Market Entry Modes: Chery Cars - Essay Example

Cover page GLOBAL MARKETING STRATEGIES M3X9086 Market entry modes: Chery Cars Submitted by: BA Business Portfolio International Business December 2013 Table of contents 1. Executive summary 3 2. Introduction 4 3. Overview of the U.S. car market 4 a. American car culture 5 b. Shape of Automotive industry in U.S. Today 8 4. Overview of the China car market 8 a. Car culture in China 9 b. Production 9 5. Chery Automobile Co. Ltd. an overview 10 6. Methodology 12 7. Discussions 12 8. Recommended options for entering new markets for an organization 12 8.1 Exporting 12 a. distributorship 12 b. internet sales 13 8.2. Strategic Alliance 13 9. Timing of entry 14 9 Conclusion 15 10. References 16 Executive Summary This study focuses on modes of entry and strategies appropriate for Chery Cars. Chery Cars, an automotive company from China, is contemplating on globalization as strategy for expansion. Chery has started exporting in 67 countries and has established 7 factories in six countries. Its future plan is for an expansion in the United States. Suggested entry modes for entry to United States are exporting and joint ventures. The advantages and barriers of each strategy are presented. Export to U.S is timely because of improving economy, the need to change age old cars to newer models of light vehicles, and demand is more than the supply. Market entry options for Chery Cars to U.S. I. Introduction Multinationals target new geographical places as their products reached maturity in their home base or to augment efficiency. They are looking for more lucrative markets to sell their products. As such, many companies are giving attention into the emerging economies as future markets. They have to work out for a strategy to avoid total phase out or to gain more productivity. Introduction of these products to a new market will open up opportunities and give a new breath for the product. Ford has redesigned its Mustang, a ’60 icon, hoping to attract buyers from China and Europe (Ponchard, N, 2013) Ford has brought its cars to China through a joint venture. Other automotive dealers and heavy equipment manufacturers are also focusing on new markets. Today, principal automakers such as General Motors, Ford, Toyota, Volkswagen Daimler-Chrysler operate in global competitiveness. Advances in technology have allowed growth in the distribution system that led to globalization. . For instance, Japanese technology through its innovativeness in production, modified U.S. manufacturing of automotives. Practices of the most dynamic manufacturers are to invest in production facilities in the emerging markets. They do this either by mergers, consolidation, or partnership, a trend that is going on in automakers in order to expand.(Business Reference Services, 2004). For example, there were mergers between Volkswagen-Lamborgini; BMW-Rolls Royce, Chrysler-Mercedes Benz; Renault-Nissan-Fiat and Mazda-Mitsubishi and Kia-Volvo. Mergers of this sort are done to improve positioning in the market. Overview of the automotive industry in the U.S. a. American car culture. Economic analysts from the United States are perturbed about the changing behavior of the Americans on its car culture. Studies showed Americans are reconsidering its relationship with their cars. Several economic factors brought about these changes. The National Museum of American History (n.d.) fosters these changes are due to environment pollution that led to regulations on automobile pollution, gas shortages and changes in lifestyle. Suddenly, from big cars, American saw smaller cars beautiful. In mid-70s American’s preference for the roomy appearance of big cars changed to smaller ones. Economy made sense because of recession, gas shortages and high oil price, Americans saw the need for smaller cars. Lifestyle changes also brought changes. Lowy, Joans (2013) argued that there are more women drivers now because of employment. Lowy stated that the levels of driving growth is declining since he saw the rate of teenagers getting drivers licesenses is low. He correlates this fact that due to traffic congestion, teens see driving is no longer fun and the idea of masculinity in driving is gone. Internet and social networking also helped in the declining interest for driving. It is easier now to go on line shopping and to communicate. Demographic changes also are other reason. The market now is not just anybody, but the upper middle class whose ages are between 45 and 55, who are at the height of their careers and have money to spend. Lowy said that driving of 65 years old has declined. Buying of cars is affected by recession too. Lowy again said that teenagers and young adults find the average cost of a new car of $31,000 a financial stretch, so most buy second hand cars or just commute to economize.