various types of vehicles and automotive parts that a business venture can choose to specialize in, in the Chinese automobile company.

Table 1: Various automobile production units

Source: (EUSME, 2015, p.5).

Passenger

Vehicles

Buses

Tracks

Semi-Trailer Tractors

Automotive parts

Sedan

MPV

SUV

Crossove

Large bus

Medium bus

Light bus

Heavy truck

Medium truck

Light truck

Mini truck

GVW2

< =25t

25t < GVW < = 40t

40t <GVW

Transmissions

Bodies parts and

accessories

Steering wheels, steering columns and steering boxes

Brakes and servo-brakes

and parts

Shock absorbers

Safety airbags with inflator system and parts

Drive axles

Clutches and parts

Mufflers and exhaust pipes

Bumpers and parts

Radiators

Wheels including parts

and accessories

Seat belts

Non-driving axles and parts

Mounted brake linings

Brake system parts

Chassis fitted with engine

Bodies for motor vehicles

According to the 2015 report by EUSME, business in passenger vehicles in China is run mainly by foreign investors who control about 62% of the passenger vehicle market, while domestic investors dominate the production and sale of vehicles and parts of commercial vehicles (EUSME, 2015, p.5). The rapid growth in the Chinese automotive market has been attributed to the government's policy framework that is aimed at promoting urbanization in the country (EUSME, 2015, p.5). Additionally, there has been an increase in the average increase in the average household income in the country, an aspect that has led to an increased demand for cars in the country (EUSME, 2015, p.5). Through a study that compared the impact of multinational investors on China's automobile and its related industry, the electronics industry, Motohashi and Yuan (2010, p.1) establish that international firms have vertical spillovers in the automobile industry. On the other hand, the local firms in the automobile industry only exhibit a small amount of vertical spillover (Motohashi and Yuan, 2010, p.1).The findings indicate that foreign businesses perform well in the automobile industry when compared to local investors. In addition, companies that deal in related products like Health and Safety Engineering Limited are also performing well in the Chinese market because they have taken advantage of these factors in addition to the large market availed in the country and beyond.

Cultural profiles and Implications

Having started as a humble industry with limited knowledge in 1885, the automobile industry has continued to expand to become one of the largest economic sectors globally (Novada, 2012, p.2). The fact that the industry applies both demand and supply makes it lucrative for various investors and stakeholders, an aspect that has also greatly contributed to its growth and expansion. The growth of the industry has been sporadic in countries that can readily access the global market of experts and automotive parts such as China (Novada, 2012, p.2). In respect to the Chinese automotive market, various cultural factors influence the success of the automobile industry (Novada, 2012, p.2). Variables in the cultural aspects of China such as social responsibility, differences in culture, population attributes, and the consumer preferences directly affect the performance of the country’s automobile industry (Novada, 2012, p.2). Other than that, the international organizations need to understand that they need to appreciate, for example, the Chinese way of life and doing business. In this case, the Chinese negotiation ways are very different from those of western nations like United Kingdom. The Chinese like knowing people personally before they can get into a business deal with them, which is not the case for westerners, who do not have to know an individual personally to get into a business deal with them. Therefore, when western investors and businessmen want to venture t the Chinese market, they have to understand that they have to first establish a good relationship before they can start a business relation. In addition, most clients are more concerned with certain elements of the automotive such as the prevailing prices, brand, mileage covered, the style of design, and the services provided by the company after sales (Novada, 2012, p.2). In this regard, some vehicles are on demand more than others based on the characteristics they have.

Additionally, there is a social perception against some car brands, with consumer associating them to less durability, less speed, and other negative notions which not be true but affect sales. This is because most clients in the automotive industry purchase automobiles based on recommendations and opinions of other people; such as people with experience of the products, vehicle dealers, and general perception (Novada, 2012, p.2). Age is also a socio-cultural factor that is likely to affect the performance of a given company in the Chinese automobile industry. Novada (2012, p.2) argues that age distribution is a factor that directly influences the amount of sales in the automobile industry when targeting a given population. In this regard, young people have a difference preference of automobiles as compared to old people. While old people would prefer cars with comfort to those with speed, many young people prefer trendy cars with speed.

