An analysis of the business environment of Chinas Automobile

Industry: the Case of Chery Automobile Company

By

Salisu Alhaji Uba

Aberdeen Business School, Aberdeen

Executive Summary

The aim of this report is to evaluate the business environment of the Chinese

automobile industry with particular reference to Chery automobile company.

These gives a brief review of BRICS (acronyms for Brazil, Russia, India,

China and South Africa). Then an analysis of the Chinese automobile

industrys external environment using the PESTEL was conducted. The study

further used Porters five forces to compare the industrys competitiveness in

the global automobile market, also organisational culture theory are discuss

in analysing the internal environment of Chery automobile with the view of

assessing it. Conclusion and recommendation were given on strategic option

opens to Chery automobile in its drive toward globalisation.

The study found that the BRICS countries are forces to be reckoned with in

the global automobile sector. It also found that there are sufficient evidences

suggesting that the BRICS economy with surpass that of the United States

and Europe by the year 2050. In relation to Chery, the analysis revealed that

it is one of the leading automaker in China and it rate of globalisation is very

fast. The companys corporate culture has also worked well.

Based on the analysis conducted it is recommended that among the strategic

options open to Chery in its globalisation pursue is contract manufacturing,

joint venture manufacturing, strategic alliance and licensing.

Key words: BRICS, China Automobile Industry, Chery Motors.

1.0 Introduction

One of the topical business issues that have captured the attention of the

world today is globalisation. Globalisation, according to Albrow et al

(1990:8), is all those processes by which the peoples of the world are

incorporated into a single world society. In relation to business, the IMF

(2002), sees globalisation as the increasing integration of economies across

the globe as a result of trade and financial flows.

Today, globalisation has played a major role in positioning global trading

blocs in the world economy. In particular, globalisation has impacted on the

origin, strategic direction and composition of both the BRICS and businesses

inside it.

BRICS, as a concept, was first floated in 2001 by Goldman Sachs as an

attempt to forecast global economic trends over the next half a century (Jim

2001). It was found that BRIC (now BRICS) would play an important role in

shaping the world economy. Two years later, Goldman Sachs predicted that

by the year 2050 BRIC economies could become a reckoning force in the

global economy (Dominic and Roopa 2003).

Table 1.1: Economic and Demographic Characteristics of BRICS and

the USA

GDP
Population GDP Annual Life expectancy
GDP/Capita
Country (in growth rate at birth
($
($)
Millions) (%) (Country rank)
trillion)

Brazil 198 2.01 10,100 -0.2 123

Russia 141 2.10 15,100 -7.9 163

India 1,156 3.57 3,100 7.6 161

China 1,338 8.75 6,600 9.0 108

USA 307 14.14 46,000 -2.6 49

Source: CIA (2011) cited in Ardichvili et al. (2011)

Table 1.1 below illustrates the economics position of the BRICS countries

(excluding South Africa) in comparison to the United States (US). The global

economic dynamics have since suggested that come 2050 BRICS, as

predicted, will be a force to reckon with. For example, between the years

2001 to 2010, significant economic progress was recorded by the BRICS

countries. Collectively these countries accounted for more than 40% of the

global population and about 25% of the global GDP in purchasing power

parity as against 16% in 2000 (BRICS 2012). Of recent the UN (2013) has
predicted that the economy of BRICS is in its way to overtake that of the

long standing Western super powers. The UN puts it this way:

By 2020, according to projections developed for this Report, the combined

economic output of three leading developing countries aloneBrazil, China

and Indiawill surpass the aggregate production of Canada, France,

Germany, Italy, the United Kingdom and the United States.

Strategically, BRICS is positioned as a platform for dialogue and cooperation

among member countries. Its aim is to promote peace, security and

development in todays globalised world. BRICS countries are highly

committed toward building a harmonious world order rooted on long-lasting

peace and prosperity. Specifically, have common interests in four main areas.

These areas are i) desire to reform out of date financial and economic

building block of the world which underestimate or at worse ignores the

rising influence of BRICS, ii) common commitment to principles and norms of

international law, rejection of policies of armed pressure and violation of the

sovereignty of other nations, iii) common commitment to challenges and

problems related to the needs of modernisation of economy and social life,

and iv) mutual complementary of a wide range of sectors of national

economies.

As a result of the marriage between global capital and cheap labour, brought

about by the integration of non-capitalist countries into the global capitalist

system, BRICS have been one of the main beneficiaries of globalisation

(Walden 2014). However, Walden (2014) further noted, the incorporation of

the BRICS into the global economy has been noticeable by a multifaceted

relationship with the traditional European economies and the United States,

with some of them, particularly China, developing investment systems that

are highly friendly to overseas capital. This effectively depresses their

domestic demand and thus creates disruptions in the domestic market.

