Executive Summary
The paper analyzes the possibilities of Dong Feng, the Chinese government-owned automobile corporation, to internationalize its business. The company’s strengths, weaknesses, opportunities, and threats are mentioned in the beginning. The current economic situation overview is also included for a better understanding of the immediate possibilities of the development. Three countries of BRIC were chosen as the target markets for the internationalization strategy. Each country has its own culture and administrative structure, so the internationalization modes are different for each of them. The three modes proposed are the joint ventures, the strategic alliance, and the governmental program.
Management Brief
Dong Feng is a corporation that specializes in manufacturing personal automobiles, public transportation, trucks, and other sources of land transporting (Business 2016, para. 1). It currently owns seven plants that cover all stages of production (Plants, 2016). The current trend for globalization presents Dong Feng the opportunity to grow internationally. The paper analyses the ways this process could be implemented. While it is quite hard to enter the saturated markets of the United States and the European Union, other economically developed countries may provide a great base for Dong Feng’s internationalization strategy.
Summary of Environmental Audit
Dong Feng is a strong governmental company that has leading positions in the Chinese automobile and transportation market (Introduction 2016, para. 1). The growing demand for vehicles among the population has created an advantage situation for the corporation. The main strength of the Dong Feng is the developed network of sales and distribution that allows getting high revenues. The company also knows the local market well and possesses a valuable resource for skilled workers. Dong Feng practices the establishment of joint ventures with European companies. The main weaknesses are the quality that does not reach the international level, as well as excess manufacturing. The globalized market presents the biggest opportunity for the company in the form of internalization potential. However, high competition and technological development are the threats that Dong Feng faces from the external environment.
Internationalization
External Analysis
Before proposing anything regarding the internationalization of Dong Feng, it must be said that the current economic situation in the world is not beneficial for development. All countries experience an economic recession to some extent. However, there is a chance that the situation will change in the next several years. Thus, the following analysis is applicable mostly to the conditions of the economic stability and decrease of international political tensions.
There are three countries that will potentially become the right markets for Dong Feng. These are the three other BRIC states, which are India, Russia, and Brazil (O’Neil 2011). The primary reason for choosing these countries for internationalization is that their economies were rapidly growing before the current recession (Sheth, 2011). Nowadays, there is a slowdown in their economies, but they are still viewed as having real potential. All three countries find their automobile industry at the maturity stage. Local cars are produced in moderate numbers for many years, yet they answer the stable demand only among the local population.
India has a significant population, just like China. The growing cities feel the urgent need in the development of the public transportation network. Many city buses are old, and the most popular cars are local. Dong Feng could produce buses specifically for the Indian market. However, there might be high competition in the personal vehicle sector, since there is a wide gap between people who use cheap local cars, and those who buy expensive foreign models. The majority of India’s population is extremely poor (Harris-White 2003, p. 20), so the public transport bought by the government would be the best option. Besides, India exports a lot of food products. The country needs transportation for logistics purposes. This could also become the potential market for Dong Feng, as their vehicles are relatively cheaper as compared to the European ones. The developing IT sector in India is another benefit point. Dong Feng can use newest Indian technologies in their vehicles.
Russian market shows more potential for personal vehicle sales. Firstly, the national cars are popular because of the low price, but they are usually considered to have low quality. Secondly, foreign vehicles became less affordable to Russian citizens as the latest recession has severely dropped the local currency rate to the dollar. However, Russia has vast territories in some areas of Siberia that are underpopulated (Blum 2008). The government is interested in developing those regions. Dong Feng can use this situation to build its production lines in Eastern Russia. Russian technological development is usually underestimated, yet it often provides factories with quality decisions.
Brazil is the third country that Dong Feng can target in its internationalization strategy. The country is one of the leaders in automobile production. Many European and American companies have their production lines in Brazil. The local car manufacturing is also currently emerging. This is a good sign, for it evidences that the dense population of the country is skilled in the automotive industry and the most prominent car companies like Ford, Toyota, and others rely on this workforce to make products for them. Brazil is considered to be the most developed country in the South American region (Brainard & Martinez-Diaz, 2009). The political situation is relatively stable, allowing investors to feel safe. The economy was also emerging before the latest recession. Dong Feng can focus on this country and plan to win the whole South American market in the future.
Motives for Internationalization
It may be somewhat surprising that Dong Feng, as a Chinese company wants to go international. It does not have to leave the local market for the purpose of resources since the country has all that is required to create vehicles. Nor does it need to seek lower production costs, as they are considered to be one of the lowest in China. The primary and most understandable reason for Dong Feng wanting to go international is the potential increase in profits. The more markets the company covers, the more revenues it will get. Besides, there are several socio-economic factors that prevent Dong Feng from further national growth.
Firstly, it is the Chinese policy of one child per family that was recently cancelled (Phillips 2015). This legislation has led to the extreme aging of the population. Dong Feng, along with other automobile companies in several decades, may find itself in the position where there would not be enough young and middle-aged people to buy cars.
