Market Entry Option - Chery Cars China - Case Study Example

Student Name: Tutor: Title: Market Entry Option-Chery Cars China Course: Market Entry Option-Chery Cars China Executive summary This report gives a critical evaluation of possible foreign market entry modes for Chery Corporation with the intention of finding a strategy of penetrating the United States market. The introduction explains the purpose of the report and sets the tone of the procedure that has been followed. The following section reviews direct methods of foreign market entry strategies looking at their advantages and disadvantages while highlighting the risk involved. The report concludes with suggestion in form of recommendation that gives the way forward for the Board of Directors of Chery Car China. Table of Contents Executive summary 2 Introduction 4 Exporting 4 Licensing 6 Joint venture 6 Manufacturing 7 Assembly operation 8 Turnkey operation 8 Subsidiary 9 Conclusion and recommendations 10 References 11 Introduction Chery as an automobile manufacturer producing SUV’s, minivans and cars has to found a way of penetrating into the U.S.A car market. There are various methods of new market entry that a manufacturing company can exploit when trying to penetrate a new market. It will be prudent for Chery to consider all possible methods of foreign market entry before selecting one or several. All foreign market entry strategies have potential advantages and disadvantages to the company. The company has to select a method that is suitable to its circumstances (Berry, 2006). As a marketing manager I have to critically evaluate the foreign market entry option that are available and recommend the most suitable to the Board of Directors. Some of the foreign market entry options include exporting, licensing, joint venture, manufacturing/foreign direct investment, assembly operations, Turnkey operation, and subsidiary. Every strategy has gone both advantages and disadvantages but some strategies are riskier than others. Exporting Exporting is a strategy whereby a company without any production or marketing organization overseas, exports a product from its home plant. Chery can export directly is products to the U.S.A market. Direct exporting means that Chery will export directly to interested customers in the United States market. Chery will be responsible for handling the market research, logistics of shipment, foreign distribution, and collection of payment. There are several advantages associated with this strategy. This strategy will ensure that Chery gets greater profits since intermediaries are eliminated. Direct exporting will make greater degree of control on all aspects concerning the transaction (Porter, 2008). The company will understand who its customers are and they feel more secure in doing business with Chery Company. The business trips are more effective and efficient since customers selling the company’s products. Besides, the company will know whom to conduct if something is not working right. Faster and more direct feedback is provided by customers with regard to performance in the market place. With exporting there is better protection of trademarks, copyrights and patents (Salomon, 2006). Chery will have an opportunity to better understand the United States market. As the business grows in the United States market, there will greater flexibility to redirect or improve the company’s marketing efforts. There are also disadvantages that are associated with exporting as a foreign market entry strategy. Exporting consumers more time, money and energy that may weigh heavily on Chery as a manufacturing company. Exporting needs more ‘people power’ to create a customer base which may be tedious for the company. Exporting makes the company accountable for whatever happens and there is no buffer zone. Risks, threats and losses are solely managed by the company (Reynolds, 2003). Chery will not have an opportunity to respond to customer communications as quickly as compared to a local agent in the United States. All the logistics of the transaction will have to be handled by Chery company making it expensive. Technical questions will have to be handled with by Chery and offer on-site start-up training, as well as ongoing support services. In case Chery will want to export directly it must have a company-wide commitment that will include an import/export dream team to make sure that the initiative is supported fully. Licensing Licensing refers to an agreement that allows a foreign company to use industrial property (like trademarks, copyrights, and patents), technical skills and knowhow, engineering and architectural designs, or any combination of these within a foreign market (Levi, Ruldolf & Guptara, 2007). Licensing allows a company in the target country, in this case, the USA, to use the property of the licensor (Chery). The licensee in the target country pays a fee in exchange for the rights of using the intangible property, as well as technical assistance. Since there is little investment on the part of the licensor, licensing provides very little return on investment. On the other hand, since the licensee produces and markets the product, potential returns from marketing and manufacturing activities may be lost. Joint venture A joint venture refers to a partnership at a corporate level that is formed for a given business purpose by two or even more investors sharing ownership, as well as control. There are about five objectives in a joint venture and they include: risk/reward sharing, market entry, joint product development, technology sharing, and conforming to government regulations (Chang, 2004). Other advantages include distribution channel access depending on relations and political connections. The alliances are favorable when: the partners’ market power, size and resources are little as compared to industry leaders; the strategic goals of partners converge while competitive goals diverge; and partners can learn from each other while limiting access to their proprietary skills (Burdon, Chelliah & Bhalla, 2009). The main issues to look at in a joint venture are control, ownership, length of agreement, technology transfer, pricing, resources, local firm capabilities, and government intentions. Potential problems with joint ventures include mistrust over proprietary knowledge, conflict over asymmetric new investments, lack of parent firm support, performance ambiguity-how to split the pie, cultural clashes, and how and when to end the relationship. Joint ventures have conflicting pressures to compete and cooperate. With regard to strategic imperative; the partners have to maximize the advantage gained from the joint venture, but they have to also maximize