A Case Study of Daimler AG's Entry in the Hungarian Automotive Industry

1. Introduction

The end of the cold war marked the beginning of intensified foreign direct investment (FDI) in Eastern and South Eastern Europe. This case study will focus on the entrance of Daimler AG in form of their brand Mercedes-Benz Cars, in the following Mercedes-Benz, originally founded in Germany, into the Hungarian automotive market. Mercedes Benz is active in the field of passenger cars and this specific section of the Daimler AG will be addressed. Even though previous interaction with the Hungarian market was conducted in the past, the focus will lie on the successful engagement of Mercedes-Benz since 2008, when the decision to build a car assembly plant in Kecskemét was taken (Daimler Annual Report, 2008).

2. Type of MNE and Internationalisation of Mercedes-Benz

For its foreign engagement in Hungary Mercedes-Benz used an off-shore outsourcing strategy shown by strong engagement with local suppliers which produce many parts for the car manufacturer, as described by Eddy (2011), in combination with equity investment in the final assembly plant. This makes Mercedes-Benz a fragmented MNE as it uses outsourcing, while in the same time it is an original design manufacturer as is designs and produces crucial parts of its cars itself.

Against the assumption of Brouthers, Brouthers and Werner (2002) that manufacturing firms are more reluctant to establish wholly owned subsidies (WOS), but in line with the assumption of Hymer in Cohen et al. (1979) that multinational firms spread their day-to-day operations globally, Mercedes-Benz enjoys a high degree of internationalisation including WOS for example in East London (South Africa), Tuscaloosa (USA), Bangkok (Thailand), Pekan (Malaysia) and Pune (India). Additionally Mercedes-Benz established various Jointed Ventures (JV) and licencing agreements in the past (Daimler Annual Report, 2012). Facilities which are not WOS can be found primarily in Asia and North America.

The establishment of partially owned subsidiaries in Asia can be explained by political regulations and lack of market knowledge caused by cultural distance. However all previously mentioned FDI engagements show significant experience in the field of internationalisation prior to the launch of production in the WOS in Hungary. This correlates with the findings of Padmanabhan and Cho (1999) who observed that firms who gathered experience in previous market entries are likely to adapt these experiences in future situations as implementation cost can be reduced.

3. Daimler's core business strategy

The core business strategy is described for Mercedes-Benz with respect to four aspects: strengthening core businesses, growing globally, leading in technology and pushing digitalisation (Daimler Annual Report, 2012; Daimler Annual Report, 2016). Regarding the strengthened core business and growing globally this means to further increase sales of high-tech cars especially in China and Asia (Daimler Annual Report, 2016). With respect to leading in technology and pushing digitalisation Mercedes-Benz aims at expanding its technological leadership in the field of security, autonomous driving, connectivity and drive systems (Daimler Annual Report, 2016).

4. FDI in Hungary

To gain an understanding of foreign economic activity in Hungary in the recent past, the net FDI since 2001 will be taken into account. The Hungarian government has been successful in attracting FDI from various foreign countries. The net FDI varies between approx. 1.000.000. 000.000€ and approx. 6.000.000.000.000€ from 2001 to 2012, while the years 2005 and 2006 show the highest investments of 6.172.108.902.146€ and 5.454.371.856.237€ respectively (MNB Statistics Department, n.d.).

In the recent past a negative net FDI is observable leading to the assumption that investment attractiveness of Hungary has decreased.

German net FDI in Hungary reached its peak in 2010 and 2011 with more than 2.500 million € invested, which can be explained by the construction of the Mercedes-Benz factory in Kecskemét.

5. The Market Environment in Hungary

To analyse the market environment in Hungary the 5 forces model developed by Porter (1997) will be used, as it describes the competition Mercedes-Benz faced when it entered the market.

The first aspect the analysis will focus on is the threat of new entrants as every new entrant will claim resources, which contradicts Mercedes-Benz's main goal of having an exploitative efficiency-seeking strategic motivation in Hungary, as defined by Dunning (1992). The entry barriers Porter (1997) points out, but are only applicable in a limited way in the case of the Hungarian automotive market, are government policy, capital requirements and product differentiation. This is the case as the government policy welcomes FDI and even financially supports it as it is described in the section above, following government policies do not act as entry barriers. Product differentiation to gain customer loyalty is also rather unimportant as the products are manufactured for the European and international market. The entry barriers posed to firms by capital requirements are relatively low as most internationally active car manufacturers are financially strong and additionally grants and subsidies are offered by the Hungarian government.

The next aspect the essay will focus on is the bargaining power of suppliers and buyers. As already mentioned before, the buyers in Hungary are not the primary target of the car manufacturers which can be seen by the high car export rate of approx. 93%, thus their bargaining power is limited as all cars can be exported (Jacobs, 2017). More important is the network of local and international suppliers, which is well established. The great variety of over 150 suppliers including top-TIER1 suppliers like Magna and Bosch (HITA, 2012) give Mercedes-Benz bargaining power to reduce the price for outsourced activities. As mentioned by Porter (1979) this is the case as Mercedes-Benz purchases production parts for more than 100.000 cars per year, making the suppliers dependent.

The third aspect to consider is the rivalry among competitors as defined by Porter (1979). The competitors decisive in the Hungarian market are the international car manufacturers Suzuki, Mercedes-Benz and Audi which have similar outputs of approx. 180.000 cars (2015), with only Mercedes-Benz lacking behind with 160.206 cars produced in 2015 caused by its delayed market entry (Jacobs, 2017). This shows that the car manufacturers are roughly equal in size and power, causing competition according to Porter (1979).