Secondly, other countries may offer more developed technologies that would benefit the quality of Dong Feng’s vehicles. China is a relatively closed country regarding the spread of information of various content. International collaboration may potentially lead to creating technologies that would reduce the amount of CO2 emissions by Dong Feng’s vehicles. It might lead to greater competitive advantage, especially since the world is now becoming more focused on sustainability.
Evaluation of National Competitive Advantage
China is known to be the largest manufacturing country in the world. It produces almost all types of products for the majority of existing industries. Moreover, China is the number one choice for production processes’ outsourcing. The automobile industry is one of the sectors that are part of the country’s national competitive advantage. This section of the paper analyses this concept through the Porter’s Diamond Model (Porter 1990). It is based on the six factors listed below.
Factor conditions
The principal factor conditions in China are based on three things. The first one is the access to the natural resources required for the industry. The country is rich in iron and other metals that are used in the automobile and machinery industry. The second factor is human resources. The country’s population is very significant, and there is no lack in the workforce. Moreover, most of China’s population works in the production field, which adds to the total skill in the industry. The third factor is the strong infrastructure required for making vehicles. The country possesses several plants that can exercise every step of the automobile manufacturing process.
Demand conditions
The demand for the automobile industry on China’s domestic market is high. As the population grows richer, more people can afford to buy a vehicle. Chinese cars compete effectively with foreign ones due to their low prices and good quality. Moreover, the government needs to order a lot of vehicles for the country’s public transportation system. Finally, as the country is a leader in manufacturing for international companies, it requires transport for shipping the produced items worldwide.
Firm strategy, structure, and rivalry
The rivalry inside the automobile industry inn China is not very intense. It is partially explained by the fact that all major industries, like the described one, are controlled by the government. The firm’s strategy is focusing more on collaboration than on the competition. Dong Feng exercises the classic vertical structure of leadership. It ensures all decisions of the firm do not argue with each other.
Related and supporting industries
There are several players in the Chinese automobile industry. As the sector is very resource-demanding, the supporting industries like metallurgy or chemical industry must work close together to create quality products. Although many processes in Chinese business are controlled by the market, these industries are monitored by the government that ensures the better goods come at the lower prices.
Government influence
As it was mentioned above, the industry is heavily influenced by the government. On one side, this can have some adverse effects like the inability to form the company’s own pricing policy or to make decisions on whether or not to collaborate with foreign companies. However, the government also ensures the industry stays profitable or at least stable during the economic crisis. It can create demand for the industry’s products and enforce laws that would make the collaboration with the supporting industries easier.
Chance
There is a good chance for the Chinese automobile industry in the nearest future. The world’s population is growing, and more people need cars. However, there might be some adverse trends as well. For instance, countries are now thinking about the development of green technologies. Vehicles with high CO2 emissions would find it hard to compete with electric cars in the future.
Evaluation of Modes of Entry
One of the most preferable modes of entry for Dong Feng would be the practice of joint ventures (Wheelen & Hunger 2012). This mode is suitable for implementing in all three countries. Firstly, it will benefit the company during the first stage of the existence in the new market. Locals do not know Dong Feng as much as they know their local automobile producers. Joint ventures may help to cut costs on marketing and promotion.
There are several local companies that Dong Feng can choose as partners. In India, for example, Tata Motors (Tata Motors 2016) is the largest automobile manufacturing company. It produces not only passenger cars but also trucks, public transport like buses and other motor vehicles. It is currently engaged in joint ventures with such companies as Fiat and Hitachi. Collaboration with Tata Motors will benefit Dong Feng regarding the feasibility. The corporation has the already developed production lines. This will help to cut costs on building new facilities and training personnel. Since Tata Motors already has experience of building transport for other companies, the process of setting up a new production line should not create problems. Moreover, the two corporations can work together on the technological development of the vehicles.
The strategic alliance mode can be exercised in Brazil. This country is situated at the long distance from China and has a completely different culture. If Dong Feng tries to enter the market independently, there is a chance the corporation will face problems with understanding the local demands and the corporate culture. A strategic alliance may be created with Marcopolo S.A. (Marcopolo S. A. 2016), which is the Brazilian manufacturer of buses. Dong Feng can make the collaboration in bus production with this company. The processes’ feasibility is expected to be quite high, as there will be no need for extensive production reorganization. Brazilian factories can adjust the buses to the local needs. Once again, the Dong Feng’s products in Brazil would be suitable since they represent the same type of product.
Russia may present the biggest problems for entering its market. The reason for this is the complexity of the local legislation. Foreign businesses may encounter difficulties with the constantly changing documentation requirements. That is why it is better to make an agreement with Russian administration about the governmental order of certain types of machinery. Dong Feng will not have to spend money on promotion and establishing the new production sites. The manufacturing process can either take place in China or Russia.
Conclusion and Recommendations
There is a big potential for Dong Feng for internationalization. Although the current economic situation in the world does not give opportunities for the immediate growth, the steps proposed in this paper could be implemented after the recession period. The three main countries that Dong Feng must target in order to receive the most benefits are the countries of BRIC, which are India, Russia, and Brazil. Each of these countries is easier to enter unlike the United States or the European region.
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