Renault s success of Logan Expansion to China

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1 MENDEL UNIVERSITY OF AGRICULTURE AND FORESTRY FACULTY OF BUSINESS AND ECONOMICS Renault s success of Logan Expansion to China FINAL THESIS 2006 Patrick Mitric Author Ing. Tomáš Pyšný Supervisor

2 ABSTRACT INTRODUCTION OBJECTIVES AND METHODOLOGY THEORY MARKET DEFINITION MARKET ANALYSIS MARKET SEGMENTATION EXTERNAL ENVIRONMENT ANALYSIS PESTEL analysis Porter s 5 Forces INTERNAL ENVIRONMENT 7-S ANALYSIS SWOT ANALYSIS BARRIERS AND RESISTANCES TO TRADE MARKETING MIX MARKET STRATEGIES FOREIGN MARKET ENTRY Direct exporting versus indirect exporting Contractual entry modes Investment entry modes ANALYSIS OF RENAULT THE COMPANY History Group profile Dacia INTERNAL ENVIRONMENT ANALYSIS 7-S ANALYSIS SITUATION IN THE CAR INDUSTRY MARKET ANALYSIS OF CHINA MARKET SEGMENTATION EXTERNAL ENVIRONMENT ANALYSIS PESTEL analysis Porter s 5 Forces SWOT ANALYSIS MARKETING MIX REMAINING TRADE BARRIERS ENTERING THE CHINESE MARKET DISCUSSION CONCLUSION RESOURCES LIST OF TABLES AND FIGURES APPENDICES 1

3 ABSTRACT This thesis discuss about Dacia s expansion to the Chinese market. Renault is the first automaker in Europe and through its alliance with Nissan it became the world s fourth biggest vehicle manufacturer in terms of production volume. Renault has for many years foreseen the saturation of its home market and continuously looks for new markets where it can spread out its production. Early 1960s, Renault expanded production and sales in Africa and North America. In 1966, Renault formed a cooperation with the Romanian carmaker Dacia to sale Renault models under license. Pushed by production and sales expansion in other markets, Renault Group is now composed of Renault, Dacia, and Renault Samsung Motors. With a comfortable leading position on European market and a recent success of its low-cost Logan on Eastern European market, Renault is considering entering the booming Chinese market through Dacia. Considering a population of 1.3 billion people and a fast growing market, China is a very lucrative market for expansion. ABSTRAIT Cette thèse traite de l expansion de Dacia au marché chinois. Renault est le premier constructeur européen et à travers l alliance avec Nissan, Renault est devenu le quatrième constructeur mondial en termes de volume de production. Renault a prévu la saturation du marché européen et a donc continuellement cherché à étendre sa production à d autres marchés. Au début des années 1960, la compagnie étant son marché à l Afrique et l Amérique du Nord. En 1966, Renault forme une coopération avec de constructeur roumain Dacia pour vendre ses modèles sous licence. Poussé par une stratégie d expansion, Renault Group se compose aujourd hui de Renault, Dacia, et Renault Samsung Motors. Avec une confortable position de leader sur le marché européen et le récent succès de la Logan sur le marché de l Europe de l Est, Renault considère entrer le marché chinois en pleine essor au travers sa marque low-cost, Dacia. Avec une population de 1,3 million d habitants et un marché en plein développement, la Chine est un marché lucratif pour s étendre. 2

4 1. INTRODUCTION Globalization has increased the opportunities for a firm to expand its revenues by selling around the world and reduce its costs by producing in nations where key inputs are cheap. Each company willing to enter a foreign market must carefully consider three entry decisions: which market to enter, when and on what scale. The analysis of the internal environment of the company is crucial to determine its strength and weaknesses. The analysis of external environment is indispensable to know the country s environment in which the company wants to step in and derive opportunities and threats to the company entry and success. The external environment analysis involves an analysis of the car industry and a country analysis. Those analyze lead to the formulation of a marketing mix and a recommendation of entry to the market. Renault is the first car producer in Europe and looks for international expansion to access more profitable markets. It already seized rapidly two opportunities in East Asia through the alliance with the Japanese manufacturer Nissan and the take over of the Korean Samsung Motors. Renault grasped the opportunity to buy the Romanian Dacia and successfully restructured it to produce its new strategic low-cost car aimed for emerging markets. Since its launch in September 2004, the Logan is a frank success in Eastern Europe and was also vowed by West Europeans, thus introduced in Considering a population of 1.3 billion inhabitants, the second lowest labor wage, a recent accession in the WTO (2001), and a huge economic boom, China looks a very lucrative market for Renault s expansion strategy. 3

5 2. OBJECTIVES AND METHODOLOGY Main objective of the thesis The objective of this project is to set all the aspects each firms has to consider when entering a foreign market, to analyze its possibilities, and to recommend a suitable mode of entry for a particular company. Not to be based only on theoretical suggestions, the real company has been integrated into this thesis in order to apply the theoretical knowledge into the real business activities. Any firm going internationally and competing abroad of its home market have to face the question whether or not it pays off to enter the foreign market. In this thesis I am analyzing several aspects of Dacia which plans to expand to the Chinese market. Methodology The methodology adopted comprises three components: data collection, analysis, and recommendations. Necessary theoretical and tangible information have been gathered at the first stage of research to structure the analysis and supply it with accurate data. The structure of analysis is presented in the theoretical part of this thesis, called Theory. Methodological analysis based on the theoretical part is applied in the practical part, the Analysis of Renault. The analysis of the situation gives rise to recommendations on how to enter the Chinese market, and especially possibilities given to Dacia. 4

6 3. THEORY This part will develop the mechanism to analyze a market and a company and find out how they can fit with business objectives and vision. A marketing strategy specifies a target market and a related marketing mix. It is a big picture of what a firm will do in some market [9]. Two interrelated parts are needed: A target market a fairly homogeneous (similar) group of customers to whom a company wishes to appeal. A marketing mix the controllable variables the company puts together to satisfy this target group MARKET DEFINITION In marketing, the term market refers to the group of consumers or organizations that is interested in the product, has the resources to purchase the product, and is allowed by law to acquire the product. The market definition begins with the total market to progressively reaching the penetrated market as shown on the following diagram. Figure 3.1.: Conceptual diagram 1 1 NetMBA Business Knowledge Center [online] URL < [cited 12/03/06] 5

7 Beginning with the total population, various terms are used to describe the market based on the level of narrowing: Total population Potential market: those of the total population who have interest in acquiring the product. Available market: those in the potential market who have enough money to buy the product. Qualified available market: those in the available market who legally are allowed to buy the product. Target market: the segment of the qualified available market that the firm has decided to serve. Penetrated market: those in the target who have purchased the product. Defining the market is the first step in analyzing it. Since the market is likely to be composed of consumers with different needs, market segmentation is needed in order to have a better understanding of those needs and to target the groups within the market that the company will serve MARKET ANALYSIS The goal of market analysis is to determine the attractiveness of a market and to understand its evolving opportunities and threats as they relate to the strengths and weaknesses of the company. The following aspects have to be considered in analyzing market: Market size and share The size of the market is typically evaluated based on present sales and on potential sales. Market share is the percentage of the total market held by one particular company. By recording those data, market share shows over time if a market in growing or declining. Thus, by comparing those data to close competitors, market share shows how successful is a company. 6

8 The company that has the biggest market share is known as the market leader. It enjoys many benefits due to its position. Other than just more sales, brand leader has the benefit of better and higher distribution channels (more shops will carry the brand and they offer better positioning) and higher bargaining power (the firm is able to offer lower discounts because in the retailer interest, it has to carry that product), therefore increasing its profit. Market Concentration Market concentration is a function of the number of firms in a market and their respective market shares. It is related to the concept of industrial concentration, which concerns the distribution of production within an industry, as opposed to a market. The concentration ratio of an industry is used as an indicator of the relative size of leading firms in relation to the industry as a whole. One commonly used concentration ratio is the four-firm concentration ratio (CR 4 ), which consists of the combined market share of the four largest firms, as a percentage, in the total industry. In general, the N-firm concentration ratio is the percentage of market output generated by the N largest firms in the industry. The higher the concentration ratio, the greater the market power of the leading firms. Therefore we can distinguish four market forms: Perfect competition: every firm in the industry hold the same market share (very low concentration ratio), Monopolistic competition: also called competitive market, where there are a large number of independent firms which have a very small proportion of the market share (CR n below 40%), Oligopoly: the market is dominated by a small number of interdependent firms which own more than 40% of the market share (CR n over 40%), Monopoly: the market is mainly in the hand of one firm (CR n near 100%). Market concentration and market share are based on historical evidence. However, recent or ongoing changes in the market may indicate that the current market share of a particular firm either understates or overstates the firm's future competitive significance. For example, if a new technology that is important to long-term competitive viability is available to other firms in the market, but is not available to a particular firm, we may conclude that the historical market share of that firm overstates its future competitive significance. 7

9 Market Growth Rate A simple means of forecasting the market growth rate is to extrapolate historical data into the future. While this method may provide a first-order estimate, it does not predict important turning points. A better method is to study growth drivers such as demographic information and sales growth. Such drivers serve as leading indicators that are more accurate than simply extrapolating historical data. The implementation of a product life cycle curve is an important tool in forecasting a product s market growth. The shape of the curve can be estimated by studying the characteristics of the adoption rate of a similar product in the past. Ultimately, the maturity and decline stages of the product life cycle will be reached. Some leading indicators of the decline phase include price pressure caused by competition, a decrease in brand loyalty, the emergence of substitute products, market saturation, and the lack of growth drivers. Therefore market growth rate is a key indicator of a company s health. Market Profitability While different firms in a market will have different levels of profitability, the average profit potential for a market can be used as a guideline to know how difficult it is to be profitable on this market. Michael Porter formulated a useful framework for evaluating the attractiveness of an industry or market. This framework, known as Porter s 5 Forces, identifies five factors that influence the market profitability. Market Trends Changes in market have to be considered carefully because they often are the source of new opportunities and threats. Usually the relevant trends are industry-related, but trends can be affecting price sensitivity, new demand, or level of customer service and support. 8

10 3.3. MARKET SEGMENTATION A key objective of firm s marketing is to understand customers and satisfy their needs better than the competition. But different customers have different needs, and it is rarely possible to satisfy all customers by treating them alike. Market segmentation is a marketing process of grouping a market into smaller distinct subgroups called segments. It is derived from the recognition that the total market is often made up of submarkets. Thus, the firm can target more accurately its potential customers and therefore better satisfy their needs. In order to be relevant, a segment has to be evaluated against the following criteria: Identifiable: the differentiating attributes of the segments must be measurable so that they can be identified. Accessible: the segments must be reachable through communication and distribution channels. Substantial: the segments should be sufficiently large to justify the resources required to target them. Unique needs: the segments must respond differently to different marketing mix to justify separate offers. Durable: the segments should be relatively stable to minimize the cost of frequent changes. A good market segmentation will result in segment members that are internally homogenous and externally heterogeneous; that is, as similar as possible within the segment, and as different as possible between segments. The division of a heterogeneous market into homogeneous segments of buyers with similar needs and attitudes can be done accordingly to the following customer characteristics: Geographic: region of the world or country, country size, population density (urban, suburban, or rural), climate Demographic: age, gender, sexual orientation, family size, family life cycle, generation (baby-boomers, Generation X, etc.), income, occupation, education, ethnicity, religion, nationality/race, socioeconomic status 9

11 Psychographic: personality, activities, interests, opinions, life style, values, attitudes Behavioral: benefit sought, user status (potential, first-time, regular, etc.), product usage rate, brand loyalty, product end use, readiness-to-buy stage, decision making unit, occasions (holidays and events that stimulate purchases) When multiple variables are combined to give an in-depth understanding of a segment, this is referred to as depth segmentation. When enough information is combined to create a clear picture of a typical member of a segment, this is referred to as a buyer profile. These segments are thus homogeneous and because of it, each member is likely to respond somewhat similarly to a given marketing strategy. That is, they are likely to have similar feelings and ideas about a marketing mix of a given product or service, sold at a given price, distributed in a certain way, and promoted in a certain way. There is not one right way of segmenting markets although the requirements for successful segmentation are homogeneity within the segment and heterogeneity between segments. Market segmentation is essential to manager in order to select target markets and develop suitable marketing mixes. However, success in international marketing requires even more attention to segmenting. There are over 228 nations with their own unique cultures, and they greatly differ in language, customs (including business ethics), beliefs, religions, race, and income distribution patterns. These additional differences can complicate the segmenting process. The down side is that critical data is often less available and less dependable as firms move into international markets. This is one reason why some firms insist that local operations and decisions be handled by natives which have a better feel for their markets 2. 2 PERREAULT, W. D. and McCARTHY, E. J. Essentials of Marketing, 10 th edition, New Jersey, IRWIN/McHILL, ISBN:

12 3.4. EXTERNAL ENVIRONMENT ANALYSIS An organization s effectiveness is influenced by its external environment, which are forces outside the organization that impact its success. The external environment has to be distinguished between macro-environment and micro-environment. The macro-environment will look at a broad view of forces that affect the organization and is analyzed using the PESTEL analysis whereas the micro-environment will take a closer look into the industry and is analyzed using Porter s 5 Forces model PESTEL analysis Identifying PESTEL influences is a useful way of summarizing the external environment in which a business operates. However, it must be followed by a consideration of how a business should respond to these influences. The PESTEL abbreviation involves analyzing Political, Economical, Social, Technological, Ecological, and Legal factors of the external macro-environment. Such external factors are usually beyond the firm s control and are sometimes presented as threats; however changes in the external environment create new opportunities. Many macro-environmental factors are specific to each country; therefore a PESTEL analysis will be required for all countries of interest. Political environment includes political stability, government spending priorities, state religion, risk of military invasion, trade regulation and tariffs, favored trading partners, free enterprise, competition regulation, etc. Economic environment deals with type of economic system in counties of operation, economic growth rate, monetary policy (interest rates), inflation rate, government intervention in the free market, business cycle stage (e.g. prosperity, recession, recovery), comparative advantage of host country, exchange rate and stability of host country currency, efficiency of financial markets, infrastructure quality, workforce s skill level, labor cost, unemployment rate, etc. 11

13 Social environment embrace demographics (age, structure of the population, gender, family size and composition, changing nature of occupations), living conditions, lifestyle, class structure, education, culture, hobbies, life expectancy, religion, attitude toward health and environment, etc. Technological environment looks at recent technological developments and the resulting impact on the company such as a change in the use of raw material, development of new process, capacity to integrate new technologies, speed of technology transfer, technology diffusion rate, rates of technological obsolescence, etc. Ecological environment deals with disasters, hazardous activity/plant/equipment, waste management legislation, etc. Legal environment includes legal framework for taxation (tax rates and incentives), consumer protection (pricing regulations, product labeling requirements, etc.), wage legislation (minimum wage and overtime), work week, contract enforcement, mandatory employee benefits, safety regulations, intellectual property protection, anti-trust laws, and so on. The number of macro-environmental factors is unlimited. In practice, the organization must prioritize and monitor relevant factors that influence its industry. In situation of high level of uncertainties, the organization may be required to use scenario planning techniques to forecast more accurately future trends Porter s 5 Forces The 5 Competitive Forces Porter has identified five competitive forces that shape every industry and every market. These forces determine the intensity of competition and thus the profitability and attractiveness of an industry. The objective of corporate strategy should be to modify these competitive forces in a way that improves the position of the organization. Porter referred to these forces as the micro-environment, to contrast it with the more general term macro-environment. They consist of those forces close to a company that affect its 12

14 ability to serve its customers and make profit. Those forces are presented in the following figure. Figure : Michael Porter s Five Forces Model Source: HILL, W.L.C. International Business Porter s five competitive forces that determine industry attractiveness and long-run industry profitability are: The degree of rivalry between existing competitors The threat of entry of new competitors (new entrants) The threat of substitutes The bargaining power of suppliers The bargaining power of buyers Industry Competitors and Intensity of Rivalry Organizations have to identify their competitors to analyze how they compete. Competitors use tactics like price reductions, new product introductions, and advertising campaigns to gain advantage over their rivals. The intensity of rivalry between competitors in an industry will depend on: The structure of competition: rivalry is more intense when there are many players of about the same size; rivalry is less when an industry has a clear market leader. 13

