Redo Group assignment General MotorsInternational Business, General Motors

Danny Cornelia Marieke Martens

Introduction
This report is written as part of the International Business and Study Trip course at Nyenrode Business Universiteit. The report researches the internationalization process of General Motors Company by using theoretical concepts taught in the lectures.

Company Background
In 1908, General Motors Company was found by William C. Durant in Flint, Michigan. Now General Motors has been in business for more than a century has produced almost 450 million cars globally and these cars are available in practically any country in the world. The current GM automotive brands are Buick, Cadillac, Chevrolet, GMC, Holden, Opel, Vauxhall and Wuling. General Motors is divided up in four main regions, which are GM North America (U.S., Canada and Mexico), GM Europe (Western and Central Europe), GM International Operations (Asia-Pacific, Eastern Europe, Africa and the Middle East) and GM South America (Brazil, Argentina, Colombia, Ecuador, Venezuela, Brazil, Argentina, Colombia, Ecuador and Venezuela). Their vision is to design, build and sell the best vehicles in the world.

Table of Contents
Introduction ......................................................................................................................... 1 Company Background ....................................................................................................... 2 How Did General Motors Expand .................................................................................. 4
Stages of international expansion ......................................................................................... 4 So which Pathway did General Motors follow? ......................................................................... 5 Modes of Entry .............................................................................................................................. 7 Export based modes.............................................................................................................................. 7 Intermediate based mode ................................................................................................................... 7 Hierarchical modes................................................................................................................................ 7 Factors deciding their mode of entry strategy .................................................................. 9

Market selection and Modes of Entry .......................................................................... 7

Eclectic approach ............................................................................................................. 11

Ownership advantage........................................................................................................................ 11 Locational advantages....................................................................................................................... 11 Internationalization advantages ................................................................................................... 12

Prahaladad & Doz ............................................................................................................ 13 Bibliography ...................................................................................................................... 15

How Did General Motors Expand

Stages of international expansion
In this chapter we discuss stages of international expansion of General Motors. In describing the stages we use to the Uppsala model. A theory of how firms expand to foreign markets. According tot this theory a firm takes a 4-step approach before going abroad. 1) No regular export activities 2) Export via independent representatives 3) Establishment of a foreign sales subsidiary 4) Foreign production/manufacturing units In addition to this theory companies can decide to take the Organic pathway of expanding to foreign markets, which is equal tot the Uppsala model. Or to take the Born Global pathway. Trough the Organic pathway a company first starts operating at his home market. Then it will start exporting activities in one market in its near distant. And over time do exporting activities in another foreign market. But it enters one market at a time, step by step. Via the Born Global pathway a company starts exporting activities right away. It is serving its home market simultaneously with other foreign markets. It does not apply a step-by-step approach. The image below visualizes these different pathways.

Source: Adapted from Aijo et al. (2005), P

So which Pathway did General Motors follow? William Durant, the founder of General Motors, first wanted to call the company the International Motor Company. He had this vision and great idea that several carmakers combined under one company would have more growth potential than one brand on its own. (Pelfrey, 2011) Unfortunately this name was already taken. He then named the company General Motors as it is now. After he founded General Motors he immediately bought Oldsmobile, another American car manufacturer. (Motors, Oldsmobile, 2011) The first name that the founder wanted to use already suggests, that it was always planned to be an international company. It was borne to be global. The website of General Motors mentions that ever since the company exists they were exporting cars to other countries. As well as they did advertising overseas. (Motors, Beyond North America, 2011) Below you see an actual advertising, which was used back then.

Source: Gmheritagecenter, 2008

A year after launch Durant bought 50% shares of Oakland Motor Car Company. (Bowman, 2011) In 1925 General Motors bought the United Kingdom brand Vauxhall. (Motors, Vauxhall, 2011) Since 1926 General Motors also have a sales and distribution network and a manufacture in Australia. Together with Holden an Australian company they merged and became General Motors Australia. (Motors, Holden, 2011) About twenty years later, in 1929, General motors bought 80 percent stake of German company that we all still know today as Opel. (Kim, 2009) Years went by after GM acquired another foreign company. In the beginning of the 70s General Motors bought 34.2 percent of Isuzu Motors Ltd. This is a Japanese brand. Later GM sold this brand again. (Isuzu, 2012)

Market selection and Modes of Entry

Modes of Entry
Many modes of entering a foreign country are acknowledged. You have: Export based modes intermediate modes Hierarchical modes Export based modes Export based modes are simply exporting the product or service overseas without any interference of another company. This mode has low control, low risk and high flexibility.

