Chinas Competitiveness in the Automobiles Industry - Coursework Example

China’s competitiveness in the automobile industry: An industry analysis BY YOU YOUR SCHOOL INFO HERE HERE EXECUTIVE SUMMARY The Chinese auto industry is marked with many challenges and opportunities. Prior to 2004, the government controlled many business practices, an ideology that was carried over from the previous command economy. As the country begins adopting principles and strategies that are aligned with capitalistic systems, it is improving business efficiency, profitability growth and responsiveness to changing technological environments. Governmental support that is moving away from communist/socialist values to consumerism ideologies are building more effective commercial infrastructures and technological capabilities that give major automakers in this industry the ability to compete both domestically and in foreign markets. The report identified the major challenges to the industry as supplier network problems, cost issues along the supply chain, counterfeiting of parts, and reduced capacity for innovation that is created through national duplication of existing research and development practices. Advantages for Chinese automakers are increased knowledge, the ability to negotiate pricing reductions along the supply chain for cost leadership and control, as well as ongoing government fiscal incentives that improve research and development capabilities. This market is a dynamic and demanding industry that is now being threatened by foreign investment into China under an export market entry strategy. This has implications for national GDP and the competitiveness and profitability of major automakers in the country. TABLE OF CONTENTS 1. Introduction.................................................................................................................. 2. Industry overview – a ten year snapshot...................................................................... 3. Industrial geography of the industry............................................................................ 4. Foreign investment and technology............................................................................. 5. Competitive disadvantage............................................................................................ 6. Conclusion.................................................................................................................... References China’s competitiveness in the automobile industry: An industry analysis 1. Introduction The Chinese automobile industry has experienced consistent and substantial growth between 2003 and 2013. The industry’s four most profitable players, SAIC Motor Group, Dongfeng Motor Group, First Automobile Works and China Changan Automobile Group are all state-owned enterprises, hence there is significant government influence and investment in the corporate strategies developed by these companies. Prior to the 2000s, the Chinese government was referred to as a command economy, which is a Socialist system whereby distribution and manufacturing of products are controlled through government policy (Myers 2004; Gorman 2003; Bertell 1997). However, as international competition began to outperform domestic company output, the government was forced to adopt many of the characteristics and philosophies of a capitalistic system, whereby capital (corporate assets and factories) are controlled and maintained by private ownership (Degen 2008). What this created was an evolving industry environment where government was forced to take a position of deregulation so as to create a competitive environment. The government had maintained a majority position with many businesses in the country, a majority stake in equity. However, this limited the ability for many industries to experience new market entrants which is positive for promoting better pricing structures on products and creating new channels of financial lending that improves ability of companies to diversify, improve operations and expand on marketing. Therefore, the previous economic structure in the country was revolutionised from long-standing Socialist values to capitalistic and consumerist values that changed the dynamics of the industry. Today, the Chinese auto industry provides substantial opportunities for promoting innovation, for achieving financial capital procurement, for more effective distribution and marketing strategies, and giving the country a competitive edge in terms of automobile production and design strategies. This report conducts an industry analysis in this industry, highlights the role of foreign investment in the country as it pertains to the auto industry, describes the industrial geography of the industry, and offers an assessment of the extent of global competitiveness and innovation that China maintains in this industry. 