five competitive forces in china automobile industry.docx

five competitive forces in china automobile industry.docx

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fivecompetitiveforcesinchinaautomobileindustry

FiveCompetitiveForcesinChina’s

AutomobileIndustry

ABSTRACT

China’sautomobilemarketpostedveryrapidgrowthinrecentyears,anditwasthethirdbiggestautomobilemarketintheworldin2003.BecauseChina’slargemarketdrawsmanyforeignautomobileactors,howtobesuccessfulinthecompetitioninChinaisanessentialquestionforMultinationalEnterprises（MNE）.ThispaperwillattempttodefinetheconditionsofcompetitionforMNEsinChinathroughtheindustrialcompetitiveframeworkofPorter,andtodemonstratehowitinfluencestheMNEstrategyandcompetitiveposition.Inparticularly,thispaperprovidesacomparisonofthecompetitivepositionofAmerican,European,andJapaneseautomobilemultinationalsinChina.

1.INTRODUCTION

Inthepasttenyears,theproductionofmotorvehiclesinChinahasseenanaverageannualgrowthrateof15percent,comparedtoaworldaverageof1.5percentinthesameperiod.Chinaproduced4.4millionvehiclesin2003（OIAC2004）withagrowthof35percentfrom2002,becomingthefourthbiggestvehiclemanufacturerintheworld,justafterUnitedStates,Japan,andGermany.Risingconsumerwealthlevelshavebeenamajorcontributoryfactortothesuddenexplosioninthecarmarket.Accordingtotheworldmarketresearchcenter,Chineseconsumers'purchasingpowerhasrisento$5,500,whichhashistoricallybeenthelevelofcarconsumptioninothermarkets.With4.5millionvehiclessoldin2003,Chinanowisthefourthbiggestautomobilemarketintheworld（WMRC2004）.SeveralinstitutesarguethatChina’svehiclemarketissettoalmostdoubleuntil2008,challengingJapanforitspositionastheworld'ssecond-largestautomarket.China’sbigmarketdrawsmanyofforeignautomobileactors.Almostalloftheworld’stopautomobileassemblersandsuppliershaveinvestedinChina,withVolkswagen,PSA,GeneralMotor,Delphi,Visteon,Valeo,andManasearlyentrants,andHonda,Toyota,Nissan,Hyundai,andDensocominginlater.Thecompetitionisbecomingincreasinglyfierce.Withalltheworld’sleadingglobalautomakersrampingupproductioninabidtodominatethelocalmarket,thetensionshavebeguntomountamongforeignautomobileenterprises.

Inthiscontext,itseemsimportanttoknowtheenvironmentoftheChineseautomobileindustrywiththeviewofestablishinganappropriatestrategyforautomobileMNEstoachievesuccessinChina.

WeanalyzetheChina’sautomobileindustrythroughthePorter’sindustrialcompetitiveframeworkbecauseitnotonlyoffersinsightsintotheenvironmentoftheautomobileindustry,butalsoinfluencestheMNE’sstrategyandcompetitiveposition.Westartbypresentingthistheoreticalframework（section2）.WethenapplyittoChina’sautomobileindustry（section3）beforeourtentativeconclusionincomparingthecompetitivepositionofAmerican,European,andJapaneseautomobilemultinationalsinChina（section4）.

2.THEORETICALFRAMEWORK

Strategyisthecreationofauniqueandvaluableposition,involvingadifferentsetofactivities（Porter,1998）.Thesuccessofcompetitivestrategyisafunctionoftheattractivenessoftheindustriesinwhichthefirmcompetesandofthefirm’srelativepositioninthoseindustries（Porter1980）.AccordingtoPorter（1982）,thecompetitivegameinanindustryentailsfiveforces:

Contextofstrategyandofrivalryofenterprises

Threatofpotentialentrants

Threatofsubstituteproducts

Bargainingpowerofcustomers

Bargainingpowerofsuppliers

ThestrategyofautomobileMNEsinChinaistocreateavaluablepositionintheautomobileindustry;aboveall,itdependsonthenatureofChina’sautomobileindustryinwhichexiststheinternationalcompetition.WewillanalyzetheenvironmentoftheChineseautomobileindustrythroughthefiveforcesofanindustrialcompetitionofPorter.

3.ANALYSISOFCHINA’SAUTOMOBILEINDUSTRYBYFIVECOMPETITIVEFORCES

ContextsofStrategyandRivalryofEnterprise

Thecontextforstrategyandrivalryrelatesfirstlytotheautomotiveindustrypolicy.TheChinesegovernmentdeclaredtheautomotiveindustrya“pillar”industryin1985,targetedforfinancialanddevelopmentalassistance.TheautomobileindustryisthefirstamongChineseindustriestobebackedbyaformalstateindustrialpolicy.Thispolicywasfirstformulatedin1987andmodifiedin1994,withemphasisonthreepoints:

toshifttheproductmixoftheindustryfromcommercialvehiclestopassengercars;toboosteconomiesofscalebyrestructuringtheindustryfromasituationoffragmentationandminiaturizationtowardsconcentration;toseektechnologytransferbyinvitingtheparticipationofforeigncompanies.However,operationalpracticesinvolveasetoflimitationmeasuresforforeigninvestment.Themostimportantobstaclesarehightariffandnon-tariffbarriers,foreigninvestmentlimits,andlocalcontentrequirements.

