Investigate of Chinese Auto Mobile Industry — a Study of Shanghai Volkswagen Case Essay

Part 1 External Environment Analysis Macro Environment Analysis – PEST Analysis Political/legislative Chinese began to open its market and reduces of governmental control over marketing and labour mobility in the1980s. After twenty year reform of state-ownership enterprises the SOEs remained the most significant role in China economy and control the key industry of China. The adjustment of government policy and stabile political environment played a role in the recent increase of foreign investment in China.

By the end of June 1997, it was reported that over 200,000 business joint ventures had been registered in China, with a total foreign investment of $204 billion ($15. 7 billion from US companies) (China National Statistics Bureau, 1997). Chinese government was full support the automobile industry and regards this industry as the ‘pillar’ industry of the nationally economy. But increased restrictions on foreign exchange and set up high tariff barrier for foreign investment. In addition China’s entry into the WTO would dramatically alter the competitive landscape on one hand and also lower the tariffs on the other hand.

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Economical China is a developing country, after economic reform started in the early 1980s, China’s economic system has been in a transition period from an “old” centralized planning economy to a more open and decentralized market economy. China’s Gross Domestic Products (GDP) growth rapidly with an average 8% raise per year and seem will maintain its high-speed increase in the future. At the same time individual income gain fast growth particularly in some eastern coastal city like Shanghai (see Appendix 1,2).

A top economical official predict: “China’s gross domestic product will maintain its 7 percent growing speed in the future” (Yang, 1998). Social/Culture Labour Market: China’s abundant labor resource has provided a great amount of labors at a relatively very low cost to foreign multinational corporations and their Chinese local plants. In order to provide more knowledgeable and skilled workforce, China began to reform its the education policy in 1998. With the expanding adoption of university the percentage of group enrolled in tertiary education increased by 1% percent during nearest 10 years.

The power of the education will be more and more powerful before long. Lifestyle Change: Cities like Shanghai, Tianjin, and Guangzhou – have been developed into regional business centers, mainly due to their geographic locations – now these places displaying a more modern business-oriented culture with hybrid east-west lifestyle. Geographic change: With the economic development and increase populations China has been urbanizing more rapidly than had been anticipated. The urban share of the population rising by nine percentage points between 1987 and 1997. China National Statistics Bureau, 1997) Technological Global: Along with the computerization and usage of Internet, many company built up their own Internal Area Network and Database. Thought the extensive application of the network, many transactions performed thought the Internet. E–business has been the main transaction approach of all the company. China: the development of technology in China was two decades behind the global. But recent year, Chinese government was focusing on industry technological reform.

Industry Environment Analysis – Michael Porter’s five forces analysis The threat of new entrants Economies of scale – China’s automotive industry was in the growth stage of the industry lifecycle in 1997/98, capacity was extremely dispersed with about 115 assembly plants with an average production scale of 13739 units per plant, far below the minimum efficient scale of the international standard. Economies of scale are harder to achieve (low barrier) Capital Cost – huge requirement of plants, equipments, technologies, and skilled labors in this particular industry. high barrier) Distribution Channels – as the local market was be protected by the local government, it would be difficult for new entrants especially for foreign investments to develop new distribution channel in China. (high barrier) Switching Cost – the switching cost is higher because of the price of automotive was much more higher than can easily switch from one brand to another. (high barrier) Government Policy – Chinese government was quotas keep barriers to foreign investment to entry into the market (high barrier)

Overall – the biggest threat of new entrants comes from the local government as the government set up high entry barriers for this special industry. As a result, the overall barriers for new entrants were medium to high. Power of Suppliers Basic Production Materials: automobile industry can be regarded as a comprehensive and special industry as 50% — 70% of the value is manufactured in supply firms. Many local suppliers monopolized the local parts industry. In additional they are strange supported by local government. (high power)

Production Equipment: Chinese auto industry was 10-15 years behind the global auto industry development in the period of 1997-1998. Most manufacturers would use second-hand equipments at that time. Therefore the power of suppliers in production equipment was low. Government Influence: In China government plays an important role in auto parts supplier market. Local government implemented “localization tax” in order to improve domestic content rate of auto parts. As a result the overall bargaining power of suppliers was low. Power of Buyers

Standing on the point of 1997/98. individual income growth readily and car ownership in China was relatively much more lower compare with other countries. Also the retail price for a car was not influenced by the marketing demand but controlled by the government’s state Price Bureau. Therefore the overall power of buyers was low. Threat of Substitutes Overall threat of substitutes was low The Extent of Competitive Rivalry Globalization increasing competitive in European, U. S. and other developed countries; auto market in some developed countries were overcapacity.