(Lowy, Joans) b. Shape of Automotive industry in U.S. today The automotive industry in the United States today is characterized by cars and light duty trucks. As of November 2013, mid-size cars and light duty trucks are the fastest growing car segment that enjoyed a brisk sale of 598,084 units. Large cars are no longer saleable as it sold only 284 units for same period. For light duty trucks, pick-ups and cross-over top the list of units sold. Cross-over units sold for November 2013 was 288,799 while pick-ups sold were 175,391 units. (Wall Street Journal, Dec. 03, 2013). The brisk sales signal that the US economy is improving. After a slump in 2008, Wall, Mike (2013) gauges sales recovery of light vehicles of about 15 million units by 2013. Cars in U.S. are on the average about 10-11 years old, that implies need to change or service support. Demand for new cars are expected to rise because of the improving economy, wave of new products, favorable demographic trend and retirement lifestyle (Wall, Mike, May 2013). Accordingly, the U.S. household ratio has a strong correlation with pick-up sales wherein households debts went down to 15.5% implying a trough, while pick-ups sale going up to a high of 300,000 units. (see graph 1 below) GRAPH I GRAPH 1 New Housing Starts and Full-Size Pickup Sales Source: Wall, Mike. 2013 As a result of this development, demand (sales) is more than production by an average of 2.0 million units. A gap between demand of cars, exports, expansion and utilization is expected between the periods 2012 to 2020. (see graph 2). This gap is an opportunity for export from Chery cars. GRAPH 2. Market evolution and restructuring Source: Wall, Mike (2013) Overview of China car market a. Car culture in China The recent interest of the Chinese on cars is a sign of the awakening of a car culture. Ted Conover, an analyst, that investigates this culture writes: “Once China opened up and Chinese people could see the other side of the world and know how people lived there, you could no longer limit the right to buy cars.” “This right is something that has been ours all along.” “Driving is our right.” From then on, car sales are booming, as in today, there are about 20 million cars sold and 1000 new cars and 500 old ones are sold each day in Beijing. Prices of cars here are $10,000 for passenger vehicles and $19,000 for luxury S.U.Vs. It is comparatively cheaper than American made vehicles. (Magicalurbanism). b. Car production On the supply side, from 2007 to 20013, China is the world’s leading manufacturer of light vehicle, and is expected to lead up to 2020 with a growth rate of 8.0% CAGR. It has surpassed production of Japan which a noted country in car production. Production is expected to reach 300,000 million by 2020. (see graph 3.) China cars continued to be strong since in November 2013, it produced 2.13 million cars and sold 2.4 million cars (China Car Times, 2013). Graph 3. Source: Wall, Mike, 2013 After a slow growth in 2011 to 2013, IHS said production rate in China is improving and will likely remain to be so in 2020. It is expected that the rising demand for small cars will boost up the sales by 55% with production from Asia. In order to catch up with demand for small cars, Ford and GM motors have doubled their joint venture productions with China and India. These companies sourced its production in these countries to take advantage of cheap labor and technology.(Zachs Equity Research, Oct. 9, 2013) Succeeding paragraphs will detail suitable market entries for Chery cars to adopt in a geographical environment. The Chery Automobile Co. Ltd, an overview Formed on January 8, 1997 in China, Chery Automobile Co. Ltd. has fast developed into one of the leading Chinese vehicle companies. When the plant went into construction shortly after it was formed, first car went out on December 18, 1999 and it’s the millionth car went out of the assembly successfully on July 27, 2011. Chery has a plant production capacity of 900,000 cars annually, engines, CKDS, and 450,000 transmissions. Production in 2003 was 91,223, while sales for same year was 90,637 with a revenue of 8.2 billion Yuan (Chery International). In 2001, its first export was to Syria with only 10 units which redoubled in succeeding years. At the end of 2006, its products are exported to 67 countries and regions, set-up 7 CKD factories in 6 countries that includes Iran, Egypt, Indonesia, etc. (Chery International). Chery’s car had successive annual increases in sale, and in 2007, Chery sold 381,000 units, a 24.8% increase compared to 2006. In 2011 also, Chery achieved an annual export