Great Wall Motor - Coursework Example

? Entry of a new product in an emerging market - Great Wall motor, a Chinese Automotive firm, in Indian market Great Wall Motor - H6 Table of contents PART A Company & Industry Analysis 3 PART B Market specific Issues, CWallenges and risks 5 PART C Political & Economic Analysis 8 PART D Entry Strategy Plan 10 Conclusions and Recommendations 14 References 17 PART A Company & Industry Analysis Great Wall Motor is currently the biggest competitor in Chinese automotive industry; the car specializes on SUV cars (Great Wall Motor, Organizational website, Company Profile 2014). The company was established in 1984 and up today its growth has been impressive; in fact, the current employees of the firm are estimated to 54,000 while its production capacity is quite strong, with a ‘production capacity of 800,000 units’ (Great Wall Motor, Organizational website, Company Profile, 2014). For Great Wall Motor expanding internationally is critical for securing organizational growth; in 2012 the firm entered the Bulgarian market while in 2013 firm’s activities were expanded to Ecuador (Great Wall Motor, Organizational website, Global Business, 2014). In the near future, the company aims to enter the Indian market. In fact, the intentions of the firm to develop its production plant in India by 2016 have been already published in the media (Car Trade 2013, Choudhury and Sharma 2012). The success of Great Wall Motor has been supported by the high investment on R&D; however, currently the costs related to R&D have reached high levels and the firm’s executives aim to identify ways for limiting the firm’s overall expenses so that the firm’s profit margin is not reduced (Bhattacharya 2013). In 2013 the firm managed to achieve an important growth, compared to 2012, as shown in the interim results, since the annual report of 2013 will be published by March. Figure 1 – 2013 Interim results of Great Wall Motor (source: 2013 Interim results) In India, automotive industry is a critical part of the economy. In 2013, one of the industry’s most powerful competitors, Audi, achieved a growth of 11% compared to 2012 (Business Today 2014). More specifically, during 2013 Audi in India managed to sell 10,002 cars breaching the limit of 10,000 sales on an annual basis, a limit that no firm has managed to pass up today, except from Audi (Business Today 2014). This achievement denotes the perspectives not just of Audi but also of all firms operating in the automotive industry of India. These perspectives should be taken into consideration by foreign investors who seek for profitable emerging markets but also by foreign automotive firms that are interested in entering the specific industry of India. The sales of top auto manufacturers in India are presented in graph in Figure 1 below. A standardization of the level of sales between August 2012 and August 2013 is clear, a fact showing a delay in the industry’s growth for the same period. Figure 1 – Sales of major auto manufacturers in India between August 2012 and August 2013 (source: Team-Beap com) Figure 2 – Sales in Indian automotive industry, from Jan 2012 to May 2013 (source: Money Control 2013). The performance of Indian automotive industry from Jan 2012 up to May 2013 is presented in graph in Figure 2. In the particular graph the overall performance of the specific industry for the above period is presented, i.e. sales are not categorized by auto manufacturer. PART B Market specific Issues, CWallenges and risks An important cWallenge that automotive firms in India have to face is the following: inflation in India is at high levels, with trends for further increase; this fact has led to the increase of production costs in all industries, including the automotive sector (Choudhury 2013). At the same time, due to the Weak Rupee, producers in all industries are not able to increase prices since such practice would further reduce their customer base (Choudhury 2013). Great Wall Motor would also have to face the specific cWallenge in case that it would enter the Indian market. In other words, if Great Wall Motor would manage to enter the Indian market, then the firm’s managers could seek for alternatives, instead of the increase of prices, in order to ensure that costs would not surpass profits. The power of the India as a member of the global market cannot be doubted. Still, the country faces a series of cWallenges which seem to remain strong, despite the high growth of the national economy (Krishnan 2009). Reference should be made to two specific factors that could also influence the performance of Great Wall Motor if the above firm would decide to enter the Indian market: the country’s infrastructure is at quite low level while corruption seems to be quite high (Krishnan 2009). This means that by entering the Indian market Great Wall Motor would have to face two critical cWallenges: a) the transportation of the firm’s cars across its stores, or authorized sellers, nationwide would have to face difficulties, especially during periods of extremely bad weather; as a result, delays in delivering products to customers could be unavoidable unless a specific plan of action, for facing such issues, would be implemented in advance, b) the firm’s efforts to complete the process required for the firm’s establishment in India could be delayed by extensive bureaucracy, as the phenomenon would be related to corruption; similar problems would appear during the firm’s operation in India; the strategies employed by other firms already established in the automotive industry in India would be studied so that the specific problem is effectively managed. When trying to evaluate the Indian market, meaning its opportunities and cWallenges, managers in Great Wall Motor should also take into consideration the relevant findings of the literature published in regard to this subject. Babu (2005) noted that when entering a new market firms are likely to