Executive Summary
This report will deeply analyze the benefits, costs and risks associated with doing business in China, Russia and Germany. Through comprehensive evaluation the three countries’ macro environment, it deems China is the most attractive target for foreign direct investment. It is sure that China is an emerging market which has great potential demand for automobile products. Therefore, the automobile company should consider investing in China if it wants to enlarge its business.
1. Introduction
In recent years, with the development of economics, the demand to automobile has increased quickly in the world. It is the opportunity for automobile companies. In general, China, Russia and Germany are three big countries; the automobile company will get benefit if it chooses to any country of the three, but it also face some challenges. It is well known in Germany, the automobile industry is very powerful, if the company chooses to invest in Germany, it needs to face numerous competitors. Also, in Russia, the trade barriers will obstacle the entry of automobile company. For China, the economic condition is weaker than Russia and Germany; automobile is a luxury product for lots of people. Therefore, the company needs to comprehensively consider the benefits and risks if it wants to invest in a new market. This report will combine the macro environment to discuss the benefits, cost and risks if the company entry into the three countries and give the conclusion.
2. Core content
2.1.1Benefits investment in Germany
It is well known the automobile production technology in Germany is in the leading level all over the world (Martin, Mitchell, Swaminathan, 1995) it means that Germany automotive firm owned comparative advantage. If investment in Germany would be successful, their wills potential benefits arise when US automotive MNEs through learning affect that absorb advanced technology; superior management techniques. These resources are able to transfer back to contribute to US automotive firm. However, only on the premise of that U.S automotive company is successful in transferring know-how back to their U.S operation; the result may be a net gain for the U.S automotive firm revenue. What is more, as the consumption level and revenue in Germany is higher than china and Russia, the Germans are more affordable to pay their cars. It means total potential revenue in Germany will be optimistic, if the company establishes fixed consumer groups in the new market.
2.1.2Cost and Risk in Germany
Automotive industry is the pillar industry in Germany (Butz, Leslie, 2001). In Germany, there is large number of famous automobile brands which include Mercedes, Volkswagen and BMW (Majek, Hayter, 2008). It occupies large amount of market share in international market. Also, as these famous companies have long development history, all of which have their special supplier to supply automobile facility. Therefore, if the U.S automobile company decides to invest in Germany, the development of future market space is not optimistic. One of reason is that the large amount of automobile facilities producer have formed competitive relationship with new entrant, all of them have fixed consumers.
Meanwhile, some famous brands have the special suppliers to produce the relevant facility; they have cooperated with each other for the long time. Therefore, form the above analysis; it can be identified if the automobile company decides to choose to invest in Germany. The demand of local market is very limited. It needs to face higher risks in contrast with China and Russia. Also, the cost to invest in Germany is also very high. It is well know that the consumption level in Germany is much higher than China and Russia (Diponegoro, Sarker, 2007), the average salary in Germany is also very high level. If the automobile company chooses Germany as its target, it needs to pay higher operational cost to maintain daily business (Narayanan, Taman, Singh, 2005). All of which are not conducive to the development of the new entrant in market.
2.2.1Benefits investment in Russia
The average revenue of Russians is higher than Chinese. The high revenue and slow life pace in Russia decides lots of Russians have a keen interest in buying a private automobile. According Libor Krkoska and Alan Spencer (2008) report that the Russian economy has experienced a period of rapid economic growth due to the benefit of increase in oil prices since the August 1998 crisis. The level of per capita income of the population rapidly increased because of both salary increases and the expansion of consumer credit, which expands availability of consumer that obtain enough finance to support their car purchases.
Automobile industry occupies the dominance status, the technology is mature and it has lots of skilled and knowledgeable workforce, if the U.S automobile company select in investment in Russia, it is sure that the new technology and talents in Russia can benefit the innovation of the company. The scholar of Hill.C (2013) also believes that firms through the innovations in products and process will create significant economic value and boosted productivity. Therefore U.S automobile are able to become more competitive in fierce global market.
