Table of Content
List of figures
List of graphs
List of tables
List of abbreviations
2. Literature Review
2.1. Explanations of international activities
2.2. Competitive advantages according to Dunning’s OLI paradigm
2.3. Weaknesses and extensions of the eclectic paradigm
2.4. Internationalisation motives
2.5. Market entry modes
2.5.2. Foreign direct investment
4. Empirical study of Chinese automotive companies’ internationalisation
4.1. Introduction to regions and industry dynamics
126.96.36.199. OFDI development and motives
188.8.131.52. Preconditions on home market
184.108.40.206. Domestic automotive industry
4.2. Company case studies of BYD, Geely and SAIC
4.2.1. Competitive advantages of Chinese automotive companies
4.2.2. Reasons of Chinese automotive companies to venture abroad
4.2.3. Dominant market entry modes
220.127.116.11. Foreign direct investment
4.2.4. Obstacles and entry barriers
Appendix 1 Questionnaire Design
Appendix 2 BYD Inc
Appendix 3 Zhejiang Geely Holding Group Co. Ltd
Appendix 4 Shanghai Automotive Industry Corporation Group
List of figures
Figure 1 The Chinese outward direct investment regime
Figure 3 Engine vehicle registrations in Western Europe from 1990 – 2014
List of graphs
Graph 1 Ratio of China's inward FDI stock in relation to outward FDI stock from 1981-2013
Graph 2 Development of engine vehicles production in China 1999 - 2014 (in million units)
Graph 3 Vehicle imports statistic of European Union
List of tables
Table 1 Overview expert interviews
Table 2 Annual production (cars, buses, trucks), ownership and JV activities of selected Chinese automotive companies
Table 3 Passenger car registration in Western Europe (in units)
List of abbreviations
Abbildung in dieser Leseprobe nicht enthalten
This paper investigates Chinese automotive companies’ internationalisation activities into the European market. They are still short on experience and young in history. Since the Chinese economy has only gradually liberalised after 1978, the industry has been highly influenced by joint venture activities with foreign automobile companies in China. For 12 years, Chinese automotive companies have started to internationalise. Dunning’s eclectic paradigm is utilized as academic foundation and related motives and entry modes are aligned to current Chinese activities. In early attempts to enter Europe there was a predominant resource-seeking motive, while later market-seeking reasons became more obvious and have dominated the activities since. So far, ownership-specific advantages do not play a major role in terms of valuable intangible assets like patents, whereas location specific determinants are significant, especially in terms of the government’s impact. Additional home market advantages in labour endowment, resources, legal environment and strong financial resources give Chinese automakers an edge and prepare them to further internationalise. However, regarding all OLI forces, there are still no outweighing advantages over European competitors. The interviewed experts do not expect a noticeable market entry with significant sales volume within the next ten years. To date, Chinese exports and FDI in Europe are the most relevant modes even though visibility is marginal. According to industry experts, companies like Qoros, BYD and Geely are possible candidates to succeed on the European market in the future. Other brands, which failed to enter Europe, e.g. due to lacking safety standards, are yet still opinion-forming.
It is concluded, that if China’s automotive industry consolidates and advances technologically, it will be prepared to successfully compete on global markets, in particular Europe. The acquisition of European car manufacturers represent - in this context – a feasible possibility to speed up the process and offset technological deficiencies.
Keywords: China, Chinese automotive industry, internationalisation motives, market entry
本文对中国汽车企业进入欧洲市场的国际化进程进行了研究。在目前看来，中国汽车企业仍然十分年轻，并缺少经验。自1978年改革开放以来，中国经济稳步发展，汽车行业主要受国外企业在华合资的影响。在过去的12年里，中国汽车企业也开始走上了国际化的道路。邓宁（John H. Dunning）国际生产折衷论作为理论基础，结合关联动机和市场进入模式，都可以对目前中国企业行为作出很好的分析比对。早期尝试进入欧洲市场，更倾向于对资源的寻求；而后期 则明显更着重于寻找市场。到目前为止，这些企业的所有权优势并不明显，尤其体现在无形资产的上，例如一些非常有价值的专利 ；并且在政府政治影响下，地理位置也变得尤其重要。本土市场在人口红利、资源、法律环境和金融资源的优势，让中国汽车制造企业作好了充分的国际化准备。但同时，按照国际生产折衷论中所有的影响因素来分析，这些企业并不具备超出欧洲竞争者的明显优势。被采访的行业专家认为在未来的十年内，中国汽车企业并不能在欧洲市场创造显著的销售成绩。迄今为止，虽然成效并不明显，但在欧洲市场中国仍然主要采用出口和直接投资的市场进入方式。专家们认为，觀致,比亞迪 和吉利这些公司未来在欧洲市场非常可能取得成功。其他公司，某些并未能成功进入欧洲市场的品牌（原因例如：不符合安全标准），则仍然有成长的空间。
There was a time when the European car market existed without competitors like Toyota, Nissan, Kia, Mazda or Hyundai. Nowadays, they are among the big global players which co-shape the global automotive industry. The same happened in other industries and Chinese companies, for example Haier in household devices, Lenovo in computers, TCL in TV devices or Huawei in mobile phones, have become commonly known brands in Europe. So far, it appears, that China’s automotive industry is excluded from this phenomenon. Chinese car brand awareness outside China tends to be zero and failed attempts to enter Europe shape their reputation.
