BMW expansion in China - Research Paper Example

? BMW' Expansion in China Table of Contents BMW' Expansion in China………………………………….page 3 Objectives of Expansion…………………………………….page 4 Positioning for Greater Global Competitiveness…………….page 6 Improving Globalization of Markets…………………………page 10 Globalization Strategies………………………………………page 12 Conclusions……………………………………………………page 14 References……………………………………………………..page 16 Appendix……………………………………………………….page 18 BMW' Expansion in China Recent recession has destroyed the financial backbones of many of the American and European countries whereas Asian region, especially East Asia or countries like China, India, Korea etc escaped from recession without causing much injuries to its economies. It is said that the global wealth is slowly shifting from the European and American region to the more heavily populated Asian region at present. Many of the prominent companies in the world are now looking towards Asian region for growth or expansion prospects. China and India seem to be the number one and two targets of prominent American and European companies. China is the most heavily populated country in the world at present. Moreover, China is growing more rapidly than any other country in the world now and many people believe that China may replace United Sates in near future as the topmost economic power in the world. According to Keidel (2008), “China’s economy will surpass that of the United States by 2035 and be twice its size by midcentury” (Keidel, 2008). “The inflation rate in China was last reported at 4.4 percent in October of 2010. From 1994 until 2010, the average inflation rate in China was 4.25 percent reaching an historical high of 27.70 percent in October of 1994 and a record low of -2.20 percent in March of 1999” (China Inflation Rates, n. d) (See Appendix for more details). Moreover, “during 1997–2005, the PRC’s average annual growth rate in real GDP was 8.9%. During the forecast period of 2005–2010, it was assumed that the PRC continued its historical growth trend of 8.9% per year” (Mai et al, 2010, p.5). Even though huge population was a big barrier in front China’s march towards economic growth, they succeeded in converting this barrier in to a blessing and economists forced to rewrite many of their economic principles. Now China is a prominent labor supplier for the rest of the world. Even though Mao is still believed as a prominent leader in Chinese history, Deng was the actual leader who put bases for China’s rapid economic progress. Mao was adamant about communist principles whereas Deng succeeded in giving practical definitions to communism in China. In short, China is the most rapidly growing country in the world at present and most of the prominent companies are now focusing more on China for expansion prospects. The BMW Group in the US reported March (2009) sales of 21,125 vehicles, a decrease of 22.9 percent over the 27,404 vehicles sold in the same month of 2008. For the first quarter, The BMW Group also reported a year-to-date sales volume of 51,244 vehicles, down 25.2 percent, compared to 68,529 vehicles sold in the same period a year ago (BMW Sales Remain Low Down 26.8% - Mini Sales Decline 15.9% In March) BMW was a leader in automobile manufacturing till a couple of years before. However, same thing cannot be said about BMW at present because of the huge competition it faces from other automobile manufacturing companies along with the technical problems of tis vehicles. America and Europe were the most important markets for BMW earlier. However, the financial problems in these regions forced BMW to shift its focus towards more prosperous Asian region. This paper analyses how BMW was developed and is evolving in China, focusing more on areas like Positioning for Greater Global Competitiveness, Improving Globalization of Markets and Globalization Strategies. Objectives of Expansion BMW is in the heart of expanding urge for opulence cars and SUV’s. And in this case, the red prohibited marketplace to watch is China. In that country, sales go on to spread at a strong clip. Even more enlivening for BMW and the other opulence automobile companies is the fact China’s opulence invasion of 3% is good next the invasion in Europe (18%) or the U.S. (13%). In other words, there’s lots of room for growth (Rich, 2011) As mentioned earlier, it was difficult for BMW to rely entirely on the American and European market and compete effectively in the global automobile industry. Many of the competitors like Toyota, Honda, Mitsubishi, Mazda, GM, Mercedes, Volkswagen etc have already started operations in Asian market and increased their global market share considerably. So the major objective of BMW expansion to China was to counter the threats raised by other automobile manufacturers. “BMW’s objective is to have sales attain $2 million annually by 2020” (Rich, 2011). The above objective is difficult to achieve without exploring the opportunities in China. BMW is a renowned global brand and it can utilize its brand name effectively in any regions of the world. The sales of BMW vehicles in China increased a lot in recent times which forced BMW to think in terms of establishing business units in China. “The increase in automobiles sales is a direct link to the expanding Chinese market which became one of the two largest auto markets in the world” (Boeriu, 2011). It was difficult for BMW to manufacture the vehicles in Europe and export it to Chinese markets. Manufacturing of BMW vehicles in China would help BMW to reduce the transportation cost considerably and moreover, Chinese government will provide many incentives to industries working in its territory as part of their favorable attitude and policies towards Foreign Direct Investments (FDI) at present. It should be noted that the business climate in China was not so good a couple of decades before because of the tougher stands of Chinese communist government towards FDI. At present China is doing everything possible to attract as many foreign organizations to increase FDI in its territory. China has realized that it is impossible for them to develop properly without