Comprehensive Market Diversification to China: Holden Barina Product Line - Case Study Example

Holden Barina Product Line Executive Summary Marketing being a product promotion to increase sales has a great influence on the nature of the market whether domestic or foreign. If the Holden Barina product is to sell internationally in China, many factors have to be put into consideration including tastes and preferences of Chinese consumers. SWOT analysis will be used to consider interest rates and deep rooted cultural values are based on strengths and weaknesses assessment which economic conditions influences production costs, prices and product desirability based on income. Opportunities and threats are the qualities that the Chinese business environment show has to increase profits and risks posed to profit making alike. The government of China makes a great supervisory role in regulating automotive products which is aided by the ever increasing power of the media. The market will effectively and efficiently proof the investment is worth undertaking if initial costs are predicted against what other entrants have made. The company will to borrow best practice form Honda, Hyundai and ford which have had longstanding performance and reputation in China. It is a demand for Holden Barina that will be determined by the level of advertising and the quality of the product compared to its sale price. The government of Australia and China is in good working relationship hence no trade barriers will be expected to challenge the entry process. The brand should move to the coastal towns which have big clientele and bargaining power. This will raise the income streams and quickly move the breakeven sales to a shorter duration than was expected. The company should not overlook the role and impact of other competitors as they may be misjudged and consequently the firm closes shop due to myopic marketing intelligence. Table of Contents Executive Summary 1 Comprehensive Market Diversification to China: Holden Barina Product Line 3 1.1 Background 3 1.2 International and domestic market environment analysis 4 1.3 Estimated market size and gap analysis (Demand-Supply Analysis) 6 1.4 Expected sales and market share analysis 9 Source: Auto & Parts Wholesaling in China Market Research Report | Jul 2012 9 1.5 Market entry mode analysis and strategies 11 1.6 Estimated budget (for international marketing mix elements) 14 1.7 Time frame (2014-2017) 15 References 17 Comprehensive Market Diversification to China: Holden Barina Product Line 1.1 Background The Holden Barina, a subcompact Australian automobile company, is at an advanced stage to make a high profile marketing campaign which would see its car markets expand in China. Historically, the firm was established by Holden, an Australian entrepreneur, who pioneered the first generation of MB Barina in 1985 which was closely followed by ML Barina in 1986 in which a coil sprung rear ends were adopted to replace leaf springs. In addition, the dashboards were revised so were the front grille, headlights and the tailgate. However, it was established that the first generation Barina had lower occupant safety protection levels in events of accidents (Mohamad, 2002). The second generation of Barina (MF Barina) was renamed as Suzuki Cultus was marketed globally under a variety of name plates and had three door hatchbacks. The MH Barina of 1991, being worst than average, had its interior improved, suspension upgrades, bumpers in the rear and front and tail-lamp clusters revised. Subsequent generations were based on improved engine capacity, riding and handing, higher spec SXi three doors, and improved occupant protection levels (Doyle, 1995). To be competitive in the market, modern Barina has been equipped with 1.6 liter 16 valve variation twin cam and improved crash test ratings. With the updated TK Barina constituting power windows, side-impact airbags, electric mirrors and high strength steel for structural advancement. TM Barina which is the latest in the market as of November 2011 has a six speed automatic transmission, 5 door hatches, center stack design, ice blue LCD gauge cluster and a 1.6 liter petrol engine. Its exterior has grille designs and headlights similar to series II Holden Captiva (Doyle, 1995). 1.2 International and domestic market environment analysis It will demand a huge amount of resources to elevate from a domestic market in Australia to international market in China, which will require a feasibility study to take into consideration the trading policies of China, recruitment of strategic management to overlook the transition process more so, procurement, distribution, promotion and advertising. These should be competent personnel who believe in doing right first time (Doyle, 1995). The business should be able to flow back the profits earned to reinforce the parent company in Australia. As discussed below, the company will assess the nature of other foreign companies like Hyundai, Ford, BMW, Volkswagen, Chevrolet etc. which have a higher entry momentum into China. Marketing being a product promotion to increase sales has a great influence on the nature of the market whether