2. Industry overview – a ten year snapshot China’s entry into the World Trade Organisation radically changed the dynamics of the Chinese auto industry. Agreements with this membership charter provided opportunities for tariff reductions and the elimination of restrictions that forced automakers to utilise domestic parts for production (Chen 2012). This opened many new importation opportunities along the global supply chain for parts suppliers, putting much less reliance on domestic firms to fill supply demand. Furthermore, the government’s incremental abandonment of ideologies from the previous command economy created a new focus on building production capacity in the country. The government was instrumental in placing financial investment in such sectors as rubbers, machinery production, electronics, textiles and even automobile financing services (Chen 2012). Because of this new focus and better supply capabilities, production increased by a whopping 38.8 percent and 36.7 percent in 2002 and 2003, respectively. Previously, until 1994, the government was the central authority for price-setting for the auto industry, as the owner of the four major auto players in the industry. Government was not focused on establishing a competitive pricing structure on autos, which was causing price-sensitive Chinese buyers to maintain much less demand for vehicles. However, by 2004, the government was loosening its controls on price fixing which encouraged more competitive pricing behaviours by the major auto companies in the country. This increased demand and also attributed to more product output by 2005 (Holweg, Luo and Oliver 2008). Furthermore, the government has, in recent years, been instrumental in supplying financial support for improving the national roadway infrastructure which, in turn, creates incentive for rural and urban consumers to seek financing for auto ownership. The government, in 2013, provided guarantees for expenditures totalling £94 billion for infrastructure development (Evans-Pritchard 2012; Sweeney and Chiang 2012). Prior to 2008, there was limited availability of roadway infrastructure in the country’s most rural regions, however new investment and spending has opened many different avenues for distribution and sales of automobiles in the country. By 2009, positive outcomes of the relationship with the WTO and the establishment of new supplier networks caused the Chinese auto industry to surpass growth patterns of Western auto industries for the first time in history (Tang 2009). Yet another stifling factor was that during the 1990s, the Chinese auto industry produced a high volume of heavy vehicles following the global fad for SUVs and other large vehicles. Sudden changes in consumer preferences drove the auto industry to begin building higher output of passenger cars, which accounted for 65 percent of total industry output by 2000 (Tang 2009). This changed the dynamic of production and sales strategies and, to this day, drives the majority of output in the passenger car sector that is sustaining higher demand from Chinese consumers. During the period of the global economic recession from 2008 to 2010, the government put much more policy development support into forcing auto companies in the industry to restructure and attempt consolidation. It was becoming clear that there was a trend in demand for hybrid electric vehicles and the industry did not have the innovative capacity and knowledge to create competitive hybrids that could compete with Western car brands. The impact is growth in output of environmentally-friendly and fuel efficient vehicles that satisfy the very price-sensitive Chinese consumer segments. Hence, by 2010, the SAIC Motor Group sustained revenues of USD $33.63 billion with an output in 2011 of 3.64 million vehicles (SAIC 2011; SAIC 2011). Dongfeng, as another example, maintained revenues of USD $62.9 billion in 2012 (CNN Money 2012). This represents a 39 percent increase in total profitability for Dongfeng from just 2010. It is clear by the revenue snapshot of just two of the major players in the industry that consumer demand has increased due to government investment in infrastructure and business, as well as the establishment of WTO-chartered changes to procurement and tariff imposition that has improved the production capacity and supply opportunities for major industry players. Today, the industry is well-developed and is becoming rapidly equipped for more modern production output and establishing competitive cost controls throughout the entire value chain. 3. Industrial geography of the industry Globalisation of the supplier network has posed substantial opportunities for cost controls and efficiency in manufacturing, however there have been problems with attempting to globalise the industry. As operations become globalised, there is an internal expectation from major players that suppliers follow the automakers as they build new production facilities and improve capacities (Belzowski 2006). The aforesaid expectations prevent suppliers from creating their own global strategies because they are being forced to build manufacturing plants for parts wherever customers are demanding autos. Additionally, automakers are demanding recurrent and substantial cost reductions on parts and components based on new global pricing structures that are quite different than in the previous command economy. Therefore, automakers are applying pressure on suppliers to utilise low labour cost nations and where currency exchange rates are low in order to provide new, lowered, global benchmark pricing structures on components (Belzowski 2006). Automakers are not providing support for a more global strategies within the supplier network and do not consider the costs to suppliers for training new foreign workers, warehousing and the export duty absorption necessary to fulfil the high demands of automakers in the industry. Hence, there is a great deal of inefficiency in the supply geography of the industry and failure to optimise collaborative alliances between auto producers and suppliers in a fashion that is aligned with successful Western producers. The problems with the supply