Market Diversification Strategy for Compact and Small Car Market in China - Case Study Example

Running Head: MARKET DIVERSIFICATION STRATEGY FOR COMPACT AND SMALL CAR MARKET IN CHINA Subject Professor University/Institution Location Date Table of Contents Running Head: MARKET DIVERSIFICATION STRATEGY FOR COMPACT AND SMALL CAR MARKET IN CHINA 1 Table of Contents 2 1.0.Introduction 4 1.1.Objectives 5 1.2. Brief Background 5 2.0 Market analysis 6 2.1 Pestle – O.T 7 2.2 Competition – O.T 7 Buyer behavior– O.T 8 Fashion Chasing/ Status Seeking 8 2.4. Company analysis 10 3.0 SWOT Analysis 11 3.1 Opportunities 11 3.2 Threats 12 3.3. Strengths 12 3.4 Weaknesses 13 3.5 Matching Strengths & Opportunities (say Y/N recommend to enter the market from 3.0) 14 4.0 Marketing plan 14 4.2 Forecast sales + market share 15 4.3 Market entry strategy (at least 2 pages) 15 4.4 Estimated budget (for international marketing mix elements) + time frame (2014 – 2017) 17 5.0 Marketing mix 17 5.1 Product strategy 18 5.2 Price 19 5.3 Distribution 20 5.4. Promotion 20 5.5. Brand position 20 6.0 Conclusion 21 Reference list 21 Appendix NO.1 22 Market Diversification Proposal for the Compact and Small car market in China 1.0. Introduction China is one of the two countries that are most populous in the world and the automotive industry is one of the five biggest industries in the country. The decade has particularly seen a massive growth of this industry which has surpassed many others. This is a market diversification proposal on the diversification of the compact and small car market in China, for Holden Balarina Product line. The proposal will be based on the current situation of the Chinese market. China is the most vibrant automobile market for in the world currently and has remains so for the last about four years or so. The country’s volumes in terms of growth of the automobile industry is twice that of India which is rated number two in the world and this can be explained by the facts that the two Asian countries are the most populous in the world. China is a market to about 75% of small cars, and this can be explained by the fact that fuel prices are quite low in China; the country has a very viable infrastructure when it comes to foreign investment and also that diverse consumer perceptions abound in China (Sahar, 2008). Rising growth rates in the numbers of vehicles, the incorporation of “country road tax into fuel price” and “second-car” consumption are some of the factors that could encourage the need for small cars in the Chinese market. This paper, will review factors that concern the market for compact and small car in China to establish how new compact and small cars are likely to fair (China Association of Automotive Manufacturers and Xinhua, 2007). 1.1. Objectives This proposal will seek to evaluate the following areas: A brief background of the Chinese market for compact and small cars A market analysis A SWOT analysis A study of a suitable marketing plan A study of a marketing mix 1.2. Brief Background The Chinese market has constantly been enticing the makers of autos due to its potential when it comes to profits and its potential for growth. The makers of Automakers in the United States of America particularly view the Chinese market as the place where they could make up for the diminishing profits back home. The Japanese and European car makers are also equally enticed by the Chinese market with Volkswagen said to be making moiré sales in China than they are back home in Germany. China is however the final beneficiary of this swell in it new car market and is currently said to be building a car business of its own with the help of foreign investors from some of these countries. The policies and laws in China are also favouring this trend in the extent that no single foreign investor is allowed to own over 50% of a car manufacturing company that is based in China. The laws also stipulate that foreign investors must partner with a Chinese investor if they are to enter the Chinese market (Butner, 2005). The foreign investment laws in China, coupled with other factors such as backup from the government, the rapidly expanding economy, low labour expenditure, and the massive populace of China are causing such an explosion in the automobile investment arena to an extent where China is said to be headed towards an automotive environment that resembles that of South Korea and Japan which were also developed through the help of foreign investors from western countries and later the western investors were cut into a minorities. The economy of China is in some ways under developed. The automobile industry cannot be said to be too developed either but many manufacturers of cars are drooling over the opportunities that China has to offer. For instance, according to Lienert (2006), it is estimated that about 74 million families in China are able to afford to buy a car, and this is only about 20% of the entire Chinese population. In addition to this, China’s nominal per capita income is estimated to be about $1066 and its gross domestic savings rate has grown tremendously from 40% in the 1990s to about 50% in the past decade and this has enabled most of the consumers in China to save and be able to purchase vehicles that would otherwise have been too expensive for them were it for their incomes alone. 