15 The structure of industry costs: industries with high fixed costs encourage competitors to fill unused capacity by price cutting. Degree of differentiation: industries where products are commodities (e.g. steel, coal) have greater rivalry; industries where competitors can differentiate their products have less rivalry. Switching costs: rivalry is reduced where buyers have high switching costs, that is, there is a significant cost associated with the decision to buy a product from an alternative supplier. Strategic objectives: when competitors are pursuing aggressive growth strategies, rivalry is more intense. Where competitors are milking profits in a mature industry, the degree of rivalry is less. Exit barriers: when barriers to leaving an industry are high (e.g. the cost of closing down factories), then competitors tend to exhibit greater rivalry. Threat of New Entrants New entrants to an industry can change major determinants of the market environment (e.g. market shares, prices, customer loyalty), thus raising the level of competition, and thereby reducing its attractiveness. The threat of new entrants mostly depends on the barriers to entry. These barriers to entry include: Government policy Economies of scale Capital / investment requirements Customer switching costs Access to industry distribution channels The likelihood of reprisal from existing industry players Threat of Substitutes A threat from substitutes exists if there are alternative products with lower prices of better performance parameters for the same purpose. They could potentially attract a significant proportion of market volume and hence reduce the potential sales volume for existing players. The threat of substitute products depends on: Brand loyalty of customers Buyers willingness to substitute The relative price and performance of substitutes 14

16 The switching costs of substitutes The relative price for performance of substitutes Current trends Bargaining Power of Suppliers The cost of items bought from suppliers (e.g. raw materials, components) can have a significant impact on a company s profitability. If suppliers have high bargaining power over a company, then the company s industry is less attractive. The bargaining power of suppliers is likely to be high when: There are many buyers and few dominant suppliers The market is dominated by a few large suppliers rather than a fragmented source of supply There are no substitutes for the particular input The switching costs from one supplier to another are high Suppliers threaten to integrate forward into the industry (e.g. brand manufacturers threatening to set up their own retail outlets) Buyers do not threaten to integrate backwards into supply The industry is not a key customer group to the suppliers Bargaining Power of Buyers The bargaining power of customers determines how much customers can impose pressure on margins and volumes. The bargaining power of buyers is greater when: There are few dominant buyers and many sellers in the industry They buy large volumes, there is a concentration of buyers Products are standardized, they are undifferentiated and can be replaces by substitutes Switching cost are low Customers have low margins and are price-sensitive Customers could produce the product themselves The customer knows about the production costs of the product Buyers threaten to integrate backward into the industry Suppliers do not threaten to integrate forward into the buyer's industry The industry is not a key supplying group for buyers 15

17 Influencing the Power of Five Forces After the analysis of current and potential future state of the five competitive forces, managers can search for ways to influence these forces in their organization s interest. The objective is to reduce the power of competitive forces. To find ways to influence these forces, an organization has to pay close interest to the external market environment and rely on its own internal resources, competences and objectives. Reducing suppliers bargaining power can be achieved by creating partnership thus increasing dependency, build knowledge of supplier costs and methods, or simply integrating a supplier. Reducing buyers bargaining power can be realized by creating a partnership and increasing loyalty, or increasing incentives and value added. Reducing new entrants threat can be accomplish by increasing minimum efficient scales of operations, creating a brand image, protecting intellectual property with patents, creating alliances with linked products/services, or creating partnership with suppliers and distributors. Reducing substitutes threat can be manage by creating alliances, increasing switching costs, bring legal actions, or accentuate product/service differences. Reducing industry intensity of rivalry between existing players can be accomplished by avoiding price competition, differentiating product/service, reducing industry over-capacity, focusing on different segments, or communicating with competitors. Although of general nature, the previous examples have to be adjusted to each organization s specific situation. 16

18 3.5. INTERNAL ENVIRONMENT 7-S ANALYSIS The 7-S Model better known as McKinsey s 7-S due to the two consultants, Tom Peters and Robert Waterman, who developed it while in position at McKinsey & Co. The framework starts on the premise that an organization is not just Structure, but consists of seven interdependent elements: Figure 3.5.: 7-S Model 3 The framework examines a company s internal strengths and weaknesses by focusing on seven internal interdependent factors. Those seven elements are distinguished in so called hard S s and soft S s. The hard elements (green circles) are feasible and easy to identify. They can be found in strategy statements, corporate plans, organizational charts and other firm s documentations. The four soft S s however, are hardly feasible. They are difficult to describe since capabilities, values and elements of corporate culture are continuously developing and changing. They are highly determined by the employee in the organization. Therefore it is much more difficult to plan or to influence the characteristics of the soft elements. Although the soft factors are not that apparent, they can have a great impact on the hard elements Structures, Strategies and Systems of the organization. 3 URL < [cited 15/03/06] 17

19 The Hard S s Strategy Structure Systems The Soft S s Style / Culture Staff Skills Shared Values Actions planed in response to or anticipation of changes in its external environment and directed at achieving sustainable advantage over the competition, improving position in relation to competitors, and allocating resources. The policies and procedures which govern the way in which the organization acts internally and with its external environment. The organization chart reflects the organization hierarchy and responsibility. Formal and informal procedures that support the strategy and the structure. Means by which the company performs such critical functions as capital budgeting, manufacturing, quality control, information management, and performance measurement. The culture of the organization consist of two components: Organizational Culture: the dominant values and beliefs, and norms, which develop over time and become enduring features of organizational life. Management Style: the symbols and behaviors of managers which emphasize the creation and maintenance of meaning at work. It also describes the personality of the management and how they spend their time. Organization s ability and capability to select and hire the right people to the right position, to train them correctly, to motivate them, and to reward/punish them appropriately in order to achieve organization s goals. The distinctive competences that the organization has; what is it able to do best. The skills of the whole organization should be greater than the skills of individual organization members. Unwritten sets of values, concepts, and guidance around which a business is built. These go beyond explicit mission statements and include the actual attitudes that motivate employees to carry out their tasks. 18

20 The 7-S Model is a valuable tool to initiate change processes and to give them direction. A helpful application is to determine the current state of each element and to compare this with the ideal state. Based on this it is possible to develop action plans to achieve the intended state and thus shape the organization to face the external environment. However, in change processes, many organizations focus their efforts on the hard S s, Strategy, Structure and Systems and care less for the soft S s, Skills, Staff, Style and Shared Values. Peters and Waterman comment however, that most successful companies work hard at these soft S s. The soft factors can make or break a successful change process, since new structures and strategies are difficult to build upon inappropriate cultures and values. These problems often come up in spectacular mega-mergers. The lack of success and synergies in such mergers is often based on a clash of completely different cultures, values, and styles, and because of the elements interdependence it is difficult to establish effective common systems and structures. 19

21 3.6. SWOT ANALYSIS SWOT analysis is a simple framework for generating strategic alternatives from a situation analysis. It seeks to establish a fit between an organizations strengths and weaknesses with the opportunities and threats in its external environment. Because it concentrates on the issues that potentially have the most impact, the SWOT analysis is useful when a limited amount of time is available to address a complex strategic situation. The following diagram shows how a SWOT analysis fits into a strategic situation analysis. Figure : Situation analysis 4 Situation Analysis Internal Analysis 7-S External Analysis PESTEL & Porter Strengths Weaknesses Opportunities Threats SWOT Profile The internal and external situation analysis can produce a large amount of information, much of which may not be highly relevant. The SWOT analysis can serve as an interpretative filter to reduce the information to a manageable quantity of key issues. The SWOT analysis classifies the internal aspects of the company as strengths or weaknesses and the external situational factors as opportunities or threats. The objective of the SWOT is to determine to what degree the actual strategy is suitable and appropriate to meet the challenges and changes in the organizations environment. Strengths can serve as a foundation for building a competitive advantage, and weaknesses may hinder it. By understanding these four aspects of its situation, a firm can better leverage its strengths, correct its weaknesses, capitalize on opportunities, and prevent potentially devastating threats. 4 NetMBA Business Knowledge Center [online] URL < [cited 15/03/06] 20

22 Internal Analysis The SWOT analysis summarizes the internal factors of the firm as strengths and weaknesses. These are competences and resources that the organization possesses and that are under its control. A strength is a resource or a capacity the organization can use effectively to achieve its objectives. A weakness is a limitation or defect in the organization that will keep it from achieving its objectives. Those internal factors have been previously analyzed in the 7-S Analysis. Other factors should be also evaluated such as: Company s image Brand awareness Employees know-how and competences Access to natural resources Company s experience Operational efficiency Operational capacity Market share and position Financial resources Exclusive contracts R&D capabilities Patents and trade secrets It should be noticed that all strengths and weaknesses are relative. They gain significance only by benchmarking them against competitors competences or industry standards. External Analysis The SWOT analysis summarizes the external factors of the firm as opportunities and threats. An opportunity is any favorable situation in the organization s environment. It is usually a change occurring in the external environment that increase demand for a product or service and allow the firm to enhance its position and generate superior returns by supplying it. Many of these changes can be perceived as threats to the market position of existing products and may necessitate a change in product specifications or the development of new products in order for the firm to remain competitive. Changes in the external environment may be related to: Customers Competitors 21

23 Market trends Suppliers Partners Social changes New technology Economic environment Political and regulatory environment The last four items in the above list are macro-environmental variables, and are addressed in the PESEL analysis. It is important to identify the most important drivers for change that might have serious impact on the organization and its environment. This will draw the organization s attention to the really critical issues 5. SWOT Profile When the analysis has been completed, a SWOT profile can be generated and used as the basis of goal setting, strategy formulation, and implementation. The SWOT profile may look like the following: Figure : SWOT Profile 6 5 themanager.org [online] URL < [cited 15/03/06] 6 tutor2u.net [online] URL < [cited 15/03/06] 22

24 In the result, the organization should know to which degree its existing competences and resources will help to address the expected external changes. The SWOT analysis raises various questions that guide the organization to start thinking about the right things: In order to exploit our opportunities or to minimize our threats, which strengths should we improve and which weaknesses should we try to fix? Will our actual strengths and core competences fit tomorrow s challenges? Could our actual strengths become weaknesses tomorrow if we don t enhance them? According to our opportunities, which is the best way to exploit our strengths? How can we use our specific competences to prepare ourselves for the changes to come better than our competitors can do? What can we do better? Could this be the basis for new core competences? The key objective of SWOT analysis is the identification of major drivers and to focus on those. True strengths are those factors that give the organization a strong competitive position, compared to other players in the market. True weaknesses hinder the organization to gain competitive advantages. Opportunities of real importance are those that the organization is able to exploit and that fit with its specific strategic resources. Real threats are those risks that the organization has to face and for which it has to be prepared. SWOT Analysis Limitations While useful for reducing a large quantity of situational factors into a more manageable profile, the SWOT framework has a tendency to oversimplify the situation by classifying the firm's environmental factors into categories in which they may not always fit. The classification of some factors as strengths or weaknesses, or as opportunities or threats is somewhat arbitrary. For example, a particular company culture can either be a strength or a weakness. A technological change can either be a threat or an opportunity. The most important lies in the firm s awareness of those factors and its ability to develop a strategic plan to use them to its advantage 7. 7 URL < [cited 15/03/06] 23

25 3.7. BARRIERS AND RESISTANCES TO TRADE Exporters and importers have to deal with many difficulties in order to buy or sell in foreign markets. Some of these difficulties arise from having to do business far away from the home country. They include the challenges of language and communication, transport, foreign exchange and gathering knowledge about the market. In many cases, a firm can spend years of effort and a great amount of money just learning about the market and about competitors and suppliers. Firms have to learn the procedures for exporting and importing, including the requirements for government approvals, finance, shipping documentation and insurance. Finally, firms have to adjust with government forms regulations affecting import and export trade including: requirements for certification and inspection of exports and imports taxes ( including fees, duties and charges) on imports and exports quantitative and foreign exchange restrictions on exports and imports exclusive licensing of importers or exporters Those challenges that arise simply as a result of doing business in foreign markets are known as trade resistances and those created by regulations are usually called trade barriers. Although called by different names, they have similar effects - reducing the incentives or gains from trade - and they can be equally difficult to overcome. In the case of trade barriers, however, there exists an extensive set of treaties between governments to progressively reduce existing barriers and to provide for cooperation between governments in dealing with difficulties as they arise 8. 8 Guide to the World Trading System [online] < [cited 10/04/06] 24

26 3.8. MARKETING MIX The term marketing mix became popular after Neil H. Borden published his article The Concept of the Marketing Mix[3]. Borden began using the term in his teaching in the late 1940 s after James Culliton had described the marketing manager as a mixer of ingredients[4]. Borden identified twelve ingredients to marketing mix: product planning, pricing, branding, distribution channels, personal selling, advertising, promotions, packaging, display, servicing, physical handling, and fact finding. E. Jerome McCarthy later grouped these ingredients into the four categories that today are known as the 4 P s of marketing: Product, Place, Promotion, and Price [7]. These four P s are the parameters that the marketing manager can control, subject to the internal and external constraints of the marketing environment. A marketing mix must meet the needs of target customers, thus the goal is to make decisions that center the four P s on the customers in the target market in order to create perceived value and generate a positive response. However a firm is not likely to get a competitive advantage if it just meets needs in the same way as the competition. So, in evaluating possible strategies the marketing manager should think about whether there is a way to differentiate the marketing mix. Each of the four P s are equally important and should all be tied together, that s why they are arranged around the customer (C) in a circle, as shown of Figure Figure 3.8.1: Marketing Mix 9 9 PERREAULT, W. D. and McCARTHY, E. J. Essentials of Marketing, 10 th edition, New Jersey, IRWIN/McHILL, ISBN:

27 Product Decisions Product refers to tangible, physical products as well as services. Competitive advantage arises from differentiation of your product compared to the competition. Such differentiation can be found by taking accurate product decisions related to the following: Brand name Functionality Design Quality Safety Packaging Repairs and Support Warranty Accessories and services Environmentally friendly Distribution (Place) Decisions Place is concerned with all the decisions involved in getting the right product to the targeted market Place at the right time and in the right quantity; therefore we will talk about Distribution because a product reaches customers through a channel of distribution. A channel of distribution is any series of firms (or individuals) that participate in the delivery of products from producer to final user. Sometimes a channel system is quite short and called direct channel. This is especially common in business markets and in the marketing of services. Direct channels expand and become much more common since the development of the Internet. On the other hand, often the channel system is much more complex involving many different retailers and wholesalers. Figure shows different channels of distribution. 26

28 Figure : Four examples of basic channels of distribution for consumer products 10 Distribution channels are linked to logistics, therefore decisions concerning transporting, storing, and handling products relate to the other Place decisions and the rest of the marketing mix. 11 To examine the spectrum of Place decisions, one has to consider the following criteria: Distribution channels Market coverage (inclusive, selective, or exclusive distribution) Specific channel members Inventory management Warehousing Distribution centers Order processing Modes of transportation Marketing channels 10 PERREAULT, W. D. and McCARTHY, E. J. Essentials of Marketing, 10 th edition, New Jersey, IRWIN/McHILL, ISBN: PERREAULT, W. D. and McCARTHY, E. J. Essentials of Marketing, 10 th edition, New Jersey, IRWIN/McHILL, ISBN:

