An Analysis of Entry Modes In The Chinese Car Industry

By Liu Hu
Year 2006/2007

MSc In International Business

Abstract

Over the past decades, economic globalization is irresistible in the present world. In 2001, China accessed into World Trade Organization (WTO), forcing Chinese companies to reposition them to meet the challenges from oversea companies. Especially, Chinese car industry will suffer a lot. To serve customers outside the existing domestic market, a firm needs to choose the best mode of entry into the foreign industry. The choice of the appropriate entry mode for a particular foreign market is of critical importance for a firm conducting its business in the foreign market and has been identified as a frontier issue in international marketing.

After several years of continuous growth, China is now the fourth-largest automobile market in the world next to U.S., Japan and Germany. Auto executives, facing flat or falling sales in their home markets, predict that China will become their biggest market on the next decade. Thus competitions in the Chinese car market will become tough. How to compete with other auto companies in Chinese market, selection of entry mode is the first and key step for those foreign auto companies. Therefore, this paper will attempt to fill in the analytical gap by examining the determinants of entry mode of multinational auto companies in China. The objective of this paper is to identify and analyze conceptual framework, which presents the entry modes used by multinational auto corporations in their entry to the Chinese auto industry. This paper will also examine various factors that influence the entry mode decision of foreign auto companies when they are entering Chinese car industry.

Contents
Chapter 1
1.1 1.2 1.3 1.4

Introduction.............................................................................1
General Information on Chinese Car Market ................................................ 1 Objectives of This Paper ............................................................................... 3 Research Methodology and Data Collection................................................. 3 Structure of This Paper.................................................................................. 4

Chapter 2
2.1 2.1.1 2.1.2 2.1.3 2.1.4 2.1.5 2.1.6 2.2 2.3 2.4

Literature review ................................................................... 5

Entry Mode Theories..................................................................................... 5 Internalization Theory and Transaction Cost Theory .......................... 6 Eclectic Theory .................................................................................... 7 The Institutional Theory....................................................................... 8 Resource-Based Theory ....................................................................... 9 Competitive Advantage and Value Chain ............................................ 9 Optimal Entry Mode........................................................................... 11

Entry Mode Classification........................................................................... 12 Factors Influencing Entry Strategies ........................................................... 14 Strategies Selection ..................................................................................... 16 2.4.1 2.4.2 2.4.3 2.4.4 International Market Entry Strategies ................................................. 16 Market Entry Stages ............................................................................ 17 Market Entry Strategies: Joint venture & wholly owned subsidiary .. 18 Entry Timing ....................................................................................... 19

Chapter 3
3.1 3.2 3.3

Methodology ..........................................................................20
Qualitative Research ................................................................................... 20 Secondary Data Collection.......................................................................... 21 Case Study Research ................................................................................... 22

3.3.1 Strengths of Case Study ....................................................................... 22 3.3.2 Weakness of Case Study ...................................................................... 23 3.3.3 3.4 Cases Selection.................................................................................... 24

Summary of Methodology ........................................................................... 24

Chapter 4
4.1 4.1.1 4.1.2 4.1.3 4.1.4 4.1.5 4.1.6 4.1.7 4.1.8 4.2

Case of Chinese Car Industries ..........................................25

Analysis of external and internal environments in Chinese car market .... 28 General External Environment Analysis............................................ 29 Internal Environment Analysis........................................................... 30 Before WTO....................................................................................... 31 After WTO ......................................................................................... 32 The Impact of The Reduction of Tariff.............................................. 33 The Impact of the Change of Car Import Quota ................................ 34 The Impact of Opening of Car Trade and Service ............................. 34 The Impact of Opening Chinese Car Market to Foreign Investment. 35

