Alexandra Fernandez de Santos Santos Lazovic Student number: 3087697 Total Word Count: 2209 International Business Environment
CHINA, CAR INDUSTRY Prof. Dr. Sarianna Maarit Lundan
Case: Nanjing Auto makes the MG 1. How have foreign car firms historically established themselves in the Chinese market (what form of FDI?), and why is this mode of market entry normally used?
In the first place and as stated by the International Business book, I will like to name the different mechanisms of FDI, which are Sino-foreign joint venture, joint exploitation, foreign – owned enterprises (or WFOEs), foreign – funded share holding companies and joint development companies, among others. In the car industry case, the multinational enterprises have usually entered the Chinese market through joint ventures with local firms. This can be supported with examples as the joint ventures between Volkswagen and SAIC (Shanghai Automotive Industry Corporation) or the one with FAW (First Automotive Works). This mode of entry in the Chinese market is one of the most common because allows technology transfer among companies and what is more important, between different countries, which culminates with a more competitive enterprise, because of the newly acquired knowledge. It could be said that they doubled the information and technology of the personnel and this will lead eventually to an increase in the profits. Nowadays, and especially in the automotive sector, the technology skills and knowledge are a competitive advantage that every enterprise must leverage. And the combination of both (the outward and the inward) is perfect in order to achieve the settled objectives. One of the main targets which enterprises look forward to achieving is the low cost in the production process. But, lately, lost cost advantages are complemented by capabilities in design, manufacturing, marketing and management (driving process and production innovation). Many firms, through joint ventures with Western car makers, have developed and invested, in equal terms, in these assets and capabilities. Furthermore, the role of the government is basic for the correct functioning of the companies in China. Multinational investors have boosted the exports through joint ventures with the local firms. At the same time, this fact has allowed the local firms to become more productive as a consequence of the development of assets and skills. This is one of the main reasons why this mode of entry, joint ventures, takes place in China. The role of the government is extremely powerful and determinant in the Asian country, so the only way a multinational enterprise can access the Chinese market without having to face greatly high taxes is through the local firms and the agreements they settled with them. This mode of entry, will at least, permit the firms to pay a lower tax than if they were setting the firm by their own. Dealing with this issue, it would be interesting to make an allusion to a Chinese government initiative, which is the “Going Global”, considered a key strategy in order to internationalise the industry sectors and companies. Their policy and initiatives look for the development of target industries and indigenous innovation capabilities which are central to the government plans. So, it could be said that joint ventures are a positive tool for both MNEs and Chinese firms.
To finish, it can be appreciated the great significance and influence of this joint ventures in the car industry through SAIC, which is one of China’s largest automakers via its joint ventures with General Motors and with Volkswagen. If I associate them, with the also named companies in the article, as are Roewe and MG brands, this firms magnitude it is no comparable. But the subsequent merge between NAC and SAIC allowed this firms to achieve almost the highest rankings in the Chinese market, which could have never been attained if the coalition has not taken place. 2. List some examples of firm-specific advantages (FSAs) that are held by foreign car manufacturers and some examples of country-specific advantages (CSAs) in China relevant to this industry.
In the one hand, local companies enjoy the country-specific advantages, that are the ones they have because of their localisation accompanied by their potential to expand sales to a growing population. In relation to this specific industry, some other advantages that are remarkable are the land and buildings. They also, as big connoisseurs of their own population, can carry out an accurate local marketing strategy in order to promotion the cars offered for sale. Furthermore, to this list, it could be added: cheap labour, facilities in the country, links to suppliers, buyers, contractors, distributors etc. which could facilitate i n almost every area of the production process. This situation resembles when a franchise contract is held, the franchisor is obliged to help as much as possible the franchisee to overcome their lack of experience. This is the same, but it could be said that in a double direction performance, this means that MNEs helps local firms as much as local firms can offer their aid to MNE, both of them in t heir range and with their capabilities. Additionally, local Chinese firms can provide access to local resources and materials. As well as recruitment capabilities. And, in the last place, in relation to their location, local government connections and knowledge of local regulations that a company never established in the Chinese market will probably ignore. In the other hand, the firm – specific advantages (FSAs) are those advantages which the firm counts with and that can provide when the joint venture or acquisition in this case happens. These are, mainly, equipment, technology and capital. Because of their position, they are usually responsible for the export marketing. Moreover, their production and management systems are also an advantage the firms possess. Dealing with the last system, the management ones, it would be interesting to indicate that MG can provide a better controlled and more coordinated system followed by best practices and performance measurements. Furthermore, the MG car firm is globally known because of its high-quality cars, and this feature was directly transferred to the Chinese company, NAC when they acquired the British firm. The reputation that MG already had, would have been more difficult for NAC to obtain if this acquisition has not happened. Especially, taking into account the car industry, it is necessary to highlight advantages like management expertise, engineering and plant level training, which are considerable relevant in this sector, that is continuously changing and competing with the rest of the companies.