29 Promotion Decisions The function of Promotion is to acquire new customers, and also on retaining current customers. It includes public relations, advertising, and sales promotion. It is the marketing manager s job to blend these methods of communication to fit best the firm s strategic plan. Personal selling involves the sales force in direct spoken communication between sellers and potential customers. Personal selling usually happens face-to-face, but sometimes the communication occurs over the telephone or even via a video conference over the Internet. Personal selling lets the salesperson adapt the firm s marketing mix to each potential customer. But this individual attention comes at a price; personal selling can be very expensive. Often this personal effort has to be combined with advertising and sales promotion. Advertising is communicating with large numbers of customers at the same time. It involves a wide variety of media, ranging from newspapers and billboards to the Internet. Sales promotion refers to those promotion activities that stimulate interest, trial, or purchase by final customers or others in the channel wholesalers and retailers. This can involve use of coupons, point-of-purchase materials, fair trades, samples, signs, contests, catalogs, and novelties linked to the sale strategy. In such, promotion strategy is the appropriate combination of the various elements of promotion to communicate effectively with the target market. This involves informing, persuading, and influencing a consumer s purchase decision. Those decisions have to be made accordingly with the marketing communication budget. Price Decisions In addition to developing the right Product, Place, and Promotion, marketing managers must also decide the right Price. Price setting must consider the kind of competition in the target market and the cost of the whole marketing mix. A manager must also try to estimate customer reaction to possible prices. Besides this, the manager must know current practices as to mark-ups, discounts, and other terms of sale. Five main strategies are available for managers: premium pricing, value pricing, cost/plus pricing, competitive pricing, and penetration pricing [5]. 28

30 Premium pricing Premium pricing is used when the product has one or more unique characteristics. This uniqueness differentiates the product greatly from competition and creates a significant competitive advantage. This strategy demands a high-quality item to merit the high price. Because of the extremely high price, premium pricing generally is a short-term strategy as competitors are attracted to markets with high-margin items. The length of time you can charge customers a premium price depends on the sustainability of the competitive advantage the greater the sustainability, the longer time premium pricing is a viable option. A premium pricing strategy yields the highest product prices of the strategies available. It is best to use premium pricing when there are no substitutes for your product, substantial barriers to enter the market exist, and your potential customers are price insensitive because they value the benefits provided by the product. Also, economies of scale are not necessary for this strategy to work. Value pricing Value pricing, also called skimming, sets products price a bit lower than premium products because they face moderate market competition. A value pricing strategy is used best when only a few competitors exist, barriers to entering the market are relatively high, and potential customers value the benefits provided by the product. A business should select a value pricing strategy when its product has a competitive advantage that is unsustainable because of the likelihood that competitors will enter the market. Generally, value priced products attract many competitors because the price for products is high in relation to the barriers to entering the market. Cost/plus pricing Cost/plus pricing is used when a company has a combine focus of costs and return on sales. Companies implement cost/plus pricing when market share and profit are the objectives. To establish a price using a cost/plus strategy, the company needs to determine its break-even price by calculating all costs involved in the production and distribution of the product. Once the break-even price is known, the firm establishes a mark-up for each unit to be sold. The mark-up must be large enough to provide a sufficient profit, but should not exceed what customers are willing to pay. 29

31 Competitive pricing Competitive pricing is a basic pricing strategy focused on cost reduction. Costs of production, marketing, and distribution are kept to a minimum. To determine a price using a competitive pricing strategy, a firm can simply identify and record competitors prices and price its product accordingly. Competitive pricing maintains price status quo in product categories that use this strategy. Consider the cereal industry for example. There are many competitors with many brands to offer cereal consumers. However, cereal manufacturers have reached a delicate balance over time by pricing their products competitively. No manufacturer would benefit greatly by undercutting the prices of its competitors. Undercutting competitors prices would result in price wars that would lower profits for each company involved. Penetration Pricing Penetration pricing is used when a company launches a product in a market with several competitors. Initially, the price for the product is set low to grow product sales and increase market share. Doing this attracts new customers more quickly and easily than other strategies. Once market share is gained, price is increased. This strategy is effective when potential customers are price sensitive and economies of scale can be exploited. Guide to strategy selection Selecting an appropriate pricing strategy depends on market conditions. Knowing and understanding production costs, profit objectives, customers and competition will help managers select an appropriate pricing strategy. Pricing is difficult but should reflect the value and benefits the product provides to customers. Table can be used to select appropriate pricing strategies in specific market situations. Table : Selecting an appropriate pricing strategy depends on market conditions 12 Strategy Substitutes Entry Price Economies Goal barriers sensitivity of scale Premium None Very high None None High/unit margin Value Few High Low Low Profit Cost/Plus Some Medium Medium Medium Market share and profit Competitive Many Low High High Protect market share Penetration Many Low High High Market growth and leadership 12 AgDecision Maker, File C5-17, May 2005, p3 [online pdf]. URL < [cited 05/02/06] 30

32 To sum up our discussion on marketing mix, we develop a Product to satisfy the target customers, find a way to reach our target customers Place, use Promotion to tell the target customers (and others in the channel) about the product that has been designed for them, and we set a Price after estimating expected customer reaction to the total offering and the costs of getting it to them. Limitations of the Marketing Mix Framework McCarthy s four P s look at marketing from the perspective of the marketer productoriented marketing philosophy. It describes what variables marketers have to work with. Robert Lauterborn [6] claims that each of these variables should also be seen from a consumer s perspective client-oriented marketing philosophy. Robert Lauterborn expresses his 4 C s as followed: Product becomes Customer needs and wants Place becomes Convenience Promotion becomes Communication Price becomes Cost to the user Bernard Booms and Mary Bitner built a model consisting of seven P s [2]. As the McCarthy s 4 P s are more of a product-oriented marketing approach, they included people, physical evidence, and process in order to be efficient for service-oriented marketing. People was added to recognize the importance of the human element in all aspects of marketing. Good information are not likely to be delivered by unskilled or demotivated people. Process reflect the fact that services, unlike physical products, are experienced as a process at the time that they are purchased. Physical evidence or peripheral clues reflects the physical surroundings associated with a service encounter or retail location. Other marketing theorists include partners as a mix variable because of the growing importance of collaborative channel relationships. Many professional marketers are confused or frustrated because they are not getting the results they desire. It is often due to an inappropriate marketing mix. It is essential to do 31

33 research yet it must begin with the buyer, both potential and existing. This buyer research should be the first element of any marketing mix and cannot be ignored [4] MARKET STRATEGIES Early in the marketing strategy planning process it is useful for marketers to have a framework for thinking about the broad kinds of opportunities they may have. Ansoff s Product-Market growth matrix [1] suggests that a business attempts to grow depend on whether it markets new or existing products in new or existing markets. This matrix helps companies decide what course of action should be taken given current performance. Thus four possibilities are available for them: market penetration, market development, product development, and diversification. Table 3.9.: Ansoff s Product-Market growth matrix 13 Present New Products Products Present Market Market penetration Product development New Market Market development Diversification Market penetration Market penetration tries to increase sales of a firm s present products in its present markets. It seeks to achieve four main objectives: Maintain or increase the market share of current products this can be achieved by a combination of competitive pricing strategies, advertising, sales promotion, more 13 ANSOFF, H.I. Strategies for Diversification, Harvard Business Review, September-October

34 resources dedicated to personal selling, or increasing the number of outlets for greater convenience. Secure dominance of growth markets Driving out competitors this would require a much more aggressive promotional campaign, supported by a pricing strategy designed to make the market unattractive for competitors Increase usage of existing customers by introducing loyalty schemes, increasing rate of use/purchase, attracting nonusers (i.e. coupon offers, buy one get one free offers, etc.), or attracting competitors customers (i.e. price cut). Market development Market development seeks to increase sales by selling present products in new markets. There are many possible ways of approaching this strategy, including: New use of the product New geographical markets New distribution channels or new stores in news areas Advertising in different media to reach new target customers Different pricing policies to attract different customers or create new market segments Product development The product development approach offers new or improved products for present markets. This strategy may require the development of new competencies and requires the business to develop modified products which can appeal to existing markets. By knowing the present market s needs, a firm may see new ways to satisfy customers. Diversification Diversification means moving into totally different lines of business perhaps entirely unfamiliar products, or markets. This is a more risk strategy because the business is moving into markets in which it has little or no experience. For a business to adopt a diversification strategy, therefore, it must have a clear idea about what it expects to gain from the strategy and an honest assessment of the risks. On the other hand diversification strategies also can decrease risk, because a large corporation can spread certain risks if it operates on more than one market. Diversification can be done in four ways: 33

35 Horizontal diversification. This occurs when the company acquires or develops new products that could appeal to its current customer groups even though those new products may be technologically unrelated to the existing product lines. Vertical diversification. The company moves into the business of its suppliers or into the business of its customers. Concentric diversification. This results in new product lines or services that have technological and/or marketing synergies with existing product lines, even though the products may appeal to a new customer group. Conglomerate diversification. This occurs when there is neither technological nor marketing synergy and this requires reaching new customer groups. Although firms may pursue more than one type of opportunity at the same time, usually firms find attractive opportunities fairly close to markets they already know. This may allow them to capitalize on changes in their present markets or more basic changes in the external environment. Moreover, many firms are finding that the easiest way to increase profits is to do a better job in keeping the customers that they have already won by meeting their needs so well that they would not consider switching to another firm. For these reasons, most firms think first of greater market penetration. They want to increase profits where they already have experience and strengths. On the other hand, many firms are proving that market development and the move into new international markets is another profitable way to take advantage of current strengths FOREIGN MARKET ENTRY The decision of how to enter a new market abroad is influenced by many factors, including the local business environment and the company s own core competency. Companies have many potential entry modes at their disposal, and their selection depends mainly on the potential size of the market, risks tied to doing business abroad, and the amount of control that organizations desire. Three categories of entry mode are available to companies [10]: 1. Exporting, importing, and counter trade 2. Contractual entry 3. Investment entry 34

36 Direct exporting versus indirect exporting Direct exporting occurs when a company sells its products directly to buyers in a target country. The organization takes full responsibility for getting its goods into the target market by selling directly to local buyers and not going through intermediates companies. Typically it relies on either local sales representatives or distributors. Unlike sales representatives, by selling goods to local distributors the company loses ownership of the merchandise once entered in the foreign country. Distributors can then sell either to retailers and wholesalers or to end users through their own channels of distribution. Although using a distributor reduces the exporter s risk, it also weakens the exporter s control over the price actually charged to buyers. Therefore, it is important to select reliable distributors that will not over charge buyers thus inhibit the growth of market share. Indirect exporting occurs when a company sells its products to intermediaries who then resell to buyers in a target market. Intermediaries include: agents, export management companies, and export trading companies. A fairly common approach, because easy and inexpensive, is to use and agent which is an individual or an organization that represent one or more indirect exporters in a target market. Export management companies (EMC) operate as agents or distributors but provide additional services as gathering market information, formulating promotional strategies, performing specific promotional duties (such as attending trade fairs), researching customer credit, making shipping arrangements, and coordinating export documents. The biggest advantage of an EMC is usually a deep understanding of the cultural, political, legal, and economic situations of the target market. Whereas an EMC is restricted to export-related activities, export trading companies (ETC) assist their clients by providing import, export, and counter trade services, developing and expanding distribution channels, providing storage facilities, financing trading and investment projects, and even manufacturing products. 35

37 Contractual entry modes The products of some companies simply cannot be traded in open markets because they are intangible. Those companies have to use contracts as licensing, franchising, management contracts, and turnkey projects. Licensing Licensing is a contractual entry mode in which a company that owns intangible property (the licensor) grants another firm (the licensee) the right to use that property for a specific period of time. Licensors typically receive royalty payments based on a percentage of the licensee s sales revenue generated by the licensed property. Commonly licensed intangible property includes patents, copyrights, special formulas and designs, trademarks, and brand name. Licensing can be use as an easy way to exchange knowledge between companies and thus lowering R&D costs. This practice called cross licensing occurs when companies use licensing agreements to exchange intangible property with one another. Advantages of entering a new market through licensing are multiple: - financing international expansion by allocating profits made in purchasing equipment or financial investments, - protect licensors from the increased risk of operating its own local production facilities in markets that are unstable or hard to evaluate, - reduce the risk of illegal copy by licensing local companies to market products at local competitive price lower profits are better than no profits at all. Disadvantages of licensing are manifold: - restriction of licensor future activity due to exclusive licensing right of licensee which fails to produce the attended results that a licensor expected once the license agreement is exclusive, the licensor cannot simply begin to sell directly in that particular market to meet demand itself or contract with another licensee, - reduction of the global quality and marketing consistency of a product in different national markets, 36

38 - loss of competitive advantage at the agreement expiration if the licensee is able to produce and market a better version of the product. Franchising Franchising is a contractual entry mode in which the franchiser supplies the franchisee with intangible property and other assistance over an extended period. Franchisers typically receive compensation as flat fees, royalty payments, or both. This approach can mainly be used by big companies because franchisees priority is the acquisition of a company s brand name or trademark. Franchising differs from licensing in several important ways. First, franchising gives a company greater control over the sale of its product in a target market. Franchisees must meet strict guidelines on product quality, day-to-day management duties, and marketing promotion. Second, although licensing involves a one-time transfer of property, franchising requires ongoing assistance from the franchiser. There are several important advantages of franchising: - low-cost and low-risk entry mode assuring control over franchisees operations and marketing consistency across national markets, - rapid geographic expansion firms often gain a competitive advantage by being first in seizing a market opportunity, - benefits of cultural knowledge and local managers know-how. Franchising can also pose problems for both franchisers and franchisees: - difficulties to maintain product quality and marketing consistency if franchiser manage a large number of franchisees in a variety of national markets, - restriction on organization flexibility can be experienced by franchisees which have to promote certain products and not others. Management contracts Under a management contract, a company supplies another with managerial expertise for a specific period of time. Two types of knowledge can be transferred: specialized knowledge of technical managers and business-management skills of general managers. 37

39 The main advantage is the exploitation of an international business without having to invest its own physical assets at risk. The down side is the building of a new competitor in the local market. Indeed, after learning how to conduct certain operations, the part that had originally needed assistance may be in a position to compete on it own. Turnkey projects Turnkey project (also called build-operate-transfer project) is such agreement where a company designs, constructs, and tests a production facility for a client firm. This agreement transfer special process technologies or production-facility designs to the client. Like management contracts, turnkey projects tend to be large-scale and often involve government agencies. This agreement benefits both providers and clients: - permit companies to specialize in their core competencies and to exploit opportunities that they could not under take alone bringing them with experience of big projects, - governments obtain designs for infrastructure projects from the world s leading companies. Among disadvantages is the fact that a company may be awarded a project for political reasons rather than technological know-how. Since projects are awarded by government agencies and because of the high monetary value of the project, companies with the best political connections often win contracts, usually at a higher price which cost are passed on to local taxpayers. Like management contracts, turnkey project can create future competitors. Therefore, companies try to avoid projects in which there is a danger of transferring their core competencies to others. 38

40 Investment entry modes Investment entry modes imply direct investment and involvement in the local operation. This is possible through wholly owned subsidiary, joint ventures, and strategic alliances. Wholly owned subsidiary As the term suggests, it is a facility entirely owned and controlled by a single parent company. It can be established by forming a new company and building entirely new facilities or buy purchasing an existing company and internalizing its facilities. There are two main advantages to enter a market using a wholly own subsidiary: - the parent company have complete control over day-to-day operations, valuable technologies, processes, and other intangible properties within the subsidiary, complete control over output and price, and also receives all profits generated by the subsidiary, - easier to coordinate the activities of all national subsidiaries essential for companies that are pursuing global strategies. There are also two primary disadvantages to enter a market using a wholly owned subsidiary: - expensive to undertake requires a large amount of money which might be difficult to raise, - high risks exposure to political and social uncertainties. Joint ventures A joint venture is the creation of a company jointly owned by two or more independent entities to achieve a common business objective. The most typical joint venture is venture, in which there are two parties, each of which holds a 50 percent ownership. Some firms, however, have a majority share and thus enjoy a tighter control. Each party may contribute anything valued by its partners, including managerial talent, marketing expertise, market access, production technologies, financial capital, and knowledge of research and development. Joint ventures offer several important advantages to companies going international: - risk reduction each partners risks only its own contribution, - ease of international market penetration that would be otherwise off-limits, 39