ShangHai General Motor (GM) Case........................................................ 35 4.2.1 4.2.2 4.2.3 4.2.4 4.2.5 Brief Introduction to GM Auto Company.......................................... 35 Shanghai GM Auto - Company Overview......................................... 36 Analysis on Operation Performance of Shanghai GM Auto Co.. ...... 36 Bottle-neck Problems of Shanghai GM Auto Company.................... 38 JVs and WOFEs of Shanghai GM - Localization and...... Self Development ................................................................................ 39 4.2.6 Reflection on Development of JVs and WOFEs of Shanghai GM .... 40

4.3

ShangHai Volkswagen (VW) Case ............................................................. 41 4.3.1 4.3.2 4.3.3 4.3.4 4.3.5 4.3.6 Brief Introduction to VW Auto Company.......................................... 41 Shanghai VW Auto - Company Overview......................................... 42 Analysis on Operation Performance of Shanghai VW Auto Co........ 42 Bottle-neck Problems of Shanghai VW Auto Company.................... 43 JVs of Shanghai GM - Localization and Self Development .............. 43 Reflection on Development of JVs of Shanghai VW ........................ 45

Chapter 5
5.1 5.1.1 5.1.2 5.1.3 5.1.4

Findings and Discussions.....................................................46

Weaknesses of Chinese Car Industry .......................................................... 46 Economy of Scale............................................................................... 46 Technology......................................................................................... 47 Price.................................................................................................... 47 Ownership .......................................................................................... 47

II

5.2

Strengths of Chinese Car Industry .............................................................. 48 5.2.1 5.2.2 Operations .......................................................................................... 48 Marketing ........................................................................................... 48

5.3

Joint Ventures, Mergers, and FDI ............................................................... 49 5.3.1 5.3.2 Reasons of Popularity of Joint Venture and FDI ............................... 49 Problems in Joint Ventures and FDI .................................................. 52 5.3.2.1 5.3.2.2 5.3.2.3 Organizational Control............................................................ 52 Managerial Corporate Culture................................................. 53 Technology Dismissing........................................................... 54

Chapter 6

Conclusion.............................................................................55

References ....................................................................................................58

III

Acknowledgment
This dissertation would be not achieved and completed without academic knowledge and moral support in various aspects.

Primary, I would like to thank Dr.Chengqi Wang for his support and help as the supervisor and personal tutor during the dissertation writing process. His suggestions, advice and explanation were very significant and useful for this dissertation.

I would also like to thank my parents and friends for their perennial support and help during this paper writing process, and throughout the whole degree course study.

IV

1. Introduction
Economic globalization has been part of the modernized world over the years. When China

entered World Trade Organization (WTO) in 2001, Chinese companies were forced to reposition themselves to meet the challenges from overseas companies. This action placed the Chinese car industry to unstable situation. To serve customers outside domestic market, a firm needs to choose the best entry mode to penetrate the foreign market. Proper selection of the entry mode to a particular foreign market

is important for a firm and it has been identified as a frontier issue in international marketing (Anderson and Gatignon, 1986). As more and more manufacturing companies, operating internationally, face heavy domestic and global pressure and make increasing Foreign Direct Investment (FDI) abroad, the research of the entry mode decision has caught the attention of managers and academic scholars. In this regard, many theories, which identify and focus on diversified variables that influence the entry mode decision, have been developed.

1.1 General Information on Chinese Car Market

After several years of continuous growth, China is now the fourth-largest automobile market in the world next to U.S., Japan and Germany. Even the development continues at just half its current pace, there is a possibility that China could leap into second place in 3-5 years. Auto executives, facing flat or falling sales in their home markets, predict that China will become their biggest market on the next decade. Thus competitions in the Chinese car market will become tough, which will eventually mark down auto prices to a rational level and extend competition in price, quality and after-sale service. Since there is an increase in the number of wealthy Chinese yearly and that the recent statistics reveals that Chinese private citizens have overtaken the government in the purchased of car units, automobile giants both at home and abroad look at the Chinese car market as their prospect. Unlike in the past in which purchases were made by the government, state enterprises and private businesses, now private citizens composed the majority of car buyers. Probably the mounting of

