Market Entry Options for Chery Cars China - Report Example

Market entry options – Chery Cars China Executive Summary Given the recent recession, caused as a result of the financial crisis that was triggered in the US, external conditions for automobile manufacturers based in China have changed drastically. The US market was severely affected by the financial crisis, which saw giant companies such as, General Motors, Ford and Chrysler, going close to being bankrupt. The companies survived largely because of decisions taken by the administration; however, their future became uncertain. Thousands of people lost their jobs and many countries started to cancel their production. Since then, many companies have stepped up in order to improve the condition of the economy. Majority of those organizations belongs from the automotive industry. One of the best ways to strengthen the economy is for new and low cost companies to enter into the US market and design low cost cars, which can influence the choice of people. Thus, this situation opens a gateway of opportunity for companies like, Chery Automobile Co. Ltd., which is a leading independent Chinese automobile manufacturer. Three market entry strategies, which are indirect export, direct export and FDI, are available at the company’s disposal. However, indirect exporting was deemed appropriate, considering the stature of the company and the US automotive industry. The recommendations have been made after assessing the benefits and risks associated with all the entry strategies. The report also highlights other countries that could be considered as probable destinations for expansion by Chery Automobiles. Table of Contents Introduction 4 Background 4 Objectives of this report 4 Main Findings 5 Market Entry Options 5 Indirect Exporting 5 Direct Exporting 6 Foreign Direct Investment 7 The best option for Chery Company 7 The Particular Nuances of the U.S.A Market for Chery Company 7 Two big car companies who entered the US market 8 Conclusion 8 Recommendations 9 Reference List 10 Introduction This report highlights the entry strategies available at the disposal of Chery Automobile Co. Ltd, a Chinese automobile manufacturer. The company plans to seek entry into the US automobile industry and I, as the marketing manager of the company, was assigned with the task to evaluate the three primary entry strategies, which the company could avail. The following sections include the background of the company, followed by an assessment of the US automobile industry. Thereafter, the three entry strategies have been evaluated and appropriate conclusions as well as recommendations have been provided. Background Chery Automobile Co. Ltd. was created mainly to support the local economy. The automobile production in the company had started using the SEAT Toledo chassis; however, the company’s lack of authentic licensing prohibited it from selling cars outside of the province. Thereafter, the Chinese auto maker went through a rapid expansion, when Shanghai Automotive Industry Association purchased 20% of the company’s ownership in 2001. The automobile company’s first ever car was exported to Syria in 2001, which made it the first company to have exported cars from the mainland. Following that, the automobile manufacturer also started putting huge efforts in order to improve the quality of production and technology by building a research institute. Thereafter, the company’s next strategy was to hire expert consultants from the Japanese automobile industry in order to receive assistance and achieve six sigma/lean process standards, which is followed by Japanese and other Western competitors. These efforts generated favourable results for the company. Following that, the company was accepted as an International Standard Organization with respect to its production quality in the year 2005, which is the strictest international production quality official recognition available (Chery, 2011; Chery, 2013; Google finance, 2014). Objectives of this report The main objective of this report is to formulate an entry strategy for Chery Automobile Co. Ltd. in the US automobile industry. As the marketing manager of the company, I would be setting forth three market entry options available to the company and the risks associated with each of those. Thereafter, I would put forward the most recommended strategy, following the evaluation all benefits and risks associated with the strategies. Main Findings The US is widely recognized as one of the biggest automotive markets in the world and serves as a central hub to 13 automobile manufacturers. During the time period of 2007-2010, manufacturers throughout the country produced an annual average of 8.1 passenger cars. After Honda opened its first assembly plant in the US in 1982, every major Japanese, European and Korean automobile manufacturers established their plants in multiple states and started production. Apart from Honda, the big three auto companies in US are General Motors, Toyota and Ford motors. Other major