Market Diversification Proposal for the Compact and Small Car Market in China - Assignment Example

HOLDEN BARINA PRODUCT LINE As a Product Development Officer (International) for the ‘Holden Barina Product Line’, you are asked to develop a comprehensive market diversification proposal for the compact and small car market in China. As a Product Development Officer (International) for the ‘Holden Barina Product Line’, you are asked to develop a comprehensive market diversification proposal for the compact and small car market in China. Executive summary; The Holden Barina is a subcompact automobile that have been sold since 1985 by Holden, the Australian Branch of General Motors (GM). Each of the 5 generations of Holden Barina is engineered version of GM vehicles. Holden is the only seven fully-fully integrated arm of GM operation that designs, builds and sells vehicles for the Australian market and in the world. The company has its head office situated in Port Melbourne, with manufacturing facilities based in Adelaide South Australia. Holden is represented by more than 250 dealers around the world. The company produces 42 models of vehicle in four body styles for both local and foreign market. The high-tech facility in Port Melbourne offers Holden significant flexibility in the range of engines it can produce for domestic and overseas customers comprising customers in China and India. The company prides itself in technological know-how, for example, Holden Design, Safety and Motorsport. The Holden vehicles include Barina, Barina Classic, Barina Spark, Caprise, Sportwagon, and Cruze, and so on. The new Holden Barina hatch in Australian market was well received by the customers, although sourced from Korea; it’s an entirely new car. The Cruze which is now manufactured in Australia has been a stellar success for General Motors and there’s no doubt why Barina cannot emulate this feat in both the domestic and international market. This study is aimed in developing Holden Barina product like in China, for a launch of a small car in the Chinese Motor Market. Table of contents I. Executive Market ………………………………………………………………………2 II. Table of Contents ………………………………………………………..…………….3 1.0. Background ………………………………………………………………………………4 2.0. Holden Barina …………………………………………………………………………….4 3.0. International and domestic marketing environment analysis …………………………….5 3.1. PESTEL Analysis ………………………………………………………………………..6 3.2. SWOT Analysis ………………………………………………………………………….7 4.0. Estimated market size and gap analysis (demand-supply analysis) ……………………...9 5.0. Expected sales and market share analysis………………………………………………...10 6.0. Market entry mode analysis and strategies……………………………………………….11 6.1. Entry product target …………………………………………………………………...…12 6.2. International marketing mix elements…………………………………………………….13 7.0. Estimated budget and Time frame (2014—2017) ……………………………………......14 8.0. Conclusion ………………………………………………………………………………..14 9.0. Bibliography………………………………………………………………………...……..16 1.0. Background; China became the world’s largest automobile producer and market in 2009 with an annual sale of about 14 million vehicles. The market has continued to expand since 2010, hence the potential of purchasing power of small cars customers. The Chinese automotive industry is estimated at US $ 42 billion with exports contributing about 6% of the revenues (CAAM). The growth in the Chinese middle class people, with increasing purchasing power, as well as the strong growth of the economy over the past years has attracted world leading producers of small cars to the Chinese market. Furthermore, Chinese offers trained manpower at favourable costs, making China a preferred global manufacturing hub (Auto Shanghai, 2011). The automobile industry globally is undergoing a facelift die to technological changes that are being experienced around the world, making each firm to embrace it to sustain its competitive edge and offer customers with modest car models. 2.0. Holden Barina Holden Barina have been fashioned in the versions of GM vehicles in 5 generations. The foremost generation was MB Barina which was released in 1985 as a five-door hatchback; the second generation was MF Barina, a three-door hatchback and was launched in 1988 but was later trailed by introduction of MH Barina which upgraded version of MF Barina, with improved interior, newest front and rear bumpers and advanced suspension (Holden Official Website). Later on, SB Barina, a third generation was released in 1994, and provided both in Barina 3 door and Barina 5 door with an engine capacity of 1200cc and 1400cc. Seven years down the line, in 2001, the fourth generation was released, XC Barina. It was availed in both three and five hatchback models with engine capacity of 1400cc. and a year later Sri model was launched with an engine capacity of 1800cc. According