While depression in domestic market is seen by some analyst as a serious

threat to the future of the BRICS, others are more concern of the differences

in political systems and population dynamics amongst the BRICS countries.

All these factors made Daniel (2013) to conclude as thus:

The grouping doesnt make much sense, and any expectation that these

countries will form a new geopolitical bloc is outside of ONeills original

intent.

Whatever the arguments about the future of the BRICS, the fact remains that

at the moment BRICS is a reckoning force in shaping the global economy.

The aim of this study is to evaluate the business environment of Chinas

automobile industry with particular reference to Chery Automobile Company.

The rest of the study is divided into four sections. The first section presents a

critical analysis of the external environment of the automobile industry in

China. This is followed by a critical discussion of the competitiveness of the

automobile industry in China in the global market environment in section

two. Section three gives a critical analysis of the internal environment of

Chery. Section four presents conclusion and recommendation.

2.0 Critical analysis of the External Environment of Chinas

Automobile Industry

The development of the automobile industry in China is no doubt shaped by

the wider Chinese economy and the relative position of China in the global

economic environment. Since its market reforms of 1978, the Peoples

Republic of China has dramatically shifted from a centrally planned economy

to a market-based economy. China has now achieved significant economic

and social development. With a Gross Domestic Product (GDP) growth of

almost 10% yearly, China has succeeded in bringing out more than 500

million Chinese out of poverty (World Bank 2014). With a total population of

about 1.3 billion, the World Bank (2014) confirms China as the worlds

second largest economy.

Figure 1: Auto component Import Breakdown

In spite of being the worlds second largest economy, China still remains a

developing country. Official data, according to the World Bank (2014),

indicates that about 100 million people still lived below Chinas poverty line of

RMB 2300 per annum at the end of 2012. Similarly, Chinas global economic

dominance has brought many challenges to it, which the World Bank (2014)

identified to include high inequality amongst its populace, growing rate of

urbanisation, environmental sustainability challenges, and external

imbalances. Chinas aging population is also likely to put more demographic

pressure on it.
The automobile industry in China is greatly subsidised and dominated by the

thirteen main state-owned companies (Chen 2001). Together, these thirteen

government-controlled companies accounted for about 90% of the

automotive market (Lin 2001). Strategically, Lin (2001) further noted, the

automobile industry in China is grouped into two. The first group[1] attempts

to position in the domestic market by forming joint venture with local

companies. The groups strategy is to maximise their domestic market share.

The second group[2], whose strategy is to export their finished products to

China, take cautious approach but are largely open to major commitment in

the future.

The open-door economic policy of the Chinese government opens the window

for the globalisation of Chinas automobile industry. Today, the interaction of

many forces, including market competition, changes in technology and

environmental regulations, have changed the Chinese automobile industry

from local to global.

Analysis of the environment external to the automobile industry in China can

be expressed by the acronym PESTEL, which stands for political, economic,

social/cultural, technological, environmental, and legal factors. PESTEL

analysis is very helpful tool for assessing the forces which influence an

industry or a firm in the long run (Janet 2002).

1. a) Political environment:

In order to woo investments, the Chinese government provided sufficient

protection and incentives to automakers. These incentives include strong

support for automobiles R&D projects, encouragement for innovation

capacities and protection for intellectual property rights (Zhang and Xiajing

2013). In addition to these incentives, the automobile industry, as mentioned

above, is highly subsidised. All these measures are good for the future of the

industry. However, the fact that China does not practice democracy, many

question of the sustainability of these policy measures (VIJ and KAPOOR

2007).

1. b) Economic environment

Chinas speedy economic growth has and will continue to impact on the

development of the automobile industry in a number of ways. Firstly,

evidences have shown that the disposable income of the people have been

on the increase, with more people capable to buy personal cars (China Daily

2006). Secondly, the strong economic performance of the Chinese economy

couple with the countrys large population has seen many international

automakers including Mercedes Benz, BMW, Volvo, and Peugeot operating in

the Chinese market. The resultant effect is that the indigenous automakers

will learn from technological know-how of these foreign companies and

become competitive in the global auto market in the future. On the other

hand, the continues dominance of the Chinese automobile industry by

international automakers will be at the disadvantage of the local automakers

as they do not have the technical capacity to compete with these foreign

companies (Bao et al. 2011).

