Criteria Used to Enter the Russian Automotive Industry - Case Study Example

GLOBAL MARKETING STRATEGY Student’s Name: Code + Course name Professor’s name University City, State Date Introduction The automobile industry in Europe has staggered significantly after the recent 2008-2009 global financial crisis. Apparently, Russia was not an exception to the financial crisis. The sale of cars significantly dropped in the year 2014 as a result of the sanctions from the West regarding the Ukraine controversy and drop in the prices of oil. The decline of the Rubble also impacted negatively on the automobile sector (DeBoard 2015). Many companies operating in Russia have made declarations of shutting down their operations in the giant country. For instance, the General Motors Company stated that it would shut down its factory operations in Russia and close its Opel brand. Nissan Company, on the other hand, halted its production in Russia for 16 days in the previous month. At the onset of the year 2015, the auto market in Russia experienced the continuous implications of a weak economy, a rise in interest rate and price increments. In the coming months findings by companies, such Volkswagen indicates that the situation is not bound to change anytime soon. The shooting of the Malaysian Airliner also subjected the automobile industry to adverse reputation. The country witnessed a significant economic recession during the last half of 2014. It suffices to observe that the country is Europe’s second largest market for automobiles. Therefore, the continuous recession in the sector will result in the termination of the production activities of the major companies such as Ford, Renault-Nissan, Volkswagen and General Motors. Regardless of the uncertainty and turmoil witnessed in the sector, most of the automobile companies have expressed continued commitment towards investing in the market. The main challenges that have impeded the smooth success of the industry encompass the existing geopolitical tensions, neo-mercantilist trade policies, overreliance on gas and oil revenues and the poor network of highways and roads. Analysis and Evaluation of Market Opportunity and Market Entry Strategy Overview Russia’s market opportunity in the automobile sector does not favour new market entrants as a result of the declining market sales. The current political situation and the weak macroeconomic conditions will compel the automotive market to stagnate over the next few years. To be precise, the industry will exhibit the worst performance in 2015, 2016 and probably 2017. However, there are indicators that the industry will recover by 2020. At the time of its recovery, the number of sales of light automobiles will increase to 3.3 million units. It is worth noting that the industry had anticipated 4 million sales units in 2020 prior to the crisis. The indications are clear; that the actual performance of the giant economy about the production and sale of automobiles will be lower than the expected performance. Moreover, the estimated performance still faces some threats that may result in a further decline in the sales units. The slow pace of modernisation, unclear support from the market, and the fragile political and macroeconomic situation pose a threat to the sales estimates (Berger 2014). It is evident that some of the manufacturers have taken note of the increasing decline in the market performance to shift production to other countries. As a result, local production in the country will decrease resulting in the importation of vehicles that the country produced before the termination of some of the production activities. Decree 166 will lead to the expiration of the local manufacturers’ preferential terms. The decree will also yield a decline in the import duties thereby subjecting the local producers to the weak cost competitiveness. It is also evident that the current subsidies will not impede the growth of imports in the giant economy. The increase in imports will result in the decline in the profitability of the smaller volume production models. The estimates indicate that the country will import 40% of the automobile units that it produces locally in the future (Berger 2014). The other hazards to the industry include the reduction in the local content in the manufacturing sector, reduced localisation of the suppliers and rendering the contracts of the manufacturers to be obsolete. Criteria used to enter the Russian Automotive Industry Overview of the Industry Apparently, any firm that intends to enter the automotive industry in any country will conduct a critical analysis of the market determinants. Regarding the existing rivalry in the industry, it suffices to observe that most countries exhibit intense competition in the automotive industry. Therefore, Russia is not an exception. Globalisation has resulted in the expansion of the automotive companies in all the global countries (Bradley et al. 2005). Therefore, a firm that enters a new international market should be ready to tackle the existing competition so as to attain competitive advantage in the new country. The industry rivalry refers to the current players and competition in the market. Apparently, economies characterised by intense competition result in the high competition cost that diminishes the returns realised by the competing firms. The oligopolistic nature of the industry eliminates the adverse impacts of the price-based competition. The intensifying competition in the industry has developed new sales trends in the quest to increase the sales of companies. Such patterns include long-term warranties, preferred financing and rebates. The trends reduce the returns realised by the companies (Molnar 2009). The rivalry in the Russian automobile sector exhibits a similar trend. The level of competition in the industry is so high that the selling price of some of the units is below the production costs of the units. For instance, the strategy adopted by the Ford Company regarding the sale of the Focus model saw the giant company price the automotive type below the costs incurred to produce the automobile. It is evident that the competition rivalry exhibited by the industry is different from the other industries