In general, China has grown to a stable and crucial part of the global economy in the last 30 years. After starting to liberalise the economy from 1978, increasing inflows of direct investments were observed and supported the Chinese economy to prosper and develop high technology industries. From 1990 to 2013 inbound FDI stock increased 46-fold. In the last decade the investment patterns have yet changed dramatically towards China becoming one of the biggest investor worldwide. In the recent past the FDI originating in China have increased sharply and the outward FDI stock in 2013 was 138 times higher than the one in 1990. Abundant academic literature presents results about investment patterns and findings concerning China. Considering China as an investor, on the contrary, is still rare in academia. Few general publications can be found, but addressing the industry level as a research topic is even less available (Drauz 2013: 282).
One of the five, strategic pillar industries of the Chinese government is the automotive industry (Zhang 2001: 267). Because this domestic industry lagged behind for decades, joint ventures with foreign carmakers in China were established from 1980s onwards bringing foreign technology and fast motorisation to China.
Despite consecutive ambitions to internationalise, the academic literature again does not provide sufficient material about this phenomenon. This paper is written in the attempt to fill this void. It focuses on the analysis of internationalisation attempts of Chinese car producers on the European market. In this context, Europe is especially interesting because it is one of the biggest engine vehicle market in the world, hosts the biggest industry players and has presented a profitable market for Chinese companies of other industries. Also, against all odds in the past, Japanese and Korean carmakers have succeeded on the European market with growing sales figures. Against this backdrop, this paper aims to find out what are the predominant internationalisation motives and preferred entry modes of Chinese automotive companies to enter Europe. Additionally, related advantages according to Dunning’s eclectic paradigm are detected to evaluate whether they possess competitive advantages in certain field over competitors.
The paper will proceed in the following way: Based on findings of Dunning’s eclectic paradigm and attached internationalisation motives and entry modes, specific advantages of companies and their country of origin are investigated. For the sake of a qualitative study, experts from the European automobile sector are interviewed. The final chapter provides the reader with an analysis and conclusion of Chinese activities based on experts’ assessments and available literature.
2. Literature Review
In order to gain a proper picture of research results this chapter will concentrate on those aspects related to internationalisation theories and explanations, which attempt to clarify the road Chinese car manufacturers took or will take to successfully act on global markets.
During this work the focus will lie on market entry modes and motives rather than on full market entry strategies with marketing plans like product, price, communication or placement policies. Market entry modes explain the type of stepping on to a new market, whereas a marketing plan is conducted during the on-going process of entering this market (Albaum 2001: 225). Although some of these marketing decisions are already closely linked to the agreed market entry mode, they will be left aside.
2.1. Explanations of international activities
John H. Dunning is one of the scholars who has constantly provided new research results, empirical studies and articles about international production theories. He presented his eclectic paradigm to the public for the first time in 1976 but has been involved in this research field already since the 1950s being influenced by other researchers (Dunning 2001: 173). Dunning bases his paradigm on different internationalisation theories and condenses them to one “simple, yet profound” paradigm (Dunning 2000: 163). He confesses, that the bunch of theories included are low of predictive value themselves but he exemplifies precisely their characteristics and stresses the importance of their interdependencies (Dunning 1993: 85). He is concerned with descriptive explanations about foreign-owned production and its determinants. Although there are two main paths he elaborates on, the part of international activities of say Chinese companies step on other than the Chinese market will be the focus for me. The contrary, foreign-owned facilities by say non-Chinese in China are not considered in this work.
International activities derive from the wish to grow and arise if home market’s perceived potential cannot match strategic goals anymore (Root 1994: 43). According to Dunning, there are different options to choose from, one being diversification, another being acquisitions of existing companies and another being to step on foreign markets. The last choice mainly paves the road to become an international firm. The former choices can be included or mixed with the internationalisation path (Dunning 1980: 9)
In order to explain the extent and patterns of international activities, their determinants must be studied. The underlying core elements are three particular forces a company faces and can able to deduce advantages from it. To explain these determinants three questions clarify advantages, that a company might posses to guarantee profit from international activities covering additional expenses and risks occurring:
- Does a corporation possess unique tangible or intangible assets, which are hard to imitate by others?
- Is it more advantageous to sell or lease these assets, e.g. grant a license or to make use of them within a company?
- Should resources be utilised in the home country or in the host country to reach highest profits possible? (Dunning 1980: 9)
In descending order, these questions symbolise the ownership-specific (O), the internalisation-specific (I) and the location-specific advantages (L) of a company or of a country’s companies in total and so describe the interplay of OLI in the foreign investment decision. In his article from 2001 Dunning (2001: 186) stresses that his main focus are yet not companies but rather the sum of all firms from one country or even a nation state’s overall economy. In this way, the application of his model seemed more useful to him. The OLI framework is in particular context specific and may differ from industries, countries and firms and gives each force varying emphasis. The same is true for the motives of companies engaging internationally and may be dissimilar for resource or market seeking firms (Dunning 2001: 176).
2.2. Competitive advantages according to Dunning’s OLI paradigm
In Dunning’s eclectic paradigm advantages dealing with the possession of or access to assets are called ownership-specific advantages and exemplify the questions “why” and “which” companies engage in international activities. This first pillar of the OLI concept can be traced back to the resource-based view illustrating that corporate assets should be unique, valuable and inimitable to create competitive advantage (Andersen 1997: 35).