the help of internal capital alone. In short, favorable business climate and the positive attitudes of Chinese authorities towards foreign companies forced BMW to expand its operations in China. Positioning for Greater Global Competitiveness Competition is changing and China's overall consumer behavior pattern is evolving as they have many more new models to choose from," said Christoph Stark, president and CEO of BMW Group Region China, explaining why BMW needed to update and sharpen its brand positioning to better differentiate itself from its rivals. He added that the auto icon will not discard its well-known slogan "Sheer Driving Pleasure", but will use the new campaign to enrich BMW's brand image, showing it represents a progressive and optimistic spirit as well as concern for the public good - much more than simply a driving experience. Stark and his team spent a great deal of time discussing the proper translation of joy in Chinese. "As a global brand, it is important to make sure the idea be interpreted and known in different countries but with the same core," he said (Yang, 2010) Technology has improved a lot and it is difficult for ordinary vehicles to compete effectively in the market. Even ordinary people in China are well aware of technological developments happening across the world and they will no more take anything as granted. Brand name alone may not help BMW to sell its vehicles in China, since most of the prominent automobile manufacturers are already there in China with their advanced vehicles. In other words, BMW cannot expect an easy entry in Chinese market even though they are still one among the top five automobile manufacturers in the world. Greater innovations are required for BMW both in manufacturing and marketing in order to excel in Chinese market. The world GDP growth has been fluctuating a lot in the past years. In 2008 the market contracted with a decline in GDP of 2.6%. In 2009 however, world GDP grew by 1.6%. The projections for 2010 is a growth in GDP of 2.5% (IMF, 2009).This leads to the suggestion that the world economy is about to recover from the financial crisis. Projections for the years from 2011-2025 predict world GDP to increase steadily by 3.5%. For BMW’s operations it seems relevant to distinguish between the growth in emerging markets like China and India and the growth in Western economies like Europe and the US. The prospects for China and India are a GDP growth of 4.7% and 6.2% respectively, whereas the US and Europe grow by 2.2% and 1.8% respectively (Ploen & Olesen, 2010, p.33-34). BMW has realized that positioning of its operations in Asian region is inevitable because of the shifting of global wealth from Europe and America to Asia which is taking place at present. As mentioned earlier, China seems to be the number one country in the world as far as growth rate is concerned. Positioning of operations in China will help BMW not only to exploit markets in China, but also to exploit markets in the neighboring regions. Since China is the most heavily populated country in the world, BMW will never face any manpower shortages in China as it faces in other parts of the world (See the chart in appendix). It is evident from the chart that the number of graduates and production of high-tech industries are gradually increasing in China from 1995 onwards. In short, manpower shortage or skill shortage might not be a problem in China. Moreover, China is one of the cheapest labor markets available in the world at present. A project which is worth $ 100000 in America or UK can be completed in China for around $ 50000. Thus, BMW can reduce its vehicle production cost considerably and can offer much competitive prices to its customers in Asia. China was able to develop more rapidly than other countries, not because of its abundant manpower resources alone; in fact China was able to incorporate innovation in every aspect of its activities which helped them to make an impression in the external world. While most of the other countries tried to capture global market by giving more emphasize to quality, China focused more on quantity. For example, Japanese products are believed to be expensive because of topmost quality whereas Chinese products are believed to be the cheapest because of the bulk production taking place in China. “Japan is all about the way of doing things. China is all about finding a way to do things” (The difference between China and Japan, 2007). In other words, China rewrote many of the traditional economic principles. As mentioned earlier, they transformed the curse of huge population size into a blessing. Moreover they educated the external world that movement of the products in global market is not entirely dependent on quality and price of the product is a significant factor in attracting customers. Thus China is a laboratory in which lots of innovations are taking place and BMW can cash on the abilities of Chinese population in developing new business concepts and strategies. “GDP has risen from Rmb362.4 billion in 1978, at the start of the reform period, to Rmb30 trillion in 2008” (GDP growth in China 1952-2009, 2009) (see appendix for more details). “The world’s richest country United States has $ 246 trillion trade deficit with China at present” (McEachern, 2009, p.275). The above statistics clearly indicate the strength and growth prospects of Chinese economy at present. Even though, United Sates is still the biggest market in the world, China needs not much time to replace United States from its top spot. The strategic importance of BMW expansion to China is the possibility of increased cooperation between East and West. Earlier western countries have given little importance to Eastern countries. They never thought that Eastern countries like China and India will never raise any challenges to their supremacy because of lack of resources and constraints for developments in these countries. However, China and India were able to force westerners to change their mindset or attitude towards this region. China is the most prominent communist country in the world at present after the destruction of communism