to Holden Official Website, the upgraded system and features in the fourth generation in 2001 made Barina to earn recognition and was awarded the Wheels Car of the Year Award. This motivated the C.E.O of Holden to import higher-spec SXi three and five hatchback models, to increase the Barina sales. However, the changes in the newest model did not advance sales in the market; hence it was reverted to previous models of Barina 3 and 5 door models. In late 2005, Holden rebadged the Daewoo Kalos hatchback to the fifth generation, TK Barina. This was meant to ensure Holden maintains its high competition in the fast-growing market of small cars in Australia. Still, the company made losses due to stiff competition from South Korea sourced models like Hyundai Getz. The latest model, the fifth generation was released late year, 2011 in Melbourne and later launch of sedan in early 2012. The latest model, TM Barina has same features of Barina Spark and its engine capacity is 1600cc. 3.0. International and domestic marketing environment analysis According to Drucker (2006), for a comprehensive environmental analysis, an organisation has to take into consideration various factors in coming up with new products, renovating and re-inventing existing products and expanding into new potential markets. For this to happen in a systemic and more organised form they have to use various theory models and concepts to formulate and organise themselves well (Armstrong, 2002). This is where the PESTEL and SWOT analysis comes in. PESTEL stands for Political, Economic, Social, Technological, Environmental and Legal. All these constitute the framework factors that make up the PESTEL analysis. The elements of an environmental scan include both internal analysis and external analysis which culminate in a SWOT analysis of the organization. In most of the situations organizations take environmental scans to only involve the external analysis. But for it to be comprehensive and conclusive enough it has to involve both internal and external analysis. Armstrong (2002) argues that internal analysis includes an analysis of the internal structures of the company, its policies and operations, employees and abilities while External analysis includes concepts such as the macroeconomic environment of the area in which the company operates. This includes the government, legislation policies, technology, socio-cultural trends, and shareholders. 3.1. PESTEL Analysis In relation to Chinese automotive market, we can make the analysis; PESTEL framework covers the macro-environment. Political: The Chinese government has opened up an open door for new entrants at the automobile market. This has been through the formulation of supportive policies which have attracted potential investors to invest heavily in the automobile industry. The Chine central government has also pushed for mergers and acquisitions in the automotive industry, a move that is likely to support the emergence of joint ventures between leading national companies and foreign firms. The government is also very committed to building infrastructure like roads, as a way to increase literacy levels to stimulate economic growth. In terms of business support the Government is controlling the lending rates of banks to help both local and foreign investor’s access funds for business growth and expansion. Economic: The Chinese government has implemented several tax adjustments and subsidies for automobile purchases to encourage hybrid and small engines vehicles. Interest rates have also been lowered as a matter of government policy to spur borrowing and lending, economic growth has been on the rise throughout, inflation has been contained and exchange rates against the USD have been steady. Social: Changes in the Chinese social structures are favourable for businesses looking to venture in China market, for example availability of cheaper labour and large urban market. Stress and unemployment make people desperate for jobs thus providing cheaper and efficient labour force. There has also been the rising domestic demand for small cars that is attributed to rising incomes and a growing middle class. Technological: the weak Research and Development, domestic innovation and design capabilities in Chinese automobile industry are key challenges to its international competitiveness. This has forced government to encourage strategic partnerships with foreign players, aiming to facilitate technology transfer and improve domestic design and engineering capabilities. Environment: Beijing has gradually launched higher automobile emission standards for new vehicles. Plans to develop hybrid electric and pure electric vehicle production capabilities are part of a broader, environmentally friendly strategy to develop the auto industry. Legal: The provision of friendly investment policies in terms of registering business and investing have been reviewed and this process is now much simpler and faster compared to previous years. There have been various reforms from the government seeking to regulate various sectors to avoid monopoly synergies. 