Dunning (1993) generally assumes those O are assets being available to all companies within the borders of one country. At a later stage, he yet relates O to individual companies rather than to all companies of one country. O advantages can be divided into two parts.
The first deals with those assets which are available to all firms but are bound to a specific location. Examples are: natural resources, labour force, market structure, legal and political framework (Dunning 1980: 9). Those nation specific assets or the access to them give companies from one country or companies located in this country a certain competitive advantage in comparison to those firms from other nation states. They are non-transferrable and sole to their location.
The second describes those resources which companies created for its own usage. They can, again, be subdivided into two categories. The first contains companies’ tangible or intangible assets and their respective structure. They include inimitable organisational or managerial capabilities, protected intellectual property rights or utility models and an existing monopoly situation in an industry. Intangible assets are in general transferrable within the company and across borders. So, utilising this transferability could give the company’s entity abroad an edge to compete with the host market competitors (Dunning 2001: 174). The second sub-section summarises those which arise from companies’ internationality as such and relate to their initial or sequential stages of foreign activities. These merits can result from a common governance system worldwide and usually mirrors the size of a company. Gained international experience of a company’s employees also favours those with established international activities over those companies which are in their early stage to venture abroad. Other preferential factors come along with internationalisation, for example an advanced purchasing system provides a company with favourable access to inputs and might result in global arbitraging opportunities. Economies of scale and scope by establishing a global production network are another benefit derived from internationality (Dunning 1993: 80,81). As a result, some multinational companies could enjoy advantages on foreign markets due to the nature and extent of their business rather than due to their specific assets or incorporated L advantages (Dunning 1993: 269).
Both types of O can be derived from former location-specific advantages which were incorporated and can now be used on the global market as O merits. Dunning (1980: 10) states that a clear distinction of both types, however, is necessary. Although assets could originate from the location of its origin once, they might now be only available to one particular owner from a certain country and thus turning into an O advantage.
With regard to international acquisitions, Dunning (2001: 175) stresses the importance to add newly acquired assets (no matter if they are tangible or intangible) instead of substituting former investments in order to improve a corporation’s competitive position and its economies of scale and scope.
This part of Dunning’s theory bases on the internalisation theory by Buckley and Casson and transaction cost theory by Coase, brought forward in the same decade Dunning developed his approach. The main theory describes the preference of companies, depending on products’ characteristics, to establish hierarchical organisational structures rather than usage of market transactions and thus explain the “why”.
The transaction cost theory sets the foundation for further elaboration about internalisation because companies would always choose most efficient and least costly mode of exchanging goods and services across borders. It is in this respect assumed, that markets are incomplete, actors are irrational and opportunistic behaviour occurs. This leads to internalising ambitions if those expenses are lower than market transactions’ costs (Bode 2009: 36).
In extending his own paradigm, Dunning (1993: 276) highlights that according to different development stages of countries the internalisation effect is mostly evident in early stages of economic trajectory and will be later replaced by market transactions.
Regarding the hierarchy mode it is best described as firms utilise their resources (capital, technology, managerial know-how) internally either on the foreign market by inter-firm non-equity agreements or on the home market by buying and selling products (Dunning 2000: 164). The more tangible and intangible assets a firm owns the higher the interest to keep them inside the company and to circumvent access for others, thus internalising them (Dunning 1980: 9). They would not make use of contractual agreements with a host country third party, e.g. portfolio investment, licensing, franchising or management contracts, with partners on the target market (Dunning 1980: 11). Benefits accrue from efficiency and control gains due to internalising parts or whole value chain of a company. They are reflected in exercising monopoly power of their assets’ ownership (Dunning 1993: 79). Staying on the home market indicates the usage of exports while stepping on the foreign market implies setting up own facilities abroad or acquiring foreign corporations – summarised as FDI. According to Buckley (2010: 3) JV are in this respect a partial internalisation form.
Those FDI can be vertically, horizontally, backward or forward oriented and bring those merits of internalisation to the firms which outweigh the expenses or benefits involved when using partners on the host market (Dunning 1993: 75). Benefits are to be found in the circumvention or exploitation of market failure. They can result from avoiding negotiation and contract compliance costs, protecting oneself against price fluctuations in the procurement, maintaining own brand reputation or quality and circumventing spill-over effect by a possible licensee abroad and so possibly creating a new competitor (Dunning 1993: 75,145). Uncertainty is reduced, control and stability are enforced.
By applying the contrary mode – to externalise production, e.g. license indigenous firms to use tangible or intangible assets – a company could either face market imperfections or possible state interventions on the target market. Market imperfections refer to uncertain market conditions, price mechanisms and risks involved with enforcing property rights. These limitations are summarised as market transaction costs increasing the propensity to internalise production. Following imperfections favour internalisation if costs involved surpass costs faced when conducting markets transactions (Buckley 1976: 37-38; Dunning 1980: 11):
- time-lags in den business activities, but no functioning future market in place
- discriminatory pricing on the host market is impossible
- market concentration does not allow bargaining and consequent sanctions are high
- information dissymetry between buyer and seller (buyer uncertainty)
- government interventions on international markets (tariffs, tax)
Using the possibility to internalise own O and L advantages, which are said to be interconnected (Dunning 1993: 76), companies gain competitive advantages over their competitors. Without the merits of internalisation much of international activities would be conducted via contractual methods like contract manufacturing, licensing or franchising, but it in fact it is not (Dunning 1980: 11). Internalisation is not only the way of usage and the possession as such of O advantages, but also part of a company’s strategic decision-making process. The internal risk-control trade-off and evaluation is essential. It paves the way to decide whether to employ hierarchical group structures by not engaging in market transactions.