domestic or foreign. If the Holden Barina product is to sell internationally in China, many factors have to be put into consideration including tastes and preferences of Chinese consumers. Using SWOT analysis, interest rates and deep rooted cultural values is based on strengths and weaknesses assessment which economic conditions influences production costs, prices and product desirability based on income (Mohamad, 2002). Opportunities and threats are the qualities that the Chinese business environment show has to increase profits and risks posed to profit making alike. The government of China makes a great supervisory role in regulating automotive products which is aided by the ever increasing power of the media (Doyle, 1995). In China, an economic and political system is undoubtedly influencing the travel policy which ultimately will determine the rise and fall of the car industry. Beijing government imposes travel restriction orders which demonstrate government robust influence on the market. The government also orders companies to own up to the responsibility of using recycled water car wash. China encourages both local and foreign investment by allowing incentives to local manufacturers such as Chang’An and Hyundai (Doyle, 1995). Historically, China has been in cordial relations with Australia with many trade agreements in place which range in mining, tourism, engineering, construction among others. China is a communist country believing in the rule of law and respect for personal property. The Chinese are predominantly Buddhists with a more conservative and traditional culture of worship, dress, greeting, culinary and accommodation. However, China does not respect international patents and copyright laws which makes it difficult to originate and earn from ones innovations. There are many tariffs and nontariff barriers as well (Kandampully & Duddy 2005). China’s economy has the potential to double when compared to some few years ago. It has one of the fastest growing in population, rising levels of income and consumer consumption. They have opened up the business environment to allow foreign businesses to take a space in the country. Declining sales in the Australian market will force Holden Barina to walk the talk into China (Kandampully & Duddy 2005). To get into China and perform is not easy especially with a business novice. China can fit to be a collection of semi-markets which are largely defined by economic, cultural and demographic differences. Foreign companies tend to accumulate in the coastal towns like Guangdong, Jiangsu, Zhejiang and Shanghai since they have higher incomes. The government of China encourages the establishment of cluster industries in certain cities or some regions. In such situations, the whole supply chain is confined to fewer cities thus helping foreign companies to locate its target customers. Identifying a geographical location of the target market will ensure proper market entry strategy is used (Mohamad, 2002). China puts higher restrictions on foreign companies investing in telecommunications, energy and petrochemicals which demands that the company moving in should consult with the Chinese foreign investment catalogue (Kandampully & Duddy 2005). China has a body of ministries and regulatory organizations are vested with the responsibility of implementing and maintaining the laid laws and regulations. Regulations are getting tougher in imposing their orders. The case of 2008 melamine poisoned milk scandal has led to stringent measures being undertaken. All the foreign companies will have to undertake a lengthy evaluation and environmental assessment before being allowed to operate. Regulatory bodies in China opaquely operate which makes it hard to expect regulatory changes to take place. In addition, their regulations have unclear wordings and objective interpretation which can unsettle any foreign company known to clear regulatory environment. 1.3 Estimated market size and gap analysis (Demand-Supply Analysis) China has a population of over 1.3billion people, and its landmass exceeds that of the US. China is not a uniform market not measured and determined by economic, social or geo-political space. Growth rates differ in almost all parts of China with big variations in the provinces. For Holden Barina, China is the place to go. It is one of the world’s largest and fastest growing auto markets with greater potential for good profits. China will help the company to compensate for falling profits at home (Mohamad, 2002). Owing to these market sustainability and stability, Japanese and European Car Company are also banking their hopes on China. Volkswagen for example sells more cars in China than it does in Germany (Drucker, 2008). China attracts many foreign investors to build its car market but with conditions that the company should not own more than 50% of the Chinese shares and must also partner with Chinese companies to enter their market. Over 74 million Chinese families which are approximately 20% of the population can afford to own vehicles implying that their choices may provide leverage for sale of Holden Barina cars in China. Cars may not be affordable in