sales is attributed to the car loan offerings of banks, series of price cuts for homemade cars promoted by a tariff cut in January and the construction of additional roads. There is immense untapped growth potential in Chinas auto industry. According to government statistics, last year car ownership was only 1.5 units per 1,000 persons over the global average of more than 90 units. Besides, statistics also reveal that in the next five years about 32% of Chinas urban residents intend to buy a car. These results bode well for car marketers both in China and abroad. Giant global automobile industries now are either responding with vast investment or reforming models like mini cars that most fit the Chinese family use. Following Volkswagen and Citroen, almost all of major car manufactures, such as General Motors, Ford Motor, Honda, Fiat, Toyota and Mazda, made

investments in joint ventures with Chinese carmakers successively thus intensifying competition for market shares. Unlike the international auto giants, Chinas auto industry is fragmented. Of the 118 car manufactures in China, most are small, whereas its top five manufacturers produced 37 percent of total output in 2001. However, with the current low labor cost which is only one-twentieth and one-thirtieth of that in Japan, the government labeled China as a pillar industry that has great room for development. But still it is expected to be a difficult process and the need for Chinese government restructure the industry is yet to realize. With the commitments to the WTO in 2003, China has agreed to implement another round of tariff cuts for automobiles before ultimately reducing the tariff level for automobiles to 25 percent by 2006. Besides, China is also committed in issuing more car import quotas. Now automobile makers have begun chopping prices which trigger to Chinas first industry wide price war. In an estimation of an analyst, by 2010 companies will be able to build 20% more cars in China than they can sell there. And by 2020, China shall expect to have 140 million automobiles playing on its roads, which is seven times more than now, fueling demand for transportation infrastructure and services.

1.2 Objectives of this Paper

In spite of the rapid growth of manufacturing sector in developing countries, the extant literature on entry mode decision of manufacturing firms has been mainly grounded in the national setting of developed industrial countries and the experiences of transnational and multinational corporations from these countries. In other words, only few studies identifying factors influencing manufacturing and service companies entry strategies in the context of developing countries, which generate different external investment environment for foreign investors, have been done. Therefore, this paper will attempt to fill in the analytical gap by examining the determinants of entry mode of multinational auto companies in China. The objective of this paper is to identify and analyze conceptual framework, which presents the entry modes used by multinational auto corporations in their entry to the Chinese auto industry. This paper will examine various factors that influence the entry mode decision of foreign auto companies when they are entering Chinese car industry. To achieve the objective, there are two case studies to be used in comparing and explaining the popularity of entry mode choice of joint venture and FDI in present Chinese car industry. The advantages and problems that encountered using these entry modes will be discussed as well.

1.3 Research Methodology and Data Collection

Denzin (2000) pointed out that, it was difficult to get access and to collect data about the internal information of private organizations. Furthermore due to the time and financial constraint, it is impossible to conduct comprehensive interviews to collect primary data pertaining to qualitative factors discussed in proceeding literatures that may influence a firms entry mode decision. Therefore to examine the impacts of these qualitative factors on foreign automobile companies entry modes in China, this paper is principally based on secondary research in which all the data and information coming from second-hand sources. The secondary data used in this paper are primarily collected from a wide range of published

books and journals, annual reports, current press information, and others numerous information. Most statistics can be found from the news release, documentaries, government and firm-level websites. Furthermore, some interviews with CEOs have been conducted by journalists and presented through various means, including television and internet. Hence there are many statistics which can be used as basis for detail. Case study method is also employed in this paper. Case study is commonly place in journals but the comparative case studies seldom appear. Case study method can provide rich information and in-depth analysis of the business strategies and operations in most of the worlds auto corporations. Data for this case study are obtained from two sources, website and printed materials. The case studies focused on two multinational auto corporations, General Motor Corporation and Volkswagen Corporation of USA and Germany respectively, entering Chinese auto industries. These specific cases try to demonstrate the current situations of multinational corporations in auto market.