face several cWallenges, mostly related to the distance involved but also to the cultural and ethical differences between the host country and the country of origin of the new entrant. These differences could lead to important problems for the new entrant, such as: a) managing human resources in a totally different cultural environment could be quite difficult especially if there is no experience in similar plans (Babu 2005), b) aligning business practices with the regulatory framework of a foreign country is not always easy and it often requires the alteration of existing business practices, especially in regard to the supply chain management processes (Babu 2005). On the other hand, Cummins and Mahul (2009) explain that the actual costs for entering a new market can be quite higher than initially estimated. Moreover, it is noted that these costs are often not paid back especially since the activities that need to be developed in the preparation phase of such project can be quite costly (Cummins and Mahul 2009). Particular reference should be made to ‘the research for identifying market needs and for developing probabilistic risk models’ (Cummins and Mahul 2009, p.48). Also, the cost of the marketing plan required for promoting the new product in the host market can be quite higher than expected under the influence of local taxation or delays in presenting the relevant advertisement to the public, meaning that profits from the particular advertising could be also significantly delayed (Cummins and Mahul 2009). Moreover, for Coade (1996) the most important cWallenges that managers in firms trying to enter a foreign market have to face are the following: a) the pricing of the new product may be proved inappropriate, either too high or too low; in both cases, losses could be resulted for the new entrant, either in the short or the long term, b) the marketing strategy used for promoting the new product could be proved ineffective; also, the cost of this strategy could be quite high. Such failure could cause extremely high loss leading even to the cancellation of the whole entry plan, c) unexpected problems could appear in regard to the distribution of the new product in the host market (Coade 1996). In all the above cases, the support of local partners would be vital for limiting losses and for recovering in a short period of time without cancelling the entry in the host market. The cWallenges and risks presented above could be effectively managed by Great Wall Motor by using two, different, approaches: a) First, the entry mode chosen should be such that risks could be controlled at any stage of business operations; Joint Venture is such an entry mode (Merna and Al-Thani 2011). The potential use of this entry mode by Great Wall Motor for entering the Indian market is analyzed in Part D below, b) The metrics used by Great Wall Motor when developing a research in regard to the Indian market should be of specific characteristics; commonly used metrics, like the volume of sales of products with similar characteristics, would be avoided. Rather, metrics belonging in three dimensions should be employed: ‘operational versus financial, internal versus external and leading versus lagging’ (Axson 2010, p.214). PART C Political & Economic Analysis When trying to evaluate the automotive industry of India reference should be made to the following fact: the specific industry of India has not always been strong. In fact, it was due to ‘the economic reform of 1991’ (India Law Journal 2007) that the sector’s growth started; the elimination of barriers, existed up to then, in regard to FDI in India has been a key event for the enhancement of India’s automotive sector. Since 1991, the annual growth of India’s automotive industry has been estimated to 20%, at least up to 2007 (India Law Journal 2007). The laws developed by the Indian government for regulating the various aspects of the specific industry denote the willingness of the above government to secure this industry’s high performance, a fact that should taken into consideration by foreign investors who plan to entry Indian market. In the case of Great Wall Motor the above trend could be explained as follows: the industry’s activities in India would have the support of local authorities; retrieving financing, if necessary, or developing strategic alliances locally would become easier for the firm if the support of the government is secured. According to Culp (2012) the risks in regard to the political environment of countries worldwide cannot be avoided. Still, these risks should be characterized as unavoidable (Culp 2012). This means that there is no market around the world that has no risks related to its political environment. But by employing appropriate entry strategy a firm can enter a foreign market without being exposed to these risks; at least, the limitation of these risks’ effects could be achieved by choosing appropriate entry mode (Culp 2012). In terms of its economy India is considered as the third most powerful country in Asia (The Economist, Dec 3, 2013). Within 2013, the increase of the country’s GDP reached a level of 4.8%, if referring to third quarter (The Economist, Dec 3, 2013). This performance can be considered as quite satisfactory if taking into consideration the strong turbulences developed in the Indian market in 2013, a result of pressures against the national currency (The Economist, Dec 3, 2013). Business services and the financial services industry were among the sectors that achieved the highest growth in India during 2013, a fact indicating these sectors’ strength (The Economist, Dec 3, 2013). According to a report published in November of 2013 the economy of India seems to have many perspectives for future growth; reference is made to the increase of the country’s GDP by a percentage of 4.4% compared to the previous year (BBC News, Nov 29, 2013). However, it is explained that the country’s government should