General Motors in China:
Chinese Motor Vehicle Industry Structure:
The motor vehicle industry in China had over 200 carmakers in 2004 with most of them being small Chinese firms. In addition to being small and domestic companies, the carmakers were solely owned by the Chinese government and had a market share of approximately 40%. As new joint venture firms emerged during this period, the Chinese government was reluctant to see its manufacturers of motor vehicles eliminated. Generally, this motor vehicle industry structure was mainly dominated by small domestic firms that were owned by the government. These firms experienced serious threats from new joint ventures on supporting their existence while attracting managerial skills and foreign technology.
Therefore, the Chinese motor vehicle industry was seemingly modest in the global context as it grew in heady rates (Teslik, 2007). Since this industry had a modest structure, it produced great uncertainty regarding future prices because the domestic companies didn’t have shareholders demanding specific levels of profits and didn’t seek to sustain their market share through reducing prices. The small firms were also tempted to copy the designs and technologies being introduced to the market by new joint venture companies.
As foreign companies continue to increase their investments in this market and intensify price competition, the Chinese motor vehicle industry is expected to change significantly. Most of these future changes are based on the reforms of the automotive industry policy as the government relaxes its control in this industry. Through the rapid economic growth, the country is expected to increase of its car sales in the domestic market as many Chinese would be able to buy vehicles in the future. By 2009, the motor vehicle industry structure in China would have few popular brands and international competitive automotive groups due to self-reliant and local brand development. The Chinese motor vehicle industry will develop to become the largest vehicle market in the world by 2014. The growth is primarily because of the increased investments in this market by new joint venture firms that contribute to a decline in prices. The industry’s growth to be the leading motor vehicle market by 2014 is fueled by the intense price competition as prices continue to fall at about 10% annually. Actually, these initiatives have contributed to an extent that the local brand vehicles are approximately one-third of this market and the rest are joint venture companies (Bursa, 2011).
As a result of the state of the Chinese motor vehicle industry in 2004, General Motors had to adopt certain strategies that huge implications on its business operations in China. The main strategy adopted by General Motors since 1992 was developing several joint ventures with Chinese government-owned enterprises that enabled it to obtain outstanding levels of profits. The first implication of General Motor’s strategy is that it became the first foreign automaker in China to be permitted to provide car loans to its buyers. While other ventures had applied for permission to provide these loans, General Motors was given a head start due to its well-established ventures with government-owned businesses. Secondly, General Motor’s strategy pioneered the investments of new joint ventures in the Chinese motor vehicle industry. This contributed to the emergence of new trends in the market and the decline in the number of local-brand vehicles.
Post-WTO Challenges of Government Restrictions and Intellectual Property Violation:
Before joining the World Trade Organization, China had imposed significant high tariffs on motor vehicles and components as well as import quotas for some products. As a result, China was provided with a transition period in tariff reductions and import quotas were eliminated by 2005. During this period, the government also enforced local content requirements to encourage domestic suppliers of components. The Chinese government also determined the kinds of vehicles that overseas companies manufactured as well as the requirement of production licenses.
However, through the World Trade Organization, overseas companies obtained more independence in production decisions to an extent that they were free to distribute products of their choice by 2004. In addition to retaining the 50% domestic ownership requirement for all assembly enterprises, the Chinese government removed its joint venture requirements for the manufacture of engines. The impact of WTO on business operations contributed to predictions by analysts that overseas companies could obtain significant new opportunities.
Despite of these WTO reforms, there were serious challenges of government restrictions and intellectual property violation. The reforms created a degree of tension in the country because foreign companies were trying to control the operations of their firms based on the interests of their overseas stakeholders. The main challenge of post-WTO on government restrictions and intellectual property violation was that some degree of direct control in the motor vehicle industry was exercised from overseas. As general restrictions on overseas investors were geared towards exercising certain extent of control with domestic enterprises, WTO reforms have made it difficult for the government to exercise this control relative to domestic investors.
The severity of these initiatives is evident from the fact that the government has lost some of its significant control over this industry (Holweg, Luo & Oliver, 2005). The probable impact of post-WTO challenges on intellectual property violation is the possibility of local-based firms to copy the design and technology used by overseas companies. Consequently, foreign-based companies could experience numerous difficulties and challenges in their attempts to protect intellectual property.
