Analysis of the Institutional Impact on Doing Business in China - Example

Running head: Analysis of the al impact on doing business in China 21st April Introduction One of the industries that have positively impacted on China economy is automotive industry. Being the largest in the world in terms of unit production, automotive industry in China is dominated by companies such as general Motors, Volkswagen, Toyota, Hyundai, Mitsubishi and Nissan. The industry is dated back in 1978 when only two manufacturers were controlling the market. These included Shanghai Automobile Assembly and First Automotive Works. With the introduction of economic reforms in 1978 by the Chinese government, there emerged a number of changes in the automobile industry and the opportunities for investment in the sector emerged. For example, in order to attract domestic and external investors, the government simplified the market entrance in the first years. This led to establishment of new car manufacturers such as Brilliance, Chery and Geely. By 2011, China car exports stood at 814,300 units. One of the major aspects that led to the development of automobile industry in China was the entry of the country into the World Trade Organization in 2001. For example, from 2002 to 2007, China automobile market expanded by 21% which was equivalent of producing 1 million vehicles per year. This led to further expansion of the market where in 2010 more than 18 million units were manufactured with the sector producing approximately 13 million passenger cars. According to McKinsey& Company consultants, the number of registered cars, vans, busses and trucks on China road will reach 200 million by 2020 and the sector will expand ten times between 2005 and 2030. This paper aims at discussing the China’s development trend and business potentials in automobile industry. Market growth As noted earlier, Chinese government economic reforms significantly contributed to the development of the China automobile industry. The simplification of the market was followed by establishment of an aid scheme for the industry to support innovation thus resulting to the improvement of product quality of the China cars. Another major strategy that the government initiated was allowing the formation of joint ventures with foreign manufacturers (Mann, 1997). This resulted to higher growth in addition to internationalization of the sector. With the government intervention of the automobile industry, the number of cars produced in the country increased from 222,000 units in 1980 to more than 18 million in 2011 (Anthony et al, 2008). This has made China to be the leading car manufacturers globally. The table below indicates the number of passenger and commercial vehicles produced in China from 2008 to march 2015.Figures in million units Years 2008 2009 2010 2011 2012 2013 2014 2015 Commercial vehicle 2.6 3.3 4.3 4.6 3.8 4.6 3.8 0.85 Passenger vehicle 6.8 10.3 13.8 14.5 15.5 18 19.7 5.3 With the improved technology and high demand for the cars locally and in the global market, it is expected that in the next few years, Chinese automotive market will exceed the US and Europe markets together. In addition to the high demand for cars, there exist high potential for electric cars. This is based on the fact that the Chinese government aims at reducing carbon emission by 17% by 2020. Another aspect that exists in the automobile sector in China is that it offers opportunities for American and European car manufacturers. For example, Volkswagen, a German based automobile manufacturer established a new plant in Changsha in 2013, which has an annual capacity of 300,000 cars. In this way, the company will enjoy support from the local communities based on the creation of jobs and the production of quality brands that meet the needs of the customers. However, the international automotive companies face a number of challenges. When viewed from the economic perspective, due to the weakness of the Chinese Yuan as compared to the US-Dollar, the local players enjoy trading advantage. This makes the local firms to increase their sales and profit thus making them to expand at a faster rate as compared to the foreign rivals. Additionally, the high rate of inflation in the country cause rise in labor cost and capital leading to high cost of production (Cara, 2010). The foreign companies are left with no option but to pass the high costs to the Chinese customers. Notable risk that face Chinese car market relates to intellectual property that is derived from research and development in addition to sales and distribution strategies. Through the establishment of joint ventures by the government, there has been knowledge transfer. This implies that the international car manufacturers must manage the production process to protect their interests. Sectors In its effort to achieve an economic growth and expand domestic investment, Chinese government has relaxed the entry strategies in the automobile industry. This has led to the emergence of large number of automotive firms. For example, by 2006, the number of automotive enterprises stood at 6,322. This has led to the expansive production and the high demand for the brands has resulted into increased income for the companies and the private ownership is expected to accelerate. Electric vehicles and alternate fuel vehicles With the increased concern of effects of carbon, car manufacturers are directed to have an effective plan to reduce the emissions. China central government notable strategy that it has launched recently is the production of approximately 500,000 green cars including plug-in hybrid and battery vehicles. On their part, the vehicle manufacturing companies have adopted modern technologies in their production facilities in order to produce new energy cars. For example, during the Beijing Motor Show that took place in 2010, more than 20 electric vehicles were displayed by the local manufacturers. This was followed by 10 electric models that were set for volume production at the start of 2011. With the support of the government, Chinese manufacturers produced in mass BYD F3DM, Zonda Bus and Luxgen 7 MPV EV which were all energy friendly. Just like the way the government advocates for the production of electric vehicles, manufacturing companies in China are encouraged to develop fuel efficient and clean vehicles in order to achieve sustainable growth in the automobile industry. In 2007, the government established policies to increase the proportionate of vehicles burning alternate fuel in its effort to optimize energy consumption in China. In addition the Chinese government gives priority to the research and development facilities that are involved in production of vehicles that use alternate fuel as well as hybrid vehicles (Kotler and Keller, 2012). Shanghai and Beijing cities requires that local and foreign companies located in the nearby should emulate the Euro III emission standards. These standards indicate the acceptable limits