Mercedes-Benz Expansion in Hungary: A Business Report

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Business Organizations and Environments in a Global
Context
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Executive Summary
The business environment of any country includes several internal and external factors which
manipulates the mode of operations of the business organizations running within it. The external
factors impact more to the initiatives taken by the business organizations to maximize their profit
and ensure their growth. In this report the scope and opportunities for the business plan of
Mercedes-Benz to expand in an existing market of Hungary has been discussed. Various theories
and analysis has been provided to reach to a conclusion about the success or failure chances of
the business plan. At the end of the report, the researcher has made certain recommendations
which the company can apply for the maximum success of the company.
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Table of Contents
Introduction......................................................................................................................................4
Background Information of the Company.......................................................................................5
Background Information on the Business Environment in Hungary...............................................6
Analysis of the business scenario of Hungary using Porter’s five-forces analysis with respect to
Mercedes-Benz................................................................................................................................9
Analysis of the business opportunities for Mercedes-Benz in Ansoff’s matrix............................12
Business opportunities for Mercedes-Benz in Hungary based on the Demand and Supply
Analysis in that country.................................................................................................................13
Conclusion.....................................................................................................................................15
Recommendations..........................................................................................................................15
References......................................................................................................................................16
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Introduction
Business environment in a global context for any organization can be defined as “the
environment in different countries with factors exogenous to the home environment of the
organization, influencing decision making of the organization”. The terms ‘Global’, ‘Business’
and ‘Environment’ depict the nature of international trade and highlight the effects of numerous
forces shaping the nature and dynamics of global commerce. There are a number of reasons
behind an organization planning to expand worldwide out of which increasing the profit margin,
is the key reason. Mercedes-Benz is a multinational car manufacturing company which is based
in Germany and has its operations almost worldwide. Though Mercedes-Benz has a
manufacturing unit in Hungary, now it is planning to setup the first global “Full-Flex-Plant” in
another part of the country to produce various vehicle architectures from compact models to rear-
wheel drive sedans and various drive forms, including electric vehicles. In this report, the
planning and the various application procedures of adopted by Mercedes-Benz to materialize this
plan, has been discussed.
The key emphasis of the expansion analysis has been given on the Mercedes-Benz foreign direct
investment planning to Hungary which can help the company to diversify their portfolio and also
to Hungary to provide finance for their international sales. Foreign Direct investment is a type of
investment that a firm or individual of any country makes into its business interests in another
country. This report explains the various planning adopted by Mercedes Benz to invest in
Hungary for opening its new “Full-Flex-Plant”.
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Background Information of the Company
Mercedes-Benz is a renowned name in the field of automobile industry which is a German based
company and has its operations in almost all countries in the world such as African countries,
Asian countries etc. Founded by Karl Benz in 1926, this company is a division of German
multinational automotive corporation Daimler AG and has secured rankings among the top
global premium car brands. Mercedes-Benz is a large sized company which has around 298,700
employees working under it and has an annual revenue more than 70 billion business worth as
per the last five years data. It manufactured the first petrol powered car in 1886 and many other
innovative technologies which received huge appreciations around the world and were followed
afterwards (Engler et al., 2015).
The company manufactures cars, buses, trucks, vans and also offers mobility services. Benz cars
are further categorized as passenger cars, personal cars, sports cars, prestigious cars and smart
cars which include electric mobility system. The logo of the company is a three pointed star
which represents the three branches of motorization which are land, sea and air. The logo also
reflects the three major commitments from the company’s side for the consumers which are
brand value, superior technology and comfort (Medve‐Bálint et al., 2014). The main goal of the
company is to offer excellent assistance to their consumers and dealers, 24 hours a day and 365
days a year. The company also entertains all sorts of enquiries about their product lines from the
customers and provides immediate assistance with quick solutions. According to various
financial sources, the international performance of Mercedes-Benz in the international market in
2018 financial year, was quite good. In Europe, the company secured 1% growth on its sales
value, in Asia-Pacific countries, the company received a growth of more than 7% and it grew
around 5 % in the NAFTA regions including USA.
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Background Information on the Business Environment in Hungary
Hungary is a developing country located in the east-central Europe, having a population of more
than 10 crores people and having around 93 square kilometers of total area. Its official name of
this country is Hungarian Republic which has a manufacturing plan of Mercedes-Benz
Kecskemét which is a vital part of the global production network for compact cars of the
company. The company is planning to build a new “Full-Flex-Plant” at Budapest which is a
popular town in Hungary, to produce a wider range of vehicle architectures, ranging from the
compact car models to sedans with rear-wheel drive and various types of power trains, including
electric vehicles with more flexibility and on a single production line, presently (Shatskaya et al.,
2017). In this scenario, a thorough analysis of the effects of various macro environmental factors
on the business operations of Hungary becomes essential to determine the success rate of this
business plan in the future (Dunay et al., 2015). The detailed analysis of all the macro or external
environmental factors, is mentioned below:
Economical status
The economy of Hungary is export-oriented which has a heavy impact on foreign trade. Since
2015, the country is on the verge of economic growth with an increase in the number of
taxpayers, decrease in the national debt from 85% to 73.6%(As off 2017 data), low inflation
rate(2.1% as off 2017 data), increase in GDP by 4% (as off 2017 data), and many more (Pavlínek
et al., 2015). This increase in GDP has resulted in the increase in employment rate and allowing
the companies to hire more employees. This favorable economic situation of Hungary is
motivating the owners of Mercedes-Benz to invest in the country for expansion of their business
(Innes, 2015).
