Data Analysis - Term Paper Example

Chapter 4 – Data Presentation and Analysis Introduction Chapter four is divided into four main sections and provides an analysis on the competitiveness of the Chinese automobile industry by examining a number of different theoretical models. The first section presents Porter’s Five Forces Framework and describes how it will be used to analyse the Chinese automobile industry. Section two expands the Five Forces Framework to include Porter’s Diamond Model. The third section discusses how the Chinese automobile industry will create value and maintain a competitive advantage. Section four presents an analysis of the strengths and weaknesses of the industry as well as the opportunities and threats to the industry by using SWOT Analysis. Finally, the fifth section analyses the data obtained from a questionnaire which was administered to a random sample of local residents asking whether they will purchase a new car within the next twelve months. Porter’s Five Forces Michael Porter’s Five Forces is perhaps the most recognized model of competitive advantage and has become the standard methodological tool used by business analysts in assessing a firm’s relative position within a given industry (Businessballs, 2010). Porter’s model is useful in that it examines environmental factors from both within the industry as well as those factors external to the industry. The key for the business manager is to be able to recognize these environmental factors and to be able to respond in a manner that maximizes competitive advantage. The five forces are listed below: Competitive rivalry of the industry Threat of Potential Entrants Threat of Substitute Products Bargaining Power of Customers Bargaining Power of Suppliers (Porter, 2008) These five forces are determinants of an industry’s profitability, which is vital for the success of firms within any industry. The strategy of automobile companies in China, is to create a profitable position within the country’s automobile industry. This chapter provides an analysis of the environment of the Chinese automobile industry through the application of Porter’s five forces model of industrial competition. Competitive rivalry within the industry Competitive rivalry is the relative power of a firm’s competitors. In an industry where firms produce similar products, individual companies have little power over product pricing. Competition in China’s automobile industry is from both domestic and foreign firms. There are more than 130 car factories, which are supplied by more than 3,000 companies delivering parts (Zhao Min, 2005). FDI inflows in the Chinese automotive industry started to accelerate sharply with the expansion of joint venture agreements (JVs) from 1992. In 1989, there were about 20 JVs increasing to 120 in 1993. By 1998, the number had skyrocketed to 604 with an accumulated investment of $21 billion, accounting for 9 percent of China’s total FDI stock during this period (according to Ministry of Foreign Trade and Economic Cooperation data). Table 1 shows that in the passenger car market, the foreign players dominate, with only Chery representing domestic car manufacturers. The largest domestic competitor of Chery, Geely did not rank in the top 10 in 2007 with output and sales around 216,841 units and 219,512 units respectively though it ranked tenth in 2006, with output and sales around 206,958 and 204,331 units respectively. Sedans specifically dominated the passenger car market. Sales of sedan kept rising from 2006 and almost 4.73 million sedans were sold in 2007, which was more than three-quarters of the total sales of passenger cars in China. Simultaneously production of sedans increased to 4.8 million units (China Knowledge, N.D). Table 1 Top 10 Sedan makers in China Manufacturers Sales (1,000 units) Market share FAW Volkswagen 458.3 9.70% Shanghai Volkswagen 445.8 9.40% Shanghai GM 432 9.10% Chery 321.5 6.80% FAW Toyota 269.1 5.70% Dongfeng Nissan 261.2 5.50% Guangzhou Honda 249.5 5.30% Geely 219.5 4.60% Changan Ford Mazda 213 4.50% Dongfeng peugeot Citroen 207.3 4.40% Source: China Knowledge, N.D Utilizing Porter’s criterion of rivalry, it is clear that individual Chinese automobile manufacturers exercise little control over market prices. Threat of Potential Entrants This competitiveness criterion assesses the relative ease that new firms experience in entering the market. Obviously, if firms within a particular industry can erect barriers to entry, they have power over product supply. The threat of potential entrants into the automobile manufacturing industry in China is very high (CarFreaks, 2010). There are many new automobile manufacturers in China and most of them are in the early phases of the production life cycle. Limited intellectual property laws foster an environment where state-of-the-art manufacturing technologies are copied from competitors. This increases the number of new entrants into the industry, because firms who copy from their competitors do not have to incur the costs associated with the research and development of new technologies. Moreover, the growing demand for automobiles and China’s booming economy will attract even more new manufacturers to enter the automobile industry. Because barriers to the entry of new firms into the Chinese automobile market are weak, Chinese companies have little control