With the possibility of future elimination of joint venture requirement with government-owned partner and considerable difficulties in protecting intellectual property, General Motors could consider buying the domestic partner’s interests in the joint ventures in order to manage these challenges. In the previous years, General Motors has mainly based its business operations in creating several joint ventures with government-owned enterprises as its main strategy. Nonetheless, the strategy is likely to be ineffective in future because of the post-WTO challenges that could require the adoption of new business strategies. The purchase of the interest of domestic partner in the joint venture could enable the Chinese government to deal with the issue of privatization and whether it should retain veto rights over some managerial decisions.
Chinese Macro-economic Policies:
As China’s price level seems to have declined, the country had experienced very rapid growth for a period of five years without any significant inflation. From 1994, the government of China has retained a policy of intervening in currency markets to restrict or stop the appreciation of its currency, the renminbi, against the American dollar and other currencies. Policymakers have stated that the currency policy in China is the main factor that has resulted in the large annual U.S. trade deficits with China to an extent that it has largely contributed to the huge loss of American manufacturing jobs (Morrison & Labonte, 2010).
The current economic policy is China has also been blamed for causing disruptions to the global economic recovery since it stimulates many nations to intervene in currency markets in attempts to maintain their currencies against the U.S. dollar in order to maintain competitiveness of their firms against Chinese companies. According to some economists, these microeconomic actions could worsen economic imbalances and destabilize the global trading system. In response to the pressures associated with concerns regarding inflation, the Chinese government enforced policies to limit demand in certain sectors that appeared to be overheating. As one of the main targets, the motor vehicle industry was significantly affected by the restrictions as the government enforced restrictions on loans provided to purchase vehicles.
In light of threats associated with inflation and unemployment, the Chinese government faced a difficult choice in macro-economic policy direction and pegging renminbi to the United States. One of the possible macroeconomic policy directions is for the Chinese government to try floating its exchange rate while sustaining its capital controls. Such an initiative could remove the probability of currency depreciation because of a private capital outflow. Secondly, the Chinese government could consider maintaining the status quo since its inflation rate together with the America could diverge without changes in the nominal exchange rate. In relation to its use of renminbi as a reserve currency, the country should create a reliable political position that attracts international investors (Jordan, n.d.). This could be through overcoming several economic obstacles, developing its banking system, and adopting economic policies that embrace free capital flows.
These developments could have a significant impact on the motor vehicle industry and the leading firms like General Motors. Similar to other foreign-based investors, General Motors had enjoyed some protection against competitive imports due to the undervaluation of the renminbi. This measure acted as the tariff that supported initial business enterprises though it faced several threats that raised concerns regarding China’s new protectionist strategies. The new macroeconomic policy directions could force General Motors to adopt new strategies in order to remain competitive in the Chinese market. The company could be forced to maintain its current strategy of creating new joint ventures with the government-owned enterprises as part of the revaluation of the renminbi.
China’s Motor Vehicle Strategy:
Prior to 2004, the Chinese government had developed a motor vehicle strategy that had provided exceptional initial success. During this period the locally-based firms or domestic companies lacked modern technologies, design capability, and managerial capabilities. Nonetheless, these challenges were mainly overcome through permitting foreign investors to maintain joint ventures with the local firms. Despite of the success of this strategy, several concerns have emerged regarding its suitability in the future and the need for modification. The reason behind the need for a new strategy is because the business environment is changing significantly. Currently, this industry has new competitors from overseas and intense competition from domestic companies that are influencing it structure. The current projections on demand and supply appear to be subject to numerous uncertainties.
There are several major trends that characterize today’s motor vehicle industry in China including consolidation. Consolidation is as a result of the government’s initiative to encourage the leading eight auto firms to unite through mergers and acquisitions because of the presence of many automakers in the sector. Actually, the Chinese motor vehicle industry consists of more than 100 automakers that are currently operating in China. The second industry trend is the increase in market share and enhancement of quality because of the impact of Chinese domestic brands (Prasso, 2011). These domestic brands account for approximately 35% of the market share in this sector. The other major trend is the emergence of new-energy vehicles that has contributed to the establishment of new-energy vehicle segment as part of China’s product plan. Moreover, there is a market shift toward China’s interior cities and the increased integration of Chinese automakers around the world. The automakers in China are increasingly becoming global mainly through external acquisitions.