China’sWTOmembership（inDecember2001）favorstheliberalizationoftradeandtheestablishmentofforeigncorporationsintermsofcustomsrights,propertyrights,distribution,finance,etc.Tariffsforautomobileswillbereducedto25percentby2006fromabout50percentcurrently.WithChina’sWTOaccession,foreign-investedcompaniesmaycurrentlydistributeallproductsmanufacturedinChina.Withinoneyear,theywillbeabletodistributebothdomesticandforeignproducts.However,theformofinvestmentforautomakersremainsthemajorlimitation.AutomobileassemblyfirmshavetoenterChinaincooperationwithlocalpartners,andforeignersarelimitedtoamaximum50percentshareholding,althoughthereisapossibilityforforeignerstoconstituteamajorityinjointventures（JVs）forengineconstruction.LocalcontentrequirementsareencouragedinChina’sautomobileindustry,inordertoachievethecomplexindustrialdevelopmentandself-reliancerequirement.Localcontentsofassembledvehiclesvarywithdifferenttariffrates;forexample,thetariffonCompletelyKnockedDown（CKD）kitsisreducediflocalcontentsareincreased.Forthefirstthreeyears,thetariffsonimportedCKDpartsis50percent;afterthefourthyear,thelocalcontentratebetween60–80percentcorrespondsto48percenttariff,40–60percentto68percenttariff,andunder40percentto80percenttariff（Leeetal.1996）.

ThecompetitioninChina’sautomobileindustryisfrombothdomesticandforeignfirms.Therearemorethan130carfactories,suppliedbymorethan3,000companiesdeliveringparts,anindustrycoveringalmostasmuchasthatoftheUnitedStates,Europe,andJapantogether,buttheinternalproductionremainswellbelowanyofthesebigproducercountries.Thegovernmentthereforehasdesignatedsevennationalautomotivefirmsasthe“keyfirms”tochallengetheforeignones.Furthermore,China’srecentfive-yearplan（2001–2005）fortheautomobileindustryisaimedatformingthreeautogiantsintheyearsahead.Thesethreegroupingsare:

FirstAutomobileWorks（FAW）,ShanghaiAutomobileIndustryCorporate（SAIC）,andDongfengAutomobile（Dongfeng）.Whileseekingtheconsolidation,thegovernmenthasenabledthesethreecompaniestopursueallianceswithforeignautomobilemanufacturers.Thesealliancesfavordomesticfirmsbyraisingtechnologylevels,achievinggreatereconomiesofscale,andassuringacontinuedstrongpresenceinthepassengercarsegment,inparticular.Indeed,allthebigthreehaveformedlinkswiththeworld’sleadingcarmakers（Figure1）,whichwillensuretheirsurvivalduringtheinevitableconsolidationoftheindustry,whilecompetitionheatsupoverthenextfiveyears.Certainly,theChinesebigthreewillbegintousetheirtechnologyandknowledgetomountachallengetotheirforeignrivalsinthecarsegmentinthelongerterm.

FDIinflowsintheChineseautomotiveindustrystartedtoacceleratesharplywiththeexpansionoftheJVfrom1992.Therewereabout20JVstilltheendof1989,buttheyincreasedto120in1993andskyrocketedto604in1998,withanaccumulatedinvestmentof$21billion,accountingfor9percentofChina’stotalFDIstockduringthisperiod（accordingtoMinistryofForeignTradeandEconomicCooperationdata）.SincethefirsttenoriginalworldequipmentmanufacturersweresetupinChina（Tables1&2）,theautomotivemarketisconsideredincreasinglycompetitiveworldwide.

AsapioneeringforeigncarmakerinChina,VolkswagenwasthecolossusofChina’scarsceneforyears.SincethestartofproductioninitsShanghaiJVin1985,VolkswagenhasbeenthecarmakerleaderinChina’sautomobilemarket.TogetherwithitssecondJVwithFAW,thecompanyrepresentedmorethan50percentofmarketshareinChinaforalmost15years（Figure2）.AnotherpioneerinChina’sautomobilemarketisthePSAGroup,withitsJV:

DongfengCitro?

n,whichhandledabout5percentofmarketsharein1997,7.5percentin2000and6.7percentin2002.

ThreatofPotentialEntrants

However,themonopolisticpositionofVolkswageninChinaisseriouslythreatenedbynewentrantsanddevelopmentsofotherforeignandnationalcarmakers,duetotheexplosionofvehicledemandinChinasince2001.ThepassengercarmarketinChinacontinuedtoexpandin2002,witha42.8percentincreaseto0.5millionunitssold.TherapidexpansionofChina’sautomobilemarkethasattractedglobalautomobilemanufacturers（Table2,Figure2）,suchasGM,Toyota,andNissan,challengingthedominanceofVWinthecarmarket.GMenteredtheChinesemarketwitha$1.5billoninvestmentinitsShanghaijointventurewithSAICin1997,whichisthebiggestSino–Americanjointventure,producingitsfamousBuickSaloon.ToyotomadeitsalliancewithChina'slargestautomobilemanufacturer,FAW,in2