over product supply. This affects price and the firm’s profits as well. Threat of Substitute Products Threat of substitutes simply assesses the ease with which customers can substitute to a different product. For example, if pork prices rise consumers can substitute to beef. In the automobile industry, because there are so many firms producing cars, consumers have considerable latitude over the products they choose to purchase. This obviously limits the ability of producers to increase prices. In many countries, cheap public transportation such as mass-transit, taxis, buses and railways can be a threat to the development of the automobile industry. However, this does not appear to be the case in China where many Chinese will end up purchasing an automobile because owning a car is considered a status symbol. It is likely that if they were financially able to, they would purchase a vehicle as soon as possible despite other cheaper options such as mass-transit or bicycles. Bargaining Power of Customers Buyer power measures the relative ease with which customers can exert pressure on firms to lower their prices. In the short term at least, Chinese customers will wield significant power because the automobile industry is very competitive with Chinese and foreign firms scrambling to satisfy customer demand for their products. Customers are not limited to one or two manufacturers from which to choose. They have considerable choice which clearly helps to characterize the current industry climate in China as a buyer’s market. Bargaining Power of Suppliers Supplier power is the ability of suppliers to increase the price of their products that are used in the manufacturing process. Suppliers typically have power when the product that they supply is unique and available from only a few suppliers. If it is a buyers market for automobile customers, the opposite can be said about the firms who supply automobile parts to the car manufacturers. There is currently a glut of suppliers in the Chinese market. The power over choice of suppliers as well as the market price for the components that go into manufacturing of vehicles clearly rests with the automobile manufacturers. As Porter notes, this dynamic process of control over suppliers allows firms within the industry to contain costs and thereby maximize profits. For the parts suppliers, the business climate is one of uncertainty where suppliers go out of business because they are unable to provide products at the prices demanded by the manufacturers. Porter’s five forces model was the subject of much criticism in the academic literature during the 1980s. The primary reason was that critics argued that the model ignored macro-economic policies controlled by the government and the fact that some countries are blessed with natural endowments while others are not. This prompted Porter to develop the Diamond Model which takes into consideration what he refers to as the national competitive advantage. The Diamond model examines the role that government plays in helping to determine the success or failure of firms within the market. This model not only highlights the significant impact that government has on industry through its management of macro-economic policy, it helps to explain why some industries that enjoy much success in some countries fail dismally when they attempt to engage in the same business in another country. In addition, the model takes into account how natural endowments give a competitive national advantage to some countries over others. The Diamond model is discussed in the next section. Porter’s Diamond Model In 1990, Porter refined his model of competitiveness between firms within a given industry. The Diamond Model is now a well known theory that assesses industry competitiveness through the following four factors: (1) demand conditions, (2) factor conditions, (3) related and supporting industries, (4) strategy, structure and rivalry. Demand conditions Demand conditions compares domestic demand for a product with international demand. Porter contends that in industries where domestic demand exceeds international demand, local firms have a comparative national competitive advantage. Many international firms have entered China’s automobile industry primarily to gain access to a potential demand market of 1.6 billion people and to avoid trade barriers for imports. China has 300 million families and offers companies almost unlimited growth potential as very few Chinese currently own cars. As the Chinese middle class continues to grow in numbers, and given the prestige that automobile ownership brings, sales for automobiles are predicted to out pace the supply of cars that manufacturers are able to produce. China is deemed to be moving toward a car consumption boom much like the one witnessed in America after World War II. China’s average family income is approaching the same level of America in the 1950s which signified the golden period for the automobile industry in the United States (U.S.A. Bureau of Labour Statistics; Consumer Expenditure Survey; and U.S.A. Census Bureau, Statistical Abstract of the United States). By 2008, the average urban family income in China had risen to around 24,302 yuan ($3522) from 16,159 yuan ($1973) in 2005 (National Bureau of Statistics, People’s Republic of China, 2009). Factor conditions Factors are endowments