When globalization becomes a circumstance, many companies try to open oversea market. Here, we’d like to take a look at a Chinese private-own automobile company Geely. As china’s top car maker, Geely abstracted the world’s eyes recently. In 2004, Geely plans to export 5,000 vehicles to the Middle East, South America and North Africa after shipping 1,000 cars to Syria in the fourth quarter of 2003 at US$4,000-$6,000 each.
This year, Geely wants to open US market. But with many strong competiters in car manufactory in US, with weak reputation around chinese product, How does Geely find an appropriate approach to develop its business? This paper will try to find the answer. First, we will introduce Geely background to help reader know its history and present situation. Then we will do SWOT analysis and Entry mode comparison toward its current status to find a better approach for Geely to enter in US. We will cover chapter 4 and chapter 14 in this paper.
Company opportunity Although it’s hard for a new automotive manufactor enter in US market, which is roughly saturated and full of strong competitors, Geely still has its own advantages and oppotunities. Its super-low price becomes a brick to knock the door of US low end vehicles market. Some other famous and successful brand bulid a good model for Geely in car image, design etc. Also, US market is huge and American people have a high consumption, if Geely can catch the oppotunities, the chance to success will be great. Now, let’s take a look at its company background.
Company background Geely automobile company was found on March, 1997 in Zhe Jiang China. It is a private own automobile company. The registered capital of this company is RMB 20 million. In 2001, Geely automobile became the first approved private company in terms of automobile manufacture in mainland China. The chairman of the company is Li Shu Fu. He has good relationships with the Chinese government leaders and Zhe Jiang province government leaders. China has high economic growth rates since 1980s.
Many Chinese people make a lot of money every year. Most of them want to own cars or need cars for many reasons. So the Chinese car market become bigger and bigger. It provides a good opportunity to Li Shu Fu and his employees to realize their dream: “Make the best Cars, ordinary People Can Afford.” Geely automobile company hires many workers to produce different styles cars in Zhe Jiang province and operates big business in mainland China, Middle East, southern America and Africa.
The operation of the company can affect the economic growth of Zhe Jiang province. So, Geely automobile company always gets support from the Zhe Jiang province government. Gerry automobile company is focusing on low-income market in mainland China. In the first half of 2003, Geely Company produced 34360 units of cars and renews the lowest prices of its products in the automobile industry, so the company shared 3.84% of the total Chinese car market.
At the same, the company made technical cooperation agreement with German Rucker Company. The cooperation agreement helps Geely automobile to improve its products’ quality quickly. This company gets success in domestic market after its first car launched off in Linhai City Zhejiang Province. On June, 2003, the one hundred thousand Geely care launched off in Zhejiang Province.
This company has import & export license and the ISO 9001 quality system certification, so it is very easy for the company to export its products to other countries. Gerry Company tries to enter in international market since its foundation. The company sells its products or establishes extensive trading relationship in different countries and areas since 2003. It seems to get success in Middle East, Southern American and Africa because the company exports large quantities of products to those areas per year. This company is looking for the opportunities to enter the U.S. market now. S.W.O.T Analysis
Since we have assumed that Geely has its potential to open the automobile market in American, then the next step is to analyze the company and automobile industry environment. One of tools is provided by our text book called “S.W.O.T” analysis which stands for strengths, weaknesses, opportunities, and threats (Sulivan, 2002). * Strength
A strength could be defined as something a company is good at doing or a characteristic that gives it enhanced competitiveness. It may include valuable physical and/or human assets, an achievement or attribute that takes the company in a position of market advantage, alliances or cooperative ventures, and so on(Thompson & Strickland, 2001, p117). For Geely Automobile Company, low cost of physical and/or human assets is one of the major strengths.
As we know, although Chinese labor cost is not the lowest in the world, its cost is still much lower than lots of industrialized countries. Besides, the average cost of raw materials, plant, and land is also cheaper than some western countries. Moreover, Geely does not only have low cost labor but also has lots of valuable human assets.