1.4 Structure of this Paper

This paper consists of six chapters. The first chapter is the introduction section. The second chapter, review of related literature, gives a general view about the subject of entry modes and especially focuses some topics related to the main conceptions such as the entry mode theories ,which include internalization theory, transaction cost theory, eclectic theory, institutional theory, resource-based theory, competitive advantage, value chain and optimal entry mode; entry modes classification; factors influencing entry strategies and strategies selection, which include international market entry strategies, market entry stages, and entry timing. General reviews on the concept of qualitative research method, the second data collection method and the case study method are presented in the third chapter, the methodology. The fourth chapter is an analysis of the present Chinese car industry. The case studies of the two corporations will be scrutinized. These two auto manufacturers, General Motor Corporation and Volkswagen Corporation, share commonalities and differences on their entry to the Chinese market. The two automobile giants cover various auto industries including automotives, power

energy, gearbox, automotive finance and the likes. While GM Corp. focused on establishing the automotive empire, VW Corp. dealt on the importance of customer relationship. In China for an instance, VW Corp. has invested more in car diversification than GM Corp. Market expansion by these two corporations is just one action done and some are still to take place in the coming years. These two case studies identify the factors that influence the entry mode decision and will analyze how and these factors help the corporations in the selection of the appropriate entry mode. The fifth chapter discusses the findings from Chinese auto industry that specialized in the case studies and the analysis on the advantages and limitations of entry mode choices of joint venture, mergers, and foreign direct investment. The conclusion part gives the overall finding of the study and suggests the possibility for the conduct of further study.

2. Literature Review

2.1 Entry Mode Theories

Since strategic decision selection has great impact on the competitive advantage of multinational enterprises in entering a foreign market, Entry Mode Theories thus play a crucial role. According to Contractor and Lorange (1998), knowledge on the different effects of these theories influences a foreign investors ability to achieve control over local ventures, monitor local operations, reduce operational risks, and fulfill strategic objectives. There are several theories such as Market Imperfections Theory, Transaction Costs Theory, Internationalization Theory,

Strategic Behavior Approach, and the Resource-Based Approach that analyze entry mode selection of investing firms (Shi, Ho, ad Siu, 2001). However Andersen (1997) argues that a firms entry mode choice involves many factors and that one single theoretical perspective alone cannot provide a comprehensive explanation.

2.1.1 Internalization Theory and Transaction Cost Theory For they share similarity in some aspects, Internalization Theory and Transaction Cost Theory are discussed together. As Ekeledo and Sivakumar (2004) stated, Internalization Theory explains why many firms prefer to launch a subsidiary in a foreign market, and to establish connection with local firms with regards to licensing or supply agreement. Besides, as Chen in 1999 mentioned, it is a theory which provides reasons why a firm does it activities in organizational structure internally than doing it externally. According to Johansson (2000), internalization is to retain control over its firm-specific advantages either through domestic production, which is the export option, or foreign investment, that is the FDI option. Johansson further said that licensing or externalization option is not much attractive. The Internalization Theory is viewed that it assumes perfect competition where any activity is perfectly performed, and disregards the importance of location in choosing entry mode (Ekeledo and Sivakumar, 2004).

Internalization theory is supported by the transaction cost analysis which is the combination of the elements of industrial organization, organizational theory, and contract law (Anderson and Gatignon 1986). In principle, transaction cost theory explains the organizational preference between firms and markets (Chen, 1999). Anderson and Gatignon (1986) believed that the most appropriate entry mode is through maintaining balance between control and the cost of resource

commitment or choosing a suitable mode by analyzing risk return and/or cost control trade-offs effect . Transaction costs analysis provides four constructs that determine the optimal level of control: transaction-specific assets; external uncertainty; internal uncertainty; and free-riding potential. In choosing the best entry mode to a foreign market the challenge for the firm is on how it will minimize the transaction costs. This theory is especially useful when many factors are available; nevertheless it is difficult to gauge its effects direction.