So, to conclude, and in order to let the car industry succeed, a combination of both advantages (CSAs and FSAs) must occur. Being or having the most advanced technology is determinant in this sector. This will lead to the production of better cars that if appropriately promoted, will allow the company to achieve higher revenues. And the used word is “revenues” because as it is generally known, the fact of obtaining an enormous amount of money does not directly mean that the profits will also be considerable. This fact will also be possible thanks to the great expansion the Chinese industry has and is suffering in the last decade. 3. What are the relative costs and benefits of acquiring (rather than internally developing) particular kinds of FSAs, in the way that Nanjing Auto has done?
First and foremost, the fact of this corporation buying MG provided them with the name of the company, physical assets (powertrain and technology) and the manufacturing rights, among others that I will list hereafter. Even though some of them may seem very simple, in order to create a company all of the issues are important and can make the entrepreneurial activity easier. This form of performing, acquisition, is quite unusual. It is more common, especially in China, the joint venture, a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task and taking the risk. This task can be a new project or any other business activity. In a joint venture, each of the participants is responsible for profits, losses and costs associated with it. In relation to the text, the MG Company was struggling after the collapse they suffered on the early 2000’s. The NAC acquisition, not only helped the firm to overcome the internal crisis, but they placed them in the most competitive and, now, profitable markets. This fact was possible thanks to the cheap labour the Chinese firms relied on which made this improvement feasible. As it can be appreciated in the case of Nanjing Auto, the acquisition of such a company as it was MG could equip the local company with quality staff (transferred via training programs and by recruiting some specific staff to work in China as engineers, designers or managers), technology, R&D (because they count with the economic resources in order to work in this sector), additional skills etc. All of these were not quite remarkable in the local firm, but the British company, thanks to its position, could develop easily. The quality staff that I mentioned, in the first place, will permit the local firm to avoid the circumstance of recruiting special labour in their country and which will allow the in the last place, money saving. Because, as it is generally known, the main purpose, as of all of the enterprises is to maximise profits, and this is directly linked to minimise costs. But there are recent studies defending the fact that outstanding services and effective promotion could lead to a “low-quality product”, and this could cause a damage to the company’s reputation, that even though is not a direct loss of money, in the long-run it could affect the enterprise in an extremely negative way. But this acquisition also affected the corporation in a negative way. As they took advantage of the good aspects the firm had, the negative issues that triggered the collapse of the company did not disappear. The company, before collapsing, was going through a complex situation involving a problematic with take-overs
and management failures and when the acquisition occurred, the Chinese firm had to confront this situation. Before the acquisition, it was known that the company could not maintain their positive balance. But t hanks to the Nanjing Auto’s performance, MG was able to provide the creative and engineering spark to NAC, which owns MG and is selling millions of cars in China. Furthermore, this helped the firm in the long run, because even nowadays, if this intervention from the Chinese firm has not happened, their profits will not have been enough in order to balance the company’s losses.1 So, as a benefit of this acquisition performed by NAC, the acquisition itself is the most advantageous the firm MG could have. This is also because NAC, as a Chinese company, is aware of all t he local policies and moreover, the government support which will support them with subsidies or economically through government programmes. Besides, although there are two main types of FDI, input – oriented (resource seeking) and output – oriented (market-seeking), the motivations of multinational enterprises from emerging economies are significantly different. The presented study indicates that they are internationalising to fill current competitive disadvantages, such as technological capabilities and brands, rather than exploiting existing advantages to expand abroad. To finish, and in a brief manner, it is interesting to mention also some difficulties that multinational enterprises have to face when establishing in the Chinese market. Some of the most important are transparency of laws and regulations; the cost of doing business (in the case of foreign companies); customs procedures/export procedures and foreign exchange regulations/ exchange rate risk. But due to the aforementioned benefits, the company will be able to overcome all these obstacles and take a stance in the market (market share).
Conclusion In order to sum up all the stated information, it would be interesting to make a general overview through the Chinese situation in the last decades. In 1993, China’s auto industry was producing less than one million vehicles per year, but 20 years later, the country started producing over twenty million vehicles. In 1993 companies such as General Motors, Ford, and Toyota were the main f irms in the global auto industry. Today, China is becoming the main location for the car industry.2 Since the several joint ventures and acquisitions (as the one of MG by NAC) that took place on 2005 on, the Chinese car market has remained increasing until nowadays. This triggers the displacement of the car industry into China due basically to the cheap labour force and government facilities that local firms can provide.
1
“China ‘can get MG back to speed ’”, Bob Haywood. Birmingham Mail. Retrieved on February 18, 2017 from http://www.birminghammail.co.uk/news/local-news/china-can-mg-back-up-6212043 2 “The Changing Landspace of Global Autos ”, Jack Perkowski . Forbes. Retrieved February 19, 2017 from http://www.forbes.com/sites/jackperkowski/2013/10/10/the-changing-landscape-of-global-autos/#68ea556c3dbc
At first, what China was looking for, it was to surpass the Japanese industry, and they ended up in the top position worldwide ranking. This is a clear example of how competitiveness and the correct combination of resources can allow and industry to achieve their objectives in every field.
I will like to set that all the statements I have established all along this paper are obtained from the “International Business” book, excepting those references I have already established. Bibliography: Rugman, Alan M. & Collinson, Simon. 2012. International Business. – 6th ed., Financial
Times/Prentice Hall.
