International and Domestic Marketing Environment Analysis - Essay Example

Contents Executive Summary 3 Background 4 Introduction 4 International and domestic marketing environment analysis 5 Demand and Supply analysis 7 Expected sales and market share analysis 8 Market Growth 8 Market structure 10 Market entry mode analysis & strategies 11 Factors influencing the SME market entry modes 12 Estimated budget 14 Conclusion 15 Bibliography 16 Executive Summary In China SME is categorized as a business entity with 1-1000 employees. This is a marketing diversification proposal that focuses on the Chinese market for compact and small cars. The Chinese market is a rapidly growing as a whole due to the increase financial status of the population. This proposal paper discusses the FAW Company as a SME in China. The paper discusses demand-supply, expected sales & market share analysis, analysis of market entry mode, & strategies and estimated budget. All the analysis has base on extensive literature, case studies, theoretical modes and sales tables and curves. The statics results reflect well and car marketers from many companies both local and foreign are having an advantage. Most large automotive industries are currently either investing much in China or developing new small car models preferred by most families in China. Companies such Toyota, Ford Motor, Honda, General Motors are presently investing in China through joint ventures with the Chinese counterparts effectively thus increasing market share competition. Unlike the large international automotive industries, China’s one is fragmented. Most cars are small ones with the huge companies producing up to 37% of the total output. However, China’s current cost of labor is significantly low and the government has referred to the situation as a pillar industry one with high growth potential. The car industry in China continues to be attractive because the tariffs reduction in the industry intends to continue too much lower in the next few years. The government also plans to put car import quotas. Price decrease in China is causing many other auto companies to reduce their prices consequently. In the next few years, companies in China are to face an over production of up to 20% of cars. China has expectation to host more than 140 million cars on its roads; this is much more than the present hence forcing the government to improve the transport infrastructure and services. Background The factory began a s a truck building factory producing their first Jie Fang CA-10 in 1956 by the assistance of Russian Soviet Union. The company began its operations with only 39 employees who travelled to Stalin Truck Factory to receive their learning experience and instructions on how to build and construct trucks. The company is located at Changchun a city that was identified by the Soviet Union as the base of the factory. The city is also situated on the northern side of china, which is also near Russia. The company continued with its operations by also producing passenger cars in 1958. The company produces luxury vehicles that have gained popularity in the country. Due to a lot of fragmentation, the company has entered into ventures with other companies such as Volkswagen. The company has also moved to acquire Tianjin Automotive Xiali in September 2002. In 2009, the company entered a joint venture with Toyota and General Motors companies (Hu, 2006). China’s development concerning automotive is high i.e. recent statistics showed that every 1000 Chinese owned an average of 1.5 car units that is over the global average. Other governmental statistics also showed that almost 32% of the Chinese urban population intends to purchase cars in the next 5 years. Introduction The auto industry that is an important sector in China’s modernization and industrialization endeavors has been growing very fast since the 1990s. In the present past years, China has become the world’s greatest automotive manufacturers, with yearly production output of 18 million units in 2011. It is also currently the largest automotive market in the entire world. However, the business environment in China is facing a lot of concerns form the international companies because the government is putting in place policies that favor the local companies majorly (Tang ,2012). The international investors have majored on producing cars for the rapidly increasing market and over dominant in the market. The local companies, found at the end of the market, focus on enhancing their car designs and quality in order to attract the market overseas. The imports and exports of cars in China are significantly low as the huge population utilizes most local cars. In most cases, China only exports trucks and passenger vehicle to the market in the developing nations (Tang 2012). International and domestic marketing environment analysis FAW can get into new markets to expand their sales due to globalization. Due to production in large scale, companies reduce costs because of the occurrence of economies of scale. Furthermore, FAW can always standardize its resource strategies. International marketing utilizes the spread of market form local country and differs on the point of internationalizing the company. International marketing involves the planning, implementing, pricing, promotion, & dispatch of ideas, services, and products to develop exchanges with satisfaction of individual and company objectives. It can also involve the satisfaction of company needs and wishes in the international market platform. Currently, companies that want to establish themselves in other countries need to prioritize loyalty and not concentrate much on volumes (Slegl 2011). Companies in China such Volkswagen have their channels operating in up to 70% of China. Strong company channels enable easy sales and (Hu 2006). The two entities have over the years shared overall profits and risks faced in the auto industry. The sales entities usually prioritize cars from companies they have been in contact with and exclude the one they consider are produced by ‘strange’ companies. Generally, the sales agencies in China contribute effectively to the rates of supply within the country. The SME (external) marketing environment of Chinese vehicles consists of economic, social, governmental, and technological factors. Concerning the political environment, Chinese acceptance to join the World Trade Organization was an essential move. This enhanced the removal of the car industry protection policy in China and resulting into the entire change of the SME marketing environment. The policy initially caused extreme insufficiencies on the market in terms of decreased pricing and costs of the domestic vehicles as compared to the imported cars. Total tariffs on cars decreased to 25% by the December 2006. This led to a significant positive effect on the foreign companies’ competitiveness. The marketing environment in China is characterized by the stability in