For the last 20 years, the transaction cost theory has been broadly employed to illustrate MNCs international investment activities (Sun, 1999). It is in this theory in which firms selection of mode of entry depends on the one that will provide the least cost solution (Masten, 1993). Studies, which examined the theory of international entry mode on firm performance, show significant differences in the performance levels of different types of entry modes, specifically

between wholly owned modes and joint ventures. Generally, transaction cost based entry mode choices are efficiency-driven decisions focusing on the least transaction cost option. Chiles and Mcmackin (1996) suggest that transaction cost based governance structure decisions may reflect the optimal performance mode given the uncertainty at the time and decision was made. Poppo and Zenger (1998) point out that transaction cost driven entry mode decisions greatly affect firms performance. Willianson (1996) argues that the transaction cost solution to mode choice is an efficiency-based decision, accounting for the hazards of each potential mode structure and the safeguards needed to assure compliance. Since each entry structure has a different cost and competency structure, their associated hazard and safeguard costs also vary. Firms using a transaction cost solution select the mode that economizes on these costs.

Transaction cost theory is associated with business transaction with other parties in the market, including the costs of drafting and negotiating contracts, and the observation of the behavior of those who enter into the contract (Luo, 2001). The transaction cost propositions are complicated under conditions of uncertainty. Uncertainty in a transaction takes two forms, behavioral and contextual. Teng (2004) spells out the difference between the two forms of uncertainty such that the former entails the opportunistic behavior of transacting while, contextual uncertainty bounds rationality of decision makers and arises from changes in institutional conditions such as political and economic stability, legal ground rules, and cultural and social relations embedded in national environment.

2.1.2 Eclectic Theory Dunnings eclectic Theory of Foreign Direct Investment (FDI) gives explanation to the concepts that the latter theory have missed. Dunning (1988) points out ownership advantage, location advantage, and internalization advantage as three key determinants that a firm should look into upon entering the market. Ownership advantage suggests that a firm must possess specific advantages which are strong enough to compete with local firms. It can also be regarded as competitive or monopolistic advantage. Market potential and investment risks that may grant a firm chance to gain profit refers to second determinant. Meanwhile, the last determinant suggests the degree of control over foreign affiliate is higher through FDI than licensing a local firm. The

eclectic theory indicates that several theoretical frameworks should be involved when a company enters and serves international market.

However, Ekeledo and Sivakumar (2004) argue that, the eclectic model fails to explain and predict the entry mode choice in a unified perspective. Furthermore, even Dunning (1993) himself notices a shortcoming such that the model is not pertinent into the case when two firms doing similar business and with similar ownership, internalization, and location advantages would not select the same entry mode in the same target market. The eclectic models also set aside variables such as broad product variables (goods versus services), home country factors, and boundary variables (logistics or transportation costs and currency exchange rates between home and host countries) affecting choice of entry mode. Both theories, internalization theory and eclectic theory, focus on the influence of industry makeup (Goodnow, 1985) and overlook the strategic alliances and the internal characteristics of a firm.

2.1.3 Institutional Theory The common concept of institutional theory suggests that organizations are of common understanding of what is appropriate and fundamentally meaningful behavior as a result of pressures exerted by various types of institutions (Zucker, 1983 p105). In most cases, institutional theorists converge on the role of external institutions in affecting organizational decisions and behaviors. Olive (1991) enumerated regulatory structures, agencies, laws, courts, professions, interest groups and public opinion as parts of the institution. Both the internal and external pressures play a vital role on the entry mode decisions and structures that firms pursue. Recent institutional theory presentations stress that in achieving legitimacy; organizations must conform to the norms set by the firms institutional environment, whether the norm entails the local markets institutional environment or the internal isomorphism of the parent and subsidiaries (Haveman, 1993). The central premise of institutional theory is that organizations should adopt structures and practices that are isomorphic to those of the other organizations as a result of their quest to attain legitimacy. Researchers have identified several factors that give rise to isomorphic pressures. For example, mentioned the three pillars of the institutional environment. The regulative pillar refers to rules

and laws that exist to ensure stability and order in societies; the normative pillar which includes the domain of social values, cultures, and norms, and the cognitive pillar that has to do with the established cognitive structures are taken for granted in society.