2.2.2 Cost and Risk in Russia
The potential policy risk in Russia car industry
Xavier Richet (2003) also thought that it is impossibility for carmakers to take the majority control of a Russian company. On the one way, outside companies wish to set up Greenfields, in order to tight control business; on the other, Russia government expected through joint-ventures to cooperate on some segments of production: jointly assembling cars, produce parts. Therefore there will not be a best cost-efficiency way to manufacture car, negatively impacting on U.S automobile company to maximize their profit. He also argue that foreign companies investing in Russia face high transaction costs, entering in long discussion with their partners (domestic car market, local and federal government, banks) is necessary in order to set up their cooperation. Generally, foreign company who interest in investing in Russia will face long time discussion or negotiation with their partner, initial projects revised and time consuming on discussion with local government. As
a result, there will be leading to long delays and important gap between initial contracts and lately modified that U.S automobile management should be taken into account that opportunity cost as investment factor is also important. The increase of corruption in Russia
The challenge for the U.S Company investing in Russia auto firm will have to face serious corruption issue. According to European Bank for Reconstruction and Development (2000) report that a third of firms doing business in Russia indicate that they are required to give bribes in order to do business and that will be deducted more than 4% to the whole cost of doing business. Guy Chazan (2000) also believes that these unethical practices will face increasing scrutiny. It will be many auto MNEs feel that potential investing in Russia too risk striking a deal to manufacture car, because of unhealthy business environment.
2.3.1 Benefits investment in china
The option to invest in china automotive industry is attractive for several reasons. First, according to Chinese Automotive Industry Yearbook (1999) the automotive industry is the six key industries in China; it has grown rapidly during the reform years and taken up a large proportion of industrial production, output and employment. In 1999, nearly 4 percent of the country’s GDP (US$ 38 billion) were contributed by Chinese automotive industry; seven million employees worked in the auto-industry, taking up 3.3 percent of the total Chinese urban workforce (Harwit, 2001). If the US auto company wants to enlarge the business in China, it needs to employ lots of skilled labors. The average wage in china is much lower than the international average level. Therefore, the low labor cost decides the company can get much benefit when it decides to entry into China.
Secondly, it is too large and potentially lucrative a market to ignore. Figure 1 shows the speed with which china has become one of the world’s top automobile manufactures. China produced more than 2 million vehicles with all types, in 2000. Since then, it surpassed South Korea, France and even overtook Germany which Europe’s largest national producer for third place in 2006. Although the global economic crisis erupted in 2008, the total amount
of world vehicle production sharply decreased 4.1%, compared with previous year’s record. Chinese automotive industry impressively showed remarkable strength and ongoing growth. With an output of 9.5 million vehicles, for the first time, china surpassed the United States to become the second largest motor vehicle producer
Base on above data, it is convicted that china is potential most promising market for US auto-company expanding their oversea business. Hill.C (2013) also argue that international firms may built brand loyalty and gain the experience in that country, through early market entry strategy in a potential future economic star. According to this theory, early entrants into most promising country-china will grasp considerable firs-mover advantages, while late entrants will have to face late-mover disadvantage. Although, US automobile company currently entering Chinese automobile market that do not obtain first mover advantages, still are able to take second mover advantages. For example, second mover are able to reap benefits of fist mover investments in china where former has been well established new products and services, specifically, MNCs entering in new market need time and cost to allow consumer to be aware of their new products and services and all of these have been done by fist mover; secondly, the first movers’ mistake can be learned by second mover, US automobile company through these experience could be avoid the same mistakes that made by first mover. Therefore, if US Auto Company is able to reap second moving advantage and then gain a scale-based cost advantage, the obstacle of late-mover will be found that it is almost impossible to match. Even though their current contribution to an international firm’s revenues might be relatively small in short term, their future contributions could be much larger in long term
2.3.2 Cost and Risk in China
The cost of U.S automobile company investment in china
While the US Company can obtain benefits from home country, particularly when hosts are less developed country-china, there is much more controversy issues associated with indirect cost occurring in home-country’s company. Such as, when the us automobile company bring their superior technology and manufacturing methods of themselves into Chinese firms, spilling their
superiority technology and the latest management techniques to indigenous firms (Chinese automobile company), there would be an increase of potential rivalry’s productivity and competitiveness in china. Kinoshita (1998) claimed that this phenomenon was ‘spillover effect’, spreading into four categories: the demonstration-imitation effect, the competition effect, the foreign linkage effect, and the training effect. According to Kioshita theory, if the US auto company invests in Chinese firm to produce their facilities, bringing advanced technologies as their market entry strategy. There will create directly ‘spillover effect’ in host-country’s company, through learning and imitating the way us company operate, therefore, increase the Chinese auto company’s productivities. The competition effect also should be taken into account by us-auto managers; home-country’s company will promote their product’s quality and increase their innovation activities driven by intensive competition in order to maintain their market share (Bertschek, 1995). That will be a disaster for us-auto Company, forcing them to cut the prices in order to retain their market share.