2013 2014 2015 2016 2017
Population (million) 9.9 9.9 9.9 9.8 9.8
Economic Growth (GDP, annual variation in %) 2.1 4.2 3.4 2.2 4.0
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Consumption (annual variation in %) 0.5 2.4 3.4 3.8 4.1
Investment (annual variation in %) 9.8 12.3 1.9 -10.6 16.8
Industrial Production (annual variation in %) 1.1 7.7 7.4 0.9 4.8
Retail Sales (annual variation in %) 2.0 5.1 5.6 4.5 5.3
Unemployment Rate 10.1 7.7 6.8 5.1 4.2
Fiscal Balance (% of GDP) -2.6 -2.6 -1.9 -1.7 -2.0
Public Debt (% of GDP) 77.1 76.6 76.7 76.0 73.6
Money (annual variation in %) 4.4 9.0 7.5 9.9 9.9
Inflation Rate (CPI, annual variation in %, eop) 0.4 -0.9 0.9 1.8 2.1
Inflation Rate (HICP, annual variation in %, eop) 0.6 -0.9 1.0 1.8 2.2
Inflation (PPI, annual variation in %) 0.5 0.1 -1.3 0.5 3.9
Policy Interest Rate (%) 3.00 2.10 1.35 0.90 0.90
Stock Market (annual variation in %) 2.2 -10.4 43.8 33.8 23.0
Exchange Rate (vs EUR) 296.9 308.7 309.9 311.5 309.3
Exchange Rate (vs EUR, aop) 297.4 316.6 315.5 309.2 310.8
Current Account (% of GDP) 3.7 1.5 3.5 6.1 2.9
Current Account Balance (EUR bn) 3.9 1.6 3.9 6.9 3.6
Trade Balance (USD billion) 8.7 8.3 9.5 10.8 9.1
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Exports (EUR billion) 81.3 84.5 90.5 93.0 101
Imports (EUR billion) 74.7 78.2 81.9 83.3 92.5
Exports (annual variation in %) 1.7 4.0 7.0 2.8 8.2
Imports (annual variation in %) 2.0 4.7 4.6 1.7 11.1
External Debt (% of GDP) 117 115 107 97.2 83.6
Table 1: Details of macro and economic environment of Hungary
(Source: Innes, 2015).
Social issues
The demographics of Hungary is also quite favorable for doing business operations in the
country. The population of the country is under control and the birth rate has dropped by 1.5%
between the months of January to February, 2017. The religion difference in Hungary is quite
high which can cause social inequalities and low male: female ratio (90.59) can cause gender
inequalities in the workplace (Przychodzen et al., 2015). Still the good literacy rate (99.4% as of
2015 data) and can be favorable aspects for Mercedes company to hire more educated and skilled
employees for their new plant.
Political Stability
The political condition of Hungary is quite stable at present as centre-right Fidesz-KDNP
alliance has won the elections in 2014 and since then the government is successfully dominating
all the public discourses by applying unorthodox policies (Hajnal et al., 2014) This political
stable condition is attracting foreign investors to invest more in the country. Absence of
terrorism, war situations also offer opportunities for business expansion for the automobile
companies (Antal, 2017).
Cultural systems
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The culture of Hungary is quite formal and personal contacts and networks are very important in
this country for doing business. Socializing outside the workplace, business lunches, dinners are
the general ways for meeting and understanding people but not for negotiating or doing business
deals. Average Hungarian people can speak in English or German and direct business
communication is two crucial attributes of the country which attracts foreign investors.
Punctuality is a prevalent culture of Hungary which can be beneficial for the automobile
companies for doing business operations in that country (Tompos, 2015).
Legal and Financial Systems
The legal and financial systems are also under the continuous judgment of international and
European Union. A special report is presently under preparation which will highlight on the
prevailed law in Hungary by European Parliament’s Committee on Civil Liberties, Justice and
Home Affairs (LIBE) and its effects on the business scenario. However, there are some
limitations also from the legal point of view such as the weakness of the country on receiving
government credits, flat-rate tax models irrespective of the income level etc. Still the current low
corporate tax rate which is expected to be 9% by the end of this year, can be favourable for
Mercedes owners to invest in the country
Technological factors
The country includes a government office named as NKTH (National Office for Research and
Technology) which is solely responsible to explore government's strategy in the field of research,
technological development and innovation. The contributions of this institutions towards the
betterment of Hungary’s technological advancements, has resulted in the development of
renewable resources, introduction of the technology of using mobile phones as bank cards etc.