41 - access to another company s international distribution network, - local image when joining with a local government, as well as less government interference induced by the concern for the venture s performance. Two main disadvantages can result from a joint venture: - conflicts of interest, especially in joint ventures where decision process can be paralyzed because neither partner s managers have the final say, - communication and cultural differences can arise and thus eventually undermine cooperation. Strategic alliances Sometimes companies who are not willing to cooperate with one another do not wish to go so far as to create a separate jointly owned company. Strategic alliance allows a relationship whereby two or more entities operate (but do not form a separate company) to achieve the strategic goal of each. Strategic alliances can be established between a company and its suppliers, its buyers, and its competitors but also with universities or divisions of government. It is a synergistic arrangement whereby two or more organizations agree to cooperate in the carrying out of a business activity where each brings different strengths and capabilities to the arrangement. In forming such alliances, sometimes each partner purchases a share of the other s stock. Consequently, each company has a direct stake in its partner s future performance. In turn, this stake decrease the probability that one partner will try to take advantage of the other. This investment entry mode offers several important advantages to companies: - share cost of international projects economies of scale, share of financial investments, shorter life cycle of products, - increase in capital for R&D - benefit of partners strength and competencies access to new technology - access to partners channel of distribution - building credibility in the industry and brand awareness 40

42 Strategic alliances disadvantages are mainly two-fold: - creation of a future local or even global competitor - due to communication and cultural differences conflicts can arise and eventually undermine cooperation. As Tsuyoski Kawanishi, Toshiba director and senior executive vice president for partnerships and alliances, explains, Each pact includes the equivalent of a prenuptial agreement, so both sides know who gets what if the partnership doesn t work out. During the honeymoon time, everything is great. But as you know, divorce is always a possibility, and that s when things can get bitter. 14 In summary, Figure illustrates the control, risk, and experience relationships of each entry mode. Most companies enter the international marketplace through exporting, but as their experience increase they will step up into an entry mode that requires deeper involvement; this means that they must accept greater risk in return for greater control over operations and strategy. Figure : Evolution of entry mode decision 15 Experience Wholly Owned Subsidiary Management Contract Franchising Joint Venture Alliance Turnkey Project Licensing Exporting Risk 14 SCHLENDER B. R., Fortune, How Toshiba Makes Alliances Work, 04/10/93, pp WILD J. J. and WILD K. L. and HAN J. C. Y. International Business, 2 nd edition, New Jersey, IRWIN/McHILL, 2003.ISBN: , p394 41

43 4. ANALYSIS OF RENAULT Renault is a full-line multi-brand automotive group present in 118 countries. Since it starts in 1898 till now Renault build its notoriety through success in motor sports. Recently it has acquired a global presence through the Alliance with Nissan, the acquisition of Romanian automaker Dacia and the founding of Renault Samsung Motors in South Korea. The Renault- Nissan Alliance is the world s fourth-biggest vehicle manufacturer in terms of production volume, behind General Motors, Ford and Toyota THE COMPANY Renault is a full-line multi-brand automotive group present in 118 countries. It has gained its reputation through accomplishment in motor sport throughout its history. The company has acquired a global presence through the Alliance with Nissan, the acquisition of Romanian automaker Dacia and the founding of Renault Samsung Motors in South Korea. The Renault- Nissan Alliance is the world s fourth-biggest vehicle manufacturer in terms of production volume, behind General Motors, Ford and Toyota History The Renault corporation was founded in 1898 as Société Renault Frères by Louis Renault and his brothers Marcel and Fernand. The brothers immediately recognized the publicity that could be gotten for their vehicles by participation in motor racing and Renault made itself known through achieving instant success in the first city-to-city races held in France, resulting in rapid expansion for the company. The three brothers Renault manufactured taxis, buses and commercial cargo vehicles in the pre-war years, and during World War I branched out into ammunition, military airplanes and vehicles. By the end of the war, Renault was the number one private manufacturer in France. During World War II, Renault s factories worked for Nazi Germany producing trucks. Louis Renault died 42

44 during the liberation of France in 1944 and his industrial assets were seized by the provisional government of France. Post WWII The Renault factories became a public industry known as Régie Nationale des Usines Renault. It experienced a major success with its rear engine 4CV model. As with earlier Renault models, the company made extensive use of motor racing for promotion. Early 1960s, Renault expanded production and sales in Africa and North America. In 1966, Renault formed a cooperation with the Romanian carmaker Dacia who began to manufacture Renault 8 and Renault 12 under license, thus investing in eastern countries. In the wake of the 1973 energy crisis, the company launched a very successful compact and economical Renault 5. Endangered like all of the motor industry by the energy crisis, the already expansive company diversified further into other industries and continued to expand globally into South East Asia. The energy crisis also provoked Renault s attempt to reconquer the North American market through a collaborative partnership with the American manufacturer AMC. This was one of a series of collaborative ventures undertaken by Renault in the late 1960s and 1970s, as the company established subsidiaries in Eastern Europe, most notably Dacia in Romania, and South America. In North America, Renault continued to increase its control over AMC by owning 55% of the company by Unfortunately the American Renault- AMC partnership was not successful the cars had reliability ratings that did not meet contemporary North American standards and by the time Renault was ready to become established in the American market, the energy crisis was over taking with it much of the trend for economical compact cars. Renault sold AMC to Chrysler in 1987 and the brand and its cars subsequently disappeared. In the late 1970s and early 1980s Renault increased its involvement in motorsport, with innovative inventions such as turbochargers in their Formula One cars. The company s road car designs were revolutionary also the Renault Espace was one of the first minivans and the most well-known minivan in Europe. Renault build up its reputation with the secondgeneration Renault 5, Renault 9, and the most luxurious Renault 25, but same time the company suffered of poor product quality which reflected badly on its image. 43

45 Restructuring Although its cars were somewhat successful both on the road and on the track, Renault was losing a billion francs a month and reported a deficit of 12.5 billion in The government intervened and cuts costs dramatically, sold off many of Renault s non-core assets, withdraw almost entirely from motorsports, and lay off many employees. By the end of 1987 the company was more or less financially stable. Renault launched several successful cars in the early 1990s, including the Clio, the second generation Espace, the innovative Twingo, the Laguna, and the 19. In mid-1990s the Renault Mégane was the first car ever to achieve a 4 star rating, the highest at the time, in Euro NCAP crash test in passenger safety. In 1998 Renault introduced a completely new class of cars; Renault with its Mégane Scenic Renault introduced the compact monospace. The return to success on the road was matched by a return to success on the racetrack Renault-powered cars won the Formula One World Championship in 1992, 1993, 1996 and 1997 with Williams and in 1995 with Benetton. Privatization It was eventually decided that the company s state-owned status was detrimental to its growth, and Renault was privatized in This new freedom allowed the company to venture once again into Eastern Europe and South America, including a new factory in Brazil and upgrades for the infrastructure in Argentina and Turkey. March 1999, after three years of privatization, Renault invested $5.4 billion in Nissan in exchange for a 36% ownership, thus saving Nissan of its financial burden. The structure of the Alliance is defined as a balanced relationship between two partners, promoting profitable growth, and directed toward performance. October 30 th, 2001, Renault and Nissan announce their decision to further strengthen the Alliance, as provided in the original agreement. Renault-Nissan, a joint management company held equally by Renault and Nissan is established. It enables the two partners to implement joint projects at a faster pace. In March 2002, Renault increases its stake in Nissan from 36.8% to 44.4% and Nissan acquires a 13.5% stake in Renault. Renault was very quick to seize opportunities in Asia, following the 1998 economic crisis. Even as it was finalizing its Alliance with Nissan in March 1999, Renault began negotiations 44

46 in December 1999 in South Korea to acquire Samsung Motors operating assets. Renault Samsung Motors (RSM) was then established, following an agreement with the Samsung Group and Samsung Motors Inc. (SMI) creditors. On September 1, 2000, Renault had a 70.1% stake in the new company ($400 million in capital stock), with the remaining stock split between the Samsung Group (19.9%) and the latter s creditor banks (10%). Renault becomes the first European automaker to establish a presence in South Korea, a market long closed to foreign investors and imports. In 1999, after 35 years of cooperation, Renault acquires the automaker Dacia with a 99.3% stake. Dacia who began by assembling different Renault models under license is now producing the successful Logan for the eastern European countries. In the twenty-first century, Renault gains a reputation for innovative and distinctive design. The second generation of the Laguna and Mégane featured ambitious, angular designs which turned out to be highly successful. Less successful were the company s more luxury models. The Avantime, a bizarre coupé/minivan hybrid, sold very poorly and was quickly discontinued while the luxury Vel Satis model did not sell as well as hoped. In addition to its distinctive style, Renault become known for its car safety it is currently the car manufacturer with the largest number of models achieving the maximum 5 star rating in EuroNCAP crash tests. The Laguna was the first car to achieve a 5 star rating and in 2004 the Modus was the first small car to achieve this rating Group profile Renault is a full-line multi-brand automotive group present in 118 countries, as shown on Figure It has acquired a global presence through the Alliance with Nissan, the acquisition of Romanian automaker Dacia and the founding of Renault Samsung Motors in South Korea. The Group s 126,584 employees contribute to a strategy of profitable growth based on three key factors: competitiveness, innovation and international expansion. Renault is Europe s leading brand, the only vehicle manufacturer to have eight cars with the maximum five-star Euro NCAP rating, and the winner of the Formula 1 World Championship for Constructors and Drivers. The Group is accelerating its international development with the new Logan and pursuing the Alliance with Nissan. 45

47 Figure : Renault Group presence and sales world wide in The Group s activities are organized in two main Divisions: Automobile Division: This Division includes the brands Renault, Samsung and Dacia. The Automobile Division designs, develops and markets passenger cars and light commercial vehicles. In 2005, it accounted for 95.5% of total revenues. Sales Financing Division: This Division contributes to Renault s sales and marketing activities. It includes RCI Banque and its subsidiaries, making a total of some 60 companies supporting the Group s international development. In 2005, the Division reported revenues of more than 1.9 billion, 4.5% of total Group revenues. For 2004 Renault reported a 43% rise in net income to 3.5 billion and 5.9% operating margin, of which Nissan contributed 1,767 million. The Group (Renault, Dacia, Renault Samsung Motors) posted a 4.2% increase in worldwide sales to a record 2,490,337 vehicles, representing a global market share of 4.1%. In Europe, Renault retained its position as the 16 Ifri, Location and competitiveness of firms in Europe, VERDONCK Jacques [cited 24/05/06] 46

48 leading brand with 1.8 million passenger cars and light commercial vehicles sold and a 10.8% market share. In 2005 Renault continued its global expansion as shown on Table The Group reported a 1.7% rise in worldwide sales, with 2,510,444 vehicles sold. Logan became the key vehicle in Renault s strategy to win new markets in Russia, Morocco, Colombia and Iran. Outside Western Europe, the Group grew sales on many markets, including Turkey, North Africa, Mexico and South Africa. In the medium term, it is considering moving into China and India. The Group sales account for 83% of total sales while the rest of the World s share grows to 17%. Renault, together with associated brands Dacia and Renault Samsung, aims to sell 4 million vehicles worldwide in Table : Group profile Evolution Total revenues (millions of EUR) 40,715 41,338 +1,5% Renault group production worldwide (Cars + LCVs) 2,471,654 2,510,444 +1,55% in units (1) Renault group sales worldwide (Cars + LCVs) in 2,490,337 2,533,428 +1,7% units (1) Renault group workforce (2) 124, , ,82 (1) Including Dacia and Renault Samsung Motors (2) Payroll at December 31, 2005 (excluding CASA early retirement plan) 17 Renault [online] URL < [cited 20/05/06] 47

49 The Group s strategy shows clear profits as presented on Table Table : Group s earnings 18 Year Net Operating revenues* 36,351 36,336 37,525 40,715 41,338 Net Profit* 1,051 1,956 2,480 3,551 3,367 * in million(s) of Euro Shareholders are distributed as showed on Table Table : Shareholders 19 Holder Share Public 62.72% French State 15.33% Nissan 15% Employees 3.6% Renault 3.35% 18 Yahoo Finance [online] URL < [cited 21/05/06] 19 Yahoo Finance [online] URL < [cited 21/05/06] 48

50 Dacia Renault played a key role in the creation of the Romanian automotive industry. In 1966, Dacia a state-owned company based in Pitesti began manufacturing Renault 8 and Renault 12 under license. The cooperation lasted 35 years. Dacia began by assembling different Renault models under license and went on to produce vehicles independently. Today, cars based on former Renault models remain omnipresent in the Romanian automobile market. In 1998, the Romanian government announced the privatization of Dacia. When the government s state property fund launched a call for tenders, Renault responded by acquiring a 51% equity stake in Dacia. The acquisition was completed in Renault gradually raised its stake to 99.3% in The Renault group invested 489 million over a five-year period to upgrade Dacia, involving the modernization of the Pitesti production facilities, decontamination, radical improvement in quality, personnel training and the establishment of new working conditions. As an initial step, these investments prepared the factory for the production of SuperNova, the first product of the Dacia renaissance in Dacia also built new assembly lines for Renault engines and gearboxes, renovated its buildings and upgraded IT equipment. The biggest part of investments went to prepare the production of Logan, the key to penetrating emerging markets. This entirely new car marked a break from the then prevailing product line modeled on former Renault vehicles. It is the result of the cooperation between Dacia and the Group s team of engineers from the Technocentre in France. Logan was designed using digital simulation and computer-aided design and manufacturing tools. Even production processes were developed digitally. The challenge was to offer a modern and robust vehicle priced at 5,000. Mission accomplished! 49

51 4.2. INTERNAL ENVIRONMENT ANALYSIS 7-S ANALYSIS Described in the theoretical part, Renault s internal environment is analyzed using the 7-S framework which analyzes an organization s international effectiveness by looking on the interaction of structure, strategy, systems, staffing, skills, style (culture), and shared values. Structure The Group is structured is articulated around the Board of Directors, the Group Executive Committee, and the Renault Management Committee. The company is administered by a Board of Directors composed of 17 members: - 13 directors appointed by the Annual General Meeting of Shareholders; - three directors elected by employees; - one director appointed by the Annual General Meeting of Shareholders on the recommendation of employee shareholders. The term of office of directors appointed by the AGM is four years. The Group Executive Committee meets once a week and at monthly seminars. It comprises six members plus the Chairman (see Appendix 1 & 3). Each of the six members are Executive Vice President for a department: - Sales and Marketing, and Light Commercial Vehicles - Manufacturing and Logistics - Chief Financial Officer - Plan, Product, Planning and Programs - Engineering and Quality - Group Human Resources The Renault Management Committee meets once a month and at seminars held twice a year. The Renault Management Committee comprises 27 members, and includes the members of the Group Executive Committee. Those members of the Renault Management Committee who do not sit on the Group Executive Committee are Senior Vice President and have a superior who is on the Group Executive Committee (see Appendix 2). 50

52 At the head of Dacia s structure there is Dacia s President and CEO, who is also Renault s President of International Operations. Under him there is a Vice President who have three subordinates: Executive Vice President Project, Executive Vice President Corporate, Executive Vice President Industrial, and shown on the following Figure 4.2. Figure 4.2.: Dacia s organization chart 20 Dacia President and CEO Renault s President of International Operations Vice President Executive Vice President Project Executive Vice President Corporate Executive Vice President Industrial Strategy Cars prices have accelerated steadily for the last decade, due to an increasing dependence on technology and ever-more luxurious interiors. Even a compact car can easily cost more than $20,000. Facing that reality, Louis Schweitzer said I found it unacceptable that technical progress should stop you making a good car for He then launched in 1998 the Project X90 (future Logan) with a list of specifications in three words modern, reliable and affordable and added that everything else was negotiable. 21 Renault s strategy was to create a car for people in emerging markets who have never owned an automobile some 80% of the world s population. The Logan was initially developed for sale in emerging markets such as China and Eastern Europe, as part of Renault s strategy of raising sales outside its core Western European markets. Renault s product-planning team did research on-site in Romania and found out that Romanians use their cars for everything, including the transport of pigs. Until now, they have had small, poorly designed cars and there was a real need for a car that could transport a lot of goods. The product-planning brief was a value-for-money car with a lot of space. The goal 20 Haute Ecole de Gestion de Genève [online pdf] URL < %20Formes/Exemples%20organigrammes.pdf> [cited 21/05/06] 21 Wikipedia, the free encyclopedia [online] URL < [cited 21/05/06] 51

