Ford Motors Market Entry Strategy for the Indian Auto Market - Case Study Example

FORD MOTORS’ MARKET ENTRY STRATEGY FOR THE INDIAN AUTO MARKET Executive Summary This report provides an analysis of the market entry strategy chosenby the US-based automobile manufacturer, the Ford Motors Company. Analysis of the strategic considerations behind the market entry mode decision in relation to the Indian market has shown that the company was pursuing the international business expansion in the emerging markets. Indian market offered significant benefits and opportunities due to liberalized automotive industry, growth rate of population, strengthening and stabilization of economy, and some other economic benefits. The Ford Motors Company has established a Joint Venture with the Bombay-based automaker, Mahindra and Mahindra. The first product of the Mahindra Ford India Ltd, Ford Escort model, has failed to be successful, and the car was withdrawn from the manufacturing in the next years. The analysis of PESTEL factors has shown that one of the key barriers to success of the Ford Escort model was lack consideration of social factors of the Indian consumers as well as some economic factors. In order to make the entry mode of the Ford Motors company successful in India it was recommended to enter the market earlier and to take more seriously social factors and expectations of Indian consumers. Introduction Many successful organizations once have made a decision to expand their business internationally because of the variety of potential benefits, opportunities and gains. However, while developing the strategy for international development many companies consider alternatives of foreign market entry mode (Mayrhofer 2004). A foreign market entry mode is defined as an “institutional agreement that makes possible the entry of a firm’s productions, technology, human skills, management and other resources within a foreign country” (Krishna 1989, 50). The decision towards specific entry mode depends highly on a choice of foreign market and the level of control (Hollensen, Boyd & Ulrich 2011). Thus, the entry modes can be divided into three categories, based on the level of organizational control. These categories include: high control modes (Wholly-Owned Subsidiaries), intermediate modes (Joint Ventures and Strategic Alliances), and low control modes (indirect and direct export) (Hollensen, Boyd & Ulrich 2011). While some companies tend to choose the entry mode based on their strategic plans and foreign market uncertainties (including cultural, political, market uncertainties), other companies do not have a choice because of regulatory restrictions (Ahsan & Musteen 2011). The aim of this research is to analyze the entry mode strategy of the Ford Motors Company in India, and to evaluate the strategic considerations of its decision to launch Ford Escort. Strategic Considerations Ford’s Entry to the Indian Market Ford Motors entered the Indian automotive market in November 1995. The company has established a joint venture with the Bombay-based automaker, Mahindra and Mahindra with a 50-50 venture (India: Ford to take stake in Mahindra 1994). This joint venture been transformed into Mahindra Ford India Ltd, the aim of which was to assemble and distribute the Ford Escort model (Johnson and Sarguna 2011). In this type of partnership, both Ford Motors Company and Mahindra and Mahindra had to share their corporate resources, profits, technology and jobs Hollensen, Boyd & Ulrich 2011). Growth in new markets was one of the key strategic priorities of the Ford Motors Company. Thus, for example, in the middle of the 1990’s, the company has extended its reach in China, Thailand, Vietnam (in addition to India). All these growth strategies were implemented through the joint ventures with local manufacturer in each country (Ford Motor Co Annual Report 1995). By 1995, the company’s global market share in the automotive industry exceeded 13%, making Ford Motors the second largest vehicle producer in the world (Ford Motor Co Annual Report 1995). The company’s strategy was “to make Ford industry-leading company” (Ford Motor Co Annual Report 1995, 7). International business expansion in new and emerging markets, such as India, was an important part of the Ford’s long-term strategy. While entering the Indian market, Ford Motors was pursuing some obvious benefits and opportunities of business expansion in India. The country has been made more attractive for the foreign investors due to deregulation of the automotive market in the 1990s (more details are provided in PESTEL analysis section). The Indian automobile manufacturing industry also was attractive for Ford Motors because of the opportunities for a capacity expansion (Rathore & Swarup 2006). Indian market with its growing population and growing income per capital offered substantial benefits for international players. Thus, Ford Motors Company gained significant opportunities for market expansion, as the market was relatively unoccupied by MNC and demand for high-quality automobiles was growing steadily. The sales were expected to grow by almost three times from 300,000 