Unique ownership-specific advantages can also be a result of going abroad with an internalisation mode and makes the internationalisation process merely a method to realise O. But, if these company-specific assets had not been possessed or created before “going abroad”, the effects of internalising would be inexistent (Dunning 2001: 175, 186). In this context, Buckley (2010: 8) claims that internalisation is only applicable for those companies which produce intermediate goods due to sheer impossibility to internalise final products’ customers, which can only be consumers or governments.
Advantages deriving from locational factors explain “how” a company internationalise in terms of siting the company. Dunning bases his descriptions on the location theories by Adam Smith and David Ricardo.
Location-specific advantages can be called non-transferable in that sense that they are bound to their location of origin (Dunning 2001: 174). However, according to Dunning (2001: 174) it is strongly advisable to distinguish between advantages of a specific country, a certain industry and those of the firms in this country due to diverse ownership structures. In the wake of this, some firms acting on foreign markets utilise the L advantages of their host country as well as their L and O advantages derived from their home country to compete against indigenous firms.
In comparison to O advantages, the L advantages determine the market entry mode, whether a company gets involved in trading or in establishing production on a foreign market (Dunning 1980: 11). This implies that L refer to home country’s specifics as well as to the host country’s.
In general, infrastructural, legal, political, institutional and structural conditions are the main determinants of a country being available to all firms operating within the borders of this country. Dunning (1993: 270) further stresses the significance of economic environment and system as well as government policies and further extents to the development stage of a country, micro- and macro-economic conditions as well as cultural characteristics of the country engaged in.
If the home country’s location advantages outweigh the host country’s it is likely that they are, in combination with O advantages, exploited from the home market and as a result might outcompete companies from the importing country (Dunning 1993: 77). Dunning (1993: 77) also emphasises, that in some cases it is sufficient to possess L advantages only and thus have the strength to have an edge on the host market. This, he claims, is mostly true for companies from developing countries exporting to developed countries.
Exports are therefore most likely if the L advantages on the home market induce its O advantages to be best used at home and keep the transaction costs low and prevent possible market imperfections (Dunning 2001: 184).
On the contrary, if a foreign country offers relatively better opportunities for manufacturing to all corporations located on this market, there is a higher probability to locate production there and give up exporting (Dunning 1980: 9).
2.3. Weaknesses and extensions of the eclectic paradigm
It has not only been other scholars to criticise Dunning’s theories but also Dunning himself who has judged, extended and improved them persistently because initially his theories targeted Western multinational enterprises (Gaur, Kumar 2010: 620).
One point of criticism touches the vast extent of his paradigm due to the combination of several theories. The criteria used to explain internationalisation and FDI are so numerous that recommendation for managers cannot be derived easily. Dunning (2001: 177) replies by arguing that the theories used are well researched and that the OLI paradigm does not claim to provide a full picture similar to other theories that highlight some aspects of international activities but also do not draw the full picture.
Another point is the presumed interdependence of the three OLI forces. Dunning (2001: 177) agrees that during the lifetime of his eclectic paradigm the variables have merged and mixed more and more, thus making it difficult to strictly distinguish the origin of each. The smart combination of L and O advantages, instead of relying on these factors separately, has become more important for countries and companies to compete.
A third criticism is that Dunning’s theory is static and does not sufficiently face endogenous and exogenous changes which could possibly affect the OLI pattern within a company or a country (Dunning 2001: 179). In this respect, endogenous factors are all internal changes of a company which would change key ratios of a company. Options to encounter them are strategic decisions and respective modifications if necessary. Exogenous aspects relate to economic, social or infrastructural changes which would affect a company. A possible response, in this context, appears to be to defend the own O advantages by following competitors to foreign markets to maintain own O value sustainably (Dunning 2001: 179).
The fourth point touches psychological aspects, which Dunning neglected during his research but are viewed relevant for a Sino-European context. The “liabilities of origin” explain disadvantages borne in the host countries by firms as a consequence of where they are from . This could be expressed as consumer’s or government’s discrimination against firms from a particular country because of their (real or perceived) conflict with the regulative, normative or cultural-cognitive elements of the host country institutional environment. A negative country image and negative product-country-image might also give a company psychological disadvantages on the host market. The “liabilties of foreigness” in host countries are a consequence of where companies are not from (e.g. not local) (Ramachandran and Pant 2010: 243).
Dunning extended its eclectic paradigm in various publications since 1976 and introduced the “Investment Development Path” (IDP) applicable to countries which are on an economic development trajectory. The IDP deals with the changing OLI configuration as a country goes through development stages and can be applied to China.
The first stage explains the pre-industrialisation phase and mirrors China’s situation around 1980. First foreign investments are done in labour intensive sectors. After some modifications and improvements are made in infrastructure, legal system etc. with investment friendly policies supporting this development, more foreign investment is attracted. These created L advantages also support indigenous companies to rise. This development trajectory can be transferred to China and its automotive industry development which in the beginning was based on inward foreign direct investment and later upgraded to a more heterogeneous industry structure. On the long run these created L advantages will sprout O advantages and enforce outward foreign investments. (Dunning 2001: 181).