competitors are Nissan, BMW, Hyundai-Kia, Mazda, Mitsubishi, Daimler and Subaru. In May 2011, the automobile manufacturer count increased to 13, when Volkswagen opened a new plant in the country. In addition to the major car manufacturing companies, there is a moderate concentration of small manufacturers, who have engine and transmission plants and their main attention is towards conducting research and development, design and testing in the United States. The automotive industry in the US accounted for 4-5% of GDP and the employment of 716,900 people in 2011 (Select USA, 2013). The US automobile industry also comprises a widespread network of auto part suppliers. They produced $171 billion worth of industry shipments, which accounted for nearly 3 percent of total U.S. manufacturing in 2011 (Select USA, 2013). Market Entry Options Indirect Exporting This is specifically a very good mode of entry into the foreign market, especially for novice exporters or for companies who lack foreign country knowledge (Wankel, 2009). By adopting this mode of exporting, manufacturer is relieved of collecting any sort of payment from the overseas customers as well as from coordinating any shipping logistics (Ling-yee and Ogunmokun, 2008; Day, 1994). The main advantages of such an entry mode are that the manufacturing company can get easy and quick access to the market as well as to a huge concentration of resources required for production (Li and Ogunmokun, 2000). However, a certain degree of risks are also associated with it. The company has little or no control over the sales, distribution and marketing of its products. They are rendered incapable of learning the ways to operate overseas. In addition, a wrong choice regarding the intermediary may result in an insufficient market response, which might have a negative impact on international success of the company (Exportea, 2014). Fran Wilson Creative Cosmetics sells its cosmetic products through an intermediary agency in the Japanese market. By adopting this entry mode, the company has been able to export a significant proportion of lipsticks into the Japanese market, which accounts for about 20% of $4.3 million worth of lipsticks exported by all the US companies. Nonetheless, the company has not been able to understand the ways to directly operate in the Japanese market and in addition to that, the company’s profits are significantly reduced by the margin charged by intermediary agencies (Yousigma, 2008; Greenway, Guariglia and Kneller, 2007; Aw, Chung and Roberts, 2000; Benito, 2005). Direct Exporting The advantages of direct exporting are that a company is able to have a strong control over the selection of foreign market and the way operation is conducted in that market. Along with that, the company is able to receive direct feedback from the target market (Nguyen, 2012). Furthermore, the company is able to protect its trademarks, goodwill, patents and other intangible assets (Bernard and Jensen, 1999; Blalock and Roy, 2007; Bond and Meghir, 1994). Through this mode of entry, a company is expected to achieve better sales rate than with indirect exporting. However, there are certain risks as well, that a company faces while adopting this exporting strategy. They are high start up costs associated with establishing subsidiaries in foreign countries. The company requires greater information in order to have the know-how of operating in the foreign market and lastly, it takes longer time to market, compared to that with indirect exporting (Exportea, 2014). Toyota adopted the direct exporting strategy in 1957, when it tried to enter the US market by establishing a subsidiary in California. Even so, this approach taken by the company proved to be a nightmare as the cars performed disappointingly in the road tests. The company analysts failed to do their homework properly, as far as assessing the foreign market was concerned and henceforth, the company incurred huge losses as a result of setting up a costly subsidiary. Due to lack of local feedbacks, the company had to eventually close down its subsidiary and thereafter, withdrew from the US market, which was a huge setback for the company at that time period (Acculine Precision Manufacturing Company, 2012). Foreign Direct Investment This strategy aims to make a lasting physical investment of one entity in another entity. FDI can basically be of two types; merger and acquisition of well-established companies, where one company needs to have at least 10% ownership; and green field investment, where one company invests in new manufacturing plants (Johnson, Scholes and Whittington, 2005). This form of entry enables a company to have swift and active entry in a foreign market. The company enjoys the advantage of a greater control over resources as well as capabilities. Besides that, companies get easy access to national market technology and expertise. However, a company entering through FDI entails a certain risk of failure because of coordination issues with the acquired company. In