General Motors China - Essay Example

?Table of Contents Introduction 3 External Analysis 4 PESTLE Analysis 4 Political 4 Economic 5 Social 6 Technological 6 Environmental 6 Industry Analysis 7 Drivers of Change 7 Government Policies 7 Production Capacity Expansion 8 Mergers and Acquisitions 8 Porter’s Five Forces Analysis 8 Power of Suppliers 8 Power of Buyers 8 Threat of New Entrants 8 Threat of Substitutes 9 Rivalry among Existing Firms 9 Potential Directions for Future Growth 10 Proposed Idea 11 Issues 11 SWOT Analysis 12 Strengths 13 Weaknesses 13 Opportunities 13 Threats 14 Conclusion 14 Bibliography 15 Appendix 19 Introduction The company that has been selected for this report is GM China. General Motors Corporation started its operations on 16th September 1908 and the NEW GM Company started its operations on 10th July 2009 (GM, 2010). The aim of creating GM China together with its partner company is to become the best automotive group in China (GMChina). The Company has been appearing as the sales leader among global automakers in China over the last four years. In 2008, the estimated market shares of the GM in China were 12.1percent of the total GM Sales (GMChina). In this report, the environment analysis of GM China has been done. Through PESTLE analysis, Porter’s Five Forces Analysis, SWOT Analysis and other theoretical models, the current situation of GM in China has been analysed. External Analysis PESTLE Analysis Political Two factors are contributing to the growth and development of automobile industry of China: first, the suitable domestic policies and market openings: second, supply of vehicles and parts throughout the country in the logistic and commercial aspects (Kamiya & Ramirez, 2004). Chinese government authorities including local and central government do not only issue the automobile industry development plans but they are also involved in the operations of the companies to maintain such developments (Bungsche, 2007). Government of China has eliminated most of the fixed fees imposed on vehicles such as road maintenance fees of around $210 per year (Brogan, 2009). In 2010, Chinese government has introduced policies that could support new-energy auto industry. In the new policy, government is paying a subsidiary of up to 50,000 Yuan to any individual who buys a hybrid vehicle and 60,000 Yuan to any individual who buys battery electric vehicle or all-electric vehicle (Xinhua, 2010). The Chinese government is planning to pursue a new policy which could encourage industry consolidation thereby, promoting the development of Chinese-brand passenger cars and it has been estimated that by 2015 domestic sedans will be 40% of nation’s car market (Chinacartimes, 2010). This example shows that Chinese government aims to promote domestic car industry. Chinese government has imposed 10% sales tax on small cars which is effective from Januray 1, 2011. Analysts argue that small cars comprise of 60 percent of all passengers cars in China therefore, this policy of government will stop the growth of small cars thereby, increasing the demand of foreign companies especially the U.S. companies which have comparative advantage in manufacturing large cars (Hsu, 2010). The government inclination towards local companies is also evident from subsidies in China. According to an auto analyst, Zhang Zhiyong, the subsidies in China only promote local protection and they do not consider the model lines and technological improvements brought by foreign companies. Zhang Zhiyong argues that Chinese government should use subsidies to promote domestic automobiles which do not always mean foreign or local companies, rather it includes the companies which have significant ties with the city (Chinaenvironmentallaw, 2010). Economic Gross domestic product (GDP) has increased from 7.6 percent year-of-year in 1999 to 11.9 percent on 2007 (World Bank, 2008). In 2010, the GDP has grown by 10 percent (Chinatoday, 2011). Consumer price index (CPI) has increased from 98.6 percent year-of-year in 1999 to 104.8 percent in 2007 (World Bank, 2008). The estimated per capita income, according to 2008 statistics is $6000 which is far below as compared to the per capita income of U.S. ($30,300), Japan ($31,500) and many other countries (Tong Siak Henn, 2009). China has built strong business and trade relationships throughout the world; therefore, the state is significantly exposed to the financial crisis. The recent global financial crisis has affected the demand of autos in China however; China has been able to cushion the impact of the crisis because of strong economic fundamentals and government policies, as evident from the fact that in first quarter of 2009, auto sales of China reached to n.65 million as compared to 2.2 million of U.S (Hong & Mu, 2010). A survey of 346 companies revealed that doing business in China is a challenge for the foreign companies because of the problems like product and trademark piracy, requirement of government to use local technology and privileged treatment of the domestic Chinese companies (Kurtenbach, 2011). Social The lower tier cities and rural areas in China are actively seeking to catch up to larger cities with an aim to achieve a metropolitan lifestyle. This change is appearing because of the spread of wealth in China (Asia Briefing, 2010). Moreover, Figure I and II (Appendix) shows that average annual spending for Chinese individuals between