The final stage consists of both OFDI and IFDI as well as indigenous companies utilising its O advantages abroad by entering new markets or by acquisitions (Dunning 2001: 182).
These dynamics can already be related to China and most of its industries because overall OFDI stock has almost reached IFDI stock (UNCTAD 2014) and new markets have been entered on a remarkable level by various industries.
2.4. Internationalisation motives
Internationalisation motives and theories date back to Adam Smith and David Ricardo and explain internationalisation as a necessary step to reach an overall positive net welfare effect for nations and for the world (Bode 2009: 21). Below, the focus will be laid on companies rather than on nation states seeking to go abroad rather than the macroeconomic motives and the overall welfare effect.
Assuming that the strategy of a company is set to grow rather than to retrench or stabilise, it is likely for a company to start thinking about internationalising in terms of engaging in markets other than the home market. The motives and targets are manifold and also depend on the industry the company belongs to. Generally, Bode (2009: 20) argues that the overall target is to defend or create the own competitive advantage on the global stage, on the home market or host market. However, the need to internationalise could also be created by exogenous forces, e.g. strong competitors (Bode 2009: 21).
Dunning (1993: 56) argues, that motives to engage in foreign production can be divided into four drivers: resource-seeking, market-seeking, strategic asset seeking and efficiency seeking.
Resource-seeking firms intend to achieve lowest or best production costs in terms of e.g. labour costs, trained staff, natural resources in a country other than the home country. Resources motives can be divided into three main types (Voss 2011: 17). First, there are firms, most of which are primary products producers and manufacturing companies, which strive for the access to natural resources abroad and intend to minimise costs by this method. These resources, e.g. oil, minerals, zinc, copper or silicon, are either non abundant in the home country or its access or sourcing is relatively too costly. Relating to the access of natural resources, Dunning (1993: 144) clarifies that availability of supplementary infrastructure is crucial to extract, process and move those, which makes further investment necessary if infrastructure is not (yet) fully developed. Second, companies, especially from developed countries, seek to site their production in countries with abundant supply of cheap and/or unskilled work to replace home country production and cut expenses (Dunning 1993: 57). The third type of resource-seekers attempt to incorporate technological know-how or other intangible capabilities acquired abroad.
Market-seeking motives strive for new income and profit opportunities abroad. Eden (2003: 34) argues, that these profit-generating motives target higher income countries as well as lower income countries. Dunning (1993: 58, 142) asserts, that, in either way, the search for new markets usually compensates for the thread of losing existing markets and could be conducted as pro-active or defensive measures. Both authors share the view, that successful operations abroad are based on the unique ownership-specific advantages of a company and that they are most likely the successor of previous export to this market.
The wish to explore new markets can thus be divided into four types of sub-motives. The first phenomenon is called “follow the customer” and exemplifies the necessity to invest in a host country at the same point of time customers do invest in order to maintain business with them. Second phenomenon is named “”follow the competitor” and shows the significance of exogenous factors in this respect. If one would not consider going on the same market the competitor has entered, the repercussions for this and other markets could be seriously negative. Third, localisation needs are another aspect to be taken serious for certain companies to adapt their products to local taste or preference. Forth, cost savings in production are also regarded in terms of market seeking motives because by siting production on the target market one could circumvent import tariffs or trade policies and still serve the market appropriately (Dunning 1993: 58).
Efficiency seekers follow the goal of restructuring the company in that way that parts of the company are relocated or outsourced by shifting parts to other countries to reach economies of scale and scope benefits (Eden 2003: 34). Preceding investments are related back to market or resource seeking motives and thus explain why this motive is mostly used by larger and experienced international corporations only after initial FDI (Dunning 1993: 59). Determinants of this target are differences in labour costs, availability of skilled employees, tax and fiscal incentives granted by the host government and lower transport and communications costs.
Strategic asset seekers compose the forth motive for foreign production. Here, foreign firms or their assets are acquired in order to build up or strengthen the own competitiveness on the global market or simply weaken competitors (Dunning 1993: 60). Horizontal and vertical acquisitions as well as diversification ambitions are included in this motive.
Although Dunning’s arguments date back to 1993, he states that more and more companies from developing countries invest abroad with a resource-seeking motive to leapfrog their own development and speed up. Also, motives can be multi-faceted within multinational corporations, making a clear distinction not always possible or necessary. Moreover, some motivations can be related back to defensive behaviour in order to protect threatened markets or market shares. Others can be pro-active to advance early enough to avoid defensive behaviour at a later stage (Dunning 1993: 57, 58).
2.5. Market entry modes
In order to achieve these objectives it is necessary to develop market entry strategies by analysing the available modes in order to be prepared to enter unfamiliar markets. This sub-chapter hence highlights the market entry modes which are most likely to be used and have been used by Chinese car manufacturers.
If motives are identified, target countries are selected by the management, the next step is to analyse the mode of market entry and respective determinants in order to select the most suitable for the company. Considering the availability of own resources, risk and other non-monetary targets, it should be a mode which can contribute to company’s profit (Root 1994: 73, 184). The applied sequential order in this paper indicates a presumed internationalisation process according to Dunning’s understanding (Dunning 1993: 193-204). However, Cantwell and Narula (2003b: 5) as well as Dunning (1993) claim, that some industries or countries might skip certain steps depending on their motives to go overseas. Vissak (2010: 564) adds that this strict sequential order is hard to find with any company. Some face external or internal challenges to alter the anticipated internationalisation path and need to re-internationalise, e.g. need to decrease exports, return to markets or even reopen or resume production abroad.