Intermediate based mode Contractual modes, also known as intermediate modes, are entry modes, which uses some kind of contractual partner or intermediate. Examples of this type of entry mode are hiring an agent. An agent is an intermediary who acts as a middleman for a specified or unspecified duration in the name of and on the account and the risk of the principal, against payment that becomes due when an agreement is entered into, and who is not sub-ordinate to the principal( Article 81 of the EC Treaty) The agent knows the sales market. For this reason companies can get new customers faster then when theyre on their own. Another example is licensing. A company could license to another party to sell his product. Which gives him the right to sell the (patented) product of the other company. Last example of indirect exporting is franchising. This is basically using he complete business model including the name and logos of another company. Best-known example is Mc. Donalds. It is the exact same formula but there are many different other owners. Intermediate modes of entry give shared control and risk and split ownership. Hierarchical modes Hierarchical types of entries are closer to what General Motors had mainly done. These are investment modes like buying another company or manufacturer.

Looking at all the different types of entries that General Motors has done, we notice that the most used form of entering a foreign market is by acquiring shares of a company abroad. These types of entry give high control, have a higher risk and have low flexibility.

Year 1908 1925 1926 1929 1971

1981

1981

1986 1990

1999

Event happened GM founded in Flint, Michigan. Owns factory and brand in Australia (Holden) Acquired Vauxhall (UK) GM buys 80 percent stake in European Adam Opel AG. GM buys 34.2 percent of Isuzu Motors Ltd. GM raises stake to 49 percent in 1998 and later sells it. GM buys about 5 percent of Suzuki Motor Corp. It raises the stake to 20 percent in 2000 and later sells all but 3 percent. GM and Toyota Motor Corp form a joint venture, known as NUMMI, to build cars in Fremont, California. GM acquires British sports car maker Lotus. It sold Lotus in 1993. GM buys a 50 percent stake in Sweden's Saab and purchases the remaining half a decade later. GM buys 20 percent of Subaru maker Fuji Heavy Industries Ltd. GM later sells the entire stake.

Mode of entry Merger/Acquisition Acquisition Acquisition Acquisition

Acquisition

Join venture

Acquisition Acquisition

Acquisition

2000

2002 Source (Kim, 2009)

GM buys 20 % of Italy's automaker Fiat for $2.4 bln in GM stock. The deal includes a "put" option that gives Fiat SpA the right to force GM to buy the remainder of the Italian automaker. GM signs deal to buy most of Daewoo Motor Co.

Acquisition

Acquisition

Why General motors chose for his specific mode of entry could lie in the history of the company and with the vision it was founded. As mentioned before Durants vision was that several car manufactures under one roof could have

more growth potential. This is probably the main reason for all the overseas acquisitions. By purchasing shares they also enhance more overseas control.

Factors deciding their mode of entry strategy

Other possible factors that play a role in choosing a specific mode of entry, exists out of 4 categories according to Hollensen (2007). These factors are: Internal factors External factors Desired mode characteristics Transaction- specific factors The list of factors is summed in the table below. Internal Factors Firms size International Experience Product / Service External factors Sociocultural distance between home & host country Country risk / demand uncertainty Market size and growth Direct and indirect trade barriers Intensity of competition Small number of relevant intermediaries available Transaction-specific factors Tacit nature of know-how Opportunistic behavior

Desired Mode Characteristics Risk Averse Control Flexibility

Internal factors deal with the internal factors of the company itself. Such as the size of the firm, the employee skills, production process or whether they have international experience or not. External factors consist of elements like the size of the home market and its growth potential. General motors mentioned on their website the following: We continue to create and leverage strategic global partnerships to bring new vehicles and technologies to customers faster. As they mention that one of their strategic choices is to create global partnerships. In their objective to bring new vehicles and technology to customers faster, they can establish growth. Acquiring international brands would extend their market size and would support them to grow and even get rid of trade barriers.

Internal factors deal with the internal factors of the company itself. Such as the size of the firm, the employee skills, production process or whether they have international experience or not. External factors consist of elements like the size of the home market and its growth potential. General motors mentioned on their website the following: We continue to create and leverage strategic global partnerships to bring new vehicles and technologies to customers faster. As they mention that one of their strategic choices is to create global partnerships. In their objective to bring new vehicles and technology to customers faster, they can establish growth. Acquiring international brands would extend their market size and would support them to grow and even get rid of trade barriers. Under the desired mode characteristics the outcome of the management decision is reflected. Depending on if the person making the decision is risk avers, wants to gain more control or wishes more flexibility. The choice of entry depends on these characteristics. Continuously acquiring foreign companies shows that General Motors is not avoiding risk. They want to gain more control. As for transaction specific factors we can distinguish factors like gaining tacit knowledge, a certain knowledge that not many others posses. For example buying a company that posses a special knowledge that is useful for the company. The reason why General motors chose to buy Opel was, because of the quality of its manufacturing network and its management and engineering team. And to strengthen GMs position in the European. (Motors, 1929, Adam Opel Corporation Joins the GM Family, 2011) This is a Transaction- specific factor in practice.