the economic environment hence enhancements in consumption of cars with a significantly high demand. Therefore, the encouragement from the Chinese external SME environment with its rapidly growing car market, create a good platform for foreign company investments (Hu, L 2006). Considering the domestic (internal) marketing environment, there is a realization that the history of the foreign auto industries in China is longer compared to the Chinese auto industry. The differential gap existing between Chinese local auto companies many factors that include; ownership, technologies, economies of scale (which cannot be reaped) and price. Although these factors portray China as not competitive, other factors counter them. They include; reduced labor costs, full marketing channels, and collector techniques. Generally, the Chinese auto industry is actually young when compared to the foreign industry (Hu 2006). After almost 3 years of fast growth in the economy, the domestic car industry has significantly and gradually developed. The local SME companies have already increased their manufacturing volumes and are targeting the worldwide market. Although they are to experience challenges like original designing and reaching the international quality standards of products on safety and environment, the local companies are widening their share of the market and are gradually climbing up the value chain (Tang 2012). Demand and Supply analysis The world’s economic liberalization since 1980 and the incorporation of the Chinese economy into foreign trade have changed the consumer market from just sellers to buyers. China is currently experiencing a surplus of supply and high competition between the foreign and local car companies (Liu 2006). Globally, China’s automotive industry is the only market that has high growth rate facilitated by many factors. Some of the factors include one, strong Chinese economic fundamentals. China as a country has been reaching high GDP increase yearly of up to 10% for more than 20 years now. The demand for FAW cars is still growing and very large. The population is growing richer and the middle class population are considering to buy more cars because of their increasing social and economic status (Mu 2010) ; two, the government is highly encouraging the buying of local cars through a variety of policies to broaden car manufacture, enhance local use and facilitate the creation of alternative fuel cars. The government has put in place packages such as reduced purchase tax and direct money supplementation for the peasants in the country to buy small vans & light trucks. These policies have promoted the purchase of new cars in China; three, the rapid expansion of the road systems in China, which has led to an increase in domestic car utilization. The government realized that an efficient transportation system was needed for the effective development of the automotive industry. Therefore, it has been working tirelessly towards construction of highways over the last 10 years. By 2008, a total length of 60,300 kilometers had already construction, creating a road highway network the linked different places in China (Mu 2010). Expected sales and market share analysis Market Growth Both the domestic and foreign companies drive the market growth in China. The country’s fast growing automotive industry has overtaken the already significant GDP growth in the years recently. Locally, increasing SME incomes and government encouragements for the urban residence to acquire driving licenses have facilitated the demand for passenger automotive. The rapidly increasing passenger automotive market has resulted into a high demand for automotive utilities. At the international level, automotive producers who are experiencing low profit margins are actually seeking cheaper supply chain solutions. All of them target the broad Chinese market as an avenue for reduced cost automotive utilities. Unlike already developed markets for passenger cars, where demand has been stagnant, the local demand for new small cars has increased greatly in the past years. High car sales in the country in 2009 enabled the auto market to become the largest worldwide and the years to come are likely to go by the positive trend (Marketing analysis report 2010). For instance, between January and September 2010, the sales of automotive clicked over 13 million units, exceeding the previous year by 36.1 %. More than 9 million of the entire sales were passenger vehicles and 3.24 million commercial cars. China Association of Automotive Manufacturers foresaw that the annual sale in 2010 could hit 17 million units. Recent statistics portray China as being the world’s only country with the most market growth potential. In 2009, the per capita for private vehicle ownership was 4.78%. The low percent per capita suggests that the local market for automotive is not likely to depreciate any time soon (Marketing analysis report 2010). With reference to the Association of Manufactures, the automotive industry development will remain stable until 2020 with yearly growth expected to be at around 15%. The total cars to produce will also rise to 150 million units. The sale of cars in cities such as Beijing and Shaghai, as well as rural places is expected to continue improving spreading up to the western and central China (Marketing analysis report 2010). Market structure There is fragmentation in the Chinese auto supplier. The automotive supplier landscape in China is extremely fragmented. According to the manufacturers association, there are over 8,000 SME auto enterprises spread across including; full car production, auto refitting, and manufacture of motorcycle, manufacture of spare parts and manufacture of auto engines. Most of them produce specifically the lower end parts in automotive and the limited resources to invest in increased quality products. In China, seven of its largest producers are foreign companies, and foreign and/or joint companies (Marketing analysis report 2010) dominate about 70% of its auto supply worth $160 million. There are about 120 Original Equipment Manufacturers (OEMs) with 40 % of them manufacturing passenger cars. Seven of China's ten largest components manufacturers are foreign companies, and foreign companies or joint ventures occupy about 70% of the country’s USD 160 billion-auto supply market. An essential determinant of the fragmentation is the fact the Chinese suppliers service a large number of different OEMs. The great companies in the auto industry worldwide are located in China. The OEMs found in China include; Volkswagen Honda PSA Nissan Daimler Ford Hyundai General Motors Mazda BMW Toyota Other companies present in the country are Yazaki, TRW, Denso, Bosch, Arvin Meritor, Magna, ZF, Johnson Controls, Visteon, Lear and Delphi. Today, many companies are still investing in China as a way of being competent in the auto industry. For example, Jaguar and GM have created a headquarters in