1. c) Social-cultural environment
Cultural differences are a major factor that influences business practices of a

country. With a population of well over 1.3 billion, China has diverse cultures

and traditions that significantly differ from what is obtained in the Western

world. The implication is that international automakers coming to operate in

China must recognise these cultures and work out strategies of tackling them

when investing in China.

The business ethics and organisational behaviour by the Chinese concept of

relationship called guanxi and is completely different from the western

concept of relationship. Therefore, companies can gain competitive

advantages by developing their networks of guanxi. Consequently, many of

the multinational automobile manufacturers are choose joint venture as their

entry mode where it can ease the process in both administrative and political

processes, yet, cultural differences may become the obstacles from them to

handle (Luong 2013).

1. d) Technological environment

As mentioned above, the Chinese government has provided sufficient

incentives to the domestic companies towards technological development in

the automobile industry. This has led to huge investment by local automakers

in terms of production facilities, product design, and health and safety

technology thus making them independent from the overseas companies

(Nadezhda 2011). Similarly, in its drive toward emission control, the Chinese

government is making serious effort in order to ensure that the gap between
the desire for economic development and environmental protection is

reduced to an acceptable level (Gan 2003).

The technology in automobile industry are keeps upgrading, this is to say

automobile makers are now designing a car with environmental

consciousness in order to protect the environment and they comes up with

hybrid cars. Although the governments effort toward emission control is

laudable, the government is, nevertheless, faced by a lot of challenges. Such

challenges, Gan (2003) noted, include high cost of producing green cars and

the minimal benefits of producing such cars to the customers as well as the

automakers, among others.

1. e) Environmental factors

China is one of the countries with the highest amount of carbon emission in

the world. Against this background, the government is encouraging the

manufacture of environmentally friendly cars. While this attempt is laudable,

there are other factors which are worthy of consideration growing phase of

Chinas automobile industry. These factors include higher consumption rate of

petroleum, increasing traffic noise in big cities, and lack of parking space for

motorists, among others (Pao and Tsai 2010).

1. f) Legal environment

As discussed above, there are sufficient legislations regulating and

supporting the Chinese automobile industry. However, the lingering problem

is that of implementation. The government have been accused of being

inconsistent and bias in its enforcement of many of the regulations

(Nadezhda 2011). The consequence is that if this is not corrected, it is likely

that China would fail to meet its projected Foreign Direct Investment (FDI) as

potential investors would not like to come in.

1. G) Market Growth of Chinas Automobile Industry.

The market are fuelled by domestic and partly by foreign demand, chinas

rapidly expanding automotive industry has outpaced the nations already

impressive GDP growth rates in recent years (Nadezhda 2011). Domestically,

rising incomes and encouragement from Chinese government for the urban

population to obtain drivers licenses have spurred the demand for passenger

vehicles. The booming passenger vehicle market has led to a soaring demand

for automobile margins components. Internationally, automobile

manufactures faced with decreasing margins and profitability have sought

out more affordable supply chain solutions, looking to China as a potential

source for lower cost automobile components (CAAM 2010).

3.0 Critical analysis of Chinas Automobile industry competitiveness

in the global market

The 2008 economic meltdown has severely hit the global automobile industry

with automakers in United States experiencing significant decline in sales (Yu

and Mu 2010). In sharp contrast, the Chinas automobile industry has

continued to grow recording total sales of about 2.65 million in the first
quarter of 2009 as against 2.2 million recorded by the United States (Yu and

Mu 2010).

The Chinese automobile industry is force to be reckoned with in the global

market. There are many tools that can be used to analyse the relative

position of Chinas automobile industry in the global automobile industry. One

such tool is the Porters Five Forces Model (Porter 1990).

Figure 2: Porters Five Forces Model

Threat of new entrants

One of the reasons why the Chinese automobile industry is competitive in the

global market is the ease at which new comers enter into the market. Barrier

to entry into the market has been drastically lowered as a result of

government polity of attracting FDI. As discussed earlier, government has put

in place sufficient measures of wooing foreign investors. As at now the

number of automakers in China is around 170 with more are willing to join.

Apart from the incentives for entry, the cost of investment in the automobile

industry also influences entry. Setting up a company and putting up all the
require logistics to meet the demand of a large economy as China require

huge amount of money (Brekelmans And Chen 2014).

Furthermore, brand loyalty is also, to a lesser extent, a barrier to entry in

China. Brand names such as Toyota and General Motors have become a

household name in China and are very difficult for any automaker to enter

into the market with the aim of beating their sales record.

