Automobile Distribution in China - Holden and Dongfeng Motor Group - Case Study Example

Automobile distribution in China Foreign direct investment has been, incorporated into goals and strategies of modern business organizations that seek to thrive in rapidly shifting market forces stemming from unstable political, social, ecological, economical, legal, financial, and technological paradigms. The enhancement in the flow and growth of foreign direct investment is dependent on steady economic development, reduced stringent regulations and foreign policies, improved flexibility in operations in foreign markets and enhanced liberal investments (Wei & Liu, 2001). Foreign direct investments offers a business organization an opportunity to enter new global markets, enhancing its market share, improve its uptake and transfer of information technology and improved competitiveness to survive the competitive market environments. This report candidly highlights the analysis of China’s automobile industry and appropriate risk management considerations. Overview of Holden (automobile maker in Australia) and China’s Dongfeng Motor Group Joint ventures are the backbone and the frame on which foreign direct investments lies on. Joint venture between Holden, an Australian carmaker and Dongfeng Motor Group, China’s leading automobile company is, anticipated to help boosts the market share, competitive edge, innovation, quality, effectiveness and efficiency for both brands to satisfactorily meet the needs, expectations, changing trends, tastes and preferences of their modern customer. China’s FDI has tremendously increased from a mere eighteen billion dollars in the 1990’s to over half a billion US dollars in the year 2000 (Facts & Details. 2011). As a result, China’s FDI flow rates are developing immensely making China’s FDI, pacesetter for developing countries (Wei & Liu, 2001). The foreign direct investments in China remain a strong despite the threat of terrorism in modern world and emerging global financial crises (Facts & Details. 2011). Holden Ltd Holden Ltd is an automobile manufacturer that operates in Australasia. The company was, established in the mid 1850’s as a producer of saddley and later on to be United State located General Motors’ subsidiary in 1930’s (Wright, 2008). The company deals with engines and automobiles with a workforce base of more than six thousand employees. Dongfeng Motor Group Dongfeng Motor Group is, rated the third largest public company in China in the automobile industry. It is market leader in production and selling of commercial, PSVs, car accessories, auto parts and auto and car engines (Dongfeng. 2011). Presently, the company has joint ventures with Honda, Nissan, PSA Peugeot Citroen Group and Kia Motors. The company has its headquarters in Wuhan, Hubei, China with its stocks at the Hong Kong Stock Exchange (Dongfeng. 2011). The company had more than six billion yuan net profit, which is equivalent to more than nine hundred million US dollars in the year 2010. Industry/Competitor analysis For Australian Holden Ltd to have a successful and effective joint venture with China’s Dongfeng Motor Group that will ensure both company’s interests, goals and objectives are not compromised and that their customers are still the core determinant in production and delivery of quality products and services, it is vital to assess the industry and competitors existent in China. This section will identify and highlight the external factors influencing the automobile industry in China using the porter’s five forces. The five forces are namely the threat of new entrants, competitive rivalry within the industry, buyer’s bargaining power, suppliers bargaining power, and the threat of substitutes (Porter, 2008). This will enable Holden Ltd establish its market position and safeguard and combat existing competitive forces. The porter’s five forces China’s automobile industry has a very high potential to develop with four people in every 1000 having a car (Harwit, 1995). According to recent study of the automobile buying trends in China, there is a chance for car sales to increase by more than one million per year by 2015, with more than 74 million families being able to afford to buy a car by the said year (The World Fact book, 2010). There is a growing trend to adopt a car culture and automobile industry in China. 1. Threat of new entrants The threat of new entrants entails the ease with which a new company is able to enter the market (Porter, 2008). Increased ease of entry translates to reduced market volumes and shares for existing companies, since new entrants may offer efficient, quality, and cost effective products thus taking a big proportion of existing and potential customers belonging to already established brands. The threat of new entrants is dependent on economies of scale, government regulations, capital requirements, availability of reliable supply chains, switching costs and customer’s brand loyalty (Porter, 2008). Economies of scale; the MES which is the minimum efficient scale refers to the position where the costs are reduced. The higher the variation linking the MES and unit costs of entry, the high the barrier to enter and the lower the threat. The rates of demands for all types of cars in China are growing by the day with the increase with population (Harwit, 1995). This has allowed a boom in the number of automobile mergers and joint ventures coming up to fill in the market gap. Customer switching costs; presently, there are no switching costs levied to customers who would prefer one auto brand over another and they can as easily and as effortlessly do so. Government regulations; the intellectual property rights and laws in China are relatively frail thus enabling increased replication of car models and types for the late entrants, who benefit more since copying is cost effective, easier and quicker to do since infrastructures, research and development have already been, done by the first entrants (Facts & Details. 