The Chinese Market: Compact and Small Cars - Term Paper Example

 International Marketing Contents 1.0 Executive Summary 2 2.0 Background 3 3.0 Introduction 3 4.0 International and domestic marketing environment analysis 4 5.0 Demand and Supply analysis 7 6.0 Expected sales and market share analysis 8 6.1 Market Growth 8 6.2 Market structure 10 7.0 Market entry mode analysis & strategies 12 7.1 Factors influencing the market entry modes 12 8.0 Estimated budget 15 9.0 Conclusion 17 10.0 Bibliography 18 1.0 Executive Summary 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 various marketing environment analysis, 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. 2.0 Background For the past many years, China has grown gradually and is currently the fourth largest market for automobile, coming behind, Germany, U.S., and Japan. If the development continues even at slightly reduced rate than the current, China would still be among the top 2 auto markets in three to five years. The automotive industry facing declined home markets are eyeing China as their next potential market. This will result into high competition in the Chinese market hence causing reduced prices for high quality automobiles. The fraction of the Chinese population increasing their wealthy year is significant with the individual citizens purchasing more cars than even the government. The large car industries in China and abroad are specifically targeting that market. Previously, in China, car purchases mostly were by the government and enterprises, but this has changed due to the economic income growth of the population. The current market has attributes to bank loans, reduced prices on the locally manufactured cars through reduced tariffs and the extensive construction of new roads (Hu, 2006). China’s development concerning automotives 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. 3.0 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. China has also failed proper implementation of laws and agreements on the market barriers that are one sided. This could significantly affect the international corporations trying to conduct car business in the Country. Actually, despite that condition, the auto sector has grown widely through foreign investments, which has emerged in form of joint venture between the foreign international companies and the Chinese companies (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). 4.0 International and domestic marketing environment analysis Many international companies can get into new markets to expand their sales due to globalization. Due to production of in large scale, companies reduce costs because of the occurrence of economies of scale. Furthermore, companies can always standardize their 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). There are many steps that a particular company needs c to consider in order to become international. According to Andersen, they are four major ones: irregular export activities; manufacturing overseas; independent representatives export systems and development of an overseas sale branch. At first, companies go into a foreign country with the same goods or services and marketing style because of similarities in socio-economical and geographical factors i.e. if the foreign country is a neighbor. However, as the company expands, an international framework of marketing is required because of the existing differences of consumption in a particular far away country of interest (Slegl 2011). The Chinese marketing and sales department have essentials features that need consideration by foreign marketers. One, the channels of Chinese retailing are broad and also brief. Each of the retail channels has a maximum of two layers resulting into increased levels of efficiency and reduced sales costs. Companies in China such Volkswagen have their channels operating in up to 70% of China. Strong company channels enable easy sales and give the local auto companies an opportunity to acquire readily information on the market demand. The international companies that enter China with no proper strategies on sales channels usually experience hardships. In addition, due to the cooperation that has been there for long between the sales entities in China and its car companies, a very strong relationship is existing between the two (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 international (external) marketing environment of Chinese vehicles consists of economical, 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 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 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 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). 5.0 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 of 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). 6.0 Expected sales and market share analysis 6.1 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 incomes and government encouragements for the urban residence to acquire driving licenses have facilitated the demand for passenger automotives. 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 ahs 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 automotives 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%. This was much lower compared to the 40% in developed countries and even significantly low compared to other arising automotive markets like Russia, India etc. The low percent per capita suggests that the local market for automotives 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). 6.2 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 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 automotives and the limited resources to invest in increased quality products. In China, seven of its largest producers are foreign companies, and about 70% of its auto supply worth $160 million is dominated by foreign and/or joint companies (Marketing analysis report 2010). 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 about 70% of the country's USD 160 billion-auto supply market is occupied by foreign companies or joint ventures. 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). 7.0 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 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. 7.1 Factors influencing the 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. Many of the modes of market entry give different dimensions. The significant dimensions are shown by the different level of control, committing of resources, flexibility, and risks involved (Root 1994). In most cases, international companies use the degree of control over the market whenever they want to decide on a particular mode of entry. The best way of foreign companies to enter China’s market is through joint ventures. This facilitates the ready production of original foreign brands. According to the manufacturers association, the products of these venture contributed to over 64% of total car sales in 2010. In 2009, the foreign 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 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). 8.0 Estimated budget According to financial statistics of a foreign company (Skoda 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 because 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 9.0 Conclusion 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. Therefore, it very economically appropriate for international automotive companies to venture into the market in China as it is promising for now up to 2020. 10.0 Bibliography Beebe, A, ‘Wining in China’s mass markets’, IBM global business service, viewed 8 September, http://www-935.ibm.com/services/us/gbs/bus/pdf/g510-6578-01-chinamassmkt.pdf Chen, J, H, C 1999, Strategies and performance of Taiwanese oversea direct investment 1987 1993 with special reference to location and entry-mode choice, PHD Thesis, University of Nottingham China Association of Automotive Manufacturers (2010) China Ministry of Commerce; IBM analysis, 2001, Multinational in China – the long march to profitability Driscoll, A, M & Paliwoda, S, J 1997, ‘Dimensionalizing international market entry mode choice’, Journal of Marketing Management, Vol. 13, pp.57-87 Dunning, J, H 1988, ‘Explaining international production’ , Unwin Hyman Ltd: London. National Commission of Audit 1996, Report to the Commonwealth Government, Australian Government Publishing Service, Canberra. Foreign car companies in China, viewed 8 September, http://factsanddetails.com/china.php?itemid=360&catid=9&subcatid=61 Goodnow, J, D, 1985, ‘Development in international mode of entry analysis’ International Marketing Review, autumn, pp.17-30. Hu, L 2006, ‘An analysis of entry modes in the Chinese car industry’, viewed 8 September, http://edissertations.nottingham.ac.uk/1161/1/07MSclixlh10.pdf Kwon, Y, & Konopa, L, J, 1992, ‘Impact of host country market characteristicsOn the choice of foreign market entry mode’. International Marketing Review, Vol. 10, Issue 2, pp.60 76. Liu, Y., Bauer, E 2006, ‘Segmenting the Chinese consumer goods market- a hybrid approach’, viewed Marketing analysis report: China’s automotive industry 2010, viewed 8 September http://www.export.gov.il/uploadfiles/03_2012/chinasautomotiveindustry.pdf Ministry of Industry and Information Technology 2009, Quarterly auto sales in China, the People’s Republic of China Mu, Y, Hong, Y 2010, ‘China’s automobile industry: an update’, EAI Background Brief No. 500, 14 January, viewed 8 September, http://www.eai.nus.edu.sg/BB500.pdf Root, F, R 1994, Entry strategies for international markets revised and expanded, Jossey-Bass Publishers: San Francisco. Slegl, M 2011, Marketing analysis of Skoda auto in China, thesis, Prague, University of Economics, viewed 8 September, www.vse.cz/vskp/show_file.php?soubor_id=990988 Tang, R 2012, ‘China’s auto sector development and policies: issues and implication Congressional Research Service, 25 June, viewed 8 September, http://www.hsdl.org/?view&did=718658 Read More