Therefore many foreign auto manufacturers came into China to share the market with local competitors. But Chinese automobile industry was still in the growth stage of the industry lifecycle in the period of 1997-1998. The competency of local manufacturers was much more lower than foreign investments. Therefore in China the overall rivalry is medium. Key Success Factors for the Auto Industry in China Government support: the main power was control by the government in the auto industry; therefore the company should build up close relationship with the local governments in order to succeed in China.

Supplier network: local suppliers play an important role lie on the government support and as 50% — 70% of the value of an automobile is manufactured in supply firms. Increasing the proportion of parts/components provided locally by localizing a company’s parts/components supplier network is such a key factor – because it will not only result in a direct reduction in materials costs, but also in improvement on several key business performance. Therefore to build up a stabile and long-term relationship with local suppliers was the key element to be succeeding in China auto industry.

Labor Market: The ability to attract high quality local professionals and highly-skilled laborers is certainly another key success factor for an international joint venture business, especially for high-tech industries (e. g. automobile industry). Part 2 Internal Resources and Competences Analysis Value Chain Analysis for SVW Infrastructure Human Resources Management Technology Development Procurement Operations Marketing and Sales Outbound Logistics External and Internal Linkages External linkages: firm internal infrastructure link with Germany parent company’s value chain system.

Inbound logistics link with suppliers value chain system. Internal linkages: technology development vs. operations, infrastructure vs. operations and outbound logistics. (The development of technique or management style can improve productivities. Close relationship with local partner can make effective distribution. ) Stakeholder expectation The stakeholders of SVW were including: owners, employees, governments, customers, creditors, and suppliers (see Appendix 3). Major stakeholders of SVW were Government, Owners (can be divided into two parts: Germany VW and SAIC), and suppliers.

SAIC was state-own conglomerate under the control of Shanghai municipal government. The SAIC group consisted not only of assembly operations but also an extensive network of supply firms. Therefore the major stakeholders for SVW were Germany VW and Chinese partner (SAIC). Different expectations between Germany VW and Chinese partner SIAC Expectations Germany VWSIAC 1. Open China’s market for its productsAdvance production technology 2. Overcome trade barriersImprove management capability 3. Take advantage of low cost labor ; materialsOpen more information channels 4.

Reduce financial risksAdd new financing source 5. Reduce capital input in investmentUtilize foreign available resource 6. Access natural resource Reduce operational risk Different expectation can arise conflict; different culture may be a potential risk for SVW expansion in China. Therefore SVW needs to take different stakeholders expectation into account. Compensate and balance expectations between different stakeholders. SWOT analysis Strength Weakness Opportunity Threats Part 3 Strategic Options for SVW

For Porters Generic Strategies I suggest to adopt cost leadership strategy. Reasons: from the external analysis of SVW, we found that Chinese automobile industry was changing rapidly, if SVW wants to maintain high profit and marketing share the company must reduce it’s operational cost. From the internal analysis of SVW, we found that supplier chain management was the key success factor for SVW. Through the localization raw material and worker forces the organization can achieve cost-effective strategy. For Market Options Matrix I suggest to adopt marketing development strategy.

Reason: SVW was the leader in Shanghai’s market, in order to achieve the objective of German partner ( global expansion strategy and use Shanghai as a base for exports other areas). With about 13 years development in China, SVW hold enough knowledge and experience for the company to develop into other areas in China. Evaluation Criteria Suitability Externally: China auto industry was in the growth stage of the industry lifecycle generally. Many competitors will entry into the market. (The competitive environment in the Chinese automobile industry was changing rapidly.

After launched an anti-inflation austerity in Beijing, the demand for automobiles plummeted. ) The final reason was the high price of the car. Therefore the auto company must reduce the cost to cut the car price. Also after the several years successful market in some big cities, the competitive environment of these cities became complicated and unstably. Like other auto manufacturers in China, SVW becoming increasingly subject to market pressures. Output was not swallowed up by a state plan; it had to be marketed and distributed throughout the country.