2.0 Market analysis This part will look at the market for both compact and small cars in China. It will analyse the market in terms of pestle, competition and the behaviour of Chinese buyers of compact and small cars as well as the company analysis of 2.1 Pestle – O.T Below is a pestle analysis of the Compact and small car market in China Political – In the political area, new policies and strategies for the working surroundings apply Economic – China’s automobile market is expected to gain strength in the future Social-Cars are a symbol of economic status in China Technological- Technology in China can be measured through the nation’s course towards technology, socio-economic infrastructure, technological infrastructure and productivity Demographics- There is a difference between pricing, fuels prices, R &D capabilities among other factors when it comes to demographics Infrastructure - Infrastructure in China has been growing really fast Ecological – Due t growth in motor vehicle industry, the quality of the air in China is still among the poorest 2.2 Competition – O.T Competition for Holden Balarina Product line in China will mainly be in the form of other foreign car companies that are seeking to invest and sell in the Chinese automotive industry and market. 2010 saw these foreign brands increase to 64% of the entire market share in China. Foreign based investment is mainly based on joint venturing with local companies as per the government’s regulations. Some of the main competitors in the Chinese market are General motors, Volkswagen among other foreign groups. Others include local producers such as Geely Holding Group and Cherry Automobile co. who are the new manufacturers of Swedish Volvo cars and who are growing quite fast (JD Power and Associates, 2006). Manufacturers from Europe, America, and Japan are also looking more and more save themselves into China as a way of saving themselves the situation of shrinking markets back at home. India and Russia are also in that category. Buyer behavior– O.T China has an estimated 1.3 billion consumers generally (Garner, 2006). Chinese automobile consumers have shown a tendency to have different preferences when it comes to car. From appendix I, one can see that it is mainly tier II customers who prefer small cars mainly with most of the tier I customers moving towards midsized cars. Below are some of the behaviors of Chinese customers that are likely to influence the product design for Holden Balarina Product line. Fashion Chasing/ Status Seeking There are five basic groups that characterize the Chinese car consumer when it comes to buying a specific brand of a car and they are mainly influenced by lifestyle inclinations. They are; 1. Fashion Chasers: Fashion chasers are customers who are always willing and ready to try anything new basically based on trends and technology driven desires. The love being on the limelight and this is what makes them like custom-made treatment when it comes to buying not just cars but everything else. They like it when the features of a car can be tailor made to their own tastes and likings, and aisde from price and brand, they are also concerned with interiors, exterior, technology and the design of the car. How much a car consumes in terms of fuel is not a problem for them. They are said to love brand such as Toyota, ford and Honda but Holden Balarina Product line will seek to entice this group (Gehring & Oswald-Chen, 2012). 2. Hedonistics: This group of consumers is modern in terms of ideals and there man concern for life is being able to enjoy life and be happy. The y love foreign goods and are willing to as far as taking loans to satisfy their desire for enjoyments and happiness. When it comes to cars, they always seek driving experience, exterior and interiors first and foremost before considering the brand (Farrell, 2005). 3. Status seekers: This groups consists of consumers who consider a car to be a symbol of status and as something that allows them to have the respect of other people. They love to buy new models of cars in order to show them off to people who know them This particular grop should be of great interest to Holden Balarina Product line because, they have the highest spending power in China and they love new brands. High price doe s not matter to them so long as they are able to satisfy their desire which is getting attention. Their main concern is brand and interiors. They love BMW, Mercedes-Benz and Audi-types of cars. 4. Progressive achievers: Progressive achievers are consumers that believe that work is the most important means of attaining their values. They are usually optimists and they are highly motivated individuals, are mostly men, they work tirelessly to earn a living and to make their status in society better and when they are buying a car, they are always mostly interested in comfort and brand rather than exteriors. They love Chevrolet and Volkswagen type cars. 5. Traditionalists: These are mainly customers who are family leaning and they value family ideals more than anything else. When buying a car, they are more concerned with fuel consumption and low carbon emissions. Other factors that are of basic concern to them are; cost efficiency, appropriateness, endurance assessment, and safety. Exteriors, brand and technology features are of less importance to them. This group mainly consists of female consumers and elderly people. This group will also be very important for Holden Balarina Product line due to the increasingly improving status of women in China. The criteria of choosing a car varies a lot in China and the knowledge of brands also varies because there are various groups of buyers defined by different aspects such as age, gender etc. However, price is key to every buyer and it is the main factor on which the decision to buy or not to buy. The above information is very important for an investor in the Chinese automobile industry like Holden Balarina Product line because it defines the marketing strategy for such a company (PRC National Bureau of Statistics, 2005). It is good to note that the Chinese consumer is well versed with factors such as brand and price, but is not well versed in technical qualities. 