of emission of new cars sold within the European member states. This implies that any firm that focuses at entering China market must be ready to be socially responsible and act in line with the carbon emission rules in China. Automobile production In 2006, China became the second largest vehicle market in 2006 after passing Japan and then it emerged as the largest in 2009 after passing US. As the result of their growth, the demand for automotive parts and after care products has significantly increased. On its part, China is now able to produce an entire line of automobile products. The leading domestic firms include Shanghai Automotive Company, China First Automobile Corporation and Dongfeng Motor Corporation. Given the simplified market and removal of barriers, the country has ample investment opportunities that foreign firms can utilize to increase their incomes (Alon and John, 2008). Auto parts in industry With the increased need to improve the vehicle industry and attract new ventures, Chinese government has not only opened the market, but it has also lowered the tariffs for auto parts. For example, while the government put cars tariff at 25%, the average tariff for accessories stands at 10-13%. The government also wants to further reduce the tariff on imported auto parts thus making the cost of producing the vehicles and raising the manufacturers’ profitability level. Automotive after sale services and products Despite the improvement in the China motor vehicle industry, as compared to other developed countries, the country’s after sale services lag behind. The first challenge that the sector faces is counterfeit products. In their effort to increase profits, some business people and industries produce substandard products that do not stay for a long time leading to loss of fund and lack of trust for the car owners (Heyne, Boettke, Prychitko, 2010). The second challenge is increasing the competitiveness of the auto parts produced in the domestic market. Due to the high quality parts that are imported from other countries, locally made ones are not valued. The third challenge is modernizing the old sales systems making motor vehicle owners to face difficulties in assessing the products. The engagement of the China in World Trade Organization has however brought some improvement in the sector. Car dealership In order to effectively control the car dealership in China, government has allowed the establishment and registration of 4S shops, where 4S stands for sale, spare parts, service and survey (Adcock and Halborg, 2001). While in most cases customers can purchase their favorite brands in 4S shops, the highly demanded new cars can be delivered to them immediately they place an order. As compared to other developed and developing countries, China car dealership is quite profitable thus attracting large number of investors. The dealership is not regulated by any association or government rules. China protection of its automobile industry In 2014, the sale of passenger cars increased by 10% in China despite the concerns of the performance of the automobile industry in the country. While other countries were struggling, China auto industry market remained the best. This is due to the strategic auto industry goals that the government has established (Kotler and Kevin, 2009). For example, since the country opened the market to foreign companies, the government requires foreign companies to partner with local companies to increase production. For example, joint ventures with Nissan and General Motors resulted into production of Venuda and Baojun brands. In addition, China regulators have come up with antitrust investigators against foreign firms (Alexander, 2010). It is worth to note that globalization and internationalization of business activities require close monitoring to avoid illegal importation or exportation of products. For example, after investigation by the National Development and Reform Commission, it was noted that Mercedes-Benz and Audi AG reduced the prices of their spare parts. Another strategy that China has adopted is squeezing of marginal domestic and foreign giants companies. In this way, the companies have been made to strictly comply with the new regulations thus rewarding the viable automakers and providing them with chance to join the international elite (Mazzocchi, 1984). In recent times, the support that the government offered to the foreign car makers has been noted to take another direction. For example, when it comes to establishing new plants, and expanding to the vast market hinterlands, the emerging rules may seem to be restrictive. This is based on the fact that the local officials will be responsible for interpreting the rules. In addition, some provinces have carmakers that they entirely trust and very loyal towards them and may not allow new factories in their regions. Conclusion Based on the above discussion, it is clear that economic reforms were the major factors that led to the development of automobile industry. Additionally, foreign companies that entered China market were required to form partnership with the local carmakers thus resulting to knowledge transfer and improved market. From 2008 to 2015, China indicated high improvement in the production of the motor vehicles. For example, in 2014, the country produced 19.7 million passenger cars up from 6.8 million cars. The country has opened the market to foreign companies and therefore it has wide business opportunities. The main sectors that are involved in the automobile industry as covered in the paper are automobile production, electric vehicle and alternate fuels vehicles, auto parts and after sale products and services. Based on the importance of the industry in China economy, the government is determined to protect it by initiating regulations and investigation of foreign companies. References Mann, J. 1997. Beijing Jeep: A Case Study of Western Business in China, Boulder, CO: Westview Press Mazzocchi, G. 1984. Anche i Cinesi vogliono lauto" [The Chinese as well want cars]. Quattroruote (in Italian) Milan, Italy: Editoriale Domus Kotler, P and Kevin, L. 2009. A Framework for Marketing Management. New York: Pearson Prentice Hall. Adcock, D and Al Halborg, R.2001. Marketing: principles and practice. New York: Xavier Kotler, P and Keller, L. 2012. Marketing Management. New York: Pearson Education Limited. Cara, A. 2010. China inflation rate at 5.1 percent. New York: Associated Press. Alon, I and John, M. 2008. The Globalization of Chinese Enterprises. New York: Palgrave McMillan. Anthony, S et al. 2008. Innovator’s Guide to growth Putting Disruptive Innovation to Work. New York: Harvard Business School Press. Heyne, P., Boettke, J and Prychitko, L. 2010. The Economic Way of Thinking. New York: Prentice Hall. Alexander, J. 2010. China wants foreign companies to disclose EV secrets. paultan.org. Available from http://paultan.org/2010/09/22/china-wants-foreign-companies-to-disclose-ev-secrets/ Read More