that a country possesses naturally or develops internally through strategic investments. Examples of natural endowments include land, minerals, lumber, fish and human capital. Technological capacity is an example of a factor that is developed through investment. Countries that are fortunate to have endowment factors have a competitive national advantage over those who do not. One of the key reasons for China’s rapid economic growth as well as its allure with foreign manufacturers is its low labour cost. In addition, China has by far the world’s largest manufacturing workforce, at more than 100 million. This gives China a significant relative national competitive advantage in manufacturing. Local employees who serve as general labourers receive very low salaries and at the management level the top annual salary is $30,000 USD. The general pay is closer to $10,000 and some getting even as low as $3,000- 4,000. The department managers also fall in the low pay category. Only Suzhou has an annual salary that is higher than $9,000. However, these low wage and salary rates are often mitigated by generous benefit packages which typically are as high as 30% of an employee’s base wage. In some cases, benefits have been known to exceed more than 50% of the base salary for employees in a given company. The actual payment for the benefits are remitted to the government and are later returned to the employees in the form of pension benefits, medical coverage, and a housing fund allowance. (Cooney, 2006) The low labour costs in China have been the reason for growth in the overall manufacturing sector in general and in the automobile manufacturing industry in particular. The graph in Table 2 shows average wages in China compared to salaries paid in the United States, Japan, Mexico and Brazil. The data show that Chinese firms enjoy a significant cost advantage over competitors in the other countries. Data from 2004, shows that China’s average hourly compensation in the manufacturing sector was lower by far than what was found in most of China’s largest trading partners. Table 2 Source: United States Department of Labour, 2007 According to estimates provided by Erin Lett and Judith Banister, China’s average hourly manufacturing compensation in 2004 was around 3% of the average hourly compensation costs of $22.87 for production workers in the United States for the same year. By comparison, China’s hourly labour rates ranged from $.045 per hour for rural workers to $1.19 per hour for workers employed in urban areas (United States Department of Labour, 2007) British experts Graeme Maxton and John Wormald, rated China among the most promising countries of those still in the developmental phase of an independent auto industry. This favourable rating is primarily because Chinese firms have direct access to modern U.S. automotive technologies as well as the enormous potential market described earlier. The Chinese government is planning to use market size and access to technology to their advantage and grow the country’s skill base to create an independent, world-class automobile industry that will rival the industries in Japan and Korea. Strategy, Structure and Rivalry Porter argues that it is the responsibility of government to create a level playing field for businesses within a particular industry. Government does this through incentive programs, fair and equitable taxation and regulatory policies and laws establishing and protecting intellectual property rights. This creates competition between local firms and the result is products that are innovative and cost effective. As of 2009, there were 52 foreign and domestic carmakers operating in China, compared to 15 in the United States (Fact and Details, 2010). The highway system in China has been rapidly expanding which helps boost vehicle consumption much like the advent of Interstate highway system in the U.S. during the 1950s The Chinese government has recognized that an expanding and reliable transportation infrastructure is essential for the development of its automobile industry and has been investing a considerable amount of public resources to accomplish its infrastructure goals. From 2001 to 2005, expressways grew by 15,350 miles, more than doubling the total length to 25,480 miles. By comparison, he United States has 46,000 miles of interstate. If infrastructure investment continues at its current levels, by 2020 China is likely to overtake the United States (USATODAY, 2006) Related and supporting industries In Porter’s five forces model, the emphasis is placed on the relative power that suppliers have over the prices that they are able to charge manufacturers for component parts. Under the Diamond Model, competition within supplier markets is examined. The more competitive the supplier market becomes, the more innovative the products are that become part of the final supply chain. This innovation in the supply chain translates into a more innovative final product which ultimately leads to a competitive national advantage for the manufacturing industry. China has 3000 automobile parts suppliers. This obviously does not represent a lean, innovative supply chain. Porter would argue that government’s role is to regulate the supply industry to increase competition and weed out those firms who are not innovative. Creating Value Successful companies create