3.2. SWOT Analysis Strength and weaknesses entails the internal surroundings elements of a firm and how impact on its operation, whereas opportunities and threats are normally external forces. Business environment for any company is a crucial aspect that affects its activities. For Holden Barina, business environment (external) has brought both opportunities and threats because of the uncertainties involved. To any business, external environment is indecisive, complex and dynamic which calls for more flexibility on the side of organization in managing them. It’s very difficult for a firm to control an environment because of its unpredictability (Armstrong, 2002). The keys aspects surrounding the Holden Barina in terms of SWOT analysis are stated in the table below. Strengths: Investment in new factories Diversification of products Improved marketing techniques High skilled expatriates/staffs Opportunities: Hybrid cars, like Barina Spark Rising technology Rising urban youth population High growth rate at the market Weaknesses: Maintaining client base Maintaining production Different supply interest Indecisiveness from management Threats: Faulty products Upcoming manufacturers Economic slowdowns Market uncertainties 4.0. Estimated market size and gap analysis (demand-supply analysis); Chinese automotive market represents an extraordinary case of economic development for an emerging market and has the most growth potential in the world. It is per capita car ownership is still extremely low at 4.78, though, is estimated to grow significantly. Its domestic manufacturers and suppliers are still government-supported consolidation. The swiftness in supply and demand had been attributed to increased buyers at the market, sound economic reforms and fast transition to full market economy. China automobile production Source: China Association of Automotive Manufacturers Such an inspiring growth rate in output has been achieved largely from the establishment of joints ventures with famous auto companies like GM. The Chinese market has high-growth rate, and there is a strong desire from world leading automobile firms to invest and establish new relationships with domestic firms, to help in building a strong auto industry of their own-a desire of the government. China has about 52 automobiles per 1000 people, while the US and Europe has about 457 automobiles per 1000 people, hence a market gap. 5.0. Expected sales and market share analysis The skyrocketing of fuel prices is driving up demand of small cars around the world. Policy makers anticipate to be importing about 10 million vehicles at an average cost of $20,000 per vehicle (Auto Shanghai, 2011). As such, creating a market gap in the market because of fewer industries to produce these volumes. Source: China Association of Automotive Manufacturers Based on the above table CAAM had projected 13.08 million units in 2010 and 15 million in 2011, figures that were surpassed slightly. This year, 2012, CAAM has project a slight growth of about 43.2% from that of last year because of the potential growth rate. Rank Company Head Office Joint Venture Partner Sales (000) Market Share 1 SAC Shanghai GM, VW 2,705.5 19.83% 2 FAW Changchun Toyota, Mazda 1,944.6 14.25% 3 Dongfeng Wuhan Nissan, Honda 1,897.7 13.91% 4 Chana Chongqing Suzuki, Mazda 1,869.8 13.70% 5 Beijing Auto Beljing Hyundai 1,243.0 9.11% 6 Guangzhou Auto Guangzhou Honda, Toyota, Isuzu 606.6 4.45% 7 Chery Hefei N/A 500.3 3.67% 8 BYD Shenzhen N/A 448.4 3.29% 9 Brilliance Shenyang BMW, Toyota 329.1 2.41% 10 Geely Taizhou N/A 1,750 12.84% Source: China Association of Automotive Manufacturers This shows that new entrants like Holden Barina have potential of tapping into existing free market share of 2.47%, then later on start to eat into existing markets of its competitors because of its viability in small cars. 6.0. Market entry mode analysis and strategies The existing positive demand growth for small cars and their components has not only caused domestic industry development, but has also increased interest of leading foreign automotive producers to venture into the rapidly growing market. The reduction in import tariffs by about 50% and the joining of China into the world Trade Organisation is perceived as a clean-up for international businesses (CAAM). Holden is the one of the leading automotive producer in Australia, focusing more on small cars. They have achieved more in Australian auto market through an increase in the design of small cars like Holden Barina while at the same time improving features