passenger cars in 1996/7 to 850,000-1 700,000 by 2000 (Mukherjee 2000). However, in addition to the benefits and opportunities offered by the Indian market and automotive industry, Ford Motors also was facing the risks that are common practically for any MNC’s going to foreign market. These risks included the following country risks: cultural, technological, political, and economic/financial risks (Lodh & Nandy 2008). Decision of the Indian government to liberalize the automotive market has made the market attractive for many global players. In addition to competition risks, the company was facing with interest rate risk and foreign exchange risk, which are common for the MNCs (Lodh & Nandy 2008). Another risk that the MNCs were facing was referred to establishing large manufacturing facilities in India. In case of poor utilization of capacity, the company was facing significant financial risks (Johnson and Sarguna 2011). In case of economic recession, expansion of major plant would also impose financial risks to the organization (Lodh & Nandy 2008). As the government of the India did not allow establishing of the wholly-owned enterprises, Ford Motors had to establish Joint Venture with the local player - Mahindra and Mahindra. While this partnership helped the Ford Motors during its market entry because of the specific local knowledge of the Mahindra and Mahindra, there was a high risk of conflicts and misunderstanding between two partners. On the other hand, Joint Venture agreement with Mahindra and Mahindra should have PESTEL Analysis of the Indian market In order to analyze the external environment in the Indian market, there was adopted PESTEL framework. PESTEL analysis is a widely used tool for scanning international environment. Adoption of PESTEL enables to identify the environment within which the company is planning to operate or currently operates. Also, it provides helpful information and foundational knowledge of macro environment, which enable the company to analyze challenges and opportunities based on political, economic, social, technological, environmental, and legal factors (Yüksel 2012). In the case of Ford Motors Company, the focus was made on the following three factors: political; economic; and social. Political/Legal factors In 1991, political/regulatory environment in India has changed dramatically as the government of India introduced significant changes to the legislation, which made this foreign market much more attractive for foreign investors. The government has allowed a partial equity participation in automotive projects in India, which made it attractive for many global car manufacturers, such as Toyota, Honda, General Motors, Hyundai, Skoda, and Ford (Rathore & Swarup 2006). Favorable climate was supplemented with reduced customers, delicensing policy, abolition of phased manufacturing, decrease of import duties of CKD to 50% and excise duty to 40% (Mukherjee 2000). Economic factors Economic factors in the Indian market were quite favorable and offered significant opportunities for automotive manufacturers. Some of these factors included: rapid growth of the middle class combined with rising income per capita (Mukherjee 2000). By 1995, Indian has recovered after the Asian crisis and the economy of the country has stabilized. The Indian economy has been demonstrating graduate decline of the inflation rate GDP grwoth and strong export growth (Krishnamurty et al. 1996). Social factors The demand for world class automobiles among Indian consumers was high; however, people were not used to buy big cars. There was obvious gap between the perception of Indian and Western consumers of what sizes and capacity the car should be (Majumdar 2007). The needs of Indian people also were different from the needs of Western people. Launch of Ford Escort to the Indian Market The first product created by the Joint venture of Mahindra and Ford Motors and launched in the Indian market was the model – Ford Escort. However, this car was not successful in India. Soon after launch in 1996, the model has been withdrawn from the Indian market because of poor sales. While the launch of Ford Escort was a good decision in terms of political environment in India, the company’s management failed to take into consideration social factors (Majumdar 2007). Despite the fact that in the world automotive market Ford Escort was perceived to be a lower end car, in India it was a big car. Ford Motors’ has failed to understand the special needs of the Indian consumers and this has lead to poor sales of Ford Escort (Johnson and Sarguna 2011). In addition to social factors, Ford Motors has failed to consider economic factors. Despite the improvement of Indian economy and growing welfare in society, the price for Ford Escort was not adjusted to the Indian market. Ford Escort was priced at more than $14,000 in India while the closest competitors such as Maruti-Suzuki offered the car for no more than $7,000 (Lodh & Nandy 2008). Indian consumers were not willing to pay such a high price for the Ford Escort, switching to less expensive alternative. Thus, penetration pricing strategy chosen by Ford