Development and business potential of automobile industry - Essay Example

DOING BUSINESS IN CHINA: DEVELOPMENT AND BUSINESS POTENTIAL OF AUTOMOBILE INDUSTRY Table of Contents Table of Contents 1 Introduction 2 Current Situation of Chinese Automobile industry 2 Factors influencing the growth and development of firms in Chinese Automobile industry: 6 Probable market opportunities in Chinese Automobile industry: 9 Conclusion 11 Reference List 12 Introduction The Chinese automobile industry is one of the most diversified yet compact industries of the world. In comparison to the global automobile region, China has developed high standards of performance for its automobile segment. Since 2008, China has topped the charts for being the highest producer of automobile units and has crossed European Union, USA and Japan with their efficient automobile management processes (Niedermeyer, 2014). The production process of the Chinese automobile segment is mainly performed by establishing relationships between the local and foreign firms. Global automotive brands such as Volkswagen, Toyota, General Motors, etc have established their manufacturing units in China for increasing their output. However, the primary market for the local automobile companies of China such as Great Wall, Beijing Automotive Group, Shanghai Automotive Industry Corporation, Geely, etc still remains the Chinese market. This report will focus on analysis of the scope of development and potential business growth offered by the Chinese market to the local and foreign automobile manufacturers. Current Situation of Chinese Automobile industry The history of Chinese automobile segment started before the Second World War. The first Chinese produced vehicle was a truck which was developed and used for military purposes. According to Oliver, Holweg and Luo (2009), most of the public transport and luxury vehicles used in China prior to the Second World War were imported from abroad or made within the country by manufacturing units of Multinational Companies. Jones (2011) noted that most of MNCs entered China for leveraging the benefit of low labour cost in comparison to the high end labours of Europe or Japan. The abundant labour force of China helped the firms in enhancing their business productivity and to meet the demands of the global market. Consultants (2011) noted that the Chinese automobile industry is currently the leading producer and consumer among the BRIC (Brazil, Russia, China and India) nations. Despite a much appreciated hype about Brazil and Indian automobile market growing in the next five years, these markets are not showing any positive signs. On the other hand, the Chinese market has showed tremendous potential as a producer and consumer of automobile products which signifies a trend for long-term sustainability for both local and foreign companies functioning in China. Figure 1: Chinese Automobile Industry sales comparison with other BRIC nations (Source: Niedermeyer, 2014) From the above given figure, it can be observed that the Chinese automobile sales has consistently increased in the past 7 years despite suffering highly during the global recession of 2007-08. In comparison to China, the growth curves of the remaining three BRIC nations appear flat. This shows the potential of the Chinese automobile market for sustaining the foreign and local companies operating within it. Oliver, Holweg and Luo (2009) observed that the growth of the Chinese automobile sector mainly occurred after revealing the policy for foreign firms to partner with the local producers of China. Most of the top brands of Chinese automobile segment are operating with MNCS and have topped the sales chart within their country. Figure 2: Top domestic manufactures and sellers of passenger vehicles in China (Source: Niedermeyer, 2014) The above given figure pressurises the production capability of the local producers of the Chinese automotive industry. It can be seen that Shanghai Automotive Industry Corporation (SAIC) is the largest producer in the industry followed by First Automotive Works Group (FAW). However, it should be noted that both these companies are in a venture with German automobile company, Volkswagen, which is the leading global producer of automobile (APCO, 2010). In fact, most of the firms given in the list of top producers and sellers are in mergers or partnerships with MNCs. This also brings up the question about the individual performances of the local Chinese automobile manufactures and the reason behind their requirement of foreign management to improve their business performance. Figure 3: China’s Automobile Production current and estimated (Source: John, 2011) The increase in the production of units of the Chinese automotive segment has been steady. They have portrayed a consistent growth curve that highlights their ability to improve by aligning themselves with the market conditions. However, it can be noted that during the initial period of 21st century, the year on year increase on the production units was around an