that utilise innovation and marketing as the basis for competition. There are six factors that influence the intensity of rivalry in the market. The factors encompass the rate of market growth, cost conditions, switching costs, product differentiation, exit barriers and industry concentration (Takoev & Pederson 2006). The threat of substitute products also suffices to be the other aspect that influence the decision of firms to enter any industry. The alternatives encompass trains, airplanes and buses. It is worth noting that the limitations of the substitute products surpass that of the cars since they are incapable of providing door-to-door services. The bicycles and motorbikes do not guarantee the same comfort as cars thereby rendering cars to be the most preferred mode of transport in the region and the world. The surging oil prices have also influenced the automobile industry since the vehicles use petroleum products as fuel and in the manufacture of tyres (Molnar 2009). About the Russian car industry, alternative transport, used cars and public transport are the main substitute products in the industry. Airplane and train transportation are the substitutes in long-distance transportation. However, the alternative transport solutions cannot provide the utility services provided by cars. For instance, they do not guarantee the convenience, social status, immediate availability, change of the route, and immediate choice of the destination. Before the financial crisis, the country exhibited an increase in the purchase of new cars. The record increase in the number of new cars witnessed in 2008 resulted in a rise in the number of used cars in 2011. In 2012, used cars exhibited a 7.8% increase in sales resulting in the transportation of approximately 3 million units in the year. There are four major strengths of the industry. The positive growth of consumer income is one of the strengths of the industry. Secondly, the recovery of the global economic recession has also increased the demand for automobiles in the country. The development in the car loan market also bears tremendous significance to foreign investment in the industry. Lastly, Russia has regained a stable macroeconomic environment that impacts positively on foreign investments (Ernest & Young 2013). Product and Branding Product positioning entails determining the specific market demands on the specific vehicle products manufactured by the company and availing the automotive products to the right customers. The market for commercial vehicles witnessed a 5% increase in sales between 2011 and 2012. However, the comparison of the growth in the demand for commercial vehicles between 2010 and 2011 reveal a negative trend in the increase since the market witnessed a 56% increase in the product in 2011. However, locally manufactured commercial vehicles command 45% of the market share. Between 2013 and 2016, there will be a 4% increase in the demand for commercial vehicles. Foreign brands had also exhibited an increase in the market share to 17% in 2012. The statistics reveal that the market shows an increase in the demand for foreign brands on a continuous basis thus providing a viable opportunity for foreign companies that intend to manufacture commercial vehicles in the country. Therefore, the significant increase in the market share for foreign commercial vehicles and the overall rise in the demand for commercial vehicles provides an opportunity for the investors that intend to develop the vehicles. The bus market has also exhibited tremendous performance over the years. For instance, the sale of buses-on-track chassis, minibuses and buses surpassed 69,000 units in 2012 reflecting a 14% increase in the sales as compared to the 2011 sales. However, domestic brands dominate the industry. The industry also requires product customisation regarding the particular brand of the vehicle as opposed to the electronics industry that utilise standard chips (Sturgeon et al. 2008). By 2011, they commanded a 63% market share. Government support geared towards fleet renovation and the necessity for new buses following the aging of the existing buses contribute to the increasing demand for new buses. Therefore, the investment in the manufacture of city and suburban buses will be appropriate for a company that intends to enter the Russian automobile industry. The sales realised from light vehicles increased by 11% in 2012 revealing a positive performance of light vehicle products. The growing demand for light vehicles emanated from the growth in the income of the consumers. The recovery from the recession also availed loans that enable Russians to purchase new light vehicles. It is also worth noting that the macroeconomic environment of the country is stabilising. Therefore, individuals will have access to funds that will enable them to acquire light vehicles more than the other product categories. Consequently, manufacturing firms should invest in light vehicles to a larger extent as compared to commercial vehicles and buses. Apparently, maintenance is a pertinent aspect in the lifetime of an automobile. Therefore, the increase in the demand for cars results in a consequent rise in the demand for vehicle parts and components. Therefore, the company should also develop the vehicle components to service the existing vehicles. Target Marketing and Product Positioning The bargaining power of suppliers is pertinent towards the proper positioning of a product in the market. The localised car manufacturers suffice to be the primary producers of the automobiles and their components. Targeting the desired market and proper positioning of the product will enable any company to gain the competitive advantage in the market. The recent implementation of the law that favours localised production provides an opportunity for the vehicle parts and components. Therefore, besides manufacturing new automobiles, it is appropriate to develop the components of the products to take advantage of the increasing demand for the items. Moreover, it is evident that the Russian automobile market has lacked a reliable manufacturer of vehicle components. The threat of the saturation of the industry does not hold since demand estimates indicate