Internally: From the SVW value chain analysis, we found that Germany VW was the parent of the SVW could supports or provide SVW to develop a new model which was adopted by Chinese market. SVW’s competence and capability Acceptability The company may face to the risk when adopted new strategies, it was acceptable because of the full support by the local government and share risk with local partner. It will be high return after reduce the cost. The major stakeholders for SVW were government, JV partners, and suppliers. Their expectation can be coordinated by the same objective that was profit.

If the now strategies can bring profit I believe the stakeholders will not hold negative opinions. Feasibility Internal: Germany parent company and local government will provide enough funds and working capital to carry on the new strategies. The objective for Germany VW was global expansion; therefore in my point of view marketing development strategy is consistent with the mission statement of Germany VW. External: The stability of government, political structure, and governmental policies has been viewed by international corporations as essential preconditions for their future investment in China.

The managerial implication here is that SVW should act positively toward government stability and policy and prepare for the best outcome. Part 4 Strategic Options Implementation Organizational Change Culture Change In an effort to speed up economic development, the Chinese government implemented an “open door policy” to introduce advanced technology and management systems from broad. Joint venture with Western countries is seen as one of the important avenues of achieving this. Western management systems have resulted in much conflict between Chinese and Western partners.

This was also appearing within SVW Joint Venture. From the analysis of stakeholder expectation; we can easy find that one of the most important issues for conflict was the culture difference between western and eastern. These differences create problems of mutual understanding and present both sides with the need for considerable adjustment and learning. Culture Web analysis Stories – The story for SVW maybe was the establish of Joint Venture in October 1984. Or maybe some interesting story about new manager’s management style or some small jokes, which pass throughout the whole company.

Organizational Structure – As SVW was combine from two parts: Volkswagen AG and the consortium of Chinese partners led by the Shanghai Automobile Industry Corporation, Organization structure of SVW basic on the function, departments including personal department, managing department, financial department and so on. But the organizational structure for Chinese partner may be more complicated. Because there were many sub-company which direct or indirect operated by SAIC. Stand on the point of Germany VW, the structure of Shanghai VW can be regarded as the holding company structure.

Control Systems – formally the organization was control by to partners Germany VW and SAIC. But in China the government plays an important role (tight control) of the organization. The Paradigm – the beliefs for SVW may be the improve productivity increase marketing share, reduce costs. The Assumptions is “SVW was a key link in a global expansion strategy, we should gain a significant foothold in China, hope to use Shanghai as a base for exports to Southeast Asia. Changing Culture In order to achieve the strategic objective of reducing cost, the organization could emphasize the important of saving cost in the weekly meeting.

Reward system could be change to establish a cost effective opinion. In order to achieve the strategic objective of develop new market the organization could add some new members to encourage other people in the organization. Also change top people will have a major impact on the culture throughout the organization. In my opinion the must effective way to change culture is involve organizational members do tell the members where the organization want to go and how we can tough it. The members will be more willing to implement decisions in that way. Change Management Style

Different management styles should be matched to the nature of the business environment and the resources in the organization in order to produce better overall performance. In the first of entry into China strategic planning style was adopted, because at that stage the new organization was not familiar with the external environment of Chinese market. The headquarters at business level to devise strategies designed to build long-term competitive success. In order to achieve profit-oriented success, SVW should adopt new management style – Strategic control.

Resources Reallocation Physical: improve productivity of equipment; use more technology equipment to reduce waste; manufactory located in some western areas. Financial: tight financial control in production and procurement areas; full financial support on the development of new geographic marketing. Human Resource: recruit western-China work forces (consistent with manufactory location); improve employee training in order to improve productivity. Difficult in China and how to solve these Problems Tight government control from tariff to foreign exchange

Solution: build up close relationship with government, localized procurement and sale product with the domestic. Low quality domestic suppliers Solution: technology support for the domestic suppliers. Build up close relationship with domestic suppliers Conflicts between western and eastern culture Solution: Learning in an intercultural context requires sensitivity to the differences in cultural values, and the transferability of management practice to a new culture. Stably government unstably government policy Solution: build up close relationship with government and flexible reflect to government policy change.


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