2.4. Company analysis Holden Balarina is an Australian based car manufacturer of Holden Special Vehicles (HSVs). The company’s vision has always been the production of high performance luxury vehicles for the local market in Australia as well as for the international market. The company has been able to produce about 60,000 such cars and can be said to have achieved its dream in the twenty years that it has been in operation. Today, Holden Balarina the company has also been able to achieve a god reputation when it comes to innovation and technology as well as business and operational ability. Holden’s parent company is General Motors (Farrell, 2005). 3.0 SWOT Analysis 3.1 Opportunities China is part of the World Trade Organizations and this is an advantage for a company like Holden Barina Product Line because it means more opportunities for trade. Globalization-Globalization has really enhanced automobile production facilities both in China and worldwide and so producing new automobile is easier and more affordable. China has particularly gained from foreign investment due to the policies that the country has which favor foreign investment in collaboration with the local industries (Beebe, 2010). The fragmentation of the automobile parts supply sector has led to provision of many opportunities for companies that want to invest in the industry in China Export of “level driven cars and parts” A significant mass of China’s population can be reached easily on a large scale domestic demand There is a momentous market share for automobiles in China Chinas fall in the rate of tariffs has led to a massive and attractive market especially for high end goods A competitive workforce 3.2 Threats The increase in assembly capacity could lead to problems related to supply demand in future Rising prices of automobile raw materials as compared to falling car prices Ever changing and volatile business environment Quick and unsteady rise and fall in manufacturing with regard to new technologies, exchange rates, social constancy and DFI. Government stringency in measures and regulations with regard to the automobile industry 3.3. Strengths Government policies in driving growth especially when it comes to manufacture of automobiles and parts There is immense potential in the size of China’s domestic market for small cars. Availability of affordable labor Improvement in logistics China’s closeness to the South East Asia and Japan markets An economy that is based on the old planning systems which has a lot of dividends 3.4 Weaknesses Limited chances of brand dependability with time Lack of local key procedural data base as well as expertise Lack of prospective for the design, production and assimilation of the key equipment related to automobile manufacturer Deficiency high technical content when it comes to the development and innovation of high-tech content. Deficiency in skilled engineering and management skills Deficient local component supply network in as far as international standards are concerned Local R&D infrastructure standards are still not up to standard in China though they have improved greatly over the years (China Association of Automotive Manufacturers and Xinhua, 2007) Likely upward trend when it comes to the rates of cost of production 3.5 Matching Strengths & Opportunities (say Y/N recommend to enter the market from 3.0) When comparing the opportunities with strengths, There are many opportunities for a company like Holden Balarina in china 4.0 Marketing plan 4.1 Estimate of market size + gap analysis (demand-supply analysis) Holden Balarina being related to GM is likely to occupy a niche that it would otherwise not have been able to occupy had it not been so. GM has held the number one position as an automaker for a while now and China is the company’s no. 2 market after the US. 2010/ 2011 saw GM produce 2 million cars in China and in April 2011, the company announced that it was hoping to double its sale to 5 million by 2015. The consumer market in China is estimated to be about 1.3 billion people (APCO Worldwide, 2010). The sale of cars in China is said to have bypassed that of the US in 2009 for the first time ever. This market is diverse as we have seen and with GM hoping to sell an extra 3 million cars by 2015, it shows that there is a gap in the strategy of GM between the company’s present situation in the Chinese market, and with GM said to be seeking to join forces with other companies to capture the market for small cars in China, this is a great opportunity for new comers like Holden Balarina. The Chinese government has been pursuing joint venture in the automotive industry to encourage growth and has also been financing it citizens through various policies to enable them access cars (Holden, 2010). Therefore, there is a big demand for cars in China and the numbers are expected to rise every day. 4.2 Forecast sales + market share The growth rate of the Chinese market is expected to stand at 8.3% in 2012 and the growth rate of consumption of cars is expected to stand at 16.8%. Investments growth rate is expected to stand at 17.0%. These are some of the factors that define the market that Holden Blarina is planning to enter into. The market share is such that GM holds an 11.0% of the total share, Volkawzgen hold about 11%. Hyundai group holds 8.3%, Nissan holds 5%, Toyota holds 5.4% of the total market share, Honda holds 5.0%, Geely Group holds 3.8%, BYD holds 3.7% Chery Group holds 3.3%, PSA group holds 3.1 %. Other companies not mentioned here occupy the remaining 33.7% and this is the market share where Holden Blarina is likely to find itself depending on how it plans to position itself. 