In 2003, Geely recuited some experienced managers into their team including former the General Manager of SAIC Volkswagen, Vice President of FAW Volkswagen Group, President of Dongfeng Automobile Institute Research, Chief Representative of German BMW and General Manager of China region after service company of Benz Company. These lower-cost advantages make Geely achieve its low price strategy among other competitors. On May, 2003, Geely sparkplug automobile popularization and renovate the newest and lowest price of automobile in the automobile industry.
For instance, Geely makes some low-priced sedans. One of those is under the brand name, Haoqing minicar which is the cheapest on the Chinese market, at just 32,000 yuan which converts to $ 3,867 U.S. dollars. Some company’s alliances or cooperative ventures also build up its strength. On Dec., 2002, Geely made contracts with Daewoo International Co., Ltd and Maggiora S.p.A, a famous Italy automobile project group with respectively to develop CK-1 and CI-1 automobile project. On June,2003, Geely made a technical cooperation agreement with German Rucker Company. * Weakness
A weakness is defined as something a company lacks or does poorly or a condition that makes the company at a disadvantage. A weakness may include lack of financial support, poor brand image or reputation and so on (Thompson & Strickland, 2001, p117).
As we mentioned that Geely is a private owned company in our company background section, it is more difficult for them to get financial support in order to expand market or R&D. Furthermore, even though it made strategy corporation with several Shanghai and Zhejiang commercial banks, from an international perspective, “the lack of a strong relationship with a large bank with global connections” (Sulivan, 2002, p512) seems to be a big weakness for them.
The second weakness is the reputation of Chinese products. For example, every time we, including Europeans, Americans even Asians, mention made-in-China products, we probably are talking about most of toys, shores, textiles or cheap electronics, but fewer of high-tech products. It is true for Chinese automobile manufacturers such as Geely that in order to open western markets they still have a long way to build their product images. * Opportunity
It is no doubt that America has one of the most favorable automobile markets in the world. The political and businesses environment such as regulation are stable and well-developed. The income per capita is also ranked at top. Besides, its infrastructures such as freeways and national transportation network are also well built. For automobile manufacturers, they can either open luxury car markets or focus on mid-income or lower-income consumers. For foreign car makers especially from Asia, Japanese opened American market in 70’s and Korean opened in 90’s; the next might be from China. * Threats
Like opportunity, a threat is also viewed at whole industry level rather than each single company. In the automobile industry, the most common threat is a lot of competitors. There are not only many worldwide well-known brands such as General Motor, Ford, Toyota, Martz-Benz which produce different kinds of luxury automobiles for high-or-mid income consumers but also lots of small manufacturers such as Hyundai, Geely, or Chery (another Chinese automobile company) which focus on lower-income market.Another threat is fueling fears. Since Asia economy boom, the demand of natural resource such as petroleum is increased dramatically.
However, nowadays, the oil reserve is decreasing. Due to the high demand and short supply in oil, consumers start to consider not only the prices of automobiles but also the ability of gasoline saving while they purchase the cars. The change of consumer purchase behaviors will directly affect automobile manufactures’ market strategy and R&D. In sum, S.W.O.T analysis is very helpful for both domestic-oriented and international-oriented companies to analyze internal or external economic environment. However, after finish this analysis, there is another analysis to do – country analysis before we choose an appropriate entry model.
US Country Analysis In US, automobiles play an important role in our daily lives. We can not finish our duties without driving a car. According auto Automotive News, there are 16 million cars in US. Most of the car sales are not made US car companies. US made cars sales is around 44.9 %. That means 55% of cars sales in US are from foreign company. Japanese cars are the most sales cars in US.
There are a lot of reasons why the Japanese cars are popular in US market. First, Japanese cars are better quality and lower price than US cars. Second, the Japanese cars saves their customers in gasoline cost. Because gasoline price increases so quickly, the US economy is experiencing a inflation problem. The daily life product prices are in a rise. People have less spending power than before.