China; other companies such as Honda have also established centers in China. They are also introducing new model vehicles that are consumed specifically in China. The international auto companies have also appropriately established themselves in China. They include; Eaton have a company headquarter, Borgwarn that have a technical center, ZF have a headquarter established in Shanghai etc. Fast expansion by international auto companies has led to increased foreign investment of suppliers covering up to 70 % of the industry. The Chinese dominate the manufacturing sector as most of the companies belong to local population. The locally owned companies include; Fuyao, Wanfeng, Hongteo etc. that can always join interested foreign companies. Regarding the high domestic demand, Chinese auto manufacturers have increased their manufacturing volumes substantially which has also resulted into many quality complaints (Marketing analysis report 2010). Market entry mode analysis & strategies For the past over 10 years, economic globalization is inevitable even during these present years. In 2001, China joined the world trade making them experience challenges from foreign companies. Specifically, the local SME Chinese companies are to face many challenges, as they are to shift to the international market. This creates a platform for the foreign investments. Therefore, there is need for an appropriate entry mode. The choosing of an effective mode of entry into a foreign market is very important and is a matter of first priority in international marketing. After many years of gradual development, China has moved to the top 3 largest auto market. Foreign companies that are planning to enter the Chinese need to figure out competitive means of entering the readily available market. Factors influencing the SME market entry modes The entry mode relates the company to the foreign market. It is not easy to come up with a specific mode (Kwon 1992). Considering the external and (Goodnow 1985) internal aspects: Internal prospective Corporate strength product features Competitive position Corporate policy External prospective Economic growth cultural environment Political environment comparative costs Geographical environment government policies Other factors include; negotiations and contracts, organizational, technological, investment & risk, product features. These factors affect the mode of entry (Chen 1999). They are also categorized the factors into 3 (Driscoll 1997): The company standings; this is with regard to the companies location considering risks posed by the foreign country, government policies, socio-cultural differences, company know-how, international experience and product (Dunning 1988). Following the fast rate of globalization resulting from transformation in technology, the economic development of developing nations, and the change in centrally designed economies to market focused ones, the competition at the international has become tough. Therefore, international market entry strategies should developed with high consideration of company long-term returns and development opportunities. In 2009, the foreign SME companies dominated the Chinese auto market at 85% with General Motors at the top with over 1.83 million units sold followed by Volkswagen. It is a requirement in China the international companies join with the local one in order to conduct business. The joint ventures come with conditions such as ready transfer of technology and recruitment of the chinese people as high profiles within the management. Although many companies did not welcome those conditions, they have since submitted to them as a mode of entry into the chinese market (Foreign car companies in China n.d). In Beijing foreign automotive companies are required to operate as joint venture, targeting the development of the local companies. However, the target has not been reached as dominance of the market is by foreign companies such General Motors. The first company to establish itself in China was Volkswagen, but today many more have established themselves. Most of the successful foreign companies in China are into joint ventures with the large China automotive manufacturers (Foreign car companies in China n.d). With reference from case studies in China of its automotive industry, foreign companies that do not enter in a joint manner tend to incur a lot of starting costs. Furthermore, in China the legal regulations do not allow fully foreign owned companies. The culture of Guanxi in China is not favorable to the foreign investments. All these support the reason why foreign companies need to choose joint venturing in order to enter the Chinese market with few challenges. The joint venture mode reduces costs in transactions and counters the cultural barrier & styles of management. This mode is considered a great avenue for foreign multinationals to gain access to the Chinese market and realize profits. Many successful international companies that have employed the joint venture technique include; General Motors and Volkswagen (Hu 2006). Estimated budget According to financial statistics of (FAW Auto) already established in China, the making of profits in China is like to be experienced by any foreign company. In 2010, the company raised its revenues by 17% (CZK 220 -13824). In the same year, profits were realized at CZK 10.5 billion and the operational profits at CZK 11.3 billion a raise of 92%. The gross profit margin that year was 14%. A growth of 14%, 10%, and 8% for the costs of sales, distribution expenses, and administrative expenses respectively was realized (Slegl 2011). Considering cash flows, the non-operating flows increased by 6% to CZK 28 billion. This was as a result of the high profits. The net cash flow decreased by 69% to 5 billion because of the loans involved (Slegl 2011). The above financial statistics give an overview of the kind of expenditure a foreign company expects to attend to while in China. Therefore taking an average of the two year financial expenditure an estimated budget can be drawn. (In CZK million) Distribution expenses 13,778 Administrative expense 5,014 Other operating expenses 5,798 total 24,590 Conclusion Many people wonder why a populous country like China has managed to be one of the richest countries in the world. The secret behind this success is SME. In China, there is a readily available market for the small cars. The population is experiencing drastic change in financial status due to the rapidly growing economy, hence the increasing demand for cars that much the current economic and social status. China’s billion populations give foreign companies another reason to venture into the Chinese market through the appropriate mode of partnership. Automotive business in China is also growing at a faster rate due to the government support of the industry and the cheap available labor force that greatly contributes to the growth. 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