These technological revolutions are attracting many business owners like mercedes-Benz to plan
for their business expansion in this country (Nagy, 2018). The ease of access of the systems and
instruments is another important benefit of Hungarian market for the investors.
Analysis of the business scenario of Hungary using Porter’s five-forces analysis with
respect to Mercedes-Benz
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Mercedes-Benz is an multinational manufacturer of premium cars, buses, trucks etc. which has
its headquarter in Germany and is operating across all the countries in the world including
Hungary. Now, the Benz owners are planning to open a new plant in the Hungary to diversify
their product portfolio and to increase their profit. Thus, the detailed analysis of the Hungarian
market is necessary for Mercedes-benz to decide whether the decision of investment on Hungary
will be favourable for the company or not (Pandurics and Illés, 2015). A brief analysis of the
Porter’s five forces of Mercedes-Benz on Hungarian market, is given below:
Competitive rivalry (High)
The premium automotive industry is quite competitive in nature as most of the players have a
strong product line and huge investment power. This industry develops vehicles having high
price range and thus proper marketing and communication with the prospective consumers are
very important for these industries to develop a perception of status, ambition, recognition,
achievement and success by owning a luxury vehicle. The Hungarian market include automotive
companies such as Audi, Credo, Alfabusz, Ikarus etc. all of which are global organizations and
perform strong promotional activities to have their hold on the premium consumer segment. This
scenario highlights the fact that Mercedes-Benz has high level of competitive rivalry in Hungary
for which the company will have to put a lot of effort to promote its new plant and its product
lines (Wegner et al., 2018). This high competitive environment poses big challenge for
Mercedes-Benz to expand in Hungarian market.
Threats of potential new entrants(Low)
The scope of new players to enter in the premium car industry, is very high. A lot of factors are
there which act as strong barriers against the new players to enter in this industry. The first
barrier is, any new company entering in this segment, will need to invest a lot of capital, skilled
technicians, advertising etc. in order to compete with the big players which very few can bear.
Next is the high brand equity the existing players are having due to spending lot of time in the
industry and market which the new entrants do not have. That is why automobile giant like
Mercedes-Benz is enjoying a lower level of threat from new automotive companies in almost all
countries around the globe including Hungary which is smoothening their way of expansion in
Hungarian market.
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Threat of substitutes (Low to medium)
Luxury and premium vehicles generally fulfill two needs of the consumers which are the means
of transportation and the indication of consumer’s privileged status. The first need can be
substituted by options such as mainstream cars, motor-bikes, bicycles, public transports etc. The
next need can be substituted by more players offering the same product lines in the same market
which is applicable in this scenario. Hungarian market has quite a lot number of automotive
companies doing business within it along with Mercedes-Benz. Another major substitute for
Mercedes-Benz in Hungarian market, is used car market which has grown 70% between January
to February, 2016 (as of 2016 data). Mercedes-Benz also has buses in its product line which is
the means of public transport which has a couple of other Hungarian manufacturers also such as
Fitos-Bus Ltd, Belabusz Ltd and similar others. All these conditions depict the fact that
Mercedes-Benz has a medium to high level of threat from the substitutes in Hungarian market
which might cause adverse effect for their new plant.
Bargaining power of suppliers (Medium-to-High)
Suppliers play a very important role for any industry, in the manufacturing of the end product by
delivering quality raw materials, labors etc within a specified time and at a particular price. Any
deviation in the delivery timings or material quality, might delay the production of the end
product and thus losing a potential consumer. As Mercedes-Benz is the owner of one of the
leading global luxurious vehicles developing brand, it might suffer a good amount of loss due to
disparity with the suppliers, as it has a premium customer base. Parallely, a very high delivery
costs proposed by the suppliers for the new plant location of Mercedes-Benz, can act as a threat
for the company for their business expansion plan (Dömötörfi et al., 2016).
Bargaining power of customers
Since Mercedes-Benz is already doing business in Hungary at a successful pace, it indicates that
the buying power of the consumers of that country matches the price range of the company’s
vehicles. This depicts that the purchasing power of the consumers might not be matter of concern
for the company to decide its new plant’s success. At the same time, it also highlights the fact
that the Hungarian consumers from premium income level do a lot of research before making
any purchase decision. As Hungary has other premium car manufacturers also operating there,
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offering relevant and proper information to the consumers before the other players becomes
highly essential for Mercedes-Benz. This scenario poses a medium to high level of threat from
bargaining powers of the consumers to Mercedes-Benz regarding their expansion plan.
Analysis of the business opportunities for Mercedes-Benz in Ansoff’s matrix
Ansoff’s matrix is a tool of making strategic planning which offers a framework to the business
owners to develop their marketing strategies accordingly. It helps to view the probable future
growth prospect of the business initiative that any organization is planning to make and develop
their marketing strategies according to that (McDonald 2016). It highlights four different
business scenarios for any business plan or initiative which are described below:
Fig: Ansoff’s Matrix
Source: (McDonald 2016)
Number one: Market Penetration
It is the safest initiative that a business organization can take as it offers a plan to promote an
existing product or service of the company which is already established or having a high demand
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