was not viable for the Indian market (Gruca & Sudharshan 1995). The Timing and the Scale of Entry Ford Motors Company has entered the Indian market in 1995 through the establishment of the JV with Mahindra and Mahindra. The timing of entry was quite favorable as it was followed by the liberalization and deregulation of the Indian automotive industry in 1993 (Johnson and Sarguna 2011). The timing entry strategy of Ford Motors was accompanied with presence of Hyundai. However, by the time Ford Motors came to India, such automobile manufacturers as General Motors, Mercedes-Benz, Peugeot, Daewoo and Honda Motors were already present there (Ranawat & Tiwary 2009). Practically all these international players have entered the Indian automobile market through the establishing of joint venture with the local Indian automobile manufacturers. In case, if Ford Motors has made a decision to enter the Indian market earlier, the company would have greater opportunities to find good and reliable local partner for Joint Venture. However, despite the presence of both local and international competitors, the time entry of Ford Motors was still favorable and offered the company significant opportunities for capturing the share of the automotive market in India. The scale of the entry of the Ford Motors Company was quite limited, as the company has established a joint venture with Mahindra and Mahindra. This joint venture assumed the model only for assembly and distribution of the Ford Escort (Johnson and Sarguna 2011). Thus, as Ford Motors did not manufacture automobile parts, it had to import it to India, raising the cost of Ford Escort and making it less competitive on the Indian market. However, taking into consideration the fact that economies of scale play critical role, large scale production would impose significant risks and require high investment from Ford Motors (Johnson, Whittington and Scholes, 2012). Recommendations The case of the Ford Escort launch has proved the theory that success of the company is highly dependent on the timing of entry, control of the entry mode, and cultural factors. As Johnson & Tellis (2008) explained, the success of the foreign company in the Indian market is greater with greater control of entry mode, earlier entry, and shorter cultural and economic gaps between the host and home countries. The case of the Ford Motors and its unsuccessful launch of the Ford Escort model to the Indian market have shown that the Joint Venture with the local partner is not always optimal decision. Even though in theory many companies tend to form Joint Ventures in order to avoid socio-cultural uncertainties (Ahsan & Musteen 2011), sometimes local partners either lack expertise or experience of working and communicating with international partner. Joint Venture of Ford Motors with Mahindra and Mahindra has shown that some important social and cultural factors have not been taken seriously while development of the Ford Escort model. In result the company has not achieved its sales target as the sales were very poor. In order to improve Ford’ market entry it is recommended to perform entry not in 1995 but as soon as the Indian government has liberalized the automobile market. As Murray, Ju & Gao (2012, 50) explain, the timing of entry is a critical strategic decision for firms making investment decisions in foreign market. Earlier timing entry would enable Ford Motors to better understand cultural and social factors of the Indian consumers and thus to better understand their needs and expectations in relation to vehicle through market research activities (Ofek & Turut 2008). All this might have increased the Ford Motors’ chances to capture higher market share (Murray, Ju & Gao 2012). On the other hand early timing mode would impose on the company some risks related to higher uncertainties (Murray, Ju & Gao 2012). These risks could be mitigated by establishing a joint venture with the strong player on the Indian automotive market. Earlier timing entry would enable Ford Motors to choose partner for Joint Venture among greater amount of local players thus increasing its chances for strong and effective partnership. Conclusion This report provides analysis of the entry mode strategy of the Ford Motors Company in India, and evaluation of the strategic considerations for launching Ford Escort. The company has established a joint venture with the Bombay-based automaker, Mahindra and Mahindra with a 50-50 venture. Strategic partnership with the local partner was aligned with the Ford’s strategy to grow in new markets with a focus made on emerging markets. By forming joint venture with Mahindra and Mahindra, the Ford Motors company was aiming to mitigate its risks related to cultural diversity as well as smooth its entry to the Indian market. However, the first product launched to the Indian market, Ford Escort turned to be not as successful as predicted. Joint Venture of Ford Motors with Mahindra and Mahindra has shown that some important social and cultural factors have not been taken seriously while development of the Ford Escort model. 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