the age of 15 and 65 is similar across the five tiers of the state. Online shopping trend is increasing in China according to China Internet Research Centre, the online sales which account for less than one percent of total retails in China will be around five to eight percent by 2012 (Chinatoday, 2011). Technological By the end of 2010, the total number of internet users in China has increased by 73 million in one year and reached to 457 million (Chinatoday, 2011). Chinese automobile companies have been accessing advanced technology by making joint ventures with the foreign companies like Ford, DaimlerChrysler, General Motors. The bug giants have helped in the transfer of advanced technology in China and modernised the automobile industry by providing emission control, fuel efficiency technology etc (Gallagher). Environmental Government of China has always considered motor industry as a pillar of economic development of China however, because of the increasing environmental pressures; environmental office has always been setting strict policies such as putting up parking fees and developing bus-only pedestrian zones (BBC, 2000). Auto emissions have become a major source of pollution in China and increasing car sales is further contributing to the environmental challenges. Therefore, Chinese government has introduced environmental taxation and more environmental policies are under consideration. Moreover, the environmental tax is contributing to rising social costs because they are being transferred to production costs (Shigong, 2010). Industry Analysis The dominance of foreign companies in China is increasing whereas, domestic companies only account for 27 percent of Chinese market and around 20 manufacturers (Autochina, 2007). The Figure III (Appendix) shows the list of companies based on their market shares in the Chinese automobile industry. GM appears to have largest market shares in 2007 in Shanghai Wuling and Shanghai GM. The entrance of foreign automakers in China has been possible through joint ventures with domestic companies (Figure IV – Appendix). The foreign companies are seeking to enter into the Chinese automotive industry because they see huge opportunities in the Chinese growing economy. There is still a huge growth potential in Chinese auto industry as less than five individuals out of 1000 posses a car. It is expected that sales of vehicles in China will grow by one million annually until 2015 and more than 75 million families will have car by 2015 as compared to 10 million in 2005 (Facts and Figures, 2010). Moreover, government is promoting production of energy efficient vehicles which further promises long term growth in this area. Based on the current growth, automobile industry of China can be classified in the “growth” phase of product life cycle. Drivers of Change Regional Production Fragmentation One key driver of change which has enhanced the attractiveness of Chinese automobile industry is the regional production fragmentation. More than 120 carmakers are operating in China and they are almost equal to the carmakers in Europe, U.S.A and Japan. All of the 120 manufacturers are not having the same competitive level and production capacities because many of them have weak competitiveness and low capacities of production (Hong & Mu, 2010). Hong and Mu argue that regional agglomeration offers benefits to the companies, as they share knowledge, enjoy economies of scale and reduced production costs. It is also expected that within next few years, the large production capacities of foreign and Chinese joint ventures will further contribute to strengthen the global competitiveness of China automobile industry against the Western competitors. Government Policies China automobile industry grew rapidly between 1980 and 2001 and the potential of this growth was hindering the government to undergo the agreement with World Trade Organisation. However, after the agreement, automobile industry faced a significant growth from 2002 to 2005 and in 2002, average development rate was 24.9 percent and by 2003, China appeared as the fourth largest automobile producing economy (Chen, Shi, Ni & Chen). Production Capacity Expansion Enhanced production capacity is another key driver in Chinese automobile industry. Both foreign and domestic carmakers have been enhancing their production capacities in China by anticipating strong demand growth since 2002. The enhanced production has not only contributed to significant competition but it has also reduced the prices of vehicle in China (). Mergers and Acquisitions After China’s WTO accession, more foreign companies entered into industry. Government has saved domestic industry by only promoting joint ventures of foreign and domestic companies. Another recent plan of government is to consolidate 14 major manufacturing groups which contribute to 90 percent of cars production into 10 groups. This plan will further increase output capacity by 2 million units (Tang, 2009). Porter’s Five Forces Analysis Power of Suppliers Power of suppliers is low to moderate because of the huge number of suppliers relative to manufacturers. A number of small and large suppliers are operating in automobile industry. Moreover, the manufacturers are price sensitive to keep the production costs low. Power of Buyers Bargaining power of buyers is moderate to high; even the switching cost is higher because buyers have the choice and