volume of 500,000 units in car sale. Chery’s line of automobile includes passenger vehicles, commercial vehicles, and minivans available in 20 different models. With “takin safe, energy-saving and eco-friendly” product objectives, Cher was able to obtain quality certifications of ISO9001 and German TUV Rheinland ISO/TS16949, and the first Chinese automotive maker to receive such certification. ISO is the most strictest and advanced quality control system in the automotive industry. (ISO, n.d.) Methodology This study makes use of qualitative research using secondary sources of materials coming from published source from the websites in order to come up with appropriate market entry. Discussions Chery Automobile Co. Ltd. has been eyeing U.S. as part of its marketing strategy to compete in the automotive industry. Its competitive edge in its battle with automotive giants is its autonomy that allows them to be innovative, advance technology contributed by international engineers, low pricing, and financial capability. U.S market is characterized by a huge growing market capacity, favorable political system, changing consumption behavior, favorable investment climate and a good chance for development . Competition in the automotive industry is stiff, led by giant names like Volkswagen from Germany; Toyota, Honda, Nissan, and Suzuki from Japan; Ford and General Motors from U.S. so competing with these giants would be a difficult feat. Recommended Market entry options 1. Exporting One of the most common paths for market entry which could be applied by Chery Cars is to export, which could either be direct or indirect. A. Distributor Direct Exporting requires establishment of a relationship with a foreign agent or distributor. It does not even require for a direct manufacturing. This kind of arrangement is advantageous since experienced agents have local contacts and understand the regulations and local conditions. The local distributor has the knowledge to source retailers or buyers of Chery cars. The barrier with this set-up is the lack of control over the operations since the company can only manage the process from a distance and rely on the agent to get the things completed. (FAO.org) . B. internet sales We can include under the category of dealership is internet sales, whereupon, inquiries can be directed to individual dealers in the area. Internet can be a showroom of the cars. It can provide a video presentation to attract customers, create attention and desire. Internet provides low-cost forum of advertising. Exporting , to be successful, needs the partnership between exporter, importer, government, and transport, without which, the exporting business will not succeed since risk of failure is high. (FAO. org.) First there is a need for a contract between buyer and seller. Next, exporters cannot do without services of forwarders and agents who take care of logistics such as transport and documentation; and the government for necessary permits and taxes. Indirect trading, which is not appropriate for Chery cars, include use of trading companies, export management companies, piggybacking and countertrade. Indirect trading is commonly found in commodities (FAO.org). 2. Strategic Alliances If and when Chery decides to go bigger than just exporting, it can go into strategic alliances, where it can either enter into joint ventures. Joint venture is defined as an “enterprise wherein two or more investors share in the ownership and control over property rights and operation”. (FAO.org) Joint venture in this aspect is to get a local manufacturer from U.S. to set up partnership with Chery for the manufacture of light passenger vehicles, pick-ups in China. Instead of setting up the factory in U.S. manufacturing will be done in China. Outsourcing of the manufacturing in China will keep costs down and will make Chery cars competitive with giant car makers. Once car is manufactured it will be exported to U.S. GM Motors and Ford have set up plants in China and India, then export the finish product to U.S. Timing of entry Forecasts of analysts as discussed above showed that this is an opportune time for entry to the U.S. market because it is already undergoing its economic recovery. Timing is good since there is a need to change 10-11 year old cars to new and more economical models. Demand for light vehicle cars is big while there is a shortage in production. Conclusion Chery Cars is a state-owned company that considers its independence particularly in executing its technology in designs. The options in modes of entry vary according to costs, risks, and degree of control. Given that, the simplest way in which company can compete globally is by exporting thru a distributor or an