a continuous improvement in the demand for vehicles and their parts. High transportation costs have also characterised the sector of automobile components. Moreover, the industry has suffered the exposure to low-quality vehicle parts that do not meet the needs of the consumers. Therefore, concentrating on the quality of the manufactured products should be a primary objective of a company that intends to enter the Russian market. To deal with the high costs of transportation, the firm should utilise the services of a major logistics company. Therefore, to improve the capabilities of the component industry, companies should capitalise on the increasing demand for vehicle parts. The Russian Government has also established special economic zones to encourage foreign investment in the component industry (PwC 2008). In order to position the product efficiently and determine the target market, it is also proper to consider the major players in the industry. The dealers and the individual consumers constitute the buyer network. Apparently, the more the buyers of the products of a company, the more the sales realised from the products. Moreover, the concentration of buyers surpasses that of the suppliers by a significant margin. The dealers impact significantly on the success of a company’s product positioning strategies (Automobile Magazine Business 2011). They market the products directly to the consumers. Purchasing vehicles through dealers is a common trend in the automobile sector. Therefore, to enhance the reputation of the components and the automobiles manufactured by a company, it is imperative that the firm should establish effective partnerships with its dealers. According to the AUTOSTAT Analytic Agency (2012), a considerable number of dealers concentrate on a few manufacturers of automobiles in the industry. However, in the quest to increase the profitability of their business, dealers prefer new cars as opposed to used ones. The manufacturing company that intends to enter the market should offer competitive prices for its new vehicle products. It is also evident that the post-sale services exhibited by the dealers to customers advertise the brand of the product. Therefore, the strategic dealer partnerships will ensure that the manufacturers recommend proper after sale services following the sale of their products so as to enhance their reputation in the market. The provision of vehicle extras is the other responsibility of the car dealers. Therefore, proper product positioning requires the company to ascertain that its dealers provide car assists, navigation, TV screens among other car extras to enhance customer satisfaction (Data monitor 2013). Guaranteeing a high margin for the services and products of the company reduces the price elasticity of the products thus increasing the profitability of the enterprise. The ever-rising demand for vehicles and their components provide an opportunity for a corporation that offers exception car-extra and after-sale services (Ernest & Young 2013). The company will not have to set the prices of its products far below the production costs to attract customers. Targeting the consumers also requires the dealers to provide accurate information regarding the feedback of clients and their product preferences. Since the quality of the brand is a responsibility of the manufacturers, the partnership between the company and the dealers will ensure the timely communication of the requirements of the customer requirements. Proactive government legislation geared towards providing a favourable environment for the establishment of local automotive manufacturing plants is a timely opportunity for the investors. The pilot programmes run by Skolkovo intend to enhance the innovativeness of the automobile industry in Russia. Towards attaining competitive advantage in the market, cooperating with the other major players bears paramount significance to the company. The guaranteed support from the Federal Government will also enable the investor to understand the special needs of the Russian market. The manufacturing plant should establish proper research and design departments aimed at enhancing the innovativeness of the automobile products. The adoption of green technology to manufacture e-cars and racing cars suffice to be some of the current trends in the automotive industry (Polyanskiy 2014). Distribution Strategies By 2012, the country witnessed a 2.4% yearly increase in the number of transported automobiles. The growth of vehicle sales handled the increase in automotive logistics in the country. However, it is evident that the poor development of transport infrastructure, inadequate transport services to haul vehicles and the weak macroeconomic environment impede the distribution of automobiles from the manufacturing plants to their destinations. Therefore, a company that intends to establish a manufacturing facility in the Russian market ought to devise proper distribution strategies to ascertain the timely and efficient delivery of products to the customers. It is worth observing that rail transportation increased significantly from 9% to 27% between 2011 and 2012. Consequently, it is evident that most companies consider the rail as the most efficient mode of transport for the automobiles in the region. Therefore, a company that intends to enter the market should also consider the mode of transportation in its distribution strategy to ascertain the timely delivery of the vehicle units to clients. The use of trains is effective in long-distance travels. However, the establishment of international automobile companies in the market is also responsible for the preference of rail transportation to other modes of transport. The local manufacturing plants developing foreign vehicles exhibit the propensity of utilising the rail transport networks. Upon the arrival of the automobile to the nearest rail terminal, car haulers take over the responsibility for transporting the vehicle to the client's doorstep. Therefore, the flexibility of truck transportation in short distances handles its choice as the preferred mode of transport whenever the client intends the company to deliver the product at the doorstep. The recent dedication