in Soviet Union and in other Eastern European countries. Almost the entire Western region is under democratic regime at present and spreading of democracy towards other region is one of the major agendas of western countries. So far China has not responded positively towards the democratization processes even though they liberalized many of their foreign and domestic policies. The increased cooperation with western countries and companies may force China to think seriously in terms of democratization of China. Germany, the mother land of BMW, has elements of both democracy and communism. It should be noted that the communist East Germany and democratic West Germany were unified and currently these two countries are functioning as a single country. Thus, expansion of BMW to China has political importance also. In Europe, BMW is facing stiff challenges from competitors. Strategic cooperation with China would help BMW to make amendments for its failures in Europe. It should be noted that BMW vehicles suffered lot of technical problems in recent times. Complaints about the technical problems of BMW vehicles are growing day by day from the customers. One customer says; “I've had this vehicle since February 2003 with only 3,900 miles on it ... that's 8 months now, and I've been back to the dealer 6 times now and next week will be the 7th. Another says I purchased a 328i BMW in June 2000 and I have had nothing but problems with the car” (BMW Miscellaneous Problems, 2011). BMW had a reputation of making engines even for airplanes. The trust put on BMW vehicles have been considerably lost in Europe because of the increasing customer complaints. It is difficult for BMW to convince its European customers at least for some time from now. Under such circumstances, BMW has the option of regaining some of its lost revenues with the help of its Asian operations. Improving Globalization of Markets It is an accepted fact that globalization has brought revolutionary changes in the world. When globalization appeared on the horizon, China thought it as a strategy introduced by western countries to exploit the wealth of other countries. However, China quickly realized their mistakes and opened its economy much wider to FDI and implemented many economic reforms to exploit the opportunities provided by globalization. China has realized the fact that its domestic market is not big enough to accommodate all the products produced internally. In other words, China realized that in order to supplement bulk production, accessibility in foreign market is necessary. Thus they sidelined its political differences with other countries and improved its trade cooperation with even arch rival America. Gao (2005) has mentioned that in China, the industry sector has relieved from the complete dominance of the government and lot of small scale industries under private ownership has been developed as part of the reformation process (Gao, 2005). Private capital was not encouraged in China before the Deng period. Leaders like Mao were so adamant about the implementation of communist principles in China. However, Deng, the Chinese communist party leader who succeeded Mao, made tremendous changes in Chinese economic circles and as a result of that China opened its market wider to private capital and FDI. In the automotive industry, globalization can have tremendous cost benefits. Automotive manufacturers have traditionally taken a multinational strategy in forming a global strategy, wherein they have traditionally operated separate organizations in North America, Europe, Asia, and South America that for the most part have acted independently with little if any synergies across organizations. This strategy has resulted in substantial inefficiencies in product development costs and to a lesser extent production costs. Traditionally, the separate geographic organizations within each auto manufacturer has developed and launched overlapping models. This overlapping represents substantial cost savings as these companies spend several years and billions of dollars designing and engineering a new car model (Mathews, 2006, p.2) The recent recession has raised many challenges to global industries, especially to automobile industry. Since the current world is extremely globalized, any problems occurred at some corners of the world can affect other corners also. In other words, problems in America or Europe can raise problems in China also. For example, if Europeans or Americans reduce their buying habits, Chinese products will struggle to move well in these markets and Chinese economic growth will be negatively affected. It should be noted that globalization succeeded in increasing the cooperation between neighboring countries and as a result of that lots of regional trade blocs were formed in order to increase the bargaining power of countries and regions. For example, European Union (EU) is currently trying to become the largest trade bloc in the world with the help of integration of European countries. They already introduced a common currency, Euro for money transactions across Europe. The European Union (EU) has taken an active stance in fostering European automobile exports and investment through improved market access and a rules-based investment environment EU makes this a priority by tantalizing in World Trade Organization negotiations and the negotiation of the Free Trade Agreements in China and South East Asia to improve opportunities for export and investment for the European automobile industry (BMW in the Age of Globalization, 2010) The increased cooperation between European Union and China would definitely help BMW further in enhancing their growth prospects in China. The trade barriers between Chin and EU have considerably reduced at present because of the increased cooperation between EU and China. Globalization Strategies Product differentiation is one of the major globalization strategy implemented by BMW to conquer Chinese market. BMW knows very well that they have unique name among global automobile manufacturers and it is necessary to exploit it for their growth prospects. As mentioned earlier, BMW