2.1.4 Resource-Based Theory Resource-based theory considers a firm as the source of competitive advantage (Capron and Hulland, 1999). The theory conveys the idea that assets and capabilities aside from being imperfectly mobile are different in one firm to another. Conner (1991) as quoted by Ekeledo and Sivakumar (2004), notes that, the resource-based theory recognizes the impact of context where a firm performs as well as the ability of a firm to construct the environment on the way to seeking success. As Johansson pointed out, the theory studies on technology, know-how, products, and services which make the firm able to compete in the market.

Ekeledo and Sivakumar (2004) thought that resource-based approach is in sharp contrast to transaction cost approach, because the former prefers solo ownership while the latter favors the shared-control mode such as franchising, licensing, management or supply contract. Furthermore, Johansson (2000) also mentions another approach versus resource-based approach, market-based resource. Market orientation requires marketers concern on consumers need. However, it is often abortive when market-based approach is applied in a country with less developed market economies.

2.1.5 Competitive Advantage and Value Chain The competitive advantage, which bolters understanding of entry mode strategy, is the core of a firms positioning. Competitive advantages are of two types, the lower cost and differentiation. Firms, which have obtained sustainable competitive advantages, can reach a success (Porter, 1998). In business, if the firm equipped value and quality in its products, the buyers are therefore willing to pay for the products or services it provides. A firm gains, if the value is more than the cost of activities required to perform otherwise it losses. Hence it is a prerogative for every

company to provide comparable buyer value but perform activities more efficiently than its

competitors (loss cost), or perform activities in a unique way that creates greater buyer value and commands a premium price (differentiation) (Johansson, 2000). The term of firm-specific advantages (FSAs) also mentioned by Johansson, shares similar view. He believed that the basic question for a firm before it enters a new market is how the company can get a reasonable payoff or turn on its firm-specific advantages. According to Shrikhande (2001), when a firm successfully established audiences loyalty to its differentiated product, the possibility for competition will be less and that it will set a barrier for new entrants. However, he also added that the process of product differentiation will enhance the cost that trades off the benefit form differentiation.

Firms should try their best to enhance the competitive advantage. The activities involved can be categorized in the value chain (Porter, 1998). The primary activities are ranked in terms of their degree of importance. It can be noted that each of the primary activities employs infrastructure, human resources, technology and procurement. In terms of value-added activities, firms should take action internally. Chen (1999) argues that internalization and competitive advantages have commonalities and differences. First, internalization aims at long-term benefits while competitive advantage is within a given time period. Second, although the essence of the imperfection always fails to spell out, competitive advantages exist in competitive market imperfectly. Finally, an internalization decision, as a short run, can enhance competitive advantages.

The value chain can be used to understand a companys cost position and to find how to facilitate the implementation of its business-level strategy. It is a good framework to examine its resources and capabilities to discover core competencies. A value chain can be divided into primary and supporting activities. Primary activities deal with production, sale, distribution and service after the sale. Activities which are to be accomplished before primary activities are to be realized are part of the support activities. By analyzing the value chain, one can determine how a product moves from the raw material stage to the final customer. For individual company, the challenge is to add as much value in the cheapest way possible, but not to sacrifice the quality of the product. (Hitt, Ireland and Hoskinsson, 1999).