Following criteria have to be considered to choose or even determine an (initial) entry mode (Albaum 2001: 236; Dunning 1993: 195).
Company individual capabilities and resources, known as their individual OLI-configuration, play an important role to evaluate the internationalisation process. Factors, like marketing capacities, international work force, size of the company and aspects like the nature of the product, product design, warranty periods, transportation time or cultural differences are significant (Albaum 2001: 238).
Depending on the industry and offered products or services the firm’s management needs to further decide on the necessity and the preference of possessing high decision power at the headquarter. For some knowledge-based goods or services it seems necessary to decide on a high-control strategy to avoid knowledge spill overs on the foreign market. The importance of the target market now and in the foreseeable future is another consideration how to enter a market (Glowik 2009: 91).
Regarding the general business risk, firms have to decide whether to take full risk in terms of capital investment or whether to share risk. If market expectations and competitive environment are advantageous, risk would be evaluated as rather small (Glowik 2009: 92).
Timing is another part of the strategic decision process. Early entry is associated with first mover advantages by earning pioneer profits without competitors on the market. These pioneers establish markets by launching new products. In the beginning, it is easy to enforce high prices and earn high profit margins due to high demand and novelty of the product. Also, early ties to suppliers, resellers and customers are, the longer existent, the more difficult to break up for later entrants. Early comers find it easier to establish long-term competitive advantages and are said to be more successful in the long run, even when more and more competitors show up on the stage and pushing prices downwards (Holtbrügge and Welge 2010: 129).
On the contrary, late entry gives a corporation follower advantages on markets with high sales volume, high uncertainty and fast consumer behaviour changes. Usually, the legal and economic environment has become more stable in comparison to the early comers’ encountered situation in the past. Moreover, learning from pioneers and accordingly avoidance of investment are critical reasons to enter a market late but being nonetheless successful (Holtbrügge and Welge 2010: 129). Based on the sales volume, late comers can act upon a cost leadership strategy, developing the market bottom-up and realise market share quickly.
External aspects originating from the host country specifics like economic, legal, political, institutional and cultural differences may require a company to enter a target market in a way it did not want to in the first place (Dunning 1993: 195).
Exports belong to an early or first step as well as to the classical way of internationalisation (Siedenbiedel 2008: 90). Due to its nature, it is only applicable to goods, which are produced outside the target market and then transported to its destination. Services can thus not been exported (Root 1994: 27). It is one of the high-control and least risky international activity of a firm because no or little capital needs to be invested abroad and no or little fix costs need to be run abroad. Decision power and control are relatively high because external partners are not involved. Production takes place “at home” and contracts are signed between the exporter and the foreign importer directly.
It is widely claimed that exports are the first step for further internationalisation modes in the future but also act as a convenient step to internationalise for rather small firms with little financial or managerial capabilities, giving them time to develop and penetrate the new market actively (Bode 2009: 26; Glowik 2009: 75; Root 1994: 73).
Another form – indirect export – involves a third party either acting as an exporting agent on the home market or as an import agent on the foreign market. Most suitable for inexperienced corporation, it gives the possibility to minimise transactions costs, e.g. avoiding socio-cultural issues in negotiations or contract closing and is characterised by little investment risk (Glowik 2009: 74; Root 1994: 73). Indirect exports bear minimum risk for running operations on other markets. However, control is delegated partly to the import agent on the foreign market and might result in spill over effects. Although companies only need little experience or know-how about the target market if they export indirectly, using the direct export mode provides the exporter with a faster feedback and comparatively better protection of its intangible assets (Root 1994: 77).
In general, exports are an internationalisation mode applied by developing countries to offset lack of experience and O advantages and due to least initial commitment it is bears relatively little risk.
Representative offices in an overseas market can be considered the extended mode of exports and introduces the second phase of a company’s international evolution trajectory. They are durable presences of companies facilitating and acquiring trans-border business while not generating turnover in the host country and not contributing to the company’s value chain (Bode 2009: 28). Their establishment ease acquisition of knowledge und increase familiarity with the local culture as well as supply and demand conditions due to their proximity to the target customers. Although they are legally not a corporation and there is no notable overseas investment, these offices can be seen as a connector to upgrade the international business from exports to equity invested forms. In some cases locally recruited personnel, setup of a show room or rented warehouses complement this market entry mode (Siedenbiedel 2008: 100). Applying this mode, business risk is still kept low while control is kept tight. Externalities like cultural aspects or changes in the economy or politics can be watched closely due to staff located on the desired market.
Dunning (1993: 198) comprehends this trade-related and marketing activity as the predecessor of relocating production in the respective country due to valuable experiences gained on the market. Siting first assembling or packaging business would be the next logical step with comparatively low setup and transaction costs as a result.
2.5.2. Foreign direct investment
Dunning (1993: 199) does not explicitly mention joint ventures as a successor of exports but rather uses the general term FDI to indicate further international activities of a corporation. From today’s perspective it is necessary to include this market entry mode due to its significance for the development of China’s automotive industry.