addition to that, investor companies are also subject to local governmental, economic and financial rules (Heil, et al., 2008). Such has been the case of WalMart, when it had entered the Indian market through foreign direct investment and faced many barriers because of governmental influences (Clerides, Lach and Tybout, 1998; Helpman, Melitz and Yeaple, 2004; Hoshi, Kashyap and Scharfstein, 1991). The best option for Chery Company Having done a rigorous research of all the entry strategies as well as the automotive industry in US; it can be said that considering the status of Chery Automobile Company, which is a relatively newer company when compared to the likes of Toyota, Honda or General Motors, it should adopt the indirect export strategy. This is precisely because it does not require high financial commitment as opposed to direct export or FDI. Moreover, for a novice exporter like, Chery, indirect exporting would always be suggestible as the company would be able to gain valuable insight regarding ways to directly market its products in the foreign market in the future. Since, financial status of the company is not as strong as that of Toyota or GM, Chery automobile should not seek to gain entry into the US market through direct export or FDI, as it would run a high risk of failure due to high cost associated with both these entry strategies (Van Biesebroeck, 2005). The Particular Nuances of the U.S.A Market for Chery Company As far as the nuances of the US market are concerned, Chery will be able to benefit hugely from the high concentration of automobile engines and peripheral manufacturers based in the country. Moreover, presence of highly skilled and expert workers will also be of great help, when the company expands its operations in the US automobile industry by establishing its own manufacturing plant. Furthermore, an flexible investment policy, highly skilled and expert workforce, large target market, highly skilled workforce, available infrastructure as well as government incentives, make USA a favourable destination for car manufacturers like, Chery automobiles, who significantly strengthen their ground in the automotive industry (Select USA, 2013). The Market Entry Options of Chery Company As far as entering other markets is concerned, the company can expand to developing countries, such as, India and Iran, where there is a huge scope within the automotive industry. With increasing purchasing power of the people of these countries, the demand for automobiles are rising at a rapid rate and thus, this is a good opportunity for a company like, Chery automobiles, to enter into a relatively cheaper market with less competitors, when compared to that of USA. Two big car companies who entered the US market Toyota and Honda are two big Japanese companies, who entered the US market decades ago. Both the companies had entered the US market through foreign direct investment and have benefitted hugely from opportunities available in the US automotive market. The companies have been able to expand their target market base significantly by designing cars appropriate to the requirements of customers. Of the two, Toyota was the most successful, which went on to become the largest automobile manufacturer, surpassing General Motors (Pascale, 1984; Toyota Global, 2012). Conclusion Having done a thorough research of the US automobile industry, it can be said that now would be a good time for Chery Automobile Co. Ltd. to enter the US market. The company will be able to utilize skill sets and experience of workers, alongside using the wide spread network of vendors and distributors, in order to expand its operations. The company will face steep competition from companies, who have already explored the market and have laid a solid foundation for conducting their operations. Therefore, in order to be able to compete with the likes of Toyota, GM and Honda, Chery Automobile Co. Ltd. has to devise an appropriate strategy according to the recommendations given in the section below. Recommendations In order to gain entry into US automobile market, the most appropriate strategy for Chery automobiles would be to adopt indirect exporting. This is particularly because for a relatively new car maker, like, Chery automobiles, FDI and direct exporting through subsidiaries would be a costlier option. Considering a relatively weaker financial position of Chery automobiles when compared to that of Toyota and Honda, gaining entry through FDI or direct export would pose a significant degree of risk, if the production operations are not achieved as expected. Moreover, since the company does not possess greater knowledge regarding the US automobile industry, it would be better off entering through the indirect market, as this strategy entails lower cost and minimum risk compared to the other two mode of entries (Chen, Griffith and Hu, 2006; Kashyap, Lamont and Stein, 1994; Konings, Rizov and Vandenbussche, 2003; Levinsohn and Petrin, 2003). 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