2011). The first two-year half tax exemption for joint ventures and relatively minimal safety and emission regulations in China allows ease of entry (The World Fact book, 2010). Capital requirements; the amount of capital requirements for automobile industry is quite high owing to the rising pressure to produce eco-friendly products and the high costs for acquiring material, financial and labor resources (The World Fact book, 2010). However, in China, there is reliable supply of cheap labor, availability of technology and low cost research and development due to borrowing and copying designs from international companies (Facts & Details. 2011). Brand loyalty; the level of brand loyalty in China’ automobile industry is dependent on individual brand’s innovativeness, distinctiveness, customer relations, product differentiation and product diversification. The conclusions are the threat of new entrants into China’s automobile industry is very high in among factors discussed above, the fact that the lifecycle of the industry in China is in its infant stages and the increased growth of the economy allow the population have more disposable income that allow them to buy cars from different brands. 2. Threat of substitutes According to Porter, the threat of substitute arises from availability and accessibility to products and services with similar functions and satisfies similar customer needs (Porter, 2008). The threat of substitute products in China’s automobile industry is, relatively low as majority of automakers invest in producing unique, customer friendly and competitive products to attract and retain their customers. The threat of substitutes is, influenced by quality of substitute product, willingness of buyer to substitute, and costs (Porter, 2008). Majority of Chinese nationals prefer land transport over air and water transport, giving automobile industry an advantage. Mass transit and use of bicycles although a preference of many Chinese locals, and an alternative to personal cars, has a medium threat to volume of cars on sale, since more people are earning more they can use, which they invest in buying a family or personal car. Cars are more durable, quality, effective, and efficient than bicycles and boats. Cars are associated with class, superiority and independence and therefore, more working class populations which forms majority of Chinese population may prefer to buy their own cars rather than use bicycles, trains or boats. Majority of Chinese locals are unwilling to substitute cars with planes owing to costs and inflexibility of planes especially for daily use when going shopping, schooling, touring, working and visiting friends. The increase of eco-friendly hybrid cars is attracting more sales from the environmentally aware customers who may opt for alternative transport, but now, they do not have to use alternative products such as bicycles. 3. The bargaining power of buyers A high buyer bargaining power drives the prices of commodities down and increased pressure for companies to produce more quality, efficient and competitive products in order to attract and retain potential and existing customers respectively (Porter, 2008). The Chinese automobile industry is very competitive with increased number of automakers selling their products. The ease in availability of goods offers buyers a chance to bargain how they want it, what they want, where they want it and when they want. The bargaining power of buyers is, influenced by concentration of sellers, product differentiation, quality and switching costs (Porter, 2008). The bargaining power for automobile buyers in China is moderately high since local customers are more sophisticated, they have a variety of auto brands both local and international and diversity of products to select from and government regulations such as availability of credit and environmental regulation policies improves the purchasing power of auto buyers in China (Facts & Details. 2011). 4. The bargaining power of suppliers The bargaining power of suppliers is, influenced by the availability of buyers and the access to few prevailing suppliers, branding, and integration forward and backward, quality of goods and services and switching costs to alternative suppliers (Porter, 2008). Chinese automobile suppliers include automotive enterprises, motor assemblers, re-manufacturers, motorcycle assemblers, auto motor parts and accessories, and engine makers (Harwit, 1995). Availability of able and specialized auto suppliers and associated industries forms an integral domestic state. The numbers of component auto suppliers are limited in China but are easily, substituted with oversea suppliers. The bargaining supplier power is low owing to the increased profitability of purchasing industry over the supplying industry, fragile standards in product development, and inability of local suppliers to function on system basis. Moreover, the fact that majority of the Chinese locals do not see cars as a must have product and therefore they can do without it and the increased influx of outsourced auto parts and suppliers (Harwit, 1995). This includes suppliers from Japan, Korea, Australia and western economies and establishment of global auto equipment companies such as Siemens, Bosch and Delphi among others in China. 5. The competitive rivalry Competitive rivalry entails the intensity of competition among rival companies within one industry (Porter, 2008). High competition rivalry drives returns and market shares downwards owing to the increased costs of competition and ease of customer moving to substitute products. The competitive rivalry in China would be high, but it is relatively medium to low, were it not for the infancy stage of the automobile industry and the high automobile market growth rates in China. The automobile industry is still rising and has not yet reached the maturity stage (The World Fact book, 2010). The increase in auto firms, and reduced product differentiation are the points to consider when addressing competitive rivalry in the Chinese auto industry. In addition, when an industry’s growth is high, the degree of rivalry is relatively low. This is, seen in Chinese automobile industry, which is growing tremendously, and therefore, the degree of rivalry is low (Facts & Details. 