53 was to make an attractive, modern, safe, and solid car. To design this low-cost car, engineers had to two driving forces: design and cost but we had to keep it simple. The moment you introduce a complex design or solution, you open the door to quality problems. We took away that risk of quality problems and waste, which in the end raises the cost of the car, says Kenneth Melville, head of the Logan design team. 22 The developers have taken into account several differences between road and climate conditions in developed and developing countries. The Logan suspension is soft and strong to help it negotiate dirt roads and potholes on ill-maintained asphalt roads. The engine is specially prepared to handle lower quality fuel, whereas the air conditioning is powerful enough to lower temperature several degrees (above 40ºC are common in the Middle East and Mediterranean Sea). To keep cost down some parts are also much simpler than those of its competitors. For example, rear-view mirrors are symmetrical and can be used on either sides of the car; the windshield is flatter than usual, curves result in more defects and higher costs; and the dashboard is a single injection-molded piece, versus up to 30 pieces for a top-of-the-line Renault. Launched in fall 2004 through its Renault dealership, the $6,000 Logan started its success with 40,000 vehicles purchased and ordered by the end of Aimed for emerging markets (Colombia, Croatia, the Czech Republic, Hungary, Poland, Romania, Russia, Turkey, Slovakia and Syria), the Logan was also wowed by West Europeans. Thus June 2005, Renault started its commercialization in France, Germany, and Spain. Between October 2005 and January 2006, the car will be also launched on the markets in Belgium, Switzerland, the Netherlands, Italy and Austria. The other countries of West, Central and East Europe as well as those of Maghreb and Middle Orient will follow. Logan was marketed in 40 counties by the end of The Logan commercial success exceeds all forecast. 23 Building cheap cars for the West was not what Chairman Louis Schweitzer had in mind when he spent $592 million in 1999 to acquire and reshape Romanian auto maker Dacia. Renault succeeded to engineer a modern car without costly design elements nor superfluous technology. Deutsche Bank pegs production costs for the Logan at $1,089 per car, less than half the $2,468 estimate for an equivalent Western Auto. The Logan is the McDonald s of cars, says Kenneth Melville. Renault expects sales of the sedan to climb to about 175, Business Week, Got 5,000 Euros? Need A New Car?, 04/07/05 [online] URL < [cited 22/05/06] 23 Dacia [online] URL < [cited 22/05/06] 52

54 this year to 1 million by 2010, supplemented by the rollout of station wagon and pick-up versions. In most countries of the world, repair and maintenance works will be carried out in the Renault Dacia dealerships. In Western Europe, the after sale service will be assured by the Renault dealerships as of January 1, 2005 benefiting of an optimum level services in accordance with the Renault quality rules. Systems Renault Group consists of many sections and departments. All these parts are interconnect and interrelated to each other and shape the group system. Renault, Dacia, and Renault Samsung Motors are inherent of this system. Luc-Alexandre Ménard is both Renault s Senior Vice President of International Operations and Northern Latin America and Public Affairs, and also Dacia s President and CEO. Launched January 23 rd, 2003, the Renault Production Way (SPR) aim to ensure that the Group s industrial system performs in line with the best in the world. The Renault Production Way (SPR) is a management method focused on continuous progress involving all the players in the manufacturing system: buyers and suppliers, logistics specialists, product-process designers and manufacturers. Used by all Group plants worldwide, the SPR is rolled out at all levels of production. Designed to create a rationalized, productive organization, it underpins the Group s international expansion. All Renault Group factories deploy the Renault Production Way, which provides extremely precise definitions of the organization and industrial procedures. The SPR identifies the best industrial practices and formalizes them to facilitate sharing throughout the Group; it also strives to achieve continuous improvement in these standards. Several levels of quality control are built into the SPR. Each operator inspects his own work. In addition, an expert is appointed for each workshop to check the quality of the outgoing subassemblies. At the end of the line, the water proof of each vehicle is systematically checked, along with all its electrical and mechanical functions. Each vehicle is then tested on a roller bench and a circuit, to validate the quality of final assembly. In the space of five years, Dacia s production facilities have been fully modernized according to Renault s standards of quality, safety and environmental protection. 53

55 Staff As stated in Renault Group employees fundamental rights declaration 24 Renault gives equal opportunities and does not discriminate for any reason whatsoever in the workplace. It recruits its employees by reference to their qualities and skills and treats them with dignity. It does not discriminate on the basis of age, social origin, family situation, gender, sexual orientation, handicap, political, trade union or religious opinions, ethnic origin, country, or race. This policy must foster diversity, in terms of the individuals employed and cultures present, in the various group companies. Renault also strives to help persons in difficulty, because of a physical handicap or otherwise, in order to integrate them into the company and the local community. Renault has a commitment to protect jobs. In the event of reorganizations or restructurings, it makes a commitment to train workers for other jobs or, wherever possible, to find other jobs for them within the Group. Renault undertakes to provide every one of its workers, worldwide, throughout their entire career, regardless of their age and position, with the training necessary to properly perform their job and build a career. Dacia s plant in Pitesti, Romania, applies naturally Renault Group employees fundamental rights declaration and more. Dacia motivates its employees by giving them a good salary but not only. Employees working 40 hours a week and get an average salary of 200 net per month, where the country s average is only half of it. Dacia also provides its employees with lunch and an on site high-tech medical center. On top of it, each employee benefit from a special price and an advantageous loan to purchase a Logan. Skills The Group, and thus Dacia, has distinctive competency in quality, innovation and international expansion. Renault is Europe s leading brand, the only vehicle manufacturer to have eight cars with the maximum five-star Euro NCAP rating. The Renault group s plants are among the most 24 International Metalworkers Federation Renault Group employees fundamental rights declaration [online pdf] URL < [cited 24/05/06] 54

56 efficient in Europe, by developing the qualifications of the men and women who manufacture the vehicles, by involving parts and tool suppliers in the production process, and by implementing the Renault Production Way (SPR), which is an important element in the organization and improvement of production facilities. All production workers are trained at dexterity schools set up in accordance with the SPR, where they learn the movements that will ensure the required standard of quality. Each operator is then trained on the job at his workstation. Once the mandatory training is complete and the worker s skills validated, he is left in charge of his workstation. Innovation at Renault has three roots: Renault R&D, covering in-house work and projects run in partnership with public and private organizations such as laboratories and research centers; cooperation with suppliers and automotive equipment manufacturers; interchange with Nissan under the Renault-Nissan Alliance, founded in Since Renault believes everyone should benefit from innovation, it introduces the best in modern technology across the whole range rather than restricting it to luxury models. Renault showed by its history the ability and capability to enter foreign market through export, but also licensing, and recently through an alliance. Style (culture) Renault Group s core values involve respecting employees worldwide and helping them to progress, fostering a spirit of openness, ensuring the full transparency of information and being honest and fair in accordance with the Renault Code of Good Conduct. Today s results must be achieved in a way that lays the foundations for future success, while preserving environmental quality and the cohesion of the society in which Renault operates. In this way, Renault will be making its contribution to sustainable development around the world. The Group s management style foster a united drive to work together more effectively, applying energy, pride, intelligence, competence, expertise and entrepreneurial spirit to active teamwork. Managers apply it through: A far-reaching commitment to training and recruitment efforts to attract and retain the best talent; 55

57 Empowered management dedicated to clearly identified, shared goals; Organization structured for short lines of command, networking, cross-functional initiatives and responsiveness; Attractive compensation reflecting individual and collective performance, as well as levels of responsibility; Frank and open dialogue with employees and employee representatives in negotiations favoring decentralization and preparing for changes to come. Shared values Renault Group develops, produces, and offers innovative, high-quality and environmentally friendly vehicles, original parts, accessories, and services around the world. Dacia, inherent of the Group, participates in fostering those values where it is implanted. Renault s engagement in motor sport is driving the whole group to strive for excellence. It is the commitment of the whole Group and the people composing it that makes Renault the winner of the Formula 1 World Championship for Constructors and Drivers. Inherent of its Group system, management style, and innovation capacity, the 7-S Analysis of Dacia shows that it is a strong player with big potential for expansion in new market. Indeed the Project X90 (Logan s project code name) was especially thought, designed, and engineered for new emerging markets. 56

58 4.3. SITUATION IN THE CAR INDUSTRY The second half of the 20 th century has seen the price explosion of petrol and consequently experienced the first oil crisis. Since the beginning of the 21 st century, consumption of petrol soared, and oil reserve decline as quick, due to the huge motorization of China and India. The high demand for cars attract all major players in the car industry which see in those new markets a great opportunity for growth. Within a few years China will replace Japan as the second-largest national market after America. Some experts predict that over the next 20 years more cars will be made than in the entire 110-year history of the industry 25. Garel Rhys, director of the Centre for Automotive Industry Research at Cardiff University in Britain, says this growth will create the need for 180 new factories, each producing 300,000 cars (and light trucks) a year. This means almost doubling the production capacity of the global industry to over 110 million units annually. The automobile industry, now a hundred years old, is often regarded as the main engine of industrial growth of the 20 th century. Many companies arise and many disappeared; frequently swallowed by the concurrence thus consolidating its position. The rapid customer change and the quick evolution of technologies experienced in the industry push industry players to consolidate in order to me more efficient in terms of R&D development and cost of production. Nowadays no fewer than 58 brands survive among the ten largest manufacturers. In fact, if their affiliates as well as their wholly-owned companies are counted, the top five company account for 75% of the global market, while the top ten takes this to 90%, with producers in China, India and Malaysia making up the rest. The strategy of consolidating behind the brands has not been entirely successful: indeed there is an inverse correlation between the number of brands a firm possesses and profitability. GM may still be the big beast of the industry, but it is no longer in any shape to swallow up others. It has twice the number of brands of its closest competitor, Ford, but is second last in the profitability league (see chart 4.3). The same goes for Ford, whose annexation of Mazda and Volvo keeps it just ahead of Toyota in terms of production. Toyota, the industry s profitability champion, has only four brands and few models, but a huge range of variants on each model. 25 The Economist, Extinction of the predator [online] URL < [cited 14/05/06] 57

59 Chart 4.3.: Global vehicle production by alliance group and operating margin compared The industry has experienced a 20-year wave of merger and acquisition that has seen GM swallowing Saab and Daewoo, while taking key stakes in Isuzu, Subaru and Suzuki in Japan, in order to share their small-car expertise and gain access to the Asian market. Since 1989 Ford, the next biggest brand-acquirer, has taken over Jaguar, Aston Martin, Land Rover and Volvo, while it has also bought heavily into Mazda. But Ford, like GM, has done more spending than getting. Jaguar still bleeds cash after an investment topping $5 billion and Volvo has only recently been profitable. None of this has done anything for the company s profitability, leaving it just above GM and Fiat. The two biggest consolidations in the industry are also the most recent: the takeover of Chrysler by Daimler-Benz in 1998; and the alliance of Renault and Nissan the following year. DaimlerChrysler has been a flop so far. It has taken years to put Chrysler into shape, reducing its surplus capacity and reviving the brand with new products good enough to drag it back into profit in Meanwhile, top management attention was diverted from growing quality problems at Mercedes, which lost its long-standing dominance on the lucrative German market to its rival BMW. The best justification for the Daimler-Chrysler merger, at the time the world s biggest industrial merger, was the growing cost of electronics systems in luxury cars. Mercedes was 58

60 the world leader in such sophisticated electronics, but it was not a volume car producer. Daimler s hope was that, by buying Chrysler, it could add the volume of production in one step, and so spread the costs of new technology over a much bigger output. New producers in emerging markets are not in any position to consolidate. Korea is down to one manufacturer, Hyundai, from the seven it had 20 years ago. China has two dozen established vehicle-builders and start-ups, which will have to go through the normal year process of consolidation before one group can emerge that is large enough to swallow up substantial competitors. Volkswagen, pride of the European predators, used acquisitions to expand geographically first southwards to pluck SEAT in Spain, then eastwards to take over Skoda in the Czech Republic. In parallel with a masterful 20-year rehabilitation of Audi as a prestige brand, VW also took over Bentley, Bugatti and Lamborghini from their distressed owners. Lamborghini has a couple of new street racers that look good but have not yet turned a profit. Critics want to know how VW will deal with its middle market brands (Volkswagen, SEAT and Skoda) which compete with each other, and what it can do to recover from the recent decline in its share of the American market. Toyota is still not the world s largest by number of cars built, but given the speed at which it is growing (output has expanded by 1.5 million vehicles in the past five years, representing half of the total growth in world production) and the speed at which GM is shrinking, the day when Toyota becomes the biggest is probably no more than five years away. Investors already recognize it as the leader. Its market capitalization, at $150 billion, is greater than that of GM, Ford and DaimlerChrysler combined ($90 billion). This superiority has been achieved by concentrating on organic growth. Toyota has concentrated solely on improving its own offering, with a relentless focus on efficiency, cost-cutting and a flood of new variations of successful models brought to market at an increasingly rapid rate. Toyota s luxury car business, Lexus, was created from scratch, rather than by the purchase of some other firm s famous, but tired, brand. Lexus is now the best-selling prestige brand in America. Encouraged, Toyota is spending a lot on marketing this year in Europe and Japan as well. At first, people laugh at Toyota when it announced its plans for creating its own luxury brand rather than paying for some other glorious firm. But Lexus succeeded as a luxury brand without having to face difficulties associated with a takeover. 59

61 In the past, making large numbers of a few models was the way to succeed. Now it is all about making a few copies of a lot of derivatives. Look at the dozens of model categories in today s Mercedes and BMW ranges a few years ago they had just three each. Yet total sales of each brand are still only around 1 million. The new way to compete is by creating niches from common platforms. BMW now sees strong competitive advantage in maintaining differences between all the cars it sells. It is investing in infrastructure so that customers can change the specification of their car as late as 100 hours before it is built. That encourages customers to spend more on optional equipment. For the carmaker it also means that every assembly plant has to be surrounded by its own suppliers. An engine cannot be shipped across continents within 100 hours of a request. Separate factories allow for more variation, but at the price of fewer economies of scale. However, the greater the specification by consumers, the higher the premium price the carmaker can command. With price of raw material increasing lately, some suppliers need a price increase to compensate their margin loss. Since every major car makers rely extensively on their parts suppliers, the latter see that car makers needed what is being offered at any price. To strengthen their position some suppliers, such as Magna, are frank about the eventual need to have their own final assembly capacity. That is an investment trend to look out for MARKET ANALYSIS OF CHINA China has begun to enter the age of mass car consumption. This is a great and historic advance. So proclaimed the state-run news agency, Xinhua, last year 26. China will make the automobile industry a pillar of the national economy in the coming six years, according to China s 11 th Five-Year Plan period ( ) ratified March 15 th The Five-year plans are a remnant of China s communist history. Once used to set economic production goals, they are now used by the government to outline general social and economic policy goals. The automobile market in China is in a period of growth characterized by mass consumption. Auto-related industries such as raw materials and road construction are geared to the needs of automobile development, said Shen Ningwu, deputy secretary-general of the China Association of Automobile Industry. As part of the efforts to join economic globalization, all major automakers in China have accelerated the pace of regrouping or mergers, Shen said. 26 The Economist, Dream Machines, 02/06/

