Market Entry Options - Chery Cars China - Case Study Example

Market entry options – Chery Cars China Executive Summary This report deals with the entry mode that can be used by the automobile industry. The Chinese automobile company, Chery Cars, has found itself in a position where it is losing its sales. The automobile company has been a highly successful national venture till date. The company wishes to enter the US market at this time. Therefore, the purpose of this report was to find out the appropriate mode of entry for Chery Cars into the US markets. After an analysis of previous strategies, which has been adopted by the company in entering foreign countries and the possible risks in the US markets, it has been suggested that the company should use joint venture as a mode of entry. Contents Executive Summary 2 Introduction 4 Main Findings 4 Conclusion 8 Recommendations 8 Advantages 9 Disadvantages 9 Introduction Chery Cars can be considered as a pride of the Chinese automobile industry, as it has consistently proved itself to be one of the most successful national automobile companies. The company was set-up in 1997 and since then, it has constantly been an efficient performer in the automobile industry (Tao, n.d.). However, Chery Cars has witnessed a fall in the units of sales since 2010. In order to increase the number of units of sales, the company is trying to enter the US automobile market. The purpose of this report is to highlight the possible strategies and find the perfect mode of entry for the company to enter the American market. The purpose also includes pointing out the risks that can be faced by the company as it decides to enter the US market. The first section of the report will consider possible modes of entry and the latter section will focus on risks involved. The final section will consider the recommendations that will be appropriate for the company in this situation. Main Findings There are four possible modes of entry that can be chosen by any firm when it chooses to expand its base, namely exporting, licensing, joint ventures and wholly-owned subsidiaries or foreign direct investment (Osland, Taylor and Zou, 2001). Each of these modes will be discussed in details to understand the mode that can be used by Chery Cars to enter the US market. Licensing: This is non-equity, contractual mode with one or more local partners. In this type of an arrangement, the parent company allows the licensee to use properties of the company like, patents, trademarks, company name and technology. The licensor receives a small fee in return of the use of the property by the licensee (Sherman, 2004). The chief advantage of licensing is that it ensures a speedy mode of entry and the return from this kind of an investment is high. Joint venture: In this type of entry, the two companies, setting up a joint venture, invest in the enterprise and the profits are shared by them. It has been observed that there are five common grounds on which the companies prefer to use this mode, namely the sharing of risk or reward, sharing of technology, joint development of the product, ease in government regulations and equal treatment, as that of an insider, in the country. Each partner invests in the equity, which can be in form of money (Wasserman, 2003). Companies can also go for wholly-owned subsidiary, in which the parent company has full ownership and sole responsibility of management in the foreign country. Exporting: In this type, the company produces its products outside the target market of the country, that later reaches the country. There are two ways of achieving this, either through direct exporting or indirect exporting. In the former, the company uses intermediary in its home country to ship the products to the foreign market (Nelson, 1999). In the latter, the company does not use middlemen from the home country, though it might use middlemen from the target countries (Dickson and Giglierano, 1986). Foreign Direct Investment: This mode also implies that there is direct investment into the market of the home country. FDI can occur either through horizontal FDI or vertical FDI (Froot, 2008). In the former, the entire manufacturing process is reproduced in the foreign country with close proximity to the foreign markets. In vertical FDI, the investment is divided into various production processes with difference in factor intensities (Moran, Graham and Blomström, 2005). FDI can take the form of either Greenfield investment (where the company decides to set up new plant) or merger and acquisition (where the company takes over an existing firm). It has been observed that automobile industry can use combination of various entry strategies to enter foreign markets. The overall structure can be presented with help of the strategic diagram. Figure 1: Modes of entry (Source: Terpstra and Sarathy, 2001) For instance, it has been commonly observed that automobile industries use a combination of assembling and foreign manufacturing, when it enters new markets (Lambin, n.d.). The experience of Chery Cars has revealed that the company has successfully been running assembly lines in the countries of Egypt, Russia, North Korea and Vietnam. In terms of level of investment made, it is observed that the Chinese players have been heavily relying on acquisition to gain an expertise over the knowledge, brand and technology of developed countries to enter the foreign markets (Peng, 2010). Broadly, the trend followed by the automobile firms in China has indicated that, till the year 2000, the automobile industry largely relied on imbibing technology from the Western firms by setting up joint ventures with them (Voss, Tsikriktsis and Frohlich, 2002). Till the end of 2010, using exporting as a form of internationalization was a test phase in the Chinese automobile market (Drauz, 2013). Therefore, the company can invest in US, either through joint ventures or wholly-owned subsidiary. The foreign direct investment in running the foreign-based assembly can either be through Greenfield investment or merger and acquisition. Nevertheless, there are certain barriers to entry that can be faced by a firm when it is trying to enter a foreign market. Broadly speaking, there can be seven barriers to entry that can be faced by a firm, when it chooses to enter a foreign market. They are: Firstly, the economies of scale that are enjoyed by large domestic firms, owing to the superior technology they use. In this case, the operating firms in the industry are already working in the most cost efficient manner and make it difficult for the new entrant to reach the optimal costs of production, which makes it incur losses (Davis and Steil, 2001). Secondly, the government intervention can permit the local business houses to set up exclusive franchises, which make it