is a company which is making engines even for airplanes and therefore customers need not worry much about the abilities and capacities of BMW. BMW customers are ready to pay a bit more to BMW products because of the above consciousness about the quality of BMW products. “For its part, critical success factors that enabled BMW to compete in the global market seemed to lie in extensive, carefully planned, and targeted marketing campaigns” (Mathews, 2006, p.4). BMW has realized the potentials of automobile industry in the current extremely globalized markets. Earlier, BMW focused more on European regions and therefore their marketing and product development strategies were Europe and America oriented. However, at present they are developing global strategies to cater the needs of global population. For example, it is difficult for BMW to sell its luxurious models of cars in China as they do in Europe and America. The per capita income of Chinese people is still less than that of the people in America or UK. In other words, the purchasing power of Chinese people is less compared to that in America or in Europe. Cars priced only in the medium range would move better in Chinese markets. So BMW has introduced many different models of cars to suit the requirements of the Chinese population. In other words, they realized the fact that customization of products is necessary while competing in extremely globalized markets. Another globalization strategy implemented by BMW in China is the customization of advertising activities. They have realized that David Beckham could be a good brand ambassador in Europe whereas in China, they need the services of celebrities like Jackie Chan for marketing their products properly. In short, BMW has realized that even for same product, different marketing strategies are required in different markets. It should be noted that different markets operate in different cultural, political, legal and environmental climates and customization is necessary for products to excel in different markets. Sustainability is one of the major business policy implemented by major organization in current globalized world. It is difficult for an organization to implement policies which may destroy the environment. Most of the automobile manufacturers are now trying to reduce the emission levels as much as possible. BMW vehicles are capable of causing fewer threats to the environment because of the less emission levels of greenhouse gases from its engines. Another globalization strategy implemented by BMW in China is the diverse workforce. It is impossible for a company to excel in foreign market with the help of domestic workforce alone. In other words, it is impossible for BMW to appoint only Europeans in their Chinese units and control their operations in China successfully. Local knowledge is necessary for a company to excel in foreign market which can be provided by only by the locals. So BMW has employed many Chinese people in its business units in China. Conclusions BMW has realized that the global wealth is slowly shifting towards Asian region at present from Europe and America and it is necessary for them to expand to these regions in order to compete effectively in the global market. They realized that countries like China and India are developing much faster than other countries in the world. Moreover, these countries are the most heavily populated countries in the world and therefore demand for BMW products will never be exhausted if this region continues its growth phase. It is believed that China may replace America from the spot of number one economic power in the world, in near future itself. Moreover, BMW suffered some setbacks in American and European market recently which made the expansion to China inevitable. Globalization brought tremendous business opportunities to BMW and they exploited it very well. The formation of European Union (EU) has increased the cooperation and trade tie ups between China and Europe which helped BMW to enter China without much entry barriers. Differences in political ideologies between Europe and China never caused any barrier to the increased trade tie ups between them because of the awareness that mutual cooperation is necessary for mutual growth. BMW’s expansion efforts to China were carefully planned and well implemented. They never tried to introduce their European model vehicles in China as it is. They have realized that customization of products is necessary in the current extremely globalized market. At the same time they utilized product differentiation strategy very well to market their products in China. They recruited many Chinese people in their Chinese business units in order to exploit the local knowledge well for their growth prospects. Sustainability is another business strategy adopted by BMW in China, because of their awareness that it is difficult for an organization to continue its operations if it causes immense damages to the environment in which it operates. References BMW Sales Remain Low Down 26.8% - Mini Sales Decline 15.9% In March. (2009). Retrieved from http://www.autospies.com/news/BMW-Sales-Remain-Low-Down-26-8-Mini-Sales-Decline-15-9-In-March-42556/ BMW Miscellaneous Problems. (2011). Retrieved from http://www.consumeraffairs.com/automotive/bmw_misc.html BMW in the Age of Globalization, (2010). Retrieved from http://mymotorcycleapparel.org/honda-motorcycle-apparel/bmw-in-the-age-of-globalization/ Back A. (2010). China Adjusts Policy but Avoids Rate Increase to Cool Prices. The Wall Street Journal. 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Retrieved from http://likeluxurynow.com/Find_your_luxury_life_here/luxury-bmw-expanding-its-luxury-brand/ The difference between China and Japan. (2007). Retrieved from http://www.spectator.co.uk/clivedavis/373526/the-difference-between-china-and-japan.thtml Yang T (2010). New branding campaign for BMW. China Daily (12/4/2010). Retrieved from http://www.chinadaily.com.cn/bizchina/2010-04/12/content_9716541.htm Appendix (Florida et al, 2008, p.5) (GDP growth in China 1952-2009 2009) (China Inflation rates, n.d) (Back, 2010) Read More