Bargaining Powers of Buyers

Prior to the 1990s the automotive industry in China was highly protected by

high levies and stringent import rations. Then customers were largely

government and its agencies. Although consumers were government and its

agencies, bargaining power did not exist between the customers and the

automakers because prices were determined by government plans rather

than the forces of demand and supply. The situation changed in the 1990s

when demand for private automobiles began. The industry saw decline in

tariffs and expansion in import quotas (Larry 2005). This trend couple with

the growing number of automakers in the industry give the customers

bargaining powers and choices to make. This situation is positive to the

industry because it has led to the increase in the sales of automobile as

noted above (Peters and Waterman 1982).

Bargaining Powers of Suppliers

The automobile industry comprises of both the finished products (for

example trucks and cars) and intermediate products (example parts and
components). Suppliers of parts and components have bargaining power in

the Chinese automobile industry because of the number of automakers.

Most of the parts and components used in the Chinese automobile industry

are imported from abroad. Over the years the parts and components sub-

industry is moving in tandem with automobile output. At least two reasons

have accounted for this trend. First, the local content rules, and second the

importance of Just-In-time (JIT) production system in the automobile

industry. As at 2004, 35 out of the world largest 50 parts and components

producers were in China in joint venture with local companies (Larry 2005).

Rivalry among existing firms

The Chinese automobile industry is marked with stiff competition among

automakers. This competitive situation can be attributed to the presence of

three different kinds of enterprises in the industry, namely; foreign financed,

state-owned and private-owned manufacturers. The competition among

these three forms of enterprises helps to reduce prices for automobile, which

is an advantage China has over the rest of the world.

Similarly, the Chinese automobile industry is large that it allows multiple

automakers to do well without having to take market share from each other.

This might be one of the reasons why there are more that 170 auto makers

in China compared to the United States that has long standing three local car

makers (Rose 2014).

 Threats of Substitutes Products

There are many factors that affect the demand for automobile. These factors

include income level, government regulations, quality of product, and

conditions of roads, among others. Demand is also affected by the availability

of substitutes such as Bicycles, Motorcycles, Rail transport, and Taxis (Oh

2014).

One of the factors that pose the strongest challenge for automobile is the

relative cheapness of these other means of transport to automobile. Not

many people can afford to buy a car and as such many people in China go for

Bicycles and Motorcycles. This has the effect of lowering the total sales of

automobile. Similarly, people sometimes prefer public transport system

instead of having a car (Luong 2013).

4.0 Critical analysis of the internal environment of Chery Automobile

China

Chery Automobile is a Chinese company that manufactures automobile

whose headquarters is in Wuhu, China. The company, which is also called

Qirui, is state-owned founded in 1997. It main products are SUVs, Minivans

and passenger cars. Chery started production in 1999 and has remain

Chinas largest exporter of cars since 2003 (The Global Times 2012). Today,

Chery is not confined to Chinas domestic market. It is a global company

selling in many countries including Ukraine, Turkey, Belarus, South Africa,

and Iran. At present Chery is one of the biggest companies that sell Chinese

car brands and is now ranked among the top 10 automobile companies that

are based in China (Chery 2014). Chery is stepping up its overseas

operations and investments in order to achieve it globalisation strategy of

technical cooperation with foreign companies, car exportations, foreign

assembly plants, and joint venture. Chery is now synonymous with well-

made, well-appointed cars at the right time in some of the world,

particularly Australia (Chery 2014). Nothing made it so global that its

organisational culture.

Organisational culture is one of the issues that receive attention when

exploring the internal environment of organisations. Organisational culture,

according to Schein (2001:9):

is a set of basic assumptions that a group has devised, discovered or

developed on learning how to deal with external adaptation problems and

that have worked sufficiently well to be considered valid and taught to new

members as the right way to perceive, think and feel vis--vis these

problems

The idea of organisational culture can be seen from many perspectives. Beil-

Hildebrand (2002) view organisational culture as total quality management,

empowerment, or institutional excellence. Linstead and Grafton-Small

(1992), on the other hand, considers organisational culture as company or

corporate culture. However organisational culture is viewed, it is nevertheless

an important tool for not only improving productivity and performance but

also relationship at work as Peters and Waterman (1982: 75) put it thus:

Without exception, the dominance and coherence of culture proved to be an

essential quality of the excellence of companies. Moreover, the stronger the

culture and the more it was directed toward the marketplace, the less need

was there for policy manuals, organisation charts, or detailed procedures and

rules

Realising this importance, many organisations establish and adopt

organisational culture consistent with their strategic direction. In the case of

Chery, because of the continuous opposition and barriers it faced over the

past 10 years, Gao (2008) noted that the company developed a kind of can

do fighting spirit culture which Mr. Yin, its CEO described as: Every time we

hit a wall, we just reoriented and moved on.