emphasize on the control of inflation, which shows trends of continuous increase, and the limitation of interest, which is high (BBC News, Nov 29, 2013), being affected by the decrease in investment and the decrease in profits from two critical industries: ‘mining and manufacturing’ (BBC News, Nov 29, 2013). On the other hand, since inflation remains at high levels it is difficult for interest rate in India to be decreased. In the beginning of 2014 the willingness of the Governor of the Reserve Bank of India to keep interest rates at standard levels has been made known; still, it is noted that such plan would be feasible only if inflation has remained unchanged in December, a fact which is still under examination (Goyal, 2014). In a report of PWC the automotive industry of India is set under examination by referring to the country’s economic environment. The strong growth of automotive industry in India has been primarily related to the growth of the country’s economy (PWC 2012). However, emphasis is given to the delays noted during the last 2 years in regard to economic growth in India; these delays have been caused mostly by high inflation and by the weak currency (PWC 2012). For the above period, the demand in automotive industry in India has been remained at high levels mostly because the income of middle class in India has been increased; in addition, vehicle ownership, as a trend, has been expanded making the buying of an auto part of the Indian lifestyle (PWC 2012). As a result, the performance of automotive industry in India during the last 2 years has remained high, a fact indicating the important perspectives for the industry’s firms in India (PWC 2012). PART D Entry Strategy Plan In order for Great Wall Motor to secure its success in the Indian market, the strategic plan employed for developing the specific activity should be carefully reviewed. Primarily, reference could be made to the literature published in this sector. Indeed, the theories related to the specific strategic decisions would be reviewed so that an appropriate mode of entry in India is suggested to Great Wall Motor. In any case, the Entry Strategy Plan would incorporate a mechanism for monitoring the Strategy’s various phases but also a plan for responding to emergent market conditions, such as unexpected conflicts locally or globally, that would highly affect the successful completion of the particular project. Various models have been developed for helping firms to enter a foreign market. Each firm that is interested in entering a new market could choose a model that best suits to the firm’s needs and targets taking into consideration the resources available, the estimated cost and the level of the risks involved (Merna and Al-Thani 2011). Joint – venture is the most popular strategy for entering a foreign market. This fact has been related to this strategy’s advantages, such as: a) risk is shared; b) an existing customer base can be used instead of searching for new customers by scratch, c) the credit potentials of partners can be used for covering emergent costs and d) licenses and technological infrastructure of partners can be used for securing the success of the new product in the host market (Merna and Al-Thani 2011). Joint venture, as an entry strategy plan, has various modes, including ‘licensing, contract manufacturing and joint ownership’ (Tielmann 2010, p.8). The entry strategy plan chosen for Great Wall Motor is joint ownership, a decision that is based on the need for avoiding current risks of Indian market, meaning especially the high inflation and the high interest rates that could lead to extremely high operational costs. Moreover, through the above entry mode Great Wall Motor would be able to keep operational, and production, costs in India at low level, a target that it is of critical importance especially since in 2013 the firm’s costs in regard to R&D have exceeded the limits set by executives (Bhattacharya 2013), as analyzed earlier, in Part A of this study. The entry strategy mode of Great Wall Motor in India would be chosen after reviewing three crucial factors: a) the country involved/ target market, b) the timing of entry and c) the most appropriate entry mode (Andexer 2008). a) As of the first factor, India is considered as an appropriate destination for the firm’s products, especially for its new product, the H6, a SUV based on a ‘small-capacity-turbo engine’ (Hammerton 2013). The fact that the Indian automotive industry is one of the most powerful worldwide could also justify the specific decision of the firm’s executives to enter the Indian market; b) As of the timing of entry, the following fact should be made clear: currently, Indian automotive industry faces important pressures, a problem that first appeared in 2012, as explained above. However, the perspectives of the industry remain high, as verified through the researchers that have studied the specific sector of Indian economy. In addition, Great Wall Motor needs to increase its existing customer base and enhancing its profits, since its costs in R&D have reached extremely high levels, as already explained. In this context, in terms of timing the entry of Great Wall Motor in the Indian market is considered as fully justified; c) The entry mode chosen; as explained earlier the joint ownership, as a joint venture mode, would be most appropriate as an entry mode for Great Wall. Joint Venture, as an entry mode, is based on the establishment in the host country of ‘a subsidiaries that involve shared ownership between the MNE and a local company’ (Mulok 2010, p.27). The reason for choosing this entry mode is the following: through the specific entry mode Great Wall would keep the control of the production and operation processes in India while, at the same time, it could share the risks and the costs involved. Indeed, as noted in the study of Lopez-Perez and Rodriguez-Ariza (2013) in JVs the members of the management