A joint venture usually divides business risk, investment, resources, profit and decision power between the parties owning this newly established legal enterprise. However, it belongs to the more risky yet still high control options to venture abroad (Cavusgil 2008: 421). Both parties share a common endeavour, main goal is a quick market entry and can be compared to exports in terms of timing. By combining resources of the partners the lack of market knowledge or other obstacles like high social-cultural differences can be alleviated. Also, due to faster product-life-cycles of products nowadays, it seems necessary to establish JV on an international level to pool investment, lower risk and achieve economies of scale earlier than acting independently (Glowik 2009: 82).
Usually, international JV (IJV) comprise of one local and one foreign partner and are durable constructs with a long-term perspective. Benefits for the foreign partner derive from access to local capital, familiarity with the host country environment and usage of personal contacts to suppliers, government, banks and customers. Besides minority and majority JV structures, the predominant forms are equity-JV. The start-up phase of these 50:50 JV is characterised by symmetrical power and trust constellations with consistent motives to manage this JV.
Investment can either be procured with capital or by contributing fixed assets to this new company (Siedenbiedel 2008: 116). In order to have a fast market entry it is necessary to provide this new firm with staff and management personnel from the partners.
Reasons to establish a JV are not always endogenous, but rather exogenous owing to prohibition or discouragement of sole-venture entry by the governments of some developing countries. Root (1994: 172) views it as the second best investment entry strategy caused by political influences.
Wholly Foreign Owned Enterprise (WFOE)
The next step changes the commitment of a company on a foreign market from little to high. Production is transferred – partly or fully - to a host country and makes it an equity investment.
In comparison to JV risk and power of WFOE lie at the foreign owner which holds 100 per cent of all shares. It possesses the highest uncertainty, investment risk, high intra-firm organisational costs and slowest mode of entering a new market (Glowik 2009: 88; Dunning 1993: 202). In contrast to JV, a company yet fully benefits from possible competitive advantages due to unrestrained decision power. Also, experience and knowledge gained on foreign markets, also by preceding exports, will be a useful resource in the future which is not to be shared with partners or other shareholders. Dunning (1993: 2002) states that costs arising from cross-border administration are the higher, the bigger the cultural differences of home and host country. Both true for JV and sole ventures, this indicates that not only equity investment but also regular expenses due to the distance are high. So, sole ventures and joint ventures resemble in terms of long-term perspective (Bode 2009: 27).
The subsidiary can either be an acquired company or a start-up. The latter bears the advantage that all decisions in terms of location decisions, management staffing, marketing concepts or overall configuration can be done freely and quicker than in a JV. Consequently, transaction costs can be kept at a low level and the head quarter’s corporate culture can be gradually incorporated by sending expatriates abroad to build up the new affiliate according to their own preferences (Holtbrügge and Welge 2010: 122; Glowik 2009: 87). Market entry timing is yet slower than in IJV or in acquired companies and business risk is higher (Holtbrügge and Welge 2010: 126). Gains from experiences operating abroad are yet valuable asset, because they can be used for further product refinements and cause O advantages leverage on the foreign market (Zhang and Roelfsema 2014: 90).
WFOE can be established as simple assembly facilities by shipping unfinished goods to assembly the final products on the target market. Dunning (1993: 2002) claims that assembly activities are usually the initial FDI abroad and linked to market-seeking motives. Due to low contribution to a company’s value adding chain, investment is comparatively low and involves least risk. This method has been applied in the automotive industry or other engineering industries and is called knock-down kit or completely knock-down (CKD) or semi-knocked-down (SKD). This way, there is no need to transfer critical know-how to foreign entities, which could be deemed inevitable in early stages of internationalisation if e.g. a stable legal and political environment are not in place yet.
Subsidiaries can also be founded as complex production facilities including transfer of know-how from the headquarter (Siedenbiedel 2008: 100). Dunning (1993: 202) yet claims that for market-seeking investors all departments except R&D will be transferred eventually.
Following steps would include further foreign investments in vertical or horizontal integration or diversification to support initial success. A possible consequence would also be further investments undertaken by customers or suppliers – called “follow the customer” effect (Dunning 1993: 203).
Acquisitions have a more difficult process of integration although the investor gets a going enterprise with existing products and markets (Bode 2009: 28). Management needs to respect carefully the culture of the host country and the prevalent company’s culture and work out the most appropriate method of integration without losing strategically important employees. This would indeed dissipate the advantage of acquiring this company (Siedenbiedel 2008: 113; Glowik 2009: 88).
After having reviewed motives and modes of the internationalisation process, the following chapter explains the applied methodology for this research paper.
Conducting academic research in the field of international business and related topics it seems crucial to base on qualitative methods. Quantitative research methods are available if a topic has been studied for several years or decades and researchers have the opportunity to access primary data. This is especially difficult due to cultural, economic and spatial barriers I am confronted with.
Because the underlying topic are internationalisation theories, I utilise existent academic literature in this field and employ related academic papers with publishing dates dating back to as young as 2015. There is a strong focus on John H. Dunning’s eclectic paradigm, market entry modes and internationalisation motives. Due to the integrated model Dunning developed and current extensions and further adaptions available, it appears most suitable for this kind of thesis. Additionally, Dunning’s arguments include countries from different development stages and he applies his theory to different economic environments. I am convinced, that other internationalisation theories, e.g. Porter’s diamond, Uppsala thoughts, network theory or Vernon’s product-life-cycle are less suitable for this work because they are limited in scope.