network geography in this industry is complicated due to the fact that SAIC maintains production facilities in six major urban cities in China, Dongfeng in seven different cities, and FAW in 14 different provinces (FAW 2008). This creates a type of conflict with attempting to consolidate the industry whilst also adopting principles of a globalised supply network. This disparity in supply geography also creates complications in this industry related to establishing a technological innovative system that is aligned with the government-mandated Five Year Plan for improving the auto industry and consolidating operations. According to theory, the development of strategic alliances along the supply chain creates many competitive advantages and opportunities for buyers and suppliers. It allows collaborations to occur that exploit expertise and knowledge production that improves technical capacity in firms (Copacino 1996). Companies that involve suppliers in the research and development process, additionally, creates more responsiveness to an evolving technological market and ability to provide joint-produced component innovations necessary to support a modernising industry environment. This is something that is not occurring in the Chinese auto industry as major companies continue to seek price reductions on products and apply pressure for suppliers to structure their operations primarily for this pursuit. Instead of being collaborative and establishing the advantageous partnerships and alliances with critical suppliers, automakers are dominating the supply environment that serves to stifle innovation production, knowledge management, and advanced technological improvements to products. The global availability of technology has also provided new challenges in the industry in relation to counterfeiting of parts by non-authorised suppliers (Belzowski 2006). The government has not been properly instrumental in creating policies that ensure intellectual property protections on a variety of innovations both with industry players and with domestic parts and components suppliers. Therefore, it creates an environment where new supply market entrants maintain the access to production technologies that allow them to undercut authorised suppliers through the production and distribution of counterfeit parts. This counterfeiting activity includes a variety of parts, such as oil seals, phony airbags, and oil seals (Bowman 2011). In response to this counterfeiting activity that is promoted by global access to production technologies, companies are now fitting their parts with radio frequency identification tags (Bowman). The country of China is responsible for supporting approximately 80 percent of all counterfeit parts that are produced, which suggests that the government needs to be more instrumental in setting up appropriate anti-counterfeiting policies and ensuring intellectual property protections on a wide variety of different technological innovations. Even ignition coils and brake pads are being counterfeited, representing problems with sustaining a competitive pricing structure on parts and components (IAC 2008). The globalisation of the Chinese auto industry is actually creating the environment by which counterfeiting production companies are able to capitalise on undercutting major suppliers, especially for used car maintenance services throughout the entire country. Furthermore, in another area of technology, governmental support and investment has created opportunities to advance hybrid car production throughout China. Fiscal incentives both local and national have created the technological infrastructure required to reduce the nation’s carbon footprint and inject efficiency into vehicle production output. The Ministry of Industry and Information Technology, a division of the government, partnered with Nissan Renault to create new battery charging technologies and promote development of completely electric cars (EIU 2009). These incentives have also benefitted major players in the industry, including FAW and Changan Automobile Group, establishing the technological and cooperative infrastructures required to meet demand for electric and other hybrid vehicles. The Shenzhen city government has also provided financial capital support for this venture, improving local responses for a variety of different automakers in the country. National government support has inspired city governments to follow suit, which expands the potential for research and development into this new technology. There are difficulties, however, with having such a widespread financial support for innovation in hybrid car production. It is easy for research and development efforts to become duplicated and can even lead to market fragmentation, which would represent significantly inefficient research outcomes (EIU 2009). In China, there are over 120 different automakers that are all working on research and development to improve hybrid technology and design development toward this effort (Hong and Mu 2010). SAIC, FAW and Dongfeng are the top three makers, but collectively, they control only 50 percent market share in the industry (Hong and Mu 2010). Though there is a strong technology infrastructure related to development of hybrid electric vehicles, the vastness of local and national support toward this effort does not supply automakers with any competitive advantages in research and development. In fact, it provides the foundation for homogeneity in the market whereby no hybrid car producers are able to differentiate their brands through innovative production output. This is the same in Europe and the United States where there are many different manufacturers (i.e. Fiat, General Motors, Ford and Volkswagen) that are also continuing to work toward production of innovation and hybrid electric technologies. Hence, China does not maintain the ability to differentiate their output and operations from global players which reduces their global competitiveness. 