4.3 Market entry strategy (at least 2 pages) Many foreign companies in the automobile industry are required by the Chinese government to form partnerships with other locally established companies t o be able to do business in China. Before a company can for such partnerships, it is required by the Chinese government to transfer some of its technological know-how to China and offer Chinese employees some of the top management positions in the joint venture. For Holden Balarina, the first strategy should be to seek a company to form a joint venture with and since the company has developed so much in terms of technology, this should not be hard. Many of the companies seeking to enter the Chinese market found the idea of transferring technological know-how repulsive but most of them have a adapted to the scheme (APCO Worldwide, 2010). Beijing needs foreign automakers to operate joint venture sand this should be another entry point for Holden Balarina. In the past years, the market in China was quite small for high volume production and most of the raw materials had to be brought in from outside and many companies only sought to invest heavily in order not to be left behind. Holden Balarina should seek to establish itself in the Chinese market in phases as many companies have already built a niche for themselves and have positioned themselves in a market share of their own. Competition is bound to be tough and may companies have lost but the market share for small and compact cars is still large and the stakes are high China having joined the WTO which led to a reduction of tariffs. The company Holden Balarina should seek to get past the excitement that often captures the imaginations of many investors of a market with over 1 billion customers and begin to find ways of outlining ways of unbolting the how they should go about unlocking means of selling to all those people, getting to know them better, their likes, dislikes, preferences, social aspects and all. The company should also seek to find what captivates them as these are the things that matter most. What the company is likely to find are consumers at crossroad who are bombarded with ideas and habits and goods that they had wished that they could have for a long time and who are now embracing them on one hand, and on the other hand, consumer culture and economic structure that is quite different from the western and more developed cultures. In other words, the Chinese market is diversified but at the same time, it is stratified and it has the old and the new, the urban and the rural, etc. the Chinese market therefore still has a lot of opportunities. China is still building up in terms of urbanization and it’s still a “country of extreme 400 millions” The urban areas have about 400 people while the rest are in rural areas. Incomes in urban areas have been growing constantly but the rural economy has been growing at a much slower rate and these are some of the factors that should guide the strategic entry of Holden Balarina into the Chinese market (Garner, 2006). Holden Balarina should also concentrate its marketing strategy on the growing middle class who are getting stronger and stronger every day and they are the people with the money. 4.4 Estimated budget (for international marketing mix elements) + time frame (2014 – 2017) This estimation will be based on reports from other companies such as Volkswagen, General Motors among others. The investments for many companies such a Volkswagen and GM for the period spanning 1984 -2011 range between 6.5 billion dollars and 12.4 Billion dollars. Volswagen for instance plans to invest a further 14 billion between 2012 and 2016 for an estimated production of about 2.3 million cars. How much Holden Balarina wants to produce will determine how much the company should invest but the figures range between 6.5 billion on the lower side and 12.4 billion on the higher side. This should be in consideration of the facts that different companies approach different markets in different ways. 5.0 Marketing mix Over 30 years have since China’s transformation and opening in its economic strata began, and the desire to own a vehicle has increased progressively amongst the affluent groups of China. Government policies have particularly been helpful in influencing consumer decisions to own private vehicles and 2009 saw China bypass the US to become the biggest market for automobiles. The car market in China is characterised by three main stages since 2005 with the first (between 2005 and 2008) manifesting a stable typical expansion rate of 20%. The second phase (2009-2010) was characterized by a growth rate that was about twice as high as the first one while the third phase (2011 onwards) the growth rate nose-dived. The growth rate stood at 5% for a while. Today, this growth rate is showing fresh signs of rising again. This part of the proposal will deal with the company’s product strategy in respect to the current trends in the Chinese market for compact and small cars, pricing, distribution, and promotion of new brand s and brand position. 