Over the years, Cherys proposals for partnership and joint venture

arrangements were repeatedly turn down by automobile companies both

within and outside China. This worked out well for because it developed a

culture of independence within the company. This gives it the confidence that

it can succeed without external help. Available statistics shows that in the

year 2007, Chery was fourth in domestic market with a market share of

6.6% in Chinas automobile industry (Snapshot 2008). Similarly, with

overseas sales of 120,000 vehicles in almost 70 countries, Chery recorded

gross revenue of $2.86 billion in the year 2007 (Gao 2008). In 2009 Chery

became the leading Chinese auto brand seller of passenger vehicles (Chery
2014). Inspite of all this achievement, Chery still has a long way to go in

terms of research and Development (R&D) and product quality compared to

big automobile companies like Ford, Toyota and General Motors (Xhang and

Xiajing 2013).

Similarly, its initial experience of its inability to attract qualified professionals

has made Chery to developed corporate culture of learning by doing

(Fairclough 2007). Majority of Cherys employees learned from practice. This,

according to Fairclough (2007), underscores the reason why Cherys CEO

states thus: we didnt get to learn from books. We have to learn everything

by doing it. Today Chery is boasting of having experienced work force that

has the right skills to achieve its desired targets. While this has worked well

for the company, it is likely to continue this way especially now that its

globalisation drive is ever increasing.

Chery also adopts an organisation culture that centres on the merit of hard

work and self critique. The company encourages employees not to rest on

their success and desist from considering themselves privileged or special

because of their past achievements. This makes Chery a flexible company

that is dynamic and growing. However, this type culture has the tendency of

demotivating senior qualified staff that have vast experience from joining the

company. This is culture is best described by Fairclough (2007) as thus:

The corporate culture they spawned is an odd hybrid of Communist state

enterprise and entrepreneurial start-up. Party propaganda posters hang on

factory walls. "Know plain living and hard struggle," one poster exhorts
workers, "do not wallow in luxuries and pleasures." In another part of the

plant, bulletin boards display quality-survey data from J.D. Power &

Associates comparing Chery's cars with those of its rivals.

Chery automobile has adopted an information management system that

integrates its tangible, intangible and human resources together and calls it

Chery Production System (CPS). In terms of tangible resources, CPS

actively monitors production facilities so as to raise efficiency. Intangible

resources are monitored toward creating a corporate culture that is aimed at

optimisation. In relation to human resources, attention is toward creating

efficiency in the flow of operation. The aim of the integration of these

resources is to structure the CPS toward lean management. However,

evidences have shown that Chery has not been able to implement the

management system efficiently. For example, it takes Chery nearly 120

seconds to couple a car while its competitors in United States take just about

60 minutes (Joann and Fara 2007).

5.0 Conclusion and recommendations

The analysis above have shown that BRICS is a force to reckon with in global

business environment and predictions have indicated that in next ten to

fifteen years BRICS will overtake the leading economic countries of United

States and Europe. It is also evident from the analysis that the automobile

industries in the BRICS countries, particularly China have developed

significantly. Chery automobile company, one of the automobile companies in

China, has raised form a very small company to a leading automaker in

China and the world at large.

While it is clear that China and, in particular Chery have shown to be visible

in the global auto market, there are quite a number of options open to them

to consolidate their position in the global automobile industry, which include

the following

Contract manufacturing. This has the benefits lower political risk and

very quick access to the market. One of its disadvantages is that in the

long run the contractor may become future competitor.

Joint venture acquisition: this option has the benefit of bringing high

rate of return and more control of operations but it is likely that

conflicts in terms of matters such as resource allocation and transfer

pricing might arise

Wholly owned subsidiary: this leads to greater control and profit and at

the same time allows owners to manage production and marketing.

There is however the risk of nationalisation

Strategic alliances: this might take the form of licensing agreement or

operation based alliance.

Licensing: in this case appeal is made to small companies that lack the

resources stand. This result in quick access to the market. There is

however the risk of opportunism.

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[1] This group comprises of Volkswagen, Toyota, Peugeot, General Motors,

Ford, Suzuki, Daimler-Chrysler and Nissan

[2] This group are mainly luxury automakers and include Mercedes-Benz,

BMW and Volvo, among others