62 China encourages the establishment of some internationally competitive automobile groups and enterprises engaging in mass production of spare parts. With 5.8 million cars sold last year, China is the world s third-largest car market, after America (17 million) and Japan (5.9 million). China s strategy, inspired by America s experience, is to make the car industry a pillar of its economy. It welcomed foreign carmakers, as long as they formed joint ventures and took no more than a 50% share. And with the banks under its control, it pushed investment into the sector and mandated a flood of lending to private individuals in order to fuel demand. Market size and share There are about 120 vehicle manufacturers in China. However, half of these companies have an annual output of less than 10,000 units and only two independent Chinese carmakers have an output exceeding 100,000 units (see Appendix 4). Since almost all major carmakers had established their plants in China, thus most the market is controlled by foreign models and most Chinese-brand cars come into play in the low-end segment or have lethargic sales. Foreign brands count for about 80% of all cars built and sold in China. But in order to enter the market, foreign car makers have to venture with Chinese carmakers as First Automotive Works Corporation (FAW), Shanghai Automotive Industry Corporation (SAIC), Dongfeng Motor Corporation (DFM) to assemble their cars. The Figure 4.4 shows the venture structure of the industry for the year Volkswagen was the first to step in the market in 1985, and with its first-mover strategy, it top market shares with 17.3% in 2005, followed by GM with 11.2%. Other players include Ford, PSA Peugeot Citroën, Honda, Hyundai, Toyota, and Mazda. To counter foreign firms, the central government has been urging Chinese companies to develop their own brands and increase innovation capability to sharpen competitiveness in the world market. In consequence, Volkswagen s and General Motors joint venture partner SAIC announced that it would branch out on its own to make cars, which signals a new trend of Chinese companies trying to make a distinct mark on the market. SAIC Motor Manufacturing Co Ltd, said that it plans to roll out 30 models from five platforms with a total investment of at least 10 billion yuan ($1.2 billion) from 2006 to

63 It aims to sell more than 200,000 cars a year by 2010 both at home and abroad. The product line will include sedans, sport utility, multi-purpose and recreational vehicles as well as compact cars. Parent company SAIC bought the technology of the Rover 75 and 25 models from the collapsed British carmaker MG Rover for 67 million pounds ($117 million) in 2004; and paid $500 million for a 48.9% stake of South Korea s Ssangyong in the year. SAIC Motor will launch its first product a large sedan based on the Rover 75 by the end of the year, Wang said. He said the company would also use the engineering expertise of SUV-maker Ssangyong. Figure 4.4: Car joint ventures in China in Beijing Automotive Industry Corporation (BAIC), which has joint ventures with DaimlerChrylser and Hyundai Motor, has also said that it plans to introduce its own cars by The third domestic carmaker, First Automotive Works Corporation (FAW), the partner of Volkswagen, Toyota and Mazda, sold fewer than 20,000 units of its own brand the Red Flag last year. The Red Flag, launched more than four decades ago, is the oldest existing Chinese car maker. 27 Boston Consulting Group, Competing to win in China s fast-growing automotive market, December 2002 [online pdf] URL < [cited 24/05/06] 62

64 Market Growth Rate Growth in production and sales has soared in recent years. Output topped two million for the first time in 2001, then more than doubled last year hitting 5.8 million cars produced. Sales may rise to a record 6.5 million units this year, according to the China Association of Automobile Manufacturers. An additional million cars roll off the rapidly-expanding production lines every year. China s auto demand is expected to rise to 10 million in 2010, second only to North American, says Zhang Xiaoqiang, Vice Minister of the State Development and Reform Commission. China is already the world s third-largest car market, after America (17 million) and Japan (5.9 million). China is going to become the secondlargest market in the world sometime over the next two or three years, says David Thomas, head of China distribution for Ford. Between 2010 and 2015, he thinks, it could be the biggest. China is developing in very similar ways (to the developed markets), but doing it so much quicker, Mr Thomas adds. So much quicker, he repeats. 28 The recent explosion in production is clearly a recent phenomenon as showed on Figure 2.4. In the China s 11 th Five-Year Plan period, China s Premier Wen Jiabao proposed an annual growth rate of 7.5% for the national economy from 2006 to It was predicted that the average annual economic growth rate in the 10 th Five Year Plan Period was between 8.8 and 9 percent, which was at a relatively high level. Comparatively speaking, the 7.5% seems low, but it actually indicates a wish for a steady growth. According to previous targets, a double of the GDP in 2000 is proposed for However, with the factor of population growth included and using the concept of per capita GDP, the growth will amount to $2,400 in 2010, in comparison with $1,700 in The Economist, Dream Machines, 02/06/

65 Figure 4.4. : Chinese Automobile Production Volume Output (million) Year * Year Output (millions) , , , , , , , , , , , , , ,8 2006* 6,5 * estimation Market Concentration Ten leading plants accounted for around 80% of China s automobile production in 2003, according to statistics from the China Association of Automobile Manufacturers. China produced million automobiles in The top 10 manufacturers produced million units, accounting for percent of the total. FAW Group Corporation claimed top spot with 858,700 units in Shanghai Automotive Industry Corporation followed closely with an output of 796,900 units, while third place went to Dongfeng Motor Corporation with an output of 470,300 units. The other seven plants reported output in the range of 101,100 units to 406,800 units. They are Chang an Automobile Group, Beijing Automotive Industry Corporation, Harbin Hafei Motor Co., Ltd., Jinbei Automobile Co., Guangzhou Automobile Industry Group Co., Ltd., Changhe Aircraft Industry Co. and SAIC Chery Automobile Co., Ltd. Among the 10 plants, Guangzhou Automobile Industry Group Co., Ltd., Beijing Automotive Industry Corporation and SAIC Chery Automobile Co., Ltd. experienced the biggest growth in both output and sales People s Daily Online, Auto production concentrated in 10 plants, January 25, 2004 [online] URL < [cited 16/05/06] 64

66 Market Profitability Until recently, profitability in China has been very attractive compared to that in the moredeveloped markets for example, in 2003, GM earned pre-tax profits of $2,267 per car in China versus $145 in the United States. In 2004, the total value of industrial output of China s automobile industry reached $132.7 billion, an increase of 17.8% from Actual sales grew by 16.9% to $130.7 billion but due to higher competition actual profit decreased by 6% to $8.7 billion. The nation s output in 2005 grew by 14% to 5.8 million units on the previous year, showed statistics from the China Association of Automobile Manufacturers. Sales this year of vehicles are expected to grow between 10 to 15% to 6.4 to 6.6 million units, according to the China Association of Automobile Manufacturers. In spite of ongoing shortfalls in production efficiency, automakers have started to increase exports from China. In 2003, they shipped fewer than 1,000 units, but this number rose to 10,000 units in 2004 and a remarkable 170,000 units in 2005, surpassing the volume of imports for the first time, by 10,000 units. In terms of value, however, exports amounted to only $1.6 billion, which was much less than the $5.2 billion value of imports. Market Trends The traditional emphasis for Chinese has been on two, rather than four wheels. But globalization is changing attitudes of millions people all over the world. Chinese market is not making any exception and follows the trends. Recently, people in China are moving more and more toward new technologies and cope with change very quickly. The majority of sells are made on mid-range and low-end cars. This segment of cars is made domestically, while most luxury cars are imported. High-class cars are relatively expensive in China and are thus hardly affordable. 65

67 4.5. MARKET SEGMENTATION Chinese car market is segmented in six segments as shown on Figure 2.5. (and Appendix 5 and 6). The demand for cars in China has been directed toward low-end and mid-range car, mostly produced domestically, whereas inaccessible expensive luxury cars are imported. Till now, there is an intense competition is mid-range and low end car segment led by price cut and on going new models. In 2004, China s sedan car market maintained rapid development, with stable growth in both output and sales revenue. Brand competition is of great importance now; marketing strategy and strategic management became an important feature of China s sedan car industry in Among market segments, the high-end and mid-range market holds huge potential, with broad prospects. In the next few years, the sedan car industry will maintain rapid growth. The Logan is part of segment C, not only the largest segment but also the most growing one. Dacia benefits thus from increasing demand on its segment. Main competitors on this segment are: Hundai Elantra, Toyota Corolla, and Volkswagen Santana 3(2)000. Figure 4.5.: Sales of Passenger Cars by Segment 30 Segment Market share 2004 (%) Market share 2005 (%) A0 Class <3800mm A Class >=3700mm & < 4300mm B Class >=4100mm & < 4700mm C Class >=4200mm & < 4800mm D Class >=4300mm & < 4900mm E Class (Luxury) China Business Update-Autostatistics, Vol. 9, No. 1, January 2005 [online pdf] URL < [cited 16/05/06] 66

68 4.6. EXTERNAL ENVIRONMENT ANALYSIS PESTEL analysis Political environment Although there has been considerable reform of China s economic model, from a centrally planned economy to a market-oriented one, the same is far less true of the PRC s (People s Republic of China) political system. The Chinese Communist Party (CCP) still dominates the entire political spectrum, and its leaders make all major policy decisions. Party members hold most senior government positions at all levels of administration. Ultimate authority rests with the 24 members of the CCP Politburo and, in particular, its nine-member Standing Committee. Ministries and lower-level counterparts implement policy on a day-to-day basis, and China s parliament, the National People s Congress (NPC), reviews and approves legislation and nominees for government offices. Many provincial governments, especially those in fast-growing coastal regions, actively adapt central government policy decisions to suit local needs. Senior leaders generally agree on the need for further economic reform, but stability remains the main concern, and differences exist within the leadership over the content, pace, and goals of both economic and political reform. The November th Communist Party Congress began the transition of power from former Party General Secretary Jiang Zemin to new Party General Secretary Hu Jintao. This transition was finalized in March 2003 during the first annual session of the Tenth NPC, which named Hu Jintao President of the People s Republic of China. Jiang Zemin remains Chair of the CPC Central Military Commission. The NPC also named Wen Jiabao Premier of the State Council. His portfolio includes economic issues. He is expected to continue economic reforms begun by his predecessor, Zhu Rongji. China faces a growing gap between the fast reforming economy and a political system that can not fit their needs. The growing disparity between urban and rural incomes, income gaps between the wealthy coastal regions and the poor interior, itinerant workers, growing unemployment, and official corruption are the main potential threats to stability. 67

69 Economic environment With China s entry in the World Trade Organization (WTO) in November 2001, the Chinese government made a number of specific commitments to trade and investment liberalization which substantially open the Chinese economy to foreign firms. China s gross domestic product (GDP) grew at a rate of 9.5% in 2004 to $1.65 trillion. The 2005 figure goes beyond expectation reaching $1.79 trillion which represents a growth of 9.3%. China s significant economic growth is expected to remain strong in the coming decade or two. Projections estimate that China will become the world s largest economy by 2025 and its current population of billion is expected to continue to increase over this period. The ageing population structure is an important concern for China. One study 31 estimates the ratio of the elderly population dependent on working adults or the government will rise from 10% in 1990 to 22% in Already nearly 10% of the billion Chinese are aged 60 or over. By mid-century, birth and death rates are expected to equalize, with the population stabilizing at 1.6 billion, of whom no fewer than a quarter will be over 40. This ageing phenomenon is occurring in many countries, but most have a stronger economic base than China and a better-developed welfare system. Inflows of foreign direct investment (FDI) into China in 2004 totalled $57 billon, a new record but only slightly bigger than the 2003 figure of $53.5 billion. Japan, South Korea, Taiwan, and the United States are China s most important sources of FDI. Major trading partners include USA, Japan, Germany, South Korea, and Taiwan. Unemployment oscillates between 8-10% in urban areas. With the second cheapest labor cost averaging $0.80/hour in 2003, China attracts firms looking for production cut costs. This tendency will remain as forecast show an increase of Chinese labor cost to $1.27/hour in 2009, still being the second world cheapest Far Eastern Economic Review, March 26, Boston Consulting Group, Capturing global advantage, April 2004 [online pdf] URL < [cited 24/05/06] 68

70 Social environment Although the People s Republic of China is officially atheist, historically, Taoism and Buddhism have been the dominant religions of Chinese societies. Today Taoists and Buddhists count for about respectively 20% and 10% of the population, while Christians represents about 3% to 4%, Muslims 1%-2% of the population. Chinese people have a relatively high power distance. The implications for management practice in China is that superiors are expected to lead, to make decisions, while subordinates are generally afraid and unwilling to disagree with their superiors. Managers live more for others, have group loyalty, and enhance group decision-making. The appropriate leadership style is paternalistic and authoritarian. The incentive systems are long-term employment, individual and group bonuses with a minimum bonus for every employee. Regardless of business experiences in ones home country, in China it is the right Guanxi that makes all the difference in ensuring that business will be successful. Guanxi literally means relationships, and stands for any type of relationship. In the Chinese business world, however, it is also understood as the network of relationships among various parties that cooperate together and support one another. The Chinese businessmen mentality is very much one of You scratch my back, I ll scratch yours. It is actually exchanging favors, which are expected to be done regularly and voluntarily. Therefore, it is an important concept to understand if one is to function effectively in Chinese society. By getting the right Guanxi, the organization minimizes the risks, frustrations, and disappointments when doing business in China. Often it is acquiring the right Guanxi with the relevant authorities that will determine the competitive standing of an organization in the long run in China. And moreover, the inevitable risks and barriers will be minimized when you have the right Guanxi network working for you. That is why the correct Guanxi is so vital to any successful business strategy in China. The Chinese culture is distinguished from the Western culture in many ways, including how business is conducted. For example, the Chinese prefer to deal with people they know and trust. On the surface, this does not seem to be much different from doing business in the Western world. But in reality, the heavy reliance on relationship means that western companies have to make themselves known to the Chinese before any business can take place. 69

71 Furthermore, this relationship is not simply between companies but also between individuals at a personal level. The relationship is not just before sales take place but it is an ongoing process. The company has to maintain the relationship if it wants to do more business with the Chinese. Although developing and cultivating the Guanxi in China is very demanding on time and resources, the time and money necessary to establish a strong network is well worth the investment. What your business could get in return from the favors for your partners are often much more valuable, especially in the long run, and when you are in need. Even domestic businesses in China establish wide networks with their suppliers, retailers, banks, and local government officials. Technological environment In the early 1990s, China was seen simply as a low cost place to make basic, labor-intensive products. Today, China is competing in many advanced technologies and is challenging the exports of many other emerging markets around the world, not to mention developed countries such as the United States and Japan. China, with its technically advanced manufacturing processes, produces more than 50% of the world s cameras, 30% of the air conditioning and TV sets, 25% of washing machines, and almost 20% of refrigerators. Ecology One of the serious negative consequences of China's rapid industrial development has been increased pollution and degradation of natural resources. A World Health Organization report on air quality in 272 cities worldwide concluded that seven of the world's 10 most polluted cities were in China. Respiratory and heart diseases related to air pollution are the leading cause of death in China. Almost all of the nation's rivers are considered polluted to some degree, and half of the population lacks access to clean water. Acid rain falls on 30% of the country. Many foreign enterprises are heavy polluters as are village enterprises, which use rivers as drains for untreated toxic wastes. Various studies estimate pollution costs the Chinese economy 7-10% of GDP each year However, the last couple of years have seen an enforcement of pollution control regulations on polluting enterprises, but every closure means fewer jobs. On this aspect, pressure is not heavy on firms shoulders; however this is an important issue that has to be faced in the future. 70

72 China frequently experiences various types of severe natural disasters which result in considerable loss of life and extensive economic damage. In recent years, the annual economic loss caused by natural disasters approached about $11.5 billion, which approximately equals 25% of the total GNP. The human and social cost of these disasters in terms of life and property loss as well as the disruption of communities and livelihood has considerably disturbed those affected areas and China s ability to recover and further develop. In order to diminish the impact of natural disasters, China has adopted a national policy for strengthening and promoting natural disaster information gathering, prevention, mitigation, and management capabilities. The government has also committed substantial resources for the development of national capabilities and has made considerable advances in natural disaster monitoring, prevention, and management. However, a systematic strategy has not yet been fully developed resulting in continued human and economic loss. This is in part due to a lack of funds, data gathering technology, and expertise. Legal environment A firms willing to enter the Chinese market through foreign direct investment has mainly four ways to establish its business: Sino-foreign joint ventures, cooperative businesses, exclusively foreign-owned enterprises, and foreign-funded share-holding companies 33. Sino-foreign joint ventures Sino-foreign joint ventures are also known as share-holding corporations. They are formed in China with joint capitals by foreign companies, enterprises, other economic organizations and individuals with Chinese companies, enterprises, other economic organizations and individuals. The main feature is that the joint parties invest together, operate together, take risk according to the ratio of their capitals and take responsibility of losses and profits. The capitals from different parties are translated into the ratios of capitals, and in general the capital from foreign party should not be lower than 25%. The Sino-foreign joint ventures are among the first forms of China s absorption of foreign direct investment and they account for the biggest part. 33 Invest in China, China's Absorption of Foreign Investment [online] URL < uage=en> [cited 17/05/06] 71