The market for cheap cars will increase year by year. On the other hand, people who have higher income still want to buy an expensive car. Most of the rich people want to buy Europe cars, such as BMW, Mercedes Benz, and Audi. As for the cheap car market, Korean cars are taking over most of the sales. China automobiles may have a good chance to break into US market, because China may be more competitive than Korean cars. The car come from China also consume less gas. It is may have a good opportunity to break into US market.
Entry mode Since the objective for Geely Automotives is to eventually dominate the U.S. low end vehicles market, the most appropriate way for Geely automotives to do this would be through the direct exporting along with sales subsidiary method of entry. Geely will start out by selecting markets that are more susceptible to buying Chinese vehicles such as California and certain parts of Texas.
Additionally, this process is set up to allow Geely to move carefully, develop a good foundation in the U.S. markets and if the future looks favorable then Geely may eventually grow and expand from there. Since China already has some of the lowest labor costs in the world, Geely automotives may be able to leave their manufacturing plant in China and the cars will then be directly exported to the U.S. from China.
Once the cars arrive then Geely U.S. subsidiary will be responsible from there on and transport the vehicles to the dealerships for sale. To augment the exporting process, Geely will open up sales subsidiary dealerships in the selected locations in California and certain parts of Texas. The function of these sales subsidiaries will be sales, customer support and along with repair and maintenance on the vehicles.The management team will be also be imported from Geely’s headquarters in China, whereas sales, customer support and mechanics can be hired locally, since there is a good supply of well trained car salesmen in U.S. already.
While a sales subsidiary dealership may be more expensive to set up in the U.S. than a simple sales branch, the sales subsidiary will be better for long term growth and the expenses should be off set by higher revenues earned from the subsidiary. According to Dr. Sullivan in Exploring International Business Environments, a sales subsidiary will also be better for long term growth because a sales subsidiary will allow Geely to “1. Be closer in touch with end-user needs.
2. Have more control over distribution channels, And 3. Being perceived by customers as more committed to the market.” ( 263). Dr. Sullivan also notes that the major disadvantage of a sales subsidiary is in finding sales personal with the right mix of experience, language skills and willingness to work for foreigners. However this should not be a big issue for Geely since there is a large Chinese population in California and many well trained sales people. (263). The major thrust behind Geely’s entry mode is to expand through economies of scale even if it means sacrificing short term profits.
Lawrence Ang, executive director of Geely describes it clearly when he said in a recent news update: “We're the most aggressive market player in pursuing price-cuts and economies-of-scale strategies,” Ang continues by explaining that “Market share is relatively more important for us in the near term than profit margin because China's auto industry will experience a trend of declining profit margins in the next couple of years," Furthermore, Ang concludes that “"We need a critical mass. Then we can push down our per-unit costs, leaving room for maneuvering on pricing.” (china.org.cn) Case study… Hyundai Motors
To understand the effectiveness of this entry mode better, let us look at Hyundai as an example. Hyundai first entered the U.S. market in 1986, their timing was perfect because it was a time when most automobile manufacturers were striving to dominate the higher-end markets, and this left plenty of room in the low end vehicles market. Hyundai took advantage of this by providing affordable cars for college students and lower income families. Hyundai also started out by exporting to Canada and later to the west and east coasts of U.S. where these markets are more liberal to foreign cars.
Hyundai’s success was immediate, setting a record by selling their 100,000th Excel in just seven months of their first appearance. (Hyundai.com). With the American car manufacturers slowly loosing market share and Hyundai moving up in their target market, this could be the perfect opportunity for Geely to enter the U.S. market and reproduce Hyundai’s astounding results.
Conclusion Eventually, as U.S. has huge demand of automobile, and slowly looses its market share to the Asian automobile manufacture, and as Hyundai moves to higher-end markets, this presents an opportunity for Geely. According to S.W.O.T analysis, Geely has its strength on low cost of natural resource and labor, and opportunity on focusing large demand of low-income consumers but the threat on powerful competitors, and weakness on poor reputation.
Thus, if Geely could fully utilize its strength and opportunity, and build up its reputation by improving its qualities, we strongly believe that Geely could successfully enter U.S. market, and has high chance to capture part of U.S. automobile industries.