Novada (2012, p.2) explains that in relation to age, people with families buy cars based on aspects such as safety of the car, space to accommodate family members, and budget availability, which might not be the case with those who do not have families. Therefore, a company entering the Chinese automobile market should put into consideration various elements that are aimed at satisfying the needs of the different types of clients and the populations. This can be effectively achieved by keenly identifying and studying the target market before venturing into the business.

Analysis

The Four PS Model

Product. This paper analyzes passenger vehicles as the main products of the automobile industry in China. Tang (2009, p.2) explains that since 2000, the number of passenger cars manufactured and sold in China has risen to about 65% of the total motor vehicle output in the country.

Price. The price of the passenger cars manufactured in China varies depending on a number of factors, including the model type of the car, tax policies, and demand. Additionally, income variations among consumers determine to some extent the prices of the automobiles in China, including the passenger vehicles. Hao and colleagues (2011, p.2) explain that high-price passenger cars are much in demand in Shanghai and Beijing which are China’s biggest cities. By comparison, Shanghai sales of high-price passenger cars are more than those in Beijing (Hao et al., 2011, p.2). Riley (2002, p.2) explains that economies of scale also affects the price of the automobile products in the market.

Promotion. The promotion of passenger cars and other automobiles in China is done using various channels. Some of the mechanisms that can be used to promote the sales of passenger vehicles include public relations, advertising, search engine marketing, and video marketing. China has various channels that can be utilized to promote products in the automobile sector, with the recently emerged channel being the social media (Zhou and Wang, 2014, p.2).

Place. Passenger vehicles have ready markets in China and abroad, which can be fully exploited to enhance profits. A market structure by Deng and Ma (2010, p.1) indicates that low-end and medium markets often provide a high sale percentage compared to high-end markets.

PEST Model

Political factors. The government of China has played a critical role in controlling the direction of the country’s automobile industry, which has largely contributed to its rapid growth. Factors such as political stability, reforms, and policies determine the market flow. Sit and Liu (2000,p.1) note that during the 1990s when the country’s automobile was rapidly growing, political factors such as enforcement of public-private joint ventures played a significant role.

Economical factors. Economic factors affecting the Chinese market include the availability of investment capital, profitability, country GDP, and economies of scale. The growth of China into a global economy has been crucial to the investors in the country's automobile industry through aspects such as industrial revolution (Fan and Scott, 2003, p.1).

Social factors. The prevailing social factors that affect the Chinese automobile industry include family income levels, improved standards of living, preferences among clients, and demographic changes. Additionally, factors such as an increase in the number of households and educational investments also affect the economy of the industries (Liu and Diamond, 2005, p.2).

Technological factors. Technological advancement in China has boosted the operations of automobile companies in the Chinese market, ranging from production to marketing. Mu and Lee (2005,p.1) note that technological adoption played an important in improving the sales of Chinese manufacturing companies.

Figure 1: China’s major automobile companies

Image source: (Balcet, 2011, p.99).

Another entry strategy to the Chinese automotive market could be through partnerships, which with the aim of pulling resources together and registering profits (Novada, 2012, p.5). Another approach is the buying off of smaller firms by larger firms which reduces competition by making the firms even stronger (Novada, 2012, p.2). For instance, in 2008, BBC News reported that TATA Car Company had bought Jaguar in order to sell the model and in turn increase its net profit (BBC, 2008, p.1). In addition, a company entering the automobile market in China in order to sell its automobiles and parts can choose to establish dealerships as a way of penetrating the lucrative markets (Novada, 2012, p.2). Through the dealerships, the investor increases the distribution of its products to the target markets in relation to its preferences.

Nag et al (2007, p.19) explain that by 2007, the automobile industry in China had 120 vehicle manufacturing enterprises with 9 of the companies working on consolidation moves. Consolidation of companies is one of the strategies through which small automotive business ventures, such as the Small and Medium Enterprises, could realize a competitive edge over the big companies. The industry not only provides profits to the entrepreneurs but it is also one of the largest employers in China. In 2007 alone, the automobile industry in China had an employee capacity of about 2 million workers (Nag et al, 2007, p.19). Allowing the private sectors to invest in China's automobile industry has played a critical role in the growth witnessed in the industry. At some point, there was a long debate on whether the country should allow private companies to enter its automobile industry or continue to be run by public ventures (Nag et al., 2007, p.19).