China, but the Chinese are big savers coupled with ease of credit access (Drucker, 2008). Their automobile business in growing more than their GDP with expanding highway infrastructure more in the urban areas as compared to the rural areas. There is a possibility that China will be overcrowded with foreign investors which will result to standards compliant auto marketing and after sale service systems. The car sales figures from 2005 to 2009 are as shown below; The leading Chinese car manufacturer, First auto works, is partnering with Toyota and Volkswagen which makes these companies perform well in China (Mohamad, 2002). Their level of business has been increasing by about 10% each year since 2003 owing to a bright strategy of introducing and quickly revising the products into China. Volkswagen rates have been increasing by 33% since 2002 while General Motors which has a market share of less than 10% comes second as the biggest foreign automaker with 38% growth rate (Drucker, 2008). Although Volkswagen, GM, Honda are key competitors, their production capacity has not kept up with the growing demand for vehicles in China. China lacks established delivery infrastructure making Honda to deliver cars in weeks or months. American companies are therefore making their cars and export them to China in order to complement those that are already being made, in partnership with Chinese companies, in China. To succeed in China, one must look at the market share more than profitability, to reduce the impact of your competitor. This idea may not run well with Holden Barina whose share holders demand quarterly reporting of profits. Speculators foresee the booming Chinese auto business to be at the verge of bursting hence bringing more problems to consumers to the disappointment of the automakers. It is believed that currently the production capacity is quite high which will be aggravated by increased output in the next three to five years (Drucker, 2008). This will likely outpace demand as concerns rise over Chinese cars making headway in overseas markets consequently leading to reduced numbers of people with the ability to sustain five year production levels. Planning production of Holden Barina gives a great chance to boost sales of more modern products. China entered into the World Trade Organization in 2001, with its population demanding greatest and latest products were able to dispose off their sell dated cars and buy latest ones with their increased discretionary income. Upon entry to WTO, China was forced to dispose old cars. It had over a longtime been protecting its domestic market from competition by taxing highly foreign products or prohibiting them. Lately, China encourages foreigners to import their cars as long as they are made on Chinese soil (Mohamad, 2002). More middle class Chinese consumers tend to buy high margin, affordable sedans like Volkswagen sedans, Honda Accord, Buick Regal which accounted for 19% of the vehicle sales in China. Chinese market has not fully evolved to provide reliable residual values to show comparison of Chinese cars with those of Australia (Drucker, 2008). Though Chinese cars are getting better, production is gaining momentum to outpace the general outrageous growth rates. Holden carina therefore has a better chance of entry into China which prefers fuel efficient and comfortable cars. 1.4 Expected sales and market share analysis In the last quarter of 2012, China’s passenger vehicle sales are expected to rise owing to increased demand from the first time car buyers. Multipurpose and sports utility vehicles wholesale deliveries are expected to rise by 11% to about 16 million units in the year. The second half of the year will see a rise to 8.48 million units which is a 15% increase. Chinese Employment Industry statistics and market size Item Volume Revenue $528billion Annual growth(2007-2012) 12.1% Employment 394,882 Businesses 4,699 Source: Auto & Parts Wholesaling in China Market Research Report | Jul 2012 It is only recently that customers had considerably small choice of vehicles for purchase but have been largely empowered to diversify ownership of sedans, SUVs, MVPs, hybrids and 4WDs. In 2011, foreign brands dominated the market with accounts to approximately 70% of China’s car sales. Auto and parts sales have low capital intensive levels and lower capital equipment in the distribution process. On the contrary, it has medium labor intensity levels of 394,882 people who earn more than $4.9billion in 2012. This amounts to service provision to more vehicle dealership and retail of parts. Capital depreciation is 0.4% in 2012 and wages being a proxy for labor is 0.9% in 2012. Capital-labor intensity is about 1:2.2 which shows that the industry is largely labor intensive though the ratio of capital to labor is anticipated to increase a bit in the coming years with the advent of computer technology and management systems. China’s GDP growth reduced to 7.6% in the second quarter of 2012 which is the lowest in the last three years and has been attributed to macro-economic pressures. Chinese association of automobile manufacturers showed that auto sales figures in the first half of 