increase of 1000000 units per year from 2001-2009. The major leap from the manufacturers came in the year 2010 when the year on year production difference highlighted an increase of 5000000 units (John, 2011). The figures of 2015 and 2020 are the estimated objectives of the Chinese Automobile industry. Oliver, Holweg and Luo (2009) stated that the increase in the production capability of Chinese automobile manufacturers took place with the increase of Foreign Direct Investment in the country. Recently, world’s largest supplier of automotive parts, Bosch (German firm) announced as investment of $520 million in the automobile industry of China. These factors suggest the current condition of the Chinese automobile industry and the ability of the concerned Chinese industry to support the firms operating within it. Factors influencing the growth and development of firms in Chinese Automobile industry: According to Jones (2011), the growth of the Chinese automobile industry started since the entry of China into the World Trade Organisation (WTO) in the year 2002. This process has also boosted the rate of FDI in China and reflected their potential to meet the global demands of the automobile sector. The Chinese automobile industry is highly based on mergers and alliances between local and foreign firms. Figure 4: Relationships in Chinese Automobile Industry (Source: Oliver, Holweg and Luo, 2009, p.89) The map of the organisational relationships within the Chinese Automobile industry shows the strong network among the business houses and the efficient accumulation of resources which enhances the capability of the firms. APCO (2010) mentioned that increasing FDI is the most influencing factor for the automotive segment of China which is ensuring its sustainability in the form of continuous improvements. Lin et al. (2013) stated that the foremost factor influencing the growth and development of Chinese automobile is the Government of the country. Since 1949 when the Chinese Government started to reform the automobile sector of the country by enhancing the probable scope of business development, Chinese Government has always supported the growth of automobile industry. Some of the top automobile manufacturers of China such as Dongfeng and FAW are directly owned by the Government (Jones, 2011). However, Canis and Morrison (2013) criticised that because of the rigid policies of Government, these companies failed to utilise their capital power for adjusting with the market changes. This led to the formation of partnership policies between the foreign and local firms. Jones (2011) argued that China is dependent on the foreign producers for improving the performance of their automobile segment which has reduced their individual capability to perform and manage. During the global recession of 2007-08, most of the foreign firms started withdrawing their investments which reduced the productivity of the Chinese automobile segment and hence created chaos in the business process (Consultants, 2011). Focusing on the factors promoting the demand of the automobile products in the Chinese market, Lin et al. (2013) explained that growing demand for passenger vehicles in the local market of China and for automotive parts in the international market has boosted the need for productivity of the automobile manufactures. While most other countries failed to develop their performance in response to this sudden change in market, China managed to upgrade its performance by customising their operational structure with Western and Asian strategies. Out of the top 10 automotive parts manufacturers based in China, 7 firms are MNCs from other nations (Jones, 2011). This has also instigated some changes in the automobile industry as Chinese firms are looking to expand their brand image in the international segment. Recently, Geely acquired Ford’s Volvo division for $1.5 billion which indicates the move of Chinese automobile towards global expansion (Canis and Morrison, 2013). Probable market opportunities in Chinese Automobile industry: CEIBS (2012) noted that the global financial meltdown has caused many international firms to withdraw their sourcing process from China. The country experienced a fall in their exports in the year 2009 when 369600 units of automotive parts were exported which was down by 48% of the total automotive parts export of the year 2008. However, the market got back to its previous growing condition in the year 2010 when the year on year export of automotive parts increased by 55.93% (Lin et al. 2013). The growth of the automotive components has been more in comparison to that of whole vehicles, and the major consumers of Chinese industry are USA, UK, Germany, Japan and South Korea. These facts reflect the potential of the Chinese market to capitalise on the changing market scenario of the national and international automobile industry. One of the key gaps in the automobile manufacturing process of China is that the local producers lack the skill and planning process to design vehicles compatible to the