team are appointed after the relevant agreement between the JVs’ partners. In this way, both partners of the JVs control the JVs’ critical decisions. The entry strategy of Great Wall in India could be designed using a network framework theory, a theory based on the proposition that ‘an MNE is an interorganizational network that is embedded in an external network consisting of all other organizations such as customers, suppliers, and regulators’ (Tang and Liu 2011, p.52). Using this theory, the choice of joint venture as an entry mode strategy would be based on the diagram presented in Figure 3 below. Figure 3 – Selection of entry mode based on the network framework theory (source: Tang and Liu 2011, p.59) The structure of the Joint Venture developed between Great Wall and a local company, one that will be chosen as most appropriate partner, could be similar with the structure of the Joint Venture presented in Figure 4 below. In the relevant graph the JV between G.J.Johnson & Co and a foreign corporation is presented, as an indicative example of such entry mode. Figure 4 – Joint venture, an example (source: http://www.krsp.com.au/AboutKRSP.htm) Conclusions and Recommendations According to the issues discussed above, the entry of an automotive firm in the Indian market can be characterized as a critical strategy for enhancing the expansion of business activities. However, the risks related to the Indian market seems to be many: a) Rupee, as a currency, seems to be rather weak; the above currency is highly exposed to turbulences in the global market, a fact that it should be considered as expected since the dependency of India on exports, especially in relation to manufacturing, is high, b) inflation is India seems to be continuously increased; moreover, due to instability in income it is difficult for producers and sellers to increase prices since such decision would decrease sales, c) there is no sign that interest rates in India would be decreased; in fact, as revealed through a relevant article, the Governor of the Reserve Bank of India would thought to keep interest rates at same levels only if it would be proved that for December of 2013 the inflation has been decreased, an issue that is still under examination (Goyal 2014); d) competition in the automotive industry of India is high; well known firms have been already established in the Indian market and have acquired the key share of Indian automotive industry. In this context it would be rather difficult for new entrants to succeed. On the other hand, the high perspectives and the high performance of the specific sector would justify the decision of a foreign automotive firm to enter the Indian market. Still, in order for the success of such plan to be secured, as possible, it would be necessary for certain measures to be taken. A series of practices is suggested below for helping Great Wall Motor to control risks related to the firm’s decision to enter the Indian market. A) The first step for managers in Great Wall Motor when planning the firm’s entry to India would be the examination of the market’s characteristics, not just in regard to the consumer buying power but also to consumer trends. In practice, it has been proved that the high percentage of consumers in India belong in the middle class, having a moderate income, a fact that makes them ‘to have limited buying power and to be value conscious’ (Krishnan 2009). Based on the above fact, managers in Great Wall Motor would prefer to bring in the Indian market a car that would be of average price, so that it could be acquired by consumers in the middle class, who represent the majority of local population (Krishnan 2009). B) Apart from the characteristics of the product chosen for the Indian market, managers in Great Wall Motor should also focus on the following issue: the investment made on the specific project, meaning the entry in the Indian market, should be not high, at least for an initial period, i.e. for about a year since the firm’s entry in Indian market. In this way, any potential losses from unexpected problems and delays would be limited without affecting the firm’s operations in India. C) Alternative plans of action should be developed in advance. This means that if the Entry Plan would fail in any of its parts alternative initiatives should be undertaken without delay so that the damages on the project are controlled. D) For a short time, since the entry of the firm in the Indian market, the targets set in regard to profitability may not be achieved. This means that initially profits may be at lower level than estimated, a fact that should be considered as normal, considering the similar practices of other firms that proceed to similar initiatives. In this context, the target set by managers in Great Wall Motor in regard to profits should be realistic, being at average level, compared to similar strategies in other emerging markets. In general, failures in one or more parts of the entry strategy should not affect the progress of the plan; these failures should be reviewed and evaluated, as of their reasons, and should be regarded as chances for improving the plan so that major failures in the future are avoided. References Andexer, T., 2008. Analysis and Evaluation of Market Entry Modes into the Asia-Pacific Region: Based on the Example of a German SME in the Industrial Goods Business. 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[Accessed at 2 January 2014] Tang, J. and Liu, B., 2011. “A NETWORK BASED THEORY OF FOREIGN MARKET ENTRY MODE AND POST-ENTRY PERFORMANCE.” International Journal of Business and Social Science, 2(23): 51-59 Team-Beap Com, 2013. ‘August 2013 : Indian Car Sales Figures & Analysis.” Available at . [Accessed at 2 January 2014] The Economist, 2013. “India’s Economy – Turning a corner.” Dec 3, 2013. Available at . [Accessed at 2 January 2014] Tielmann, V., 2010. Market Entry Strategies. Norderstedt: GRIN Verlag. Read More