Potential government policy impact on china’s auto market
Although Chinese vehicles have dramatically increased their sophisticated technology driven by massive inward FDI and partnerships with major foreign automakers (Volkswagen, Toyota, GM etch) and an incentive government policy has liberalized the Chinese automotive sector in some extent. However, the china government is fully aware that indigenous firms have no ability to compete with the foreign rivals who owned abundant experience and sophisticated technology. To cope with potential problem, it was allowed that foreigner owned companies have access to Chinese automotive market only through joint venture with local partners; each no more 50% or minority controlled by a major foreign nameplate automotive manufacture. Hodgetts, R.M and Luthans, F (2003) argue that making alliance with each other will benefits to both parties, such as access to knowledge and tackle political risk, US automotive firm are able to bring financial and technological resources to the venture; Chinese automotive firm partner can exchange their knowledge of the customer and market channels and helpfully cope with restrictive legislation. However the author will point out potential risk that joint venture as US automotive company market entry strategy. the
problem is that nearly 50% ownership of Chinese-Foreign Equity joint venture do not give a firm the tight control over manufacturing, marketing and strategy in china that expect to maximize US automotive firm its market share and earnings.
2.4 The reason of China is the best choice for U.S automobile company to enlarge its business.
Figure 2 illustrate that China is the largest of automobile maker among the BRIC countries during 2000-20008. However Russia automobile maker do not maintain the strong growth in number of production, the automobile volume of production in Russia was behind other three BRIC counties. Therefore, compared with Russia, china as potential second largest automobile maker in the world is more attractive for U.S automobile manager to invest. It has cheapest labor and high potential demand. Compared with Russia and Germany, although the automobile industry is more advanced than China, the operational cost is much higher than China, it means if the company choose to do business the Russia and Germany, the risk is much higher. Also, China has always encouraged to developed high-tech industry and introduced new technology. It provides several preferential policies to attract FDI. It is benefit to the company to develop its new market in China. What is more, as China has largest population all over the world, with the development of economy, to buy a private car in every family must become the future trend, it is the opportunity for the automobile facility suppliers. So in contrast with the other two, China is the most attractive target for foreign direct investment.
3.1conculsion
This report evaluates the benefits, costs and risks of an automobile company that associated with doing business in China, Russia and Germany. China is the largest developing country in the world, in order to attract foreign direct investment. It reduces the entry barriers in recent years (one of reason is that because china is a member of WTO). Also, as the automobile industry is not the mature industry in China, it needs to introduce the new technology from foreign countries. Meanwhile, the total number of population
in China is largest in the world. In Contrast with China, the condition in Russia is totally different, although the total area of Russia is larger than China. The population is much less than China. In Russia, there are lots of companies engage in automobile facilities’ production. Although the demand to automobile facilities in Russia is large, the supply is also large. In Germany, the condition is different with the two countries. There are lots of famous automobile companies in Germany. In order to meet the local demand, lots of manufacturers have grasped the opportunities to provide automobile facilities. It can be said automobile industry is the pillar industry of the country. Through analyzing the above of the three countries, it can be seen clearly the three countries have their own characteristic. However, china is still best choice for U.S automobile company to enlarge its business.
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