China’s Automobile Industry

Although the local government has been actively promoting, in the 1980’s China’s automobile industry is not an attractive, nor a powerful market. It was relatively small in size. There is a lack of domestic demand, cars are not the major transportation used by the locals, rather it was a privilege for a small number of high-ranking officials. Most vehicles are trucks, and China was only beginning to allow taxi services. Also, there are only a limited number of worthy local firms that can be taken as partners. However, as the economy of China rises, the local’s income and living standard upgrades.
Creating a vast number of demands for private cars. Furthermore, the Chinese government has shaped their policy to improve their economy through growth of automobile and infrastructure industry. The rapid growth of the automobile market in China has attracted more multinational firms to enter. The Chinese government realized the lack of their vehicles and their need to modernize the industry, however they should also protect the local firms. As a result, multinational automakers must set up joint ventures or licensing deals with local firm in order to build their final assembly operations in China.
It is a large project with high commitment, level of control, and need a lot of resources, and potentially create high benefits, licensing seemed to not fit the picture but rather joint venture. In addition, exporting to China is not favorable because the Chinese government realizes that it high amount of imported vehicles would be a major exhaust on their limited hard currency reserves. Car’s import duties in 1980s was 260% until 2006 where it was reduced to 25% Being an early entrant has definitely benefited Volkswagen (VW) in China.

They are able to take advantage of the scarcity of high-quality vehicles, the persistence of a seller’s market and lack of competition in choosing local partners, which leads to a solid market position. However, their success is mostly because of their hard effort. They were proactive and were willing to share a big amount of resources (both financial and technical). Their interaction with the local government, providing help to some extent, plays a role in their success. VW is not afraid to go ‘all out’, as they even reinvest their profit to develop their production.
However, another early entrant, Peugeot faced the opposite. Their failure is not due to lack of early entrant advantage, but rather to the lack of improvements. Their product was outdated, and even though they have generated high profits from selling CKD kits and parts, they did not try to develop their production (that has generated a lot of complaints). The timing on when a firm enters the market does not necessarily determine the performance of the firm but more to the effort and commitment they put in, and luck.
For example, even though Honda had fewer options of partners and market positioning, it is a successful late entrant as they invested an enormous amount of both financial and technological investments. Their excellent reputation and brand recognition that they have gained before the takeover, also contributes to their success. On the other hand, the failure of Ford (late entrant) is claimed to be mainly because of the wrong partners and improper initial strategies (article 1). I would vote yes to the proposal.
Even though China is facing potential overcapacity, their future growth is not something that can be ignored. China has been successful in many other industries, and it has certainly promoted economic growth that leads to higher local living standards. Local demand for automobile will certainly keep on increasing, as the Chinese government keeps on developing the infrastructure to promote the use of cars (article 2). Not only that, they are making bullet trains inter-countries (China-Singapore) that will push further their economic growth (article 3).
Tourism to China will increase, so will the locals income and the demand for transportations (including trains and boats). By being able to capture those potential demands, the benefits of this project will certainly outweigh the risks.
Sources
Article 1 – Ford’s failure: http://www. chinadaily. com. cn/english/doc/2004-10/22/content_384782. htm Article 2 – Highway improvements: http://www. usatoday. com/news/world/2006-01-29-china-roads_x. htm Article 3 – Bullet Train: http://www. npr. org/2011/06/14/137111321/full-steam-ahead-for-chinas-rail-links-abroad