products that are valued by customers who are willing to pay for them. The concept of ‘value creation’ is probably one of the most significant business concepts developed in past four decades. As Peter Drucker, the Austrian–born management ‘guru’ writes: “The only function of a business is to create customer value” (Newsweaver, 2010). Furthermore, John Kay, an economist also argues that businesses derive their strength from a distinctive structure of relationships with employees, customers, and suppliers. He also contends that there are three distinctive capabilities a company must have to create added value and achieve competitive advantage. They are architecture, reputation and innovation. Chinese leaders have implemented a plan to turn China into one of the leading producers of hybrid and all-electric vehicles within three years. They also strive to be the world leader in the development and production of electric cars and buses (NY Times, 2010). The ten most significant Chinese car manufacturers include the China FAW Group Corporation, Dongfeng Motor Corporation, SAIC Motor Corporation Ltd, Changan Automotive, Chery Automotive, Brilliance Automotive, Tianjin Qingyuan Automotive, BYD Auto, Geely Holding Group, and JAC Motors. All of these companies have projects underway to develop or expand capacity to build alternative energy vehicles (Renewable Energy 2010).  China also plans to increase its annual production capacity to 500,000 hybrid or all-electric cars and buses by the end of 2011 (NY Times, 2010). By comparison, CSM Worldwide, a consulting firm that does forecasts for automakers, predicts that Japan and South Korea together will be producing 1.1 million hybrid or all-electric light vehicles by then and North America will be making 267,000 (NY Times, 2010). If Chinese automobile manufacturers are successful in developing quality vehicles that incorporate the latest in “green technologies,” they may very well pass Drucker’s test of creating customer value. China has the capacity and the capability to dominate the automobile market both domestically and internationally much like Japanese firms did in the 1970s and 1980s. SWOT Analysis The comparative strengths of the Chinese automobile industry are its large domestic market, a quality product and affordable prices. Michael Robinson states, "Theres so much demand for cars inside China now, the new makers dont need to export.” (BBC News, 2010). Chinese automobile manufacturers are pursuing a cost innovation strategy (Zeng and Williamson, 2008). Normally, manufactures use innovation to charge a price premium for their products. However, Chinese automobile manufacturers are using innovation to provide products at a lower cost to consumers. Cost savings generated through innovation, coupled with affordable labour costs and access to new technologies make Chinese firms competitive with international manufacturers (Zeng and Williamson, 2008). Chinese automobile manufacturers experience several weaknesses that constrain their ability to emerge as international market leaders. The primary weakness is the perception within the international community that Chinese products are of poor quality. This negative stereotype is exacerbated by the negative media attention that China received over the Melamine scandal. Another significant barrier to Chinese auto makers is a lack of product branding. Few people outside of Asia have heard of Chery but everyone knows that Toyota is the standard bearer for quality. The opportunities that are available to the Chinese automobile industry in the coming years are noteworthy. First, even if China does not export a single car in the next five years, the demand from the domestic market alone will challenge manufacturers to keep up with the supply of vehicles. Second, the Chinese automobile industry is positioned to become the world leader in hybrid and other green technologies. Chinese carmakers have already invested large amounts of capital in R&D related to hybrid and electric vehicles. In addition, Chinese firms are using acquisition of foreign automobile firms as a strategy to acquire green technologies. The recent purchase of Volvo is a good example. Third, seemingly endless support for industry is available through programs funded by the Chinese government. The government of China has vast resources at its disposal including trillions of dollars in foreign currency. No competitor outside of China can come close to competing with that. Finally, China is already beginning to make inroads into the international automobile markets. “In Australia that process has already begun because last year Rick started importing Chinese-branded vehicles for the first time. And, he says, his customers love them” (BBC News, 2010). Most of the threats concerning the growth of the automobile manufacturing industry in China concern uncertainty over changes in government policy regarding tax and other incentives. There is some speculation that the Chinese government may raise the consumption tax from 5 percent to 10 percent next year for cars with engines larger than 1.6 liters (BusinessWeek, 2010). The research director at China’s State Information Center stated that last year’s reduction of tax caused unsustainable growth in the automobile market but was a contributing factor that helped Chinese auto demand surge past the U.S. for