As a result of the tremendous growth of the industry and projections for more growth in the future, the motor vehicle industry and business is likely to become unsustainable in the future. There is need for the country to find an alternative solution to its current strategy in the sector as part of ensuring long-term sustainability. Unlike other countries, China’s motor vehicle industry is a growing market with several managerial skills and technological difficulties. The two possible strategies that the Chinese government can consider for this sector including forming both strategic alliances and joint ventures since there are opportunities here. Despite of various partnerships that currently exist, the country should continue to explore the opportunities so long as it continues to be profitable.
The second proposal is that China needs a long-term strategy on the use of vehicles as the government considers adopting the concept of being an automobile society. Such a strategy will also enhance the sustainability of the sector through comprehensive planning that organizes the car industry and its economic and social impacts (Wei, 2011). The Chinese government can change its role from supervision of the industry to monitoring other sectors that are related to it such as urban planning, the environment, and energy.
Timeliness of GM’s Entrance to China:
As one of the leading vehicle manufacturers across the globe, General Motors entered the Chinese market at the appropriate time. The investment of the company in China since its entrance has continued to work out effectively despite of several challenges from time to time (“Online Extra,” 2004). Since its entrance, General Motors share in the Chinese motor vehicle industry has continued to grow with the continual growth of this sector. GM entered the Chinese motor vehicle industry through creating various joint ventures with government-owned enterprises. As a result of the timely entrance and an effective strategy, the company had attained outstanding levels of profit by 2004.
The timeliness of the firm’s entrance into the Chinese market are evident from the fact that it’s currently regarded as one of the most profitable foreign-based companies in the motor vehicle industry in China. In addition to establishing a strong business relation with the government and effective business operations in this market, General Motors has pioneered the establishment of new Chinese vehicle brands under the patronage of joint ventures. The other factor that shows the timeliness of the GM’s entrance into China is the fact that it was the first overseas company to be permitted to offer loans for purchase of vehicles. While other foreign companies had applied for similar permission, they were denied because GM had basically established a long-standing business relationship with the Chinese government. According to Jackson (2012), GM chose the best time to enter the Chinese market at a time when it was growing to an extent that it has now become the largest market for car sales worldwide.
Nonetheless, General Motors business operations in China were faced with a series of issues originating from the country’s entry into the World Trade Organization that raised concerns on the firm strategy. Some of the issues faced by the firm included the changing requirements for foreign companies in their operations in the Chinese motor vehicle industry and the challenges in protection of intellectual property. These issues contributed to concerns on whether General Motors should have waited until the requirements of joint ventures were removed to enter China. General Motors chose the best time to enter China and should have not waited for the elimination of these requirements before exploring this market. If the firm waited for the removal of these requirements, it could have experienced numerous difficulties in trying to establish itself as a leading company in this market. Companies that waited for the elimination of the requirements currently experience considerable difficulties in entering China.
References:
Bursa, M. (2011, March 7). March Management Briefing: China’s Emerging Auto Industry (Part
1). Retrieved July 4, 2012, from http://www.just-auto.com/analysis/chinas-emerging-auto-industry-part-1_id109555.aspx
Holweg, M., Luo, J. & Oliver, N. (2005, August). The Past, Present and Future of China’s
Automotive Industry: A Value Chain Perspective. Retrieved from University of Cambridge website: http://www-innovation.jbs.cam.ac.uk/publications/downloads/holweg_past.pdf
Jackson, B. (2012, June 8). Is GM Becoming ‘China Motors’? Retrieved July 4, 2012, from http://www.factcheck.org/2012/06/is-gm-becoming-china-motors/
Jordan, M. (n.d.). Will the Renminbi Become the Next Reserve Currency? Retrieved July 4, 2012,
from http://www.project-firefly.com/node/10026
Morrison, W.M. & Labonte, M. (2010, December 30). China’s Currency: An Analysis of the Economic Issues. Retrieved from Congressional Research Service website: http://fpc.state.gov/documents/organization/154184.pdf
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Prasso, S. (2011, November 22). China’s Auto Industry Responds to Record Growth. Retrieved July 4, 2012, from http://www.strategy-business.com/article/00084?pg=all
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Wei, H. (2011, November 14). China Needs Long-term Strategy on Vehicle Use. Retrieved July
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