their individual competitive position. The joint venture is usually controlled through negotiations and coordination processes, whereas each company want to have hierarchical control (Byrne & Popoff, 2008). The joint venture tries to develop shared resources, but each company wants to protect and develop its own proprietary resources. Manufacturing Manufacturing is a strategy entailing production or some manufacturing in a foreign country. Foreign direct investment refers to the direct ownership of facilities in the target country. It entails the transfer of resources such as technology, capital, and personnel. Direct foreign investment can also be made possible through the acquisition of an already existing entity or putting up a new enterprise (Peng, 2008). Direct ownership offers a high level of control in the operations and the capacity to better know the competitive environment and the customers. However, it usually needs high level of resources and a high level of commitment. Assembly operation An assembly operation entails production of components of parts in various countries for the purpose of gaining the comparative advantage of each country and the subsequent assembly of these parts into finished products. In this case the United States America has to be among the countries that component assembly will take place (Slywotzky & Hoban, 2007). Turnkey operation A turnkey operation refers to an agreement by a seller to supply with a facility that is fully equipped and ready to be managed by the buyer’s personnel, who will in turn be trained by the seller. A turnkey project is essential a way of a foreign company exporting its technology and process to other countries through building a plant in that country. Complex production technologies can effectively use turnkey projects as a means of new market entry strategy. One key advantage of turnkey projects is the possibility for Chery to establish a plant and get profits in a foreign country particularly in which foreign direct investment opportunities are constrained and there is no expertise in specific areas (Yamin & Sinkovics, 2006). This cannot be said of the United States market because there is high technology advancement in the country. Possible disadvantages of a turnkey project for Chery entail the risk of divulging the secrets of the company to rivals, and a takeover of the plant by the host nation. Penetrating a foreign market by a turnkey project can demonstrate that a company does not have long-term interest in the host country which can be a drawback of the country proves to be the main market for output of the processes exported. Subsidiary Chery can establish a subsidiary that wholly owned by it in the United States market. Chery will have controlling ownership interest over the subsidiaries. A subsidiary gives the parent country strategic and operational control over it. The degree of control is usually higher for the first months of subsidiary’s operation. The degree of control is likely to subside for an acquired subsidiary with a successful operating history. Besides it is easier to come up with common operating processes, particularly in case a parent company dispatches its executives to manage the subsidiaries (Borouthers & Hennart, 2007). Another advantage is that there is less risk of losing intellectual property to competition since the parent company can put in place common data security and access protocols. Cost synergies are made possible since a parent and its subsidiaries can make use of common financial systems, sharing administrative services and come up with joint marketing programs. Chery, being the parent company can control the assets of its subsidiaries in the United States and invest them as it deems fit. On the dark side, establishing a subsidiary is a very expensive undertaking. Whereas acquiring a local firm may facilitate market entry, the parent company may overpay for the assets of the company, particularly when there is war in case of bidding (Hitt, 2009). Moreover, it takes longer before establishing relationship with customers and suppliers, although the acquisition of a local firm with built-in networks can help to speed up the procedure. It is not easy to find skilled employees who can work and manage the subsidiaries. Cultural barriers are likely to hinder the integration of subsidiary and parent operations. The risks created by the subsidiaries spill over to the parent company (Kale & Singh, 2009). For instance, a lawsuit targeting a subsidiary can lead to financial losses even to the parent company and the same applies to negative publicity. Conclusion and recommendations Chery Corporation has to consider carefully before deciding on a mode of entry into the United States market. There are other modes of entry which can be dismissed without further evaluation. A thorough market research has to be done to ensure that the mode of entry being chosen will work and not lead to loss of economic resources. Turnkey operation, subsidiary and joint venture can be eliminated. Joint venture is a high risk options that can cost the company. Turnkey operation can apply where the level of technology is not developed as such and this does not apply to the United States. A subsidiary is very expensive to establish. Chery may not consider exporting directly following the high cost involved and the tedious logistic procedures that the parent company has to deal with. Direct foreign investment by means of acquisition can be the best method of penetrating the United States market since it is a low risk strategy. Chery will be in a better position of understanding the United States market and what the customers need in the market. Licensing can be considered since it minimizes risk and investment. It can also be used to quickly penetrate the foreign market. Barriers to trade can be overcome easily. The disadvantaged involved can be dealt with. As the marketing manager I will consider foreign direct investment through acquisition of a local firm or licensing. If adequate marketing has been done and there are interest clients then direct exporting could be considered although it involves a lot of logistics before the automobiles reach the foreign market. References Berry, H., 2006, Leaders, laggards, and the pursuits of foreign knowledge, Strategic Management Journal 27, 151-168. Borouthers, K.D., & Hennart, J.F., 2007, Boundaries of the firm: Insights from international entry mode research, Journal of Management 33: 395-425. Burdon S., Chelliah J., & Bhalla A., 2009, Structuring enduring strategic alliances: the case of Shell Australia and Transfield Services, Journal of Business Strategy, 30(4), 42-51. 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