International Business: Entry Strategies in China Auto Market

This case study examines the entry mode strategies employed by foreign companies in the Chinese automobile market, focusing on joint ventures, licensing, and exporting. It discusses the motivations behind entering the Chinese market, including access to a growing demand and low production costs. The analysis incorporates the product lifecycle theory to explain the industry's dynamics. Various entry strategies are evaluated, including asset-light approaches and exporting key components. Strategic players like General Motors, Honda, Toyota, Nissan and BMW and their respective approaches are highlighted, emphasizing the influence of their strategies on the overall market entry landscape. The document provides a detailed overview useful for understanding international business strategies in emerging markets, and Desklib provides access to more resources on this topic.

Q.1
Creates synergy
A joint venture is initiated between two or more parties to exploit the qualities of each
other. One company may have a unique trait that the other firm lacks. For instance, between
AMC and BAW, AMC was to bring its technology and the BAW was to open the market.
Sharing of risks and rewards
In this case, the risks and rewards with regards to a specific activity for which the joint
venture was entered are shared between the partners.
Advantages of a joint venture
Economies of scale
It is through joint ventures that firms can scale up their constrained capacity, for instance,
the Beijing Jeep could produce more than 80,000 units.
Access to new markets and networks of distribution
The joint venture between the American and Chinese firms allowed American firms to
access the Chinese automobile market.
Low production costs
The joint venture between American automobile firms and Chinese firms allowed the
American firms enjoy the low labor costs in China thus reducing the production costs.
Disadvantages of joint venture
Disputes
A good example is the disagreements that went between the AMC and BAW over the
kind of jeeps to be produced, and this led to the dissolution of the joint venture.

Q2
China has been considered as a good ground for producing vehicles and many elements
needed in manufacturing automobiles. Some of the arguments in favor of stem from the demand
side. It is argued that in the developed economies the demand for automobiles is constant. It is
anticipated that in future, the majority of the increased demand will originate from developing
nations such as Brazil and China where demand will be expected to grow at around 10%
annually. It is anticipated that in the next few years China will account for more than 15% of the
world demand. Based on the supply side of why China is suitable for automobile production, it is
said that manufacturing technologies are well identified. China is characterized by a cheap
workforce that is flexible when it comes to training. The level of education of such workforce is
also said to be rising. Thus, the economies of scale and the extent of flexibility would enable
production costs to be low.
Q.3
Product lifecycle
The theory entails three distinct phases. One is a new product, and the second is maturing a
product and finally product standardization. This theory fits well with the Chinese automobile
industry looking at the innovation and manufacturing processes happening across the globe. A
good example is where the American automobile firms conducted research in the Chinese market
and found that highly skilled workforce was cheap there and this is the primary reason they were
seeking joint ventures so that they could tap onto such benefits. China offered both high skilled
labor and research facilities at a low cost to such global firms
Q.4
Asset-light strategy equivalent to licensing

This approach translates to having the global partner dictating how the design would be
and brand to be assigned to its products. The global partner would be responsible for the whole
process involved in designing and the development of the automobile. On the other hand, the
Chinese partner would contract to manufacture the vehicle facilitating sourcing of components
domestically as opposed to what the Finnish Company Valmet did for Porshe.
Advantages
With this mode of entry, entrants would be allowed to enjoy and experience the benefit of
Chinese manufacturing which is said to be low cost and the steady establishment of component
supply. It would also enable capital to be saved by the foreign partner and concentrate on those
sectors where the global partner has the absolute advantage for instance in areas of research and
development and design and marketing.
Disadvantages
The global brands may be victims of tainted reputation mainly due to poor quality.
Disputes may also arise regarding the sharing of losses.
CEO’s choice
As a CEO, the asset-light strategy equivalent to licensing would be strategic as the
company would benefit from the manufacturer in China that is characterized by low production
costs and a steady supply of raw materials. The company would also be able to save on capital
and specialize in sectors where it has an absolute advantage, particularly in research and
development. Licensing also enables the parent company to retain its exclusive patent rights, and
this is important as it will allow the company to prevent cases of copying.
Exporting key components to be assembled in China by an assembly plant in China that
could be a product of a joint venture, domestically owned or foreign-owned.

Advantage
Assembling automobiles in China come with some benefits such as low production costs.
Also, through a partner, it would be easy to have access to some of the distribution networks.
Disadvantages
Loss of quality may be experienced particularly if a domestic manufacturer is involved. It
requires a partner in most cases.
Q5.
General Motors commonly known as GM was ranked as the second largest player in the
Chinese automobile industry as it accounted for 9% of the gross sales. It is in 1998 that GM
entered the Chinese market and established the Shanghai Automobile Manufacturing Company
with an investment value of about $1.5 billion.GM used a joint venture with SAIC based on a
50/50 and the motivation behind the venture was to produce 40% of the estimated value of the
car with Chinese labor and parts as per the first-year schedule, followed by 60% in the second
year and 80% in the third year.
Honda ranked as the third largest with regards to selling automobiles in the Chinese
market accounted for 5.5% of the total sales. It established the first foreign full-service
dealership chain. It was the first company to construct a plant that was strategically designed for
export. The plant that was to be built in Guangzhou was to be completed in 2004 and was
anticipated to export more than 50000 units of vehicles to continents such as Europe and Asia.
Toyota, on the other hand, came up with a different approach, licensing. It established a
relationship with Tianjin Xiali a TAIC subsidiary. It is in 2000 that it licensed Tianjin Xiali to
manufacture a car as stipulated by the Chinese firm’s marque a vehicle that was structured using
the concept of Toyota Platz that was commonly known in the U.S. as Toyota Echo. Toyota was

using the license as a source of its revenue. In this agreement, Toyota manned the production and
developed Tianjin’s capability to match the exact standards that Toyota needed. However, FAW
took over Tianjin, and this saw a change of strategy to a joint venture now between Toyota and
FAW with Toyota building an entirely new model which was to be sold under the brand name by
Toyota. Toyota only claims 5% of the Chinese market which it services primarily through
imports. Toyota seemed to aim higher with the introduction of Toyota way of doing things in
China similar to what it did in the U.S., for instance, it is developing a young and vibrant
workforce with an average of 21 years and intentionally relying substantially on the manual
assembly.
Nissan also developed a licensing agreement to manufacture the Bluebird with an affiliate
of Dongfeng Fengshen Automobile company. The motive behind the Nissan’s strategy was to
establish a joint venture with Dongfeng Fengshen Automobile company to produce cars at the
beginning of 2003. It was the first joint venture to have a complete production line.
BMW had been laboring on a variant of the authentic Toyota strategy. It built a
relationship with Brilliance China Automotive, and BMW was strategic as it helped Brilliance
construct an assembly plant in Shenyang where the staff and workers got trained. BMW
purposed to use Brilliance to manufacture its 3-series and 5-series models that were to be
produced for the market in the East Asian region.