the first time (BusinessWeek, 2010). According to Paul Newton, a London-based auto analyst at IHS Global Insight, even if the tax break is phased out, “there is a fear that amid all of this investment and stellar growth, the vehicle market could start to overheat. (BusinessWeek, 2010). ” In summary, the one major threat faced by the Chinese automobile industry is that if government policy becomes a deterrent to sustainable market growth. Questionnaire results – Local Residents Upon asking the respondents whether they currently have or do not have a car or, the majority of the respondents 64% indicated that they currently “do not have a car.” The other 36% revealed that they “have a car.” This data verifies that there are still a majority of people in China who does not own a car. However, 78% of the respondents who revealed having a car, currently have one car whereas the other 22% responded of having two or more cars. This again shows that people in China are just starting to own a car. When asked whether or not the respondents will purchase a new car within the next 12 months, as many as 70% said they will purchase a new car whereas 20% said maybe since they are currently having financial issues. Only 10% of the respondents revealed that they will not purchase a new car due to currently having 2 or more cars. Conclusion This chapter applied a SWOT analysis as well as Porter’s Five Forces and Diamond models to the Chinese automobile manufacturing industry. The analysis is quite revealing. Utilizing the five forces approach, it is clear that the automobile manufacturing firms do not enjoy a strong competitive advantage. In fact, the consumer wields significant power given the large number of products from which to choose. The Diamond model, on the other hand, clearly shows that China is a nation poised to exercise a considerable national competitive advantage over automobile producers in other countries. The Chinese government is investing huge sums of money on upgrading and expanding the highway transportation infrastructure, the government is investing heavily in research and development into new technologies and the government has trillions of dollars available to support the development of China’s automobile industry’s movement into a global leadership position. The SWOT analysis revealed that the Chinese automotive manufacturing industry enjoys many strengths as well as opportunities to assume a leadership role in the global market. This is particularly the case in the area of emerging green technologies. The only threat of any significance is a major change in the Chinese government’s taxation or regulatory policies that may somehow impact consumer demand for cars. The detailed analysis in this chapter utilized multiple theoretical business models in assessing the current situation with the Chinese automotive manufacturing industry. It is clear from each of the theoretical models that China is quickly becoming the standard for success in the automobile manufacturing industry. Bibliography Zhao Min (September 2005). Five Competitive Forces in China’s Automobile Industry. Retrieved June 10, 2010, from http://www.commerce.uct.ac.za/managementstudies/Courses/bus2010s/2007/Nicole%20Frey/Readings/Journal%20Articles/Contemporary/Five%20Competitive%20Forces%20in%20Chinas%20Automobile%20Industry.pdf http://www.businessweek.com/news/2010-04-26/carmakers-unsustainable-growth-in-china-risks-overcapacity.html Porter, M. E., 1990.The competitive advantage of nations. Macmillan Press, London. http://oica.net/wp-content/uploads/world-ranking-2008.pdf Johnson, G , Scholes, K & Whittington, R (2006) Exploring Corporate Strategy. 7th edition. Prentice Hall, London Zeng, M & Williamson, P.J. (2008) Dragons At Your Doors. Harvard Business School Publishing Corporation, Boston China Knowledge (N.D.). Manufacturing in China. Retrieved on July 20,2010 from http://www.chinaknowledge.com/Business/CBGdetails.aspx?subchap=3&content=9 United States Department of Labor (2007). Labor costs in china’s manufacturing sector. Retrieved on July 20,2010 from http://www.bls.gov/opub/ted/2007/jan/wk1/art03.htm http://www.nytimes.com/2009/04/02/business/global/02electric.html http://news.bbc.co.uk/2/hi/programmes/from_our_own_correspondent/8803950.stm http://www.renewableenergyworld.com/rea/news/article/2010/04/an-update-on-chinas-alternative-energy-vehicle-industry USA Today http://www.usatoday.com/news/world/2006-01-29-china-roads_x.htm Fact and Details, 2010 http://factsanddetails.com/china.php?itemid=361&catid=9&subcatid=61 Questionnaire Two – Local Residents The Competiveness of the Chinese Automobile Industry By Ho Yin Hung I am currently a final year real estate student at Imperial College. The following questionnaire has been compiled to help me gather relevant data for analysis as part of my research. It is an anonymous survey and has been approved by Imperial College Research Ethics Committee. It will take less than 5 minutes to complete all the questions and your feedback will be greatly appreciated. Please circle one letter for each of the following questions: 1. Do you Currently have a car? a) Yes b) No 2. If so how many cars do you currently have? a) 1 b) 2 c) 3 or more 3. Are you planning to purchase a new car over the next 12 months? a) Yes b) No c) Maybe Thank you for completing this questionnaire Read More