access to a huge variety of vehicles. Buyers have free access to information to compare the vehicles. Moreover, buyers are price sensitive because demand is elastic with respect to price. Threat of New Entrants Threat of new entrants is low because the capital requirements to enter into the industry are very high. Second, large companies are better able to achieve economies of scale which new entrants cannot attain very easily. Third, product differentiation is very high because of the distinct features and capabilities. Fourth, government and legal barriers in China are significantly higher as evident from political factors in PESTLE analysis. For example, local content scheme of government. The Chinese Law on equity joint ventures state that an equity joint venture will give priority to Chinese suppliers for raw material and semi-processed material and in an automobile company, the required local content is 40 percent (Anderson, 1998). It is important to note that almost all major giants have already stepped into Chinese market and it is expected that existing companies will compete by creating more companies. For example, Volkswagen is planning to launch a local brand of automobiles in China with new nameplates against its rivals like General Motors, Nissan and Honda Motors etc (Lin, 2011). On the other hand, government is seeking to reduce the barriers for the companies which aim to enter in electric vehicle technology. Government facilitates Chinese car manufacturers to use low barriers to entry for electric cars thereby, reducing the gap with giant foreign competitors and promises steady long-term growth (Shirouzu, 2009). Threat of Substitutes A number of domestic and foreign companies are offering various categories of cars, which give buyers a choice to select the most suitable one. It means threat of substitutes is significant in China automobile industry. However, green car manufacturing faces substitutes because very few companies have adopted completely green cars manufacturing. However, because of the increasing support of Chinese government for green carmakers, more and more companies are seeking to invest in green car manufacturing, which increases the threat of substitutes. The government of China takes strong steps to develop a low-carbon economy because the drift for bringing cleaner and low-emission green cars in the market has increased (Ke, 2010). Government has announced to subsidise the energy-efficient cars to reduce cut emissions and to increase the sales of green cars by $59 billion. The giant carmakers including GM, Warren Buffett-backed BYD Co and Toyota have boosted their manufacturing of hybrid and electric vehicles (Bloomberg Businessweek, 2010). Rivalry among Existing Firms The industry rivalry among the existing firms is increasing and it significantly high. Actually the concentration of carmakers is increasing because of the increasing foreign companies and domestic companies. Second, the production capacity of Chinese automobile industry is significantly great which attracts the carmakers. The rivalry situation of Chinese industry is directly related to automobile industry policy. The government has replaced the previous policy 1994 by a new policy that was issued on 21 May 2004 which aims to restructure and strengthen the automobile industry (Deacons, 2004). The policy of government is to encourage the development of large corporations that can compete at international level therefore, government promotes mergers of Chinese and international automobile groups. In short, government aims to promote international competitive situation rather than domestic competitive situation. Furthermore, China WTO’s accession further contributed to the competition by liberalising trade and increasing policy-relaxations. More than 120 car companies are operating in China (Hong & Mu, 2010) and the competition comes both from domestic and foreign companies. From the Porter’s five forces of competitive framework, following spectrum has been created. The highlighted portions show that few firms are operating in the industry which makes it an Oligopoly industry. The entry and exit barriers are significantly higher and imperfect information is available. Moreover, the potential for product differentiation is higher because of the growing demand of green technology. Based on all these factors, the industry attractiveness of China automobile industry can be categorised as moderate. The Spectrum of Industry Structures Perfect competition Oligopoly Duopoly Monopoly Concentration Many firms A few firm Two firms One firm Entry and exit barriers No barriers Significant barriers High barriers Product differentiation Homogenous product Potential for product differentiation Information availability No impediments to information flow Imperfect availability of information Source: Grant, 2005 Potential Directions for Future Growth Proposed Idea General Motors has already planned to manufacture small battery electric cars in China. The company aims to manufacture these cars within next two years. The company has announced that it plans to develop energy-efficient engines and small cars with its partner S.A.I.C Motor Corporation. The plan of manufacturing small cars is to achieve the objective of manufacturing environment friendly technologies and to expand market shares in China (Barboza, 2010). Based on the above analysis, it is recommended to GM that