impossible for other firms to operate. Thirdly, the control of essential raw materials by the existing business houses makes it difficult for the new entrants to obtain these materials cheaply and efficiently. If the raw materials cannot be obtained cheaply, then the cost of production increases, thereby reducing revenue of the firms. Fourthly, the protection of few products by patents acts as a barrier for entry to new entrants. This will not allow any new entrant to manufacture similar products. Fifthly, the product differentiation strategy also acts as an impediment to new entrants. Sixthly, the requirement of licensing from government in some industries delays the process of entry for firms. Finally, the behaviour of existing firms, like, aggressive price competition, can deter the entry of new firms (Brux, 2007). The larger firms can afford to reduce prices and temporarily experience a reduction in their revenues, but this is not possible for new firms entering business. The biggest problem faced by any automobile company, while entering the US market, is the economies of scale (McEachern, 2012). The most important agenda is to produce cars at the most competitive and efficient scale of production, so that the company can generate profits to outcompete others. Over-crowding in the automobile industry would indicate that existing players are operating at an inefficient scale and the average cost of production will be higher. This increases the risk of entering the country because if the company is unable to operate in a cost-efficient manner, then it cannot break-even in the market. Another possible risk that can be faced by the firm is the highly competitive nature of this industry (Toyota Group, 2009). The automobile industry in the United States has been one of the largest markets, both in terms of size and revenue and presently, it houses 13 car manufacturers and is highly competitive (Brock, 2013). One of the most interesting features is that a considerable proportion of manufacturers in this country have their own engine and transmission plants to conduct works of research and development, design and testing to improve the quality of products (Select USA, 2014.). This means that any foreign company, which wishes to start operation, will have to face very stiff completion from the domestic producers. Another big risk for an automobile company, entering the foreign market, is the high volatility of this market. Demand for vehicles depends to a large extent on social, political and economic conditions in a given market and the introduction of new vehicles and technologies (McEachern, 2012). This requires constant innovation, on part of the companies, to survive. Conclusion This report has discussed in details about the various possible modes of entry, which can be undertaken by any enterprise, when it chooses to enter a foreign market. The purpose at hand was to recommend the mode of entry that could be adopted by Chery Cars when they decide to enter the US markets. The possible threats of entry, which might be faced by the firm when it ventures into the US market, have also been pointed out. After studying the possible entry modes, it has been observed that the firm should chose joint venture as a mode of entry. This is because it can be a useful way by which the firm can utilize the economies of scale of its partner and establish a strong foothold. The level of investment required will also be less compared to the other modes. The highly competitive US automobile industry will also make it difficult for the company to operate, if it does not enter through a local partner. Recommendations After an analysis of the possible modes of entry and conditions in the US automobile market, this section offers choices that can be preferred by Chery automobiles, when it enters the foreign market. Firstly, the company should invest in a joint venture mode with an established company and not wholly-owned subsidiary. This is primarily because wholly-owned subsidiary involves a higher investment commitment and risk (Vaidya, 2006). In a joint venture, not only will the resources be shared by the companies, but the technological know-how can also be utilized. The risk of the company will be lowered as risks get diluted in a joint venture (Campbell and Netzer, 2009). The biggest risk that can be faced by the company is economies of scale, as has already been discussed. To overcome this challenge as well as to endure the stiff competition, joint-venture will be the most appropriate strategy. This is because the company will be able to gather all the required information about the local market from the local company and at the same time, utilize the facility of research and development and other business development models, used by its partner. Other modes of entry like, setting up an independent assembly line, with full investment from the company, will greatly reduce the risk of operating the business because if the company fails to create sufficient demand for the product, then it will face losses and may not break even. However, it must be mentioned that setting up of the joint venture will require an elaborate and complex process of technical and economic assessment. Both of these factors require a careful study before the company uses this mode of entry. The exact legislative nature of the joint venture can be decided only by the partners, who are involved in the business (Triantis, 1999). It is also easier to get an approval from the government by setting up joint ventures, than by entering independently in the country. This can provide another incentive for the company to use joint venture as the mode of entry. Advantages The short-term sales of the company increases in the foreign markets. Rapid transfer of technology which improves the products. More funds for the company as the resources of the companies are joined. Risks are lowered. Disadvantages The risk of investment always remains. The ownership of the company may get diluted with partner exerting control. Involves higher risk than exporting and licensing. Partner may become competitor. Reference List Brock, J., 2013. The structure of American industry: Twelfth edition. New York: Waveland Press. Brux, J., 2007. Economic issues and policy. Connecticut: Cengage Learning. 7 Campbell, D. and Netzer, A., 2009. International joint ventures. Netherlands: Kluwer Law International. Davis, E. P. and Steil, B., 2001. Institutional investors. Hong Kong: MIT Press. Dickson, P.R. and Giglierano, J.J., 1986. Missing the boat and sinking the boat: a conceptual model of entrepreneurial risk. Journal of Marketing, 50 (3), pp. 58-70. Drauz, R., 2013. 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Partnerships, joint ventures & strategic alliances. New York: Law Journal Press. Read More