2011). Conclusively, Figure 1 illustrates that the effectiveness and success of joint venture between Australian Holden Ltd and China’s Dongfeng Motor Group is relatively medium to high considering the porter’s five forces. No Risks type Risk level Evaluation     Low Moderate High   1. Threat of New Entrants    * Weak intellectual laws, lenient government regulations and increased demand by buyers 2. The power of suppliers  *   Outsourcing components, weak standards in commodity development, inability for local suppliers to function in system basis 3. The power of buyers    * Increased customer sophistication, increased automakers/ brands to choose from 4. Threat of substitutes  *   Increased efficiency, effectiveness, cost effectiveness of cars 5. Degree of rivalry  *   Automobile industry’s growth is high, reduced product differentiation and increased number of automakers and brands Risk management considerations To effectively, succeed in the Holden and Dongfeng joint venture in automobile distribution entails proper management of the risks of new entrants into the Chinese automobile market, the bargaining power of buyers and reducing the degree of rivalry involves. This entails constructing vital motor development efficiency to attain both firms’ targets. There is need to develop reliable, efficient and reliable supply management chains that will ensure the customer receives the automobiles and accessories whenever and wherever they are (Deresky, 2008). The distribution channels should be, developed in such a way that they do not add to overhead costs which adds financial constraints to the end user. This involves having adequate, qualified and experienced supply of labor, smooth running of operations from and to the two joint venture companies, harmonization of organization culture, structures, language, behavior and values between the two companies to ensure flow of communication, flow of operations and effective and efficient functioning of work processes and meeting the needs of the customer (Deresky, 2008). Appropriate asset integration mechanisms and structures are fundamental in ensuring automobile distribution within the two joint ventured companies is not only adequate but also reliable in order to build a strong customer loyalty, and improve its competitiveness There is greater need to reinforce and develop government regulations that moderate the ease in market entry to avoid market saturation with similar brands with minimal product differentiation and the two joint companies need to develop and implement new product development (Domansky, 2006). Moreover, establishment of distribution techniques and infrastructures that is custom made and unique to counter competition from local and foreign auto firms and meeting the changing needs, tastes, preference, expectations and buying behavior of buyers, thus, reducing the bargaining power of buyers (Conrow, 2003). Since the two companies have no control over the number of emerging and existing automakers, to manage the risks of losses, competition and ease in market entry, they need to invest in customer analysis to know what will satisfy the customer and thereafter offering it. Additionally, producing high quality, faultless, eco-friendly, diversified products, and investing in innovation and use of modern technologies to meet the rising demand for more sophisticated products and services. This is, supported by aligning the joint venture’s goals and objectives with customer’s needs (Conrow, 2003). Distributing automobiles, engines and auto parts that meets international standards and regulations cannot be over-emphasized and is not an option in modern global economies (Domansky, 2006). This is because for the two companies from different nations to function cohesively and effectively, there is need to have effective, quality and efficient products that satisfy safety and security regulations. Conclusion Effective foreign direct investment is dependent on cohesive relationships among the transacting nations and having favorable market conditions. This report has highlighted the external environment and competitive forces using Porter’s five forces to analyze the suitability of a joint venture between Australian Holden Ltd and Chinese Dongfeng Motor Group. This is to ensure effective and adequate automobile distribution within the two nations and management strategies that can be, used to enhance the companies’ competitiveness and adequacy in satisfying the needs, tastes and preferences of local and international customer. References Conrow, E.H. 2003. Effective risk management: some keys to success. London: AIAA. Deresky, H.2008. International Management Managing across Border and Cultures, sixth Edition, Pearson Prentice Hill, NJ, USA. Domansky, L.R. 2006. Automobile industry: current issues. Sidney: Nova Publishers. Dongfeng. 2011. Dongfeng Motor Ltd website. Accessed at http://www.dfmg.com.cn/en/index.jsp Facts & Details. 2011. Automobile industry in China. Accessed at Factsanddetails.com/China Harwit, E. 1995. China's automobile industry: policies, problems, and prospects. London: M.E. Sharpe. Porter, M. E. 2008. The Five Competitive Forces that shape strategy. Harvard Business Review Vol. 86 Issue 1, 78-93. The World Fact book. 2011. China statistics, Central Intelligent Agency, Office of Public Affairs. Wei, Y. & Liu, X. 2001. Foreign direct investment in China: determinants and impact. Beijing: Edward Elgar Publishing. Wright, J. 2008. Special: The Untold Story of Australia's Holden. Melbourne: Allen & Unwin. Read More