4. Foreign investment and technology Because the technological infrastructure in China in this industry supports duplication of research and development, it has promoted many large automakers to develop strategic alliances with foreign businesses. This is designed to promote unique technology transfers and improve differentiated engineering capabilities (APCO Worldwide 2010). In China, there are many different manufacturers and suppliers that are improving their competencies and knowledge related to technology innovation production toward the goal of producing more efficient and hybrid vehicles. It is more advantageous, therefore, to seek out strategic alliances with foreign knowledge holders in foreign auto industries to achieve unique competitive outputs related to research and development, as well as prototyping. However, the government influence in improving production capacity and capability, the development of a more quality distribution infrastructure, and increasing Chinese demand for passenger cars have created an environment that incentivises new market entrants from foreign auto producers. Import tariffs in China, as a result of World Trade Organisation membership, have been reduced by 25 percent, which allows for an attractive market by which foreign producers can enter the Chinese market (APCO Worldwide 2010). This is problematic in terms of securing domestic GDP on Chinese customers that, today, are strongly drawn toward Western brands. The start of foreign product importation into the country creates many competitive challenges with domestic automakers that do not have the marketing prowess to establish a differentiated brand in the same capacity as Western producers. Foreign investment into the country through importation of foreign-made cars challenges the economic security of the industry from a domestic perspective. One major hurdle in the country for domestic automakers is that many urban consumers live in apartments, which makes it considerably difficult to establish charging of hybrid electric vehicles, thus impacting demand. Foreign producers have been more proactive in recognising these problems by investing in many different charging centres across the country to facilitate more convenient utilisation of these hybrid vehicles. Putting major brands on these centres such as General Motors and Ford will have considerable marketing clout and establish brand identity in the country for those consumers that are demanding and attracted to hybrid technologies. In marketing theory, when a brand is able to provide consumers with a perception of personal lifestyle self-expansion and self-improvement, they are likely to develop strong connections and preferences for the brand (Zhang and Chan 2009). Foreign investment into improving consumer-centric convenience maintains many long-term implications, especially for consumer segments that are highly attracted to Western product brands. 5. Competitive disadvantage In 2009, Chinese automakers exported only 61,000 vehicles which was a 62 percent decline from 2008 (Russo, Tse and Ke 2010). According to marketing theory, the concept of “Made in China” maintains many negative connotations in Western culture. It is difficult enough for domestic producers to convince Chinese consumers that “Made in China” represents top quality, hence it is difficult with companies that maintain little global knowledge in effective marketing to convince Western buyers (Russo, Tse and Ke 2010). Furthermore, the capitalistic economy such as that of the United States has many regulatory obligations for automakers that are not present in China. Therefore, in order to be an effective exporter and compete in foreign markets, it would require adjustment to operations and production which is quite costly to firms. This gives China a considerable set of competitive disadvantages from a global perspective that makes it quite cumbersome to establish viable and profitable foreign export markets. 6. Conclusion Though the Chinese auto industry is evolving rapidly, there are clearly many challenges that prevent Chinese companies from sustaining competitive advantages in the industry. Supplier network problems, global benchmark pricing structures, counterfeiting and foreign investment through importation of foreign-made products into China are the most significant concerns for the industry players. However, China maintains competitive advantages domestically that included considerable negotiation and buyer power in the supply network that ensures major players receive low cost, top quality parts. The Chinese automotive industry is dynamic and ever-evolving, creating opportunities and threats that must be combated through better technology development, diversification of operations, financial support from government, and better marketing strategies. China should be more aggressive in being proactive when it comes to marketing, since this is one of the most fundamental tools for differentiating and establishing a brand identity. 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