agent. Experiences of Chery cars show success in exporting thru distributorship. Today, it has outgrown its passive orders’ appearance and is ready to compete with overseas distributors. Armed with strategy of enhanced after service, nice type of cars, good quality, and very competitive prices, Chery cars are appreciated by customers both home and abroad. Company believes the principles of reasonable arrangements and regional radiation, seek cooperation first, then joint venture. It favors establishment of a wholly owned subsidiary in order to have control in its operations. Following are influencing factors in choosing a market, a guide provided by Prof. Welling MODE OF ENTRY Export Joint venture Target market United States U.S and China partnership Marketing goals To be able to start export of 100,000 Chery cars, to gradually increase annually To be able to manufacture light vehicles and pick-ups for U.S. consumers. Control Difficult internal control Joint Market size 30% of the market 30% of the U.S market; 70% is controlled by Big 5 Market growth Rapid growth Rapid growth Level of competition Stiff, crowded by big 5 Stiff, crowded by big 5 Economic environment Recovering Recovering Company objectives Expansion Expansion Financial resources State owned, has backed up resources State owned, has backed up resources Level of commitment Company is willing to commit resources Company is willing to commit resources International experience Have exported to 61 countries since 2002 Established 7 CKD factories in 6 countries. Production capacity enough. Flexibility Exit is easy due to low investment cost. Investment is high. Exit is costly. Industrial product Product has a small number of customers, need personal service and attention need personal service and attention Unit value Unit value is high, it is economical to hire company’s own salesman Unit value is high, but pricing will be comparatively lower than existing ones. Style obsolescence Design does not easily change New design that fits customers’ needs. Weight Product is bulky and complicated Product is bulky and complicated, needs new models. Standardized product Similar in shape, color, etc. Customized as to needs Purchase frequency Not frequently purchased Not frequently purchased Newness and market acceptance Need aggressive selling Need aggressive selling Financial strength Financially sound Financially sound Marketing policy Advertising Advertising It is clear therefore that in entry mode, Chery cars’ most appropriate entry is first distributorship thru an agent. Although control is difficult, exit thru this mode is easy, costs is not too much than setting up of a subsidiary. Following company’s principles, it is better to test the waters first, go into distributor system, then after getting a grasp of its culture and environment, to establish a joint venture. References . BERA. Retail. Automotive Industry. Viewed 09 December 2013 ww.loc.gov/rr/business/BERA/issue2/retail.html Business Reference Services. The Automotive Industry. Issue 2. Fall 2004 Viewed 09 December 2013 Chery Motors Israel Chery International. http://www.cheryinternational.com/company/Chery-International.html -----Ibid. China Car Times (2013). The Chinese Car Market in November 2013. http://www.chinacartimes.com/2013/12/11/chinese-car-market-november-2013/. Viewed 13 December 2013. Economy Watch.29 June 2010 http://www.economywatch.com/international-organizations/bric.html . FAO.org. Chap. 7 Market entry strategies Viewed 10 December 2013 www.fao.org/docrep/w5973e/w5973e0b.htm‎ ---- Exporting. ---- Indirect Trading. --- Joint Venture. Lowy, Joan (August 29, 2013). American driving less as car culture wanes. Yahoo news. http://news.yahoo.com/americans-driving-less-car-culture-wanes-140031392.ht. Viewed 12 December 2013. National Museum of American History. A New World for America’s Auto Culture. http://amhistory.si.edu/onthemove/exhibition/exhibition_16_4.html ISO. International Organization for Standardization. ISO 9000. Quality Management. Viewed 09 December 2013 Nathan, Ponchard . 05 December 2013. 2014 – Here it is. Motoring. Ninemsn. Viewed 09 December 2013 Maps of the World. Top 10 Car manufacturing. Viewed 09 December 2013 Magical Urbanism (August 16, 2013) The rise of car culture in China. http://www.magicalurbanism.com/archives/131 The Wall Street Journal, Dec. 03, 2013. What’s moving: U.S. Auto Sales. http://wap.wsj.com/mdc/public/page/2_3022-autosales.html Wall, Mike. May 2013, Automotive Industry Outlook. IHS. The Source for Critical Information and Insight. - Graphs 1, 2 and 3. Zachs Equity Reasearch. October 2013. Auto Industry Outlook. http://finance.yahoo.com/news/auto-industry-stock-outlook-oct-173002888.html Read More