2012 grew by 2.9% as compared to 9.6 million in 2011. Capacity expansions of many producers have dismally reduced the room for further growth. In addition, local governments have strict measures to limit car purchases. Three megacities like Guangzhou, Shanghai and Beijing are capping yearly issuance of license plates. The domestic boom in a young market in 2010 was expected to reach maturity and stability but the sluggish growth of the first half of 2012 by Chinese homegrown auto makers. Foreign brands made significant sales and profits in the same quarter due to encouraging discounts of the global automakers. They also ensured lowered prices and expanded sales networks into small towns. Foreign companies are making all possible means to win market favor by employing methods like effective supply to meet demand, efficient maintenance services and a sizeable chain. Car consumption trends are constantly changing in China and are rapidly receptive to diversification by way of establishing new models and propositioning of consumer groups. First time buyers of vehicles are now known to be coming from small towns while consumers in big cities are anticipating for an upgraded or higher priced car models. Indeed, consumption tastes are driving Chinese consumers to SUVs and MPVs because of driving experience and brand recognition. There is room for Holden Barina to meet Chinese consumption tastes by aligning their brand to SUVs and MPVs. 1.5 Market entry mode analysis and strategies China is undoubtedly one of the fastest growing world markets for foreign companies. Studies have shown that smaller firms entering China are bound to be successful than larger companies (Grönroos, 2004). With earlier entry, success is greater with increased control of entry mode and shorter economic and cultural distances between China and Australia. With annual growth rates of over 9%, the Chinese economy is the third in purchasing power parity. By 2020, according to some forecasts, shows that China will pass Japan in GDP’s purchasing power parity. China will act as a host country to Australia’s Holden Barina and will largely influence its performance in the market (Grönroos, 2004). Firm (Australia) will consider firm strategy and firm resources which includes entry mode and entry timing to be measured in firm size. Country (China) differentiation assesses host country characteristics like openness and risk. Mode of entry influences the firm’s marketing, deployment of new skills and production strategy. To be evaluated in the entry mode are; i) Export: Holden Barina’s sales of car models produced in Australia and sold in China through and entity of China. ii) License and franchise: Formal permission to Holden Barina or agent situated in China to apply Australia’s proprietary technology or alternative resources in expectation of payment. iii) Alliance: treaty or agreement between Holden Barina in the Australian market and a company situated in China to share activities in China. iv) Joint venture: ownership which is shared in China by two partners, one in Australia and another in China. This is more advisable to use in China since it has low risks v) Wholly owned subsidiary: entire ownership of a firm in China by a firm situated in Australia to make, undertake value addition or sell cars in China. Holden Barina can choose one or a combination of them to enter China (Grönroos, 2004). The degree of which China gives Holden Barina control over its crucial marketing resources will determine the entry mode to be chosen. Export of goods has the lowest degree while licenses, forms of joint ventures and franchises provide a degree of control to the firm (Grönroos, 2004). Wholly based subsidiaries have the highest controls. Entry timing can either hurt or favor success. Early entry presents more advantages since one can lock up access to suppliers and distribution channels. They can also set up consumer preference patterns, benefit from government concessions and incentives as well as exploit a growing market which is able to be observed and learned for a longer period of time. However, a first entrant may fail miserably by falling into pitfalls not earlier known, and returns on investment may be small or unsteady as earlier predicted. Late entrants have the advantage of learning from the earlier entrants and their consequent failures (Grönroos, 2004). Larger firms are likely to succeed than smaller firms due to their resource strengths. They also have product specific and wealth specific knowledge when compared to smaller firms. Holden Barina can buy a medium sized car manufacturer in China. Big organizational history of international expansion and capacity to cushion from negative performance are the merits of wealthy firms. Though size does not guarantee success, bureaucratic organizational structures, kills innovativeness and creativity. Economic distance of disparities between China and Australia should be close which helps a great deal. Close economic distances share similar market segments for average consumption. Other similar physical similarities are in roadways, railroads, seaports and airports which will enjoy same efficiency scales and