government of China is more focusing on sales of large fuel-efficient cars rather than small cars. GM should plan to incorporate energy-efficient technology both in small and large cars; however, as company is not offering small cars therefore, plan of manufacturing small cars is also suitable. Moreover, it is also recommended to the company to export the small fuel-efficient vehicles manufactured in China to U.S. GM is known for its large cars in the U.S. however, the company is already planning to introduce small cars in the U.S. market. GM has already shifted its advanced technology in the Chinese market and if it manufactures small cars in Chinese market and exports to U.S. market, company can reduce production costs. Company can reduce labour costs and get access to a huge number of suppliers and raw material. Therefore, it is proposed to the company to invest in the manufacturing of small fuel-efficient vehicles and to target both Chinese and U.S. markets for these cars. Issues Although company can find significant potential for growth in small cars manufacturing however, company can also face various issues. First, a number of domestic companies are already manufacturing small cars because of the huge market of small cars in China. GM has established its position in big cars market; therefore, GM can face a tough competition in small cars industry. Second, as mentioned previously that Chinese government has imposed 10% sales tax on small cars to stop the sales growth of small cars; therefore, GM can also face problems because increase in taxes will reduce the demand of small cars. Third, wages are sharply increasing in various regions of China which is increasing the concerns for manufacturing companies and the risk of wage inflation for carmakers has also increased (Chinacartimes, 2010). Therefore, a potential risk of increase in production cost can reduce the advantage of GM to manufacture small cars in China. SWOT Analysis Strengths Market leader in terms of market shares (based on sales) Strong demand in Chinese automobile industry Financial stability of company Based on its advanced technology resources, company has been able to establish its facilities in China Chinese government is promoting big cars by discouraging small cars and GM is already having a strong position in big cars market Weaknesses Bankruptcy of GM Europe has negative influenced the image of General Motors and New GM Company is trying to put more efforts to reposition itself Shares profits with Chinese automaker in the joint venture and lacks complete control and authority Opportunities Government considers automobile industry as one of the primary contributors to Chinese economic development therefore; government is formulating policies which may facilitate the growth of car makers Government plans to subsidise energy-efficient vehicles create high demand potential for carmakers Growing automobile industry as evident from previous growth rates imply positive future growth potential Improving standards of people of lower tiers cities and rural areas in China is contributing to expanding Chinese consumer market for automobiles Threats Government interference is relatively higher as compared to the other markets where GM is operating therefore, Chinese government can influence the operations and strategies of GM if it continues expanding in China Increase in taxes on less efficient cars will reduce the market for less-energy efficient vehicles available in the market Preferential treatment of government for Chinese automakers Because of increasing manufacturing plans of domestic and foreign companies in China to exploit resources, China is being considered as one of the major economies contributing to potential. Government of China has already imposed environmental tax on vehicles and there is a potential to introduce more strict policies to achieve environment sustainability Increasing monopoly in Chinese market through mergers and acquisition Conclusion China automobile industry appears to be the fastest growing and developing auto industry of the world. It has been analysed that Chinese government has opened the opportunities for international automakers by anticipating a significant role of auto industry in economic development. However, government has a strong influence in the operations of automakers. The growing economy, changing social status and lifestyles of Chinese and technological developments are some attractive factors to enter into Chinese auto industry. On other hand, environmental concerns, high capital requirements, increasing threat of substitutes and monopolising of market structure appear to be some major concerns for automakers. 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[Online] Available at: http://siteresources.worldbank.org/CHINAEXTN/Resources/chinaei.pdf [Accessed on 19th January 2011] Xinhua, 2010. New Energy Cars Take Off in China with Government Support. [Online] Available at: http://www.chinadaily.com.cn/business/greenchina/2010-12/10/content_11683177.htm [Accessed on 18th January 2011] Appendix Figure I: Average Annual Spending of Chinese Individual Source: Asia Briefing, 2010 Figure II: Chinese Tiers Source: Asia Briefing, 2010 Figure III: Top Ten Passenger Car Manufacturers in 2007 Based on Number of Vehicle Sold Source: Chinaknowledge Figure IV: Automobile Joint Ventures in China Source: Holwegm, Luo and Oliver, 2005 Read More