The discussion lead to the agreement that the government of the People’s Republic of China should allow private investors into its automobile industry and in some areas joint ventures between private and public ventures, an aspect that has significantly boosted its trading capacity (Nag et al., 2007, p.19). Since then, most of the companies in the automobile industry in China are run by a joint venture between private and public business ventures. Foreign Direct Investment (FDI) has also been a critical factor in the development of the automobile industry in China, as the number of foreign investors has continued to grow over time. In the 1990s when the Chinese automobile industry was establishing itself, it received more foreign investors compared to any other developing industry and country in the world (Nag et al, 2007, p.19). The increase in a number of foreign investors at that time could be attributed to the rapidly growing economy of the country, with foreign investors determined to establish themselves and reap more profits in the lucrative business environment (Nag et al., 2007, p.19).

Even though the whole economy of China was at this time growing rapidly, many foreign investors chose to venture into the automobile industry and by 2001, more than 800 companies that dealt in vehicle-related business had received FDI (Nag et al., 2007, p.19). FDI had already invested a net capital total worth $ 12 billion in the Chinese automobile industry by 2001 when the industry was growing (Nag et al., 2007, p.19). The fact that the industry has matured to be one of the leading ventures across the globe and the existence of opportunities to make partnerships provides ideal investment opportunities for foreign investors today. By 2007, the Chinese automobile industry had already been dominated by foreign investors (Fig.1).

Figure 2: China’s top 10 passenger vehicle manufacturers in 2007

Image source: (Balcet, 2011, p.70).

However, the involvement of foreign investors in the Chinese automobile industry has emerged as a threat to the local producers. A report by Niedermeyer (2014, p. 2) indicates that foreign brands are dominating the Chinese market, with more sales compared to those derived from the local firms. By July 2014, local manufacturers sold only about 34.6 % of the total passenger vehicles sold out by investment companies (Niedermeyer, 2014, p. 2). The dominance by foreign investors can be attributed to the high level of innovativeness that is put into their manufacturing compared to the local companies Niedermeyer (2014, p. 2). With the foreign investors making huge amounts of profits in the Chinese automobile industry, the country has to find other mechanisms of boosting the sales from the local manufacturers. Appendix 1 indicates the number of passengers sold by top domestic manufacturers between January and July 2014.

Recommendations

Specific goal; any company planning to venture into the Chinese market needs to have a clear goal that must consider the exact location to set up the business, the amount of investment to make, and the products and services to provide. Another important factor that should be considered is the period in which the company will set up in the country.

Measurable goal; to ensure smooth transition into the Chinese market, there is a need for the international organization to introduce measures of the goals. In this case, it should have a specific strategy for asserting that the goals are being met and on the right track at any given time.

Attaining goals: it is important for an organization to ensure that the goals it sets are attainable and achievable within a specific timeframe. In this case, there is a need for a company to strategize carefully to ensure that every objective set is possible to attain within that time.

Realistic goals; it is important for a company’s management to ensure that all the objectives are realistic and can be achieved. This calls for the management to ensure that all plans are done strategically by considering all factors, including the nature of the market, China in this case.

Timely goals; it is important for a company to ensure that all the objectives set are given a specific period. Giving a goal a timeline ensures that a company sets the necessary resources in place to ensure that they are achievable.

Conclusion

The rapid growth in the Chinese automobile industry provides a wonderful investment opportunity for foreign direct investors, including large and small companies, for example, Health and Safety Engineering Limited that produces engineering related products and consultation services. This company has the potential to make in China, especially because of the rapid growth of the Chinese automobile industry, which is a ready market for the company’s products and services. The business industry is very much diversified with a large range of products that an entrepreneur can choose to specialize in. The availability of ready market in China and globally makes the industry even more lucrative as a company has the potential of making enormous profits and expanding gradually within a short period.