Nonetheless, given the availability of literature, is it essential to mention that information relating to internationalisation of Chinese corporations is still rare. It is especially difficult to obtain information for non-native speakers. The publications for this topic have been increasing for approximately ten years and more and more information can be used as a result. It has to be noted, that existent literature, although publications are growing, becomes out-dated quickly because the Chinese economy and its companies have been developing so fast that books and papers from 2007 draw a totally different picture which cannot be taken to be adequate anymore in 2015.
To show the releveance of this topic and to demonstrate how such processes look like in real life, cases studies are discussed. For this paper, the case study method is selected because it allows combining previously developed theories and new empirical results, answering “why” and “how” questions of Chinese automotive companies’ internationalisation. Case studies simplify the procedure of research and fit into the given time frame for this thesis. The evidence was collected through several sources, including annual reports, local business papers and journals, the companies’ homepage and interviews. To enhance the quality of the selected case studies, I decided to conduct expert interviews within the automotive industry. As mentioned, it seems very challenging to investigate about Chinese car manufacturers without full Mandarin proficiency and an established network in China.
Because this paper was mainly written in Germany and due to the predominance of German car manufacturers on the European market, the focus of investigation lies on the German automotive market representing the European market. Also, as all indigenous German automotive companies are engaged in China it appears adequate to proceed in this way.
Making up for the shortcoming of a qualitative research approach and to enhance the quality of case studies, the method of expert interviews is added to this paper.
First, I decided on the general topics and specific questions I want to know about from the experts. It is necessary to select appropriate questions which remain unresolved during literature review and case study research. I am convinced that contacting European experts and finding out about their opinions and evaluations about Chinese car manufacturers is a appropriate substitute for respective shortcomings. Since those experts selected are familiar with the Chinese automotive industry, I expect them to be able to derive deliberate expectations about China’s international strategy in the automotive industry. This presumption turned out to be true as interviewees were very familiar with latest activities inside China’s automotive industry and could provide detailed information about competitors from China.
Second, interviewees were selected from German car manufacturers, related associations and public authorities and affiliates. Chinese car manufacturers having entities in Europe and the recently opened Chinese Chamber of Commerce in Germany were also selected but contacting attempts were not successful. Table 1 shows that I conducted eight expert interviews within the given time frame of four months. Research limitations derive from the lack of further interviewees and lack of further European car companies or Chinese interviewees. One expert wanted to be made anonymous in this paper and consequently the employer is not mentioned.
Table 1 Overview expert interviews
Abbildung in dieser Leseprobe nicht enthalten
Third, pre-research and first interviews were conducted in March 2015. The necessity of reassessing the questionnaire and ensuring quality led me to having a first pre-study. It was revealed, that the structure was suitable for the interview procedure and ambiguous questions or responses and misunderstandings could be circumvented. Although it could already be asserted, that answers resembled, experts hold slightly different positions or elaborate further on certain fields owing to the departments they work for, their responsibility field or their company’s strategy. Consequently, a necessity to deduce changes within the questionnaire was not given.
Fourth, the questionnaire’s layout is eventually designed in the following way. The questionnaire is aimed to be conducted in three languages – English, German and Chinese. It was initially intended to conduct the interviews personally. Due to time or financial restrictions some of the interviews were processed via email or video conference. Those conducted face-to-face or via video call were transcribed afterwards and are attached in the appendix. To estimate the value of the responses the professional experience and the management level are recorded at the first place. Sub-section “market” deals with a general overview and intends to find out about the automotive segment, Chinese carmakers might be mostly interested in the future, sales volume and the spatial distribution or target markets of the Chinese. It is also worthwhile to look at the brands the experts know to derive predominant competitors which appear to be important for the Europeans. Sub-section “strategy” relates to the possible applied strategy of Chinese car manufacturers and aims to provide the reader with a very subjective view. However, it is a very interesting point of view because it reveals at the same time perceived weaknesses and strengths of the Chinese as well as of the Europeans.
Last section “market entry mode” handles precise questions about modes the Chinese used or will probably apply in the near future. I plan to learn about their observed competitive advantages or failures in the past.
Selection of representative cases
Due to size and breadth of the Chinese automobile industry it is necessary to select a small number of companies to further elaborate on by using case studies. In order to preselect companies, Fortunes’ Global 500 list (Forbes Magazine 2014), Marklines’ statistics about Chinese engine vehicle producers (Marklines 2015) and import data to Europe (ACEA 2015b) are utilised to gain a first overview and lay the foundation for further argumentation.
Table 2 shows twelve indigenous Chinese automotive companies producing engine vehicles (cars, trucks, busses). This table gives a brief overview of companies that are worth considering in terms of past or possible internationalisation. Several aspects are regarded to select three major cases, supplemented by other minor cases taken from Table 2 to support the thesis’ arguments.
 According to UNCTAD database China’s outward FDI flows were 101,000 mill USD, China’s inward FDI were 123,911 mill USD in 2013
 Refer to the example of the People’s Republic of China and the former policies in strategic industries to permit foreign corporations to enter the Chinese market by establishing a joint venture with a local partner. These market entry barriers prevent more competitors entering the market without permission and coordination of the state.
- Quote paper
- Ramona Blietz (Author), 2015, Market Entry Concepts of Chinese Automotive Companies into the European Market, Munich, GRIN Verlag, https://www.grin.com/document/319841