Further aspects he highlights leading to significant competition in the industry are high fixed costs and exit barriers. High fixed costs and high exit barriers can be found as Mercedes-Benz entered the Hungarian market in an equity based way using an investment of over €2,2 billion combining the investments in 2012 and 2016 (Jacobs, 2017), making a market exit unfavourable.

The fifth point Porter (1979) mentions to describe competition in the environment is the threat of substitutes. In the case of conventional car manufacturers this might be the use of public transportation, electric vehicles or bikes. As shown by Jacobs (2017) the various car manufacturers do not target the Hungarian market. Thus this criteria defined by Porter (1979) is only partially applicable to Mercedes-Benz as the cars produced, can be sold in other international markets in case substitutes gain strength in Hungary.

Concluding one can say that several conditions defined by Porter (1979) are fulfilled and a certain degree of competition between Audi, Suzuki and Mercedes Benz exists. According to Brouthers, Brouthers and Werner (2002) the firms would be reluctant to conduct FDI in a highly competitive market. However one important aspect is that all automotive firms active in Hungary produce for the export, which enables the firms to sell their products abroad, reducing the risk arising from a highly competitive market, thus explaining the high engagements in FDI opposing the assumption of Brouthers, Brouthers and Werner (2002).

6. Entry into Hungary

Mercedes-Benz entered Hungary by opening a wholly owned facility through greenfield investment in Kecskemét. Nevertheless only the final assembly, the production of the car body and a paint spray line are conducted in the location (Wirtschaftswoche, 2016). However Mercedes-Benz cooperates strongly with local and international suppliers in an non-equity based way, meaning that significant parts of the production are outsourced to other firms as mentioned by Eddy (2011). This allows Mercedes-Benz to keep flexibility in the production process as suppliers can be chosen according to the needs of the firm (Cohen et al., 1979).

Mercedes-Benz uses the increased flexibility which comes along with externalisation but does not lose control in the production process. Instead the outsourcing allows Mercedes-Benz to spread its influence on other firms. This is based on the situation that there are many automotive suppliers available in the Hungarian market, reducing dependency, while increasing power over the individual supplier, as pointed out by Hymer (in Cohen et al., 1979; HITA, 2012).

Entering Hungary by establishing a WOS in combination with a network of international and controllable local suppliers allowed Mercedes-Benz to invest financial resources elsewhere, e.g. in building up its reputation and innovation abilities, as pointed out by Strange and Newton (2006) and Hymer in Cohen et al. (1979), which is a crucial part of Mercedes-Benz overall ownership advantages and firm strategy.

Another decisive aspect is that a variety of international automotive suppliers, like Bosch, and Johnson Controls entered Hungary prior to Mercedes-Benz, because many other car manufacturers were already engaging in Hungary (Lichter, 2016; Industry Week, 2012). Thus the entry can be explained in the way that Mercedes-Benz followed its suppliers as it is referred to by Johanson and Vahlne (2009).

7. Mercedes-Benz's Strategic Motivation to Enter Hungary

In the following paragraphs reasons for Mercedes-Benz to enter Hungary will be analysed by applying the OLI Framework developed by Dunning in 1977. The approach will be used because it encompasses aspects of the resource-based view, the transaction-cost-analysis and the institutional theory which can be used complementary to explain MNEs entry decisions (Dunning, 2000).

7.1 Ownership advantages Mercedes-Benz enjoys

Ownership advantages are decisive for a MNE's performance in international business as it gives the enterprise competitive advantages and help to overcome the liability of foreignness as argued by Barney (1991) and Peng and Meyer (2009). Crucial to ownership advantages is that they are not location-bound (Peng and Meyer, 2009). In the case of Mercedes-Benz good logistics and the experience gained through previous internationalisation activities can be considered competitive advantages over other firms.

Especially experience is seen as a crucial factor by Agarwal and Ramaswami (1992) and Dunning (2000) points out that in the recent past the ability to organise and integrate knowledge intensive assets gained in importance. The ability to coordinate production activities is important as Mercedes-Benz is an MNE using outsourcing, meaning that the production of the individual suppliers have to be adjusted to the final assembly. These abilities can be found in the case of Mercedes-Benz because of its high number of equity and non-equity based subsidies in various countries (Daimler Annual Report, 2012).

Another ownership advantage Mercedes-Benz possesses is good brand reputation, based on high quality (Forbes, 2017). This is valuable as it is a long-term achievement which cannot be copied by new emerging entrants as pointed out by Vallance in George (2015). Furthermore good reputation gives firms a higher attractiveness in the eyes of potential employees as argued by George (2015) allowing Mercedes-Benz to hire talented workers in Hungary.

Further ownership advantages Mercedes-Benz enjoys are significant financial resources caused by its size which can be invested in broad R&D activities and new production technologies, which is another central aspect to the overall firm strategy (Daimler Annual Report, 2016).

Regarding the R&D expenditures a significant increase over the last years can be observed reaching its peak in 2016 with €5,7 billion (Statista, 2017).

The final intangible resource, good marketing and advertisement, is closely connected to the brand reputation. One example for this is the sponsorship of the German Football National Team since 1972, which made Mercedes-Benz visible to customers throughout the world, including world cup victories which received significant international attention (Handelsblatt, 2017).

As argued by Dunning (2017) the advantages described above are dynamic, which he highlights is observable when MNEs enter markets based on efficiency-seeking motivations, which is the case of Hungary.

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