global markets. The R&D segment of most of the local producers is weak which has urged them to indulge in joint ventures with other MNCs (Canis and Morrison, 2013). The scope of operations for MNCs with the high level of designing and engineering capabilities is more in the Chinese automotive industry. However, the Chinese government is trying to improve the situation by funding the core functions of the engineering processes such as engines, transmission systems, steering, brakes etc. This enhances the opportunity for the local firms to develop their product viability for the international market place and also to reflect their brand image to a larger group of customers. Considering the trends in the automobile industry of China, the growth in demand for passenger vehicles has enhanced the performance of the local Chinese firms (CEIBS, 2012). As the customer base for most of the local companies is Chinese population, the MNCs are tying up the local firms for improving their production of passenger vehicles that can be catered to the international market. With big markets such as India lying nearby, Chinese producers can leverage their high production skills with the engineering talent of Indian car manufacturers (Oliver, Holweg and Luo, 2009). Jones (2011) noticed that growth in international demand for automotive components is urging the business houses to reduce their operational costs and develop an alternative and economical approach towards production. The labour base of China is one of the most suitable options in this context. Global business houses can outsource their operational functions in China for reducing their operational cost and on the other hand, the Chinese automotive market will receive a varied product base for catering to their customer base. Altenburg, Bhasin and Fischer (2012) explained that operating in a major market such as China also opens up the Asian markets for the western companies which can be utilised as a competitive tool for promoting global existence. As previously mentioned, Chinese manufacturers are also trying to expand their market area. China’s largest commercial vehicle producer, Beiqi Foton has announced to open up new production base at Russia, India, Mexico, Brazil and Thailand with capability of producing 100000 vehicles per year (Li, 2011). These facts suggest the scope for growth and development of MNCs and the local firms operating in the Chinese automobile industry. Conclusion The growth of the automobile industry of China is based on many factors but one of the most influencing factors in the wide range of ventures and alliances with MNCs. Establishing relationships with international firms have led to the exponential growth of the Chinese automobile industry. Although the government regulations creates some barriers for the international firms, the availability of cheap labour force and direct access to one of the most developed automobile markets of the world is an added advantage for any firms. It can be concluded that the Chinese automobile market provides a potential platform for entering the Asian market and generating a sustainable position in the competitive business scenario. . Reference List Altenburg, T., Bhasin, S. and Fischer, D., 2012. Sustainability-oriented innovation in the automobile industry: advancing electromobility in China, France, Germany and India. Innovation and Development, 2(1), pp. 67-85. APCO, 2010. Market Analysis Report: China’s Automotive Industry. [Online] Available at: < http://www.export.gov.il/uploadfiles/03_2012/chinasautomotiveindustry.pdf> [Accessed 26th April 2015]. Canis, B. and Morrison, W. M., 2013. US-Chinese motor vehicle trade: Overview and issues. In CRS Report for Congress, pp. 7-500. CEIBS, 2012. The Chinese Automotive Industry in 2012. [online] Available at:  [Accessed 26th April 2015]. Consultants, R. B. S., 2011. Chinese appetite–Emerging market players are buying into the European auto supplier industry, Automotive Industrial know-how Expertise, Roland Berger. Jones, H., 2011. China's Auto Industry Shows Signs Of Impending Gridlock. [Online]. Available at: < http://www.forbes.com/sites/china/2011/05/20/chinas-auto-industry-shows-signs-of-impending-gridlock/ >  [Accessed 26th April 2015]. Li, Y., 2011. Intellectual Property and Innovation: A Case Study of High-Tech Industries in China. Or. Rev. Int'l L. Lin, C. Y. Y., Edvinsson, L., Chen, J. and Beding, T., 2013. Impact of the 2008 Global Financial Crisis. In National Intellectual Capital and the Financial Crisis in Brazil, Russia, India, China, Korea, and South Africa (pp. 7-20). Springer New York. Niedermeyer, E., 2014. How China Protects Its Auto Industry. [Online]. Available at: < http://www.bloombergview.com/articles/2014-08-15/how-china-protects-its-auto-industry >  [Accessed 26th April 2015]. Oliver, N., Holweg, M. and Luo, J., 2009. The past, present and future of China's automotive industry: a value chain perspective. International Journal of Technological Learning, Innovation and Development, 2(1-2), pp. 76-118. Read More