Primary activities include inbound logistics, operations, outbound logistics, marketing and sales,

10

and services (Hitt, Ireland and Hoskinsson, 1999). Inbound logistics is composed of activities such as materials handling, warehousing, and inventory control, which is used to receive, store, and disseminate inputs to a product. Operations consist of activities necessary to convert the inputs provided by inbound logistics into final product form, such as machining, packing, assembly, and equipment maintenance. Outbound logistics refers to activities concern with collecting, storing, and physically distributing the final product to customers, such as finished goods warehousing, materials handling, and order processing. Activities completed to provide means through which customers can purchase products and to induce them to do so are part of the marketing and sales. To effectively market and sell products, companies can develop advertising and promotional campaigns, select appropriate distribution channels, and select, develop, and support their sales force. Services are activities designed to enhance to maintain a products value. These activities include installation, repair, training and adjustment.

2.1.6 Optimal Entry Mode Since each entry mode has its advantages and disadvantages, arriving at the one that is appropriate is not an easy task. Anderson and Gatignon (1986) criticized the previous literature mentioned as irrelevant and devoid help. One consideration was generally active in one case, but literature failed to discuss how the consideration acts in other situation. However, optimal entry mode still has been suggested which is thought as a means to maximize profit (Know and Konopa, 1992). Johansson provides an optimal entry mode matrix (See Table 1).

Table 1 shows the three strategic postures of a company. Incremental means that the entry strategy is stable for some time and other options are still open. When a firm has a well-protected trade secret or patentable know-how, there is a large potential to explore the foreign market. The protected posture refers to a situation when the firm with potential needs to learn how to for abroad and get familiar to local market. The final posture is granted to those companies whose competitive advantages are strong enough to overcome obstacles in local market.

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Company strategic posture Incremental Emerging Indirect exports Joint venture

Product/Market Situation High-Growth Indirect exports Indirect exports Acquisition/ alliance Mature Direct exports Alliance/ licensing Wholly owned subsidiary Services Licensing alliance Licensing Franchising/ alliance/ exporting

Protected

Control

Wholly owned subsidiary

Table 1: Optimal Entry Mode Matrix (Source: Johansson 2000, P171)

The table also classifies product/market conditions into four categories. Emerging markets are those which recently open up due to political changes. They have minimal well-established infrastructures and lack distribution alternatives. For markets which fall in this condition It is rather difficult to accomplish market-based exchanges and there is risk of default on payments. High-growth markets refer to high-technology markets in advanced economies and markets in many fast-growing countries, including the newly industrialized states. The first-mover advantage is notable in this market. If an entrant can establish a leadership soon, it will witness manifestations on the growth of sales. Many markets in advanced economies are considered mature. Instead of speed in penetration, presence establishment and loyalty maintenance transpired as the significant tasks in the mature stage.

2.2 Entry Modes Classification

As Driscoll and Paliwoda (1997) state, no agreement has been done to classify entry methods and each classification shares similarities, which are involved in three generic groups: export, contractual and investment. This concept can be reflected in Root (1994) as shown in Table 2.

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Export Indirect Direct agent or distributor Direct branch or subsidiary

Contractual Licensing Contract manufacture Management contracts Construction or turnkey contract Co-production agreement Technical agreement Service contracts

Investment Sole venture: new establishment Sole venture: acquisition Joint venture: new establishment or acquisition

Other

Franchising Other

Other

Table 2: Entry Modes Classification (source: Root, 1994, P6)

The export entry mode involves transfer of a firms products that are made in the domestic country or a third market, either directly or indirectly to the host market (Driscoll and Paliwoda, 1997). The key difference which distinguishes export entry mode from the other two modes is the final or intermediate product which is produced outside the target country (Root, 1994). The indirect exporting can be conducted via home country agencies like trading companies and export management firms. Direct exporting in the other hand takes place when a firm contacts buyers by itself outside the local market (Johansson, 2000).