of the car models. They do this through their brands with GM, one of the leading auto companies in the world. Their basic business principles remain unchanged from the time of the origins of the company and reflect on the provision of hybrid car alternatives for every model that is sold in the market. Holden Barina is well-placed to capitalise on its strengths and opportunities it has to enter into the Chinese market and build a competitive edge in the automotive industry. For example, the extensively differentiated auto models are helping the Holden to have more global presence. This can also be achieved through entering new markets like China and Europe. The company had in the past concentrated on the Australian and Korea markets and it needs to setup sound strategies to go through the other markets as well. Holden Barina has by now embraced product diversification as a major strategy in Chinese market penetration. The pricing issue is going to be a vital weapon of fighting competitors in the new market. The cost of production of Barina unit is likely to be low owing to possible mass production plants, thus making the general cost of production much lower. This means the business will be in position to sell their small cars much cheaply and still stay cost-effective. The Holden Corporation should use this advantage and break through the Chinese automotive with affordable products. 6.1. Entry product target Holden products (cars) should be developed to target and fit a specific market and individuals. The design features should vary from top speed, capacity and exterior appearance like color and shape and hatchbacks. They should also launch modest sporty car models with a high speed, which are relatively preferred by younger and single people like celebs, who are adventurous, because rich Chinese youth. The Holden models should also target the geographical features, cars that cruise rough terrain, or on the smooth tarmac road as and rugged road terrain. The quality features of cars will create a positive image for the company and attract more customers to identify with the latest and existing car models of Holden Barina. 6.2. International marketing mix elements The market program for Holden Barina consists of the four marketing mix aspects, designed to fit into a target market in terms of their needs and accessibility of goods and services. Product Strategy: Holden Barina is believed to be moving with strategies generational changes of its car models and mass production to enhance its corporate image on the global automotive market. It has also incorporated the strategy of hybrid product, which can help it increase its production in case of a arising need in the Chinese automotive market. Price Strategy: The repute of the Holden Barina emerged from its ability to manufacture high quality vehicles that can be sold at an affordable price. The firm has actively involved in tactful pricing strategies such as price demarcation to a competitive edge in the market. Location Strategy: By venturing into a Chinese automotive market, which is perceived to be growing at a high rate is going to place Holden Barina into a strategic position in small car production. This is going to increase its production units annually as well as earnings. Promotion Strategy: The Holden Barina should use a competitive pricing mechanism as a promotional strategy to give it a competitive edge over its main competitors like Mazda, Toyota, Isuzu and Tata. This is a means is self driven and likely to secure a good market share to capitalise on as it outwit its competitors. 7.0. Estimated budget and Time frame (2014—2017) The entry to a new market and use of efficient modest production technologies, it is expected that the increase in profits will continue for the next 3 years. Below are the projections for the next five year period Sales Forecast Millions of AU $ year 2014 2015 2016 2017 Net Sales Operating income Ordinary Income Net Income Research Divindends/yen 1,455,650 65,023 80.636 47,999 32,051 44 1,900,340 89,954 108,484 60,231 30,051 50 1,957,879 98,0530 125,444 81,234 20,051 60 2,000,534 99,760 14,343 57,576 30,051 78 8.0. Conclusion As a leading market for small cars, China automakers firms are seriously entering joint ventures to accelerate domestic image by importing large units of cars and increase their presence in global market. Holden Barina should also focus on future development as it enters this new market, as China is committed to embracing new energy vehicles, because of skyrocketing fuel prices and air pollution (Auto Shanghai, 2011). New energy vehicles are thought to minimize carbon emissions and use of alternative sources of energies. 9.0. Bibliography Auto Shanghai. (2011 April). Shanghai New International Expo Center. 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