costs. They will also share common knowledge based resources and competencies to their advantage. Shared values and behavior of members of society influences their consumption behavior, marketing strategies and implementation of marketing (Neef, 2009. Difference in culture affects consumer behavior, product attribute levels, derived meaning from the product or brands and the marketing mix. Linguistic determinant is greater than economic factors in determining cultural consideration into moving to an emerging market. Country risk poses environmental uncertainties which are attributable to financial, political and economic. Political risks weigh negatively on foreign firms with regard to laws and regulations. Imposition of tariffs and unrest to political regimes causes asset confiscation without compensation (Neef, 2009. Economic and financial risks can be in the form of market downturns, crises in currency and galloping inflation. Country risk may significantly cause firms to lose revenue, devaluation, and delayed investment or underinvestment. Country openness has the effect of decreasing or increasing entry success by stimulating demand through increasing product variety in the market (Neef, 2009. Gradual growth of the economy increases efficiency reduces pricing and increases demand. Growth acceleration in China is tied with opening up of markets in major Chinese towns like Wuhan, Shenzhen, Nanjing, Suzhou, Tianjin and Hangzhou with strong commercial activities for foreign companies. It is important to undertake due diligence when hiring staff especially when setting up base for the first time. This helps to verify partners and employees trustworthiness thus unraveling ‘hidden time bombs’ this will require business intelligence, risk analysis consultancy and individual background checks (Neef, 2009). 1.6 Estimated budget (for international marketing mix elements) Launching of Holden Barina product line in China requires a standard marketing mix to suit business transactions in China. The budget will account for all types of marketing costs like salaries for marketing managers, marketing communications (website, advertising, public relations e.t.c.) and office space. Some of the items below have been generalized, but it may include sub costs like printing, coffee, fees e.t.c ID Marketing Mix Item Cost ($)/ half year 1 Product Administration costs 15,000 Office space 55,000 Salaries ( managers and support) 30,000 Fixtures and fittings 42,000 Branding 68,000 2 Promotion Travel costs 25,000 Marketing communications 70,000 Design 55,000 Packaging 59,000 Safety 54,000 3 Distribution Promotion 102,000 Shipping 67,000 Transportation 56,000 Warehousing 45,000 4 Pricing Discounts and incentives 20,000 Tariffs 23,000 Import duties 34,000 Exchange rate fluctuations 34,000 Total 860,000 1.7 Time frame (2014-2017) Year Quarter Activity 2014 January-March Identification of target market April- June Market research on Chinese market environment July- September Research on regulations and laws October- December Market size estimation and gap analysis 2015 January-March Consideration of entry mode April- June Liaising with Chinese companies July- September Financial feasibility and payment for factory space October- December Assessing economic and cultural risks 2016 January-March Identifying key towns to locate the headquarters April- June Observing market trends in the town and environs July- September Moving some of the resources to the town October- December Situating the office 2017 January-March Moving raw materials to the town April- June Pilot production July- September Initial distribution and market feedback October- December Running mass production of Holden Barina Conclusion The market will effectively and efficiently proof the investment is worth undertaking if initial costs are predicted against what other entrants have made. The company will to borrow best practice form Honda, Hyundai and ford which have had longstanding performance and reputation in China. It is a demand for Holden Barina that will be determined by the level of advertising and the quality of the product compared to its sale price. The government of Australia and China is in good working relationship hence no trade barriers will be expected to challenge the entry process. References Doyle, P 1995, Marketing in the new millennium, European Journal of Marketing, 29(12), 23–41. Drucker, P F2008, Management Challenges for the Twenty-first Century, Woburn, MA: Butterworth Heinemann. Grönroos, C 2004, From marketing mix to relationship marketing: towards a paradigm shift in Marketing, Management Decision, 32(2), 4–20. Kandampully, J & Duddy, R 2005, Competitive advantage through anticipation, innovation and relationships, Management Decision, 37(1), 51–6. Keegan, W 1960, Marketing Management: Policies and Decisions, Boston, MA: Houghton Mohamad, M 2002, Globalization: Challenges and Impact on Asia, in Richter, F.-J. and Mar, P. C. M. (eds.), Recreating Asia: Visions for a New Century, Singapore: John Wiley & Sons (Asia), pp. 5–11. Neef, D 2009, Making the case for knowledge management: the bigger picture’, Management Decision, 37(1), 72–8. Read More