73 Cooperative businesses Cooperative business is also called contractual cooperation businesses. They are formed in China with joint capitals or terms of cooperation by foreign companies, enterprises, other economic organizations and individuals with Chinese companies, enterprises, other economic organizations and individuals. The rights and obligations of different parties are stated in the contract. To establish a cooperative business, the foreign party supplies all or most of the capital while Chinese party supplies land, factory buildings, and useful facilities, and also supply a certain amount of capital too. Exclusively foreign-owned enterprises Exclusively foreign-owned enterprises, which are totally invested by foreign party in China by foreign companies, enterprises, other economic organizations and individuals in accordance with laws of China. According to the law of foreign-funded enterprises, the establishment of foreign enterprises should benefit the development of China national economy and agree with at least one of the following criteria: the enterprises must adopt international advanced technology and facility; all or most of the products must be exportoriented. The foreign funded enterprises often take the form of limited liability. Foreign-funded share-holding companies Foreign companies, enterprises, other economic organizations and individuals can form foreign funded share-holding companies in China with Chinese companies, enterprises, and other economic organizations. The total capital of the share-holding company is formed by equal shares,shareholders will take due responsibilities for the company according to shares purchased; company will take responsibilities for all its debts through all its assets and the Chinese and foreign shareholders will hold the shares of the company. Among them, the shares purchased and held by foreign investors account for more than 25% of the total registered capital of the company. New types of foreign investment Since multinational merger and acquisition has become the major type of international direct investment, Chinese government is now researching and enacting related policies so as to facilitate the foreigners to invest in China by means of merger and acquisition. Foreign companies entering into joint venture should be prepared for healthy tension between themselves and their partners with respect to the scope and pace of investment. Generally, 72

74 Chinese partners prefer more and faster investments and greater technology transfer, whereas foreign companies like tying investment to revenue growth rather than over investing initially and then starving for a long time. Customer financing legislation in China was paved for domestic and foreign companies to engage in providing car loans to customers only in 2003, when the central government s Banking Regulatory Commission issued the Administrative Rules Governing Auto Financing Companies. Most foreign manufacturers have made preparations for car-finance businesses in the country and applied for, or received, a license. A number of expansion projects are also planned by commercial banks and finance companies in Porter s 5 Forces Competitors Among emerging markets, China s automotive industry is the most fragmented. Every major international manufacturer is present through imports and, increasingly, with local assembly and production plants, which are generally owned in conjunction with local joint-venture partners. While world s giant carmakers benefit from higher quality, brand reputation, high R&D capacity, and tradition, Chinese producers attract with low prices and usually less quality cars. Thus we can distinguish two categories of competitors, world carmakers and Chinese producers. After the accession of China in the WTO, quotas and tariffs for export and import were minimized and consequently attract more competitors to the market. Recently, there is a big competition in the car industry because of the huge size of Chinese market. Many competitors are thus attracted by this fast growing market where demand for cars is still exceeding its supply. Volkswagen was the first foreign carmaker into the Chinese market nearly 20 years ago. It has managed to retain its leading share since then, although the trend is declining. Sales growth has slowed in recent years, and Volkswagen s market share has plummeted to 17.3% in 2005 from nearly 60% in the mid 1990s, reflecting the increasing pressure VW faces from new products in the middle segment of the market, in which it has traditionally been strongest. 73

75 General Motors Corp. has also been one of the big movers in China. Through its six joint ventures, GM is well positioned to capitalize on recent rapid growth in the Chinese market, and the company is in the process of significantly increasing its production capacity in China. GM s Regal and Excelle models have managed to take sales from VW s Santana, Bora, and Audi. GM is now second in the market, with a 14% share. Other large foreign manufacturers in China include Toyota Motor Corp., Suzuki Motor Corp., Honda Motor Co. Ltd., Peugeot S.A., Ford Motor Co., Nissan Motor Co. Ltd., and Hyundai Motor Co. When considering local joint-venture partners, the leader is First Automobile Works (FAW) with an output of 722,300 units, then follows Shanghai Automotive Industry Corporation (SAIC) with 636,730 units produced, and the third place goes to Dongfeng Motor Corporation (DFM) with 521,700 units produced in An increasing slice of the market capacity growth is likely to be taken by domestic Chinese automakers that build their own vehicles outside Sino-foreign joint ventures. Although they now only represent about one-quarter of the market, with an installed production capacity of a mere 560,000 units to date, they are set to triple this by the end of the decade. Some industry reports suggest that 50% of sales in China will come from domestic production with domestic proprietary technology by Threat of new entrants Chinese market is open to the world. Many world leading are coming to China for its low labor cost and growing economy. However, the threat is coming from the inside. As discussed previously, it is the few domestic joint-venture partners of foreign firms that are consolidating and already announced their plan to produce their own cars. Those domestic firms aim to increase their technology and quality in order to compete on a less saturated market of midand high-range cars. Customers China has a population of 1.3 billion inhabitants and a big income disparity among them. Chinese economy is not so strong and its GDP per capita of $6,300 is about five times lower compared to Western countries. Due to the big disparity between prosperous coastal region and traditional inland region, big differences in standard of living are observed. For some people in the country-side it is impossible to a car or even a motorbike, but for some others 74

76 who benefit a wealthier life it is obvious to buy a car and to be able to select it among a variety of brands, models, and price. Chinese car buyers are increasingly knowledgeable, sophisticated, and demanding. Information is widely available, and the media continue to devote expensive coverage of to the automotive sector. Numerous rating organizations now also provide useful discussions of new models, including detailed comparison of features. The proliferation of auto-club communities has created opportunities for car owners and potential buyers to share their driving experience, bargaining tactics, maintenance tips, and discuss about market trend. As consumers become more sophisticated, branding becomes more important. Consumers choice is influenced by their purchasing and service experience. The key to cultivate brand loyalty is providing consistently superior brand experience throughout the customer s product-ownership life cycle. The brand war is increasingly being fought in customers presale, sales, and after-sales experience. Suppliers Today, the automotive industry is witnessing the specific role of suppliers. Systematic attention has been given to the selection and development of suppliers. Many car parts and components are developed, designed, and tested in cooperation with external suppliers who also assume comprehensive guarantees for their products and for all subcontractors of the additional supply lines, all the way to the supplier of raw material. This integration of suppliers is a current trend in major carmakers. Another beneficial trend in the automotive industry is associated with modular production or modular suppliers. The principle is that the most important suppliers of larger functional units (modules) become involved in the process from the module development stage (development supplier) to the final assembly (integrated supplier), which they also partly assume. This method places considerable requirements on the efficiency of the suppliers but it is also a guarantee of the highest quality. Threat of substitutes Substitutes are being washed out by Chinese dedication to the car industry. China was once mainly populated by bikes, motorbikes, and tuk-tuk (three wheelers) but by setting the 75

77 automotive industry as one of China s pillar, cars are more and more taking over other means of transportation. Porter s analysis shows a high degree of rivalry between existing competitors. The already fragmented market still attracts many other companies. This threat can be overcome by a differentiated product. Dacia s low-cost car distinguishes itself from its competitors by being exclusively develop for this market. The analysis highlights the importance of suppliers in China. Renault has the international expertise to implement a quality network in Asian countries, however Renault still need to build Guanxi, which is time and resource consuming. The threat of local partner-ventures is rising as some announced to produce their own car as early as Other companies are already working on cheap cars, too. Volkswagen is considering building a $3,650 car for China. As Logan enter this niche segment, Mee-too will soon invade this niche. Time is a strong factors in entering the Chinese market SWOT ANALYSIS SWOT analysis seeks to establish a fit between an organizations strengths and weaknesses with the opportunities and threats in its external environment. Strengths Company s experience in foreign market; successful experience in international cooperation and partnership especially recently in East Asia Product specifically designed for emerging market modern, reliable and affordable complying with EU standards for safety, gas and noise emissions and recycling of materials Strong success of the Logan on its current markets; strong market share and position in current markets Growing net operating revenues, growing net profit; financially stable Innovation capacities R&D capabilities Efficient factories (SPR) Employees know-how (SPR) Quality of production (SPR) 76

78 Environmentally friendly vehicles Thanks to the Group, Nissan s presence on the market through joint-venture partners Dongfeng and Zhengzhou might help start and speed up the development of Guanxi inevitable to conduct business successfully Weaknesses No brand awareness Opportunities China wants to make the automobile industry a pillar of its economy Market size and growth Growing demand in segment C Second world s cheapest labor Profitable market Consumer preference for mid-range and low-end cars Threats Central government has been urging Chinese companies to develop their own brands and increase innovation capability Intellectual property protection High market concentration New competitors Local venture-partners starting to make their own cars (SAIC, BAIC) Me-too Increasing price of oil Developing and cultivating the Guanxi in China is necessary and very demanding on time and resources Dacia holds strong Strengths due to Renault Group s, its history, its knowledge, and its international expertise. Dacia s strategy is focused to meet emerging market demand needs. Its success in East Europe is hitting West Europe and has good potential on Chinese market 77

79 especially at a time where China wants to make the automobile industry a pillar of its booming economy and where Logan s segment C is experiencing growing demand. Obstacles to Dacia s success remains in time and resource allocation to build Guanxi, no brand recognition, and me-too phenomena. Time and resources demanding, developing and cultivating Guanxi with local partners is necessary. This can be smoothed by the Group s international expertise and the presence of Nissan on the market. Dacia has to build from the ground up its brand which adds on costs. Its model of low-cost car modern, reliable and affordable is a strong asset of Dacia s strategy. Other companies are already working on cheap cars, too. Volkswagen is considering building a $3,650 car for China. Even though India s Tata Motors are not planning (yet?) to enter the Chinese market, it is expected to debut a $2,000 car before But for now, the Logan is the only one! MARKETING MIX Product Before the Romanian brand joined the Renault group in 1999, Renault and Dacia started cooperating in the mid- 1960s to manufacture Renault 8 and Renault 12 under license. The launch of the Logan marked the Dacia brand revival. At the present time, the brand also offers a Pick-up. Dacia is planning on releasing a station wagon forecasted for end Other vehicles are being developed as a small van, and a five-door hatchback. 34 Business Week, Got 5,000 Euros? Need A New Car?, 04/07/05 [online] URL < [cited 22/05/06] 78

80 Logan The back to basics car Introduced by Renault in 1992, Logan was a decisive step of the design to cost program, which implies the use of the same elements for several vehicles of the same car manufacturer to guarantee reliability and savings for the customers. This logic was present all the way in the development of Logan. Thus, Logan takes over the engines, the front axle, the steering, and rear brakes from the Renault Clio. The central unit of the interior space, which groups together the electronic functions, is derived from the one, which equips the Clio. Renault had put all its know-how to the service of the Logan project to conceive a modern, robust, reliable and very competitive product. Logan offers the best price/service ratio to the customers along with a three-year warranty. Logan meets European security standards. It was severely tested by Renault in its centers, as well as by independent organisations and specialized press across Europe. The car succeeded brake and avoidance tests and performed well at the Euro NCAP tests winning three stars. In Western Europe, Logan offers ABS, two front airbags and head restraints for all seats as standard equipment. The numerous articles published by different European magazines after Logan was launched prove that Logan is a safe vehicle. Logan is a family and multi-purpose sedan, with a dynamic general look. Its generous dimensions provide an excellent habitability, which easily allow three tall passengers to sit down comfortably on the rear seats. The 510 litres volume of the trunk, as well as its geometry, allow the easy loading of objects of various shapes. Logan offers to choose between three engines characterized by a moderate consumption level and a fair cost of maintenance: two gas engine 1.4l MPI (75 HP) and 1.6l MPI (90 HP), and a diesel engine 1.5l dci (90 HP). Its modern conception corresponds to international standards, notably to the standards of the European Union, concerning safety, gas and noise emissions and recycling of materials. Due to the membership to Renault Group, Dacia vehicles benefit from an extensive and performing after sales worldwide network. The Manufacturer s warranty is applied through the trade-mark network in the countries where the vehicles are marketed. 79

81 Dacia Pick-up Easy handling in all situations Dacia offers three different versions of its light commercial vehicle with a rear platform: Pick Up, Drop Side and Double Cab. The Pick Up can be tailored to any situation, including the transportation of passengers or goods. The Double Cab has four doors to accommodate backseat passengers. Regardless of the version, the Pick Up is a sturdy vehicle which adapts to tough road, climatic or driving conditions. Three different transmissions are available (front-wheel, rear-wheel and four-wheel drive) teamed with a Renault engine. Flexible steering and an improved braking system add to the Pick Up s driving pleasure and efficiency. Versatile and reliable, the Dacia Pick Up benefits from a particularly fuel-efficient diesel engine (6.5 l / 100km in mixed cycle). Place (Distribution) Today, Dacia is present in 40 countries through 509 outlets. In Central Europe, Turkey and North Africa, Renault and Dacia brands are marketed separately, with a distinct area for each brand. In Western Europe, the Dacia brand shares Renault s network and outlets. By the end of 2005, 45% of Renault dealers also served the Dacia brand. Strategy was first defined at corporate level, with each subsidiary then making the necessary adjustments to match the structure of the existing network and local market conditions. Sharing of resources combined with respect for brand identity 80

82 Renault has already acquired experience of multi-brand marketing through the Alliance with Nissan. The two brands have separate networks and resources, allowing each to deal with its own customers, but back-office processes are pooled as are after-sales services at Renault- Nissan outlets. Dacia s need to select the right partner and build a high-quality distribution network quick. It is necessary for Dacia to find a local partner who has Guanxi in order to succeed rapidly. Without it, it is almost impossible to carry business. Renault s international expertise and its recent success in East Asia are an asset. Nissan s presence on the market can help to build Guanxi and rapidly establish operations. Price Price is at the heart of Logan s project along modernity and quality. The Logan was develop with a competitive price strategy approach dedicating a special attention to development and production cost, thus offering the best price/value of its segment. The price is set at $6,000 in Europe; this price will be lowered according to Chinese labor wage. Loyal to its strategy, Logan will still be the cheapest car on its segment and can easily compete on quality and safety matters with its direct competitors. Promotion Logan is now marketed in 36 countries under the Dacia brand and in four countries under the Renault brand (Russia, Colombia, Venezuela, and Ecuador). Due to its unique low-cost strategy, Logan s promotion was extensively carried out by specialised automotive and economic literatures. Loyal to its strategy, Logan succeed to keep cost down by avoiding expensive advertising expenditures. Customers rely increasingly on internet to gather information prior to purchase and China is no exception. Chinese car buyers are increasingly knowledgeable, sophisticated, and demanding. Chinese media devote expensive coverage of the automotive sector. Numerous rating organizations provide discussions of new models and detailed comparison of features. The proliferation of auto-club communities has raised communication among car owners and potential buyers. These allow them to share their driving experience, maintenance tips, market trend, and other related topics. The Chinese media environment is favorable to Logan s unique strategy. Logan s comparative advantage of low-cost car developed for emerging market is a uniqueness that 81