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Eclectic approach
In 1981, John Dunning came up with a model in which he says that the success of a company going abroad is dependent on the satisfaction of three types of advantages. These advantages are the ownership advantages, location and internationalization advantages (Dunning &Narula, 1996). GM is an automotive company who has to deal with fierce competition and in order to gain competitive advantage it has to be one step ahead of its competitors. This is not only the case in terms of R&D but also in choosing the right locations for going abroad. Below the advantages will be discussed of the country China.

Ownership advantage General Motors has a globally focused strategy. China was attractive for GM because of its large market size of 1.3 billion inhabitants. Since the 1920s GM starting exporting vehicles to China, but it did not seem so profitable as expected. Than GM discovered that the Chinese people had different tastes than the U.S. or European population. GM solved this problem in 1997 by making an FDI in the form of starting joint venture with SAIC to import, produce and sell cars of GM. One year later the first production facility of GM already started operating in China (Synergistics Limited, 2011). The joint venture with SAIC made it possible for GM to take into account the tastes and needs of the chines population. Especially for China GM and SAIC developed the car brand Baojun in order to raise brand awareness in the country. The brand means treasured horse and the price of its cars was aimed at $7000 (Ramsey, 2010). Next to the car brand GM is creating another ownership advantage by applying two patents for two cars within the Chevrolet brand.

Locational advantages GM could have locational advantages in case of factor endowments being profitable. GM build manufacturing plants for several reasons such as lower wage rates, cheaper raw materials and cheaper energy. The minimum wage rates in China can differ between different regions in China. In the poorer regions the minimum wage level is $90 per month and in the richer regions, such as

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Shanghai, the minimum wage level can be $230 per month. These minimum wage levels are by far lower than the minimum wage levels of the U.S. (Bloomsberg, 2012). As a result of manufacturing plants in China distribution will run smoother instead of exporting all automobiles from the US. When focusing on resources, China is considered as the world leader in terms of gross weight (Mbendi, 2012).

Internationalization advantages GM has been creating lots of internationalization advantages. Firstly by establishing a joint venture with SAIC. Later the second move of GM was building its first production facility in China in 1998. And up until now there are in total 8 manufacturing facilities in China. In 2007, GM invested in its first wholly owned R&D facility that focused on the customization and global product design. One step further was taken in 2009 by establishing its headquarter of GM International Operations in Shangai. Less than a year later the Global Gm Advance Technology Center in Shangai was build since the technology in China is the most advanced in the world. Lastly in 2012, the Shangai Wuling platform base for vans and small cars is launched. These last three events were done in order to turn China into a Global for the sales and R&D of GM (Synergistics Limited, 2011).

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Prahaladad & Doz

The research done by Prahaladad and Doz focused on the international and global expansion strategies of companies. They made a distinction between four strategies: Global strategy, is characterised by high cost pressure in order to compete with the completion and secondly the company only sells one type of product e.g. Gucci and Rolls Royce Transnational strategy, this strategy is usually carried out by the automotive industry, which deals with reducing the costs and fulfilling regional demands e.g. Toyota and HP Multi-domestic strategy, companies who gain little from international activities have this strategy e.g. Philips International strategy, this adapts to companies who neither have advantages of local presence and a global strategy. These companies mainly operate through export. Below the model with all the four strategies can be seen and on which characteristics there are based, which are the relevance of cost pressure and local responsiveness (Lynch, 2003).

Figure: Different internationalization strategies of companies

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General Motors Company is spot on the largest industrial company in the world. It produces cars and trucks in 31 countries and these cars and trucks are available in 157 countries (Haidara, 2011). The automotive industry is an industry with fierce competition between different car brands. Maintaining its competitive cost structure in order to remain profitable at lower industry is one of the elements of GMs current strategy (GM annual report, 2011). As mentioned above GM enjoys a locational advantage as the result of moving big part of its business to China in order to reduce production costs. Also the local responsiveness of GM is high. This is a result of the emerging economies of the BRIC, such as Brazil Russia, India and China, where the costumers have different needs and tastes than the US market. These emerging economies are responsible for almost 40% of GMs unit sales. Therefore the segments GM South America and GM International Operations were created in order to focus on these markets (Haidara, 2011). In conclusion GM moved from a global strategy in the past to a transnational strategy now.

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