5.1 Product strategy Apart from the typical cyclic progression that came after the earlier period of explosive market growth in China, various sequential changes in the structures of the Chinese car market resulted namely; -the small displacement car policy ended and this ended in buyers of cars obtaining a government subsidy to be able to buy small displacement cars. -elevated general expenditure power The opening of the “redemption policy” by the government of China which gave the owners of cars the privilege of being able to get a discount if they purchased a new car as long as they were able to sell the old car to a car dealer. Subsequently, the predilection of car owners in China changed significantly, with attention turning from small displacements to larger ones and imported models of cars gaining popularity. The sports car particularly became very popular. Today, China is in new level when it comes to design behaviour upon which the product design strategy for Holden Barina Product Line will be based. There are currently to types of consumers in China who are grouped into ranks. Rank I consumers (see appendix I) are particularly fond of small models of cars and this is one strategy that Holden Barina Product Line will use. The company intends to exploit this market sufficiently in order to make maximum sales. Tier II cities in China are basically occupied by those that prefer mid sized and bigger car models. Therefore, understanding the needs of these two groups will be very critical in the product strategy of Holden Barina Product Line. In this case, this will mean matching the right product with the right tier and matching the right tier with the right price and value (Gehring & Oswald-Chen, 2012). It will be very important for Holden Barina Product Line to understand the needs of each group and come up with the right brand and price for each of the two groups separately It is also important that Holden Barina Product Line should create a brand image of its own in order to capture a market niche that is not yet occupied by any other brand. 5.2 Price With keeping in mind of the preferences of the Chinese car buyerfor the past few year, it is very critical that Holden Barina Product Line should get to appreciate the significance of harmonizing the right price and brand when it comes to the automotive industry. One of the distinctive characteristics of this industry is that the features that a product possesses are what distinguish it as a brand from other brands. A brand of a car therefore gives a clearer image of what a brand representation is than any other product. Holden Barina Product Line intends to come up with brands that are wholly achievable but at the same time, brands that are fashionable because on the price of a product and the volumes that are purchased are in most cases unswervingly connected. It is all an issue of matching the right brand with the right price and the right market segment; and this is what Holden Barina Product Line is going to concentrate on. 5.3 Distribution The company should seek distribution channels that will enable it to maximize on the opportunities that are within its reach. The paper suggest that it should have distribution channels in all the major channels in China beginning with the largest and gradually moving to other smaller towns 5.4. Promotion Promotion of cars will vary from one place to another, but the main promotion tool available for Holden Balarina is showrooms in the major cities in China as well as advertisement. 5.5. Brand position Holden Balarina needs to position itself in a market niche that is unoccupied of that has less competition and considering the middle class consumers in urban areas in China and the estimation that they are likely to grow, then that should be the market where the company is likely to position its brand in the best way. 6.0 Conclusion This paper has tried to analyze the Chinese market for compact and small cars as best as possible in an effort to propose the best market diversification strategy for Holden Balarina in a market that is as diversified as the Chinese on. The paper has looked at marketing plan, strategy and a SWOT analysis of the market. Reference list APCO Worldwide. (2010). Market Analysis Report: China's Automotive Industry. Hong Kong: APCO Worldwide. Beebe, A. (2010). Winning in China's Mass Market. Beijing: IBM. Butner, K. (2005). Follow the leaders: Scoring high on the supply chain maturity model . http://www-935.ibm.com/services/us/: IBM Institute for Business Value. China Association of Automotive Manufacturers and Xinhua. (2007). China becomes 2nd largest market for new cars. Shanghai: China Association of Automotive Manufacturers and Xinhua. Farrell, D. (2005). China’s looming talent. McKinsey Quarterly 2005. http://www.mckinsey.com/mgi/publications/Chinatalent.asp . Garner, J. (2006). Rise of the Chinese Consumer. Credit Suisse Securities. Gehring, M., & Oswald-Chen, F. (2012). What drives Chinese Car Drivers: Creating the right fit between Price and Brand for the right shape. www.china.ahk.de. Holden. (2010). Holden Business Report: Writting Our Own Future. Melbourne: Holden. JD Power and Associates. (2006). Asian Automotive Outlook 2006-2012. Shanghai: JD Power and Associates. PRC National Bureau of Statistics. (2005). Statistics Yearbook. http://www.stats.gov. cn/tjsj/ndsj/2005/indexeh.htm. Sahar, F. (2008). The Ride for Big Profit: Comparison of China and India Auto Industry. New Appendix NO.1 Customer Preference in Regard to Car Models by City Levels Model Tier I Cities Tier II Cities Miniature 5% Small 42% 60% Compact 10% 15% Mid-End 25% 14% High-end 10% 5% Multi Purpose 5% 5% SUV 8% 6% Sports Car 5% 5% New Energy 5% 5% Read More