83 will most likely be extensively covered by specialized media, as it was the case in East Europe, thus avoiding to spend extra on advertising. However, as Chinese consumers become more sophisticated, branding becomes more important. Consumers choice is influenced by their purchasing and service experience. Dacia would need to provide consistently superior brand experience throughout the customer s product-ownership life cycle customer s pre-sale, sale, and after-sale experience. Dacia s website ( offers information in English, French, and Romanian about the brand, products, international presence, press release, along with a detailed tour of production facilities. The website also offers the possibility to evaluate the price of a Logan according to the equipment selected REMAINING TRADE BARRIERS The Chinese Government has recognized for years that economic reform and market opening are essential components of sustainable and balanced economic growth. In recent years, the Chinese Government undertook a massive effort to revise its laws and regulations in a manner consistent with WTO rules. At the Central Government level, China has already revised or repealed hundreds of laws and regulations in its effort to meet its WTO obligations. However, while China has an increasingly open and competitive economy, substantial barriers have yet to be dismantled. One must be realistic about the impact of WTO accession. It has brought and will continue to bring enormous changes both economically and socially but WTO entry will not remove all commercial problems and the implementation process will take time. Table 4.9 summarizes China s trade while accessing the WTO, and shows the remaining barriers. Table 4.9.: Comparison of entry barriers before and after China s accession to the WTO Before accession to the WTO After accession to the WTO Tariffs 1980s: 200% 25% by s: % Import quota 30,000 vehicles/year Quota increase 20% a year to disappear by 2006 Local content 40% in first year of production No local-content ratio 82

84 Auto financing increasing to 60% in the second year and 80% in the third year Foreign non-banking financial institutions are prohibited form providing financing required Foreign non-banking financing institutions are permitted in selected cities prior to gradual national roll out The short-term outlook of China s economy appears positive, but it will likely be influenced by the government s ability to reform the banking system to make it more responsive to market forces, and to fully implement its WTO commitments. In the China s 11 th Five-Year Plan period ( ), China s Premier Wen Jiabao proposed an annual growth rate of 7.5% for the national economy from 2006 to A 7.5% growth in GDP rate would enable China to double its GDP in 10 years ENTERING THE CHINESE MARKET China presents huge opportunities but also hides threats for companies willing to enter this market. To be successful Dacia need to quickly find a suitable joint-venture partner who has Guanxi and start operations, set the right marketing mix, and provide customers experience throughout their product-ownership life cycle to build brand recognition. The strategy set behind the development of the Logan fit with Dacia s possibility expansion to the Chinese market. The Logan was developed for emerging markets, and produced by emerging markets. Unknown of the market, Dacia need to build brand identity from the ground up. Brand positioning and communications must appeal to Chinese consumers expectations. Dacia needs to provide brand experience throughout customer s product-ownership life cycle pre-sale, sale, after-sale. Dacia has to find a local partner-venture which might be facilitated by Nissan s presence on the market. Anyhow, Dacia has to allocate time and resource to build Guanxi, necessary to 83

85 find and operate with local stakeholders. However, the company needs to be quick as local partner-ventures announced to produce their own car and long time players like Volkswagen considering to building a $3,650. Partner-ventures know better the market, consumer expectations, have Guanxi, and by acquiring know-how from their partners, they are prepared to emerge and compete with Dacia on the low-cost car segment. Foreign brands implanted on the market are also in position to compete in a close future. This is only the beginning as other competitors might rush on this niche. 5. DISCUSSION Renault has been very successful to seize opportunities following the 1998 economic crisis and penetrate the East Asian market. In 1999, Renault signed an Alliance with the Japanese Nissan, and the following year it took over the Korean Samsung, becoming the first European automaker to establish a presence in South Korea. So far the Group has been successful and shows prosper figures. Thus, one can easily think that Renault Group can easily prosper in China as well. East Asian cultures have in common an emphasis on personal relationships as the foundation of business practices but the forms and values of these relationships differ greatly among the Japanese, Chinese, and Koreans. For the Japanese, the important concept is Wa, or the emphasis on group loyalty, harmony, and consensus; emotional support and a long-term perspective are important. The Chinese, on the other hand, think in terms of Guanxi, the special arrangements of favor-sharing that an individual has with other individuals; personal loyalties within such arrangements are more important than loyalty to an organization. Koreans emphasize Inhwa, which relates to harmony between unequals and derives from the Confucian ideal of loyalty to parents, elders, and authority figures. Non- Asians hoping to do business effectively in East Asia need to understand how these concepts all translate into quite different norms of business practice. However, Dacia has shared experience of both Japanese and Korean culture through respectively the Renault-Nissan Alliance and the acquisition of Renault Samsung Motors. With such assets, Dacia should be able to grasp Chinese business culture and inherent subtleties, much quicker and accurately than others. Nissan s joint-venture partners Dongfeng and Zhengzhou might be useful contacts to start building Guanxi. 84

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87 6. CONCLUSION The objective of this thesis was to set all the aspects each firms has to consider when entering a foreign market, to analyze its possibilities, and to recommend a suitable mode of entry for a particular company. The author analyzes several aspects of Dacia which plans to expand to the Chinese market. The analysis of the situation gives rise to recommendations on how to enter the Chinese market, and especially possibilities given to Dacia. Renault Group, comfortably installed at the first place of European automotive market, is constantly looking to expand in new market as part of its strategy of raising sales outside its core Western European markets. Attracted by emerging markets, Renault seized the opportunity to buy its Romanian partner Dacia, and restructured it into a low-cost car manufacturer with a strategic objective of producing modern, reliable and affordable cars for emerging market. Logan, the newborn symbolizing the rebirth of Dacia, has encountered a huge success in East European market following its introduction in September Vowed by West Europeans, the Logan was introduced in June The Logan commercial success exceeded all forecast. China has recently moved from a planed economy to a market economy still in transition. Considering a population of 1.3 billion inhabitants, the second lowest labor wage, a recent accession in the WTO (2001), and a huge economic boom, China looks a very lucrative market for Renault s expansion strategy. Renault restructured Dacia as to conquer emerging market, thus the marketing mix is already offered by Logan. The success should be similar. The key issue for Dacia is to build Guanxi as quick as possible to find a suitable local venture-partner and start operating; without Guanxi, it is almost impossible to do business. Another concern is brand awareness. Dacia nor Renault are recognized in China. Chinese consumers choice is influenced by their purchasing and service experience, thus Dacia need to spend resources in providing them with Dacia experience throughout their product-ownership life cycle. China s 11 th Five-Year Plan period ( ) plan to make the automobile industry a pillar of its national economy. China encourages the establishment of some internationally competitive automobile groups and enterprises engaging in mass production of spare parts. 86

88 Auto-related industries such as raw materials and road construction are geared to the needs of automobile development. Fastest growing market in the world, biggest motorbike producer worldwide, it is a question of time when China will become the world biggest car manufacturer 2010? 87

89 LITERARY RESOURCES [1] ANSOFF, H.I. Strategies for Diversification, Harvard Business Review, September- October [2] BITNER, J. and BOOMS, B. Marketing strategies and organizational structures for service firms, in Donnelly, J. and George, W. Marketing of services, American Marketing Association, Chicago, [3] BORDEN, N. The concept of the marketing mix Journal of Advertising Research, vol 4, June, 1964, p363 [4] CULLITON, J. The management of marketing costs, Harvard University, Boston, 1948 [5] Iowa State University, AgDecision Maker, File C5-17, May 2005 [online pdf]. URL < [cited 05/02/06] [6] LAUTERBORN, R New Marketing Litany: 4P s Passe; C words take over, Advertising Age, October 1, 1990, pg 26. [7] MCCARTHY, J. Basic Marketing: A managerial approach, 13 th edition (1960 1st edition), Homewood Il, IRWIN, 2001 [5] PERREAULT, W. D. and McCARTHY, E. J. Basic Marketing: A Global Managerial Approach, 15 th edition, New Jersey, IRWIN/McHILL. ISBN: [9] PERREAULT, W. D. and McCARTHY, E. J. Essentials of Marketing, 10 th edition, New Jersey, IRWIN/McHILL, ISBN: [10] WILD J. J. and WILD K. L. and HAN J. C. Y. International Business, 2 nd edition, New Jersey, IRWIN/McHILL, 2003.ISBN:

90 OTHER RESOURCES Association for Asian Research, The limits of the Chinese economic reform, 26/08/05 [online] URL < [cited 16/05/06] Boston Consulting Group, Capturing global advantage, April 2004 [online pdf] URL < [cited 24/05/06] Boston Consulting Group, Competing to win in China s fast-growing automotive market, December 2002 [online pdf] URL < [cited 24/05/06] Boston Consulting Group, Winning in today s Chinese automotive market, June 2005 [online pdf] URL < df> [cited 24/05/06] Business Week, Got 5,000 Euros? Need A New Car?, 04/07/05 [online] URL < [cited 22/05/06] China Business Update-Autostatistics, Vol. 9, No. 1, January 2005 [online pdf] URL < [cited 16/05/06] China Motor Vehicle Documenation Center [online] URL < [cited 20/05/06] Dacia [online] URL < [cited 22/05/06] Guide to the World Trading System [online] URL < 98/itc1-01.htm> [cited 10/04/06] Haute Ecole de Gestion de Genève [online pdf] URL < %20Formes/Exemples%20organigrammes.pdf> [cited 21/05/06] Ifri, Location and competitiveness of firms in Europe, VERDONCK Jacques [online pdf] URL < _IFRI_ pdf> [cited 24/05/06] 89

91 International Metalworkers, Federation Renault Group employees fundamental rights declaration [online pdf] URL < [cited 24/05/06] Invest in China, China's Absorption of Foreign Investment [online] URL < &language=en> [cited 17/05/06] NetMBA Business Knowledge Center [online] URL < [cited 21/03/06] People s Daily Online, Auto production concentrated in 10 plants, 25/01/04 [online] URL < [cited 16/05/06] People s Daily Online, China sets new targets in five-year plan, 08/03/06 [online] URL < [cited 15/05/06] Renault [online] URL < [cited 12/04/06] The Economist, Dream Machines, 02/06/2005 The Economist, Extinction of the predator, 08/05/06 [online] URL < [cited 14/05/06] themanager.org [online] URL < [cited 15/03/06] tutor2u [online] URL < [cited 15/03/06] Yahoo Finance [online] URL < [cited 21/05/06] Wikipedia, the free encyclopedia [online] URL < [cited 22/03/06] Xinhuanet.com, China to be world s third largest automaker by 2010, 18/12/06 [online] URL < [cited 15/05/06] 90

92 LIST OF TABLES AND FIGURES Figure 3.1.: Conceptual diagram Figure : Michael Porter s Five Forces Model Figure 3.5.: 7-S Model Figure : Situation analysis Figure : SWOT Profile Figure 3.8.1: Marketing Mix Figure : Four examples of basic channels of distribution for consumer products Table : Selecting an appropriate pricing strategy depends on market conditions Table 3.9.: Ansoff s Product-Market growth matrix Figure : Evolution of entry mode decision Figure : Renault Group presence and sales world wide in 2004 Table : Group profile Table : Group s earnings Table : Shareholders Figure 4.2.: Dacia s organization chart p5 p13 p17 p20 p22 p25 p27 p30 p32 p41 p46 p47 p48 p48 p51 Chart 4.3.: Global vehicle production by alliance group and operating margin compared p58 Figure 4.4: Car joint ventures in China in 2001 Figure 4.4. : Chinese Automobile Production Volume Figure 4.5.: Sales of Passenger Cars by Segment p62 p64 p66 Table 4.9.: Comparison of entry barriers before and after China s accession to the WTO p82 91

93 APPENDICES Appendix 1: Group Executive Committee at November 1, 2005 Carlos Ghosn President and CEO of Renault Patrick Blain Executive Vice President, Sales and Marketing, and Light Commercial Vehicles Michel Gornet Executive Vice President, Manufacturing and Logistics Thierry Moulonguet Executive Vice President, Chief Financial Officer Patrick Pélata Executive Vice President, Plan, Product, Planning and Programs Jean-Louis Ricaud Executive Vice President, Engineering and Quality Corporate Secretary General, Executive Vice President, Group Human Michel de Virville Resources Source: Renault [online] URL < [cited 12/04/06] 92

94 Appendix 2: Management Committee at November 1, 2005 Carlos Ghosn (1) President and CEO of Renault Patrick Blain (1) Executive Vice President, Sales and Marketing Marie-Christine Senior Vice President, Market Area Europe Caubet Jacques Chauvet Senior Vice President, Market Area France Jean-Pierre CorniouSenior Vice President, Chief Information Officer Marie-Françoise Senior Vice President, Corporate Communications Damesin Alain Dassas Senior Vice President, Renault Sport and Renault F1 Team Rémi Deconinck Senior Vice President, Product Planning Senior Vice President, Purchasing. Chairman and Managing Director, Odile Desforges Renault Nissan Purchasing Organization (RNPO) Jean-Baptiste DuzanSenior Vice President, Corporate Controller Michel Faivre- Senior Vice President, Vehicle Engineering Development Duboz Philippe Gamba Chairman and CEO, RCI Banque Manuel Gomez Advisor to the President and CEO Michel Gornet (1) Executive Vice President, Manufacturing and Logistics Kazumasa Katoh Senior Vice President, Powertrain Engineering Philippe Klein Senior Vice President, CEO Office Special Advisor to the Executive Vice President, Engineering and Jacques Lacambre Quality Patrick Le QuémentSenior Vice President, Corporate Design Benoit Marzloff Luc-Alexandre Ménard Senior Vice President, Strategy and Marketing Senior Vice President, Public Affairs Senior Vice President, International Operations and Northern Latin America and Public Affairs Bruno Morange Senior Vice President, Light Commercial Vehicles Thierry Moulonguet (1) Executive Vice President, Chief Financial Officer Patrick Pélata (1) Executive Vice President, Plan, Product, Planning and Programs Jean-Louis Ricaud (1) Executive Vice President, Engineering and Quality Jérôme Stoll Senior Vice President, Mercosur Yann Vincent Senior Vice President, Quality Michel de Virville (1) Corporate Secretary General, Executive Vice President, Group Human Resources (1) - Members of the Group Executive Committee. Source: Renault [online] URL < [cited 12/04/06] 93

95 Appendix 3: Renault Group s organigram CEO Corporate Secretary General, Executive Vice President, Group Human Resources Executive Vice President, Sales and Marketing, and Light Commercial Vehicles Executive Vice President, Manufacturing and Logistics Executive Vice President, Chief Financial Officer Executive Vice President, Plan, Product, Planning and Programs Executive Vice President, Engineering and Quality Source: Haute Ecole de Gestion de Genève [online pdf] URL < [cited 21/05/06] 94

96 Appendix 4: Car production by car makers in 2005 Car maker Number of units Chang an Auto Shanghai Volkswagen FAW Volkswagen Beiqi Futian Shanghai GM Wuling Beijing Hyundai Guangzhou-Honda: Hafei Shanghai GM (Pudong) Tianjin FAW Xiali Chery (Qirui) Dongfeng Nissan Jianghuai Dongfeng Peugeot Citroën Tianjin Toyota Jili (Geely) Dongfeng Yueda KIA Changhe Changan-Suzuki FAW Jilin Huachen Jinbei Changcheng Shanghai GM Dongyue Haima Jiangling Nanjing Chang an Dongfeng Light Truck Chang an Ford FAW Car FAW Hongta Dongnan FAW Harbin Nanjing Fiat Xinkai Qingling Zhongxing Beijing Jeep Changhe Suzuki Dongfeng Honda Shanghai GM Norsom Shanghai Huapu Zhengzhou Nissan Changfeng Liebao Dongfeng Fengxing Huachen BMW

97 Changfeng Yangzi Jiangling Lufeng Shuanghuan Beijing Auto BYD Dadi Hebei Jiangnan Huachen Zhonghua Ji ao (Gonow) Shuguang Forta (Fuda) Huatai Hyundai Tianma Zhongtai (New Tech) FAW Chengdu Shanghai Wanfeng Huayang Tianjin FAW Huali FAW Fengyue Jincheng Ji ao Shaanxi Nanqi Wuxi Lifan Fudi Shanghai Yizheng Zhongshun Dadi Chengdu Tianqi Meiya Huabei Beijing Beilu YTO Dongfang 750 Tongtian 500 Dong an Heibao 500 Huaxiang Fuqi 500 Yema 400 Feidie 150 Lushan 50 Source: China Motor Vehicle Documenation Center [online] URL < [cited 20/05/06] 96

98 Appendix 5: Sales of Passenger Cars by Segment 97

99 Appendix 6: Output of Passenger Cars by Segment 98

100 99

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