of the Federal Government towards developing and repairing roads will improve truck transportation services in the country. It is also proper for the company to establish a long-lasting partnership with the major logistics operators since they will handle transporting its products. In fact, it is proper to create a single logistics operator that will ensure the timely and efficient transport of the company's automobiles from the manufacturing facility to the client's destination. The single operator will understand the proper transport modes required to transport vehicles from the plant to the customer’s destination. The selected operator should be a major player that can adjust to the changes in demand across the entire country. The selection of such an operator will enable the firm to avail its products anywhere whenever required in the specified quantities. Communication Strategies Communication competencies play a pivotal role in the success of any company in a foreign market. The internationalisation strategy poses a significant challenge to the organisation about responding to the challenges caused by the language barrier (Mrak 2000). Addressing the language impediment necessitates the hiring of employees from the preferred country of investment to manage the operations of the company associated with direct communication with the clients. In the case of the Russian market, understanding the Russian language may prove to be a difficult task for foreign investors that speak different languages. However, the professional selected to oversee the operations of the country should have an in-depth understanding of the native language of the investors. By so doing, the professional will be able to communicate directly to the other executives originating from the headquarters of the company. Progressive learning of the new language is the other pertinent strategy that eliminates language barriers on a gradual basis. Following the elapse of a few years since the establishment of the manufacturing facility in Russia, the foreign management of the subsidiary company sent from the parent company should learn Russian on a continuous basis. Some of the effective tips associated with understanding a foreign language encompass speaking clearly and slowly, requesting clarifications and conducting regular checks to assess the level of understanding of the new language. Defining the basics of the business, avoiding idioms and jargons and emphasising on subject specificity are the other communication strategies useful in the understanding of a new language. The selected communication medium should also be effective. Lastly, exercising patience and using multiple channels to provide information also address the communication barrier (Berrardo 2007). Pricing Strategies The pricing strategy adopted by a company should correspond to the value of its products. Overpricing a product impacts negatively on the exhibited customer preference to the brand. Similarly, it is inappropriate to set the price of a product that is lower than the production cost regardless of the underlying market competition. Apparently, manufacturing companies incur substantial expenses in the development of larger and more reliable cars with more horsepower as compared to smaller cars that consume less fuel (Volgina 2011). Therefore, it is logical to set prices that correspond to the production margin while allowing a margin of the profit. The relative and absolute values of the marketing mix elements determine the effectiveness of the elements. The relative value of the company refers to the actual value of the product about the existing substitutes in the market. On the other hand, the absolute value simply refers to the real value of the automobile as specified by the manufacturer. It is appropriate to set higher prices for products that have a relatively higher value in the market rather than emphasising on its absolute value only (Sudhir 2001). According to the repeated games theory, firms that intend to achieve long-term profitability tend to implement the cooperative pricing strategy. The strategy is effective in markets characterised by high concentration of companies and stable market environments. The Russian market is a typical example of such markets. Therefore, since long-term profitability is the prime objective of the manufacturing firms, it is imperative that the firms should adopt the cooperative pricing technique. In such companies, it would be easy for the other companies to realise any deviant behaviour by one of the automobile firms. The other companies may decide to punish the defiant company. There are very many players in the automobile industry in Russia. The adoption of the cooperative pricing strategy should depend on the established absolute and relative value guidelines that govern the industry. For instance, companies should allocate particular prices to the cars that have a specific size, fuel efficiency and horsepower. Conclusion The Russian automobile industry suffered the effect of the global financial crisis through the reduction in the demand for automobiles. However, the recovery of the sector in 2011 provides an opportunity for foreign investors that intend to enter the new market. The demand for commercial vehicles, light vehicles and buses has exhibited a positive trend indicating a continuous rise over the next years. Rather than entering a phase of market saturation as feared by most investors, there is evidence affirming the future potential of the Russian automobile industry. The current government reforms geared towards encouraging foreign investment in the localised manufacture of automotive products and components acts as a stepping stone for the international companies that intend to enter the market (Vahtra & Zashev 2008). The successful performance of a corporation in the Russian market demands the adoption of an effective communications strategy, transport and logistics strategy and cooperative prices (Richet 2002). It is appropriate for a company to invest in the Russian automobile industry based on the available guarantee of long-term profitability arising from the increasing market demand. 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