Root (1994) defined contractual entry modes as long-term non equity associations between an international company and an entity in a foreign target country that involve the transfer of technology or human skills from the former to the latter. They refer to a number of arrangements including licensing, franchising, management and turnkey contracts, non-equity joint ventures and technical know-how or co production arrangements. When a firm finds it difficult to exploit its competitive advantage due to resource constrains, but can transfer the advantage to another party, contractual arrangements are generally employed. In this situation, long-term relationship between players is usually established. The arrangements can entail transformation of intermediate goods such as knowledge and/or skills (Driscoll and Paliwoda, 1997).

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Entry modes under the heading of investment mean that the ownership and control of facilities belong to a firm wholly or partly in the target market (Root, 1994). Investments can be materialized through acquisition, mergers or Greenfield investment (Driscoll and Paliwoda, 1997). It is common for companies to set up a sole venture from new establishment or by acquiring a local company. Chen (1999) suggests that the preference to owning a co-operative venture than transferring its capabilities through contracts, when a firm face following four situations, say, first, the organizational knowledge is tacit and embodied in managerial routines; second, exchange of personnel and responses to unproductive contingencies are required; third, there exists the potential for externalities; fourth, investments in assets are specific to the relationship.

2.3 Factors Influencing Entry Strategies

Entry mode links the firms products to foreign markets (Kwon and Koopa, 1992). Choice on what entry mode to use is always equipped with complexity. In terms of internal or external prospective, Goodnow (1985) groups corporate strength, competitive position, corporate policy, and a products characteristics into internal factors and identifies the foreign markets opportunity, its economic development / performance, political environment, geo-cultural environment, comparative host country costs, and a firms home governments policies as external factors. Chen (1999) logs end-product market characteristics, negotiations and contractual factors, technology transfer factors, organizational factors and general investment and risk condition as variables influencing the international business mode choice. There are a variety of factors influencing the choice. Driscoll and Paliwoda (1997) have classified them into three:

1) The variety of entry modes represents different dimensions. The remarkable dimensions are reflected through the varying degree of control, dissemination risk, resource commitment, and flexibility. Customarily company abides with the level of control over the market whenever it makes its entry mode decision. (Root, 1994).

2) The firms standing affects the choice of entry mode. The situation consists of several factors, like location such as country risk, socio-cultural distance, government regulations and

14

policies, and firms specific factors such as the essence of a firms know-how, product, differentiation and international experience of a firm (Dunning 1988).

Kwon and Konopa (1992) note that socio-cultural distance was the only variable that significantly influences the choice of entry mode. There is a great possibility that a firm will be more likely to choose contractual modes instead of investment modes if the social-cultural distance between a firms home country and its host country increases. A number of international communication literature published reveal that audiences prefer national over international product. Shrikhande (2001) claims that, audience response actively to the choice of viewing international or regional programmers and they usually choose the regional ones due to cultural relevance or proximity. The localization for auto includes products localization and personnel localization. The previous refers to manufacture and organization programs that fit to Chinese predilection. Personnel localization is the utilization of local talents who are capable of relating the domestic market and foreign culture.

3) Along with rapid pace of globalization, as a result of technological change, the economic expansion of newly industrialized countries and the transition of centrally planned economies into more market-orientation ones, the international market competition becomes more fierce. Therefore, the international strategies should be designed under a thorough consideration of long-term profitability and growth opportunities.

Driscoll and Paliwodas three groups can well present a firms market entry strategy. The first one shows the desires of a firm with regard to its own standpoint. The second looks on the reality. Sometimes, what a firm wants might go against what the actuality permits. The final one reveals the aim of a firm. It is the blueprint of a firms survival and development in a foreign market, which is the long-term goal rather than the short-term one. To some extent, the three groups, covering a great number of factors, might simplify the influential factors and the real strategies selection is rather complicated.

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2.4 Strategies Selection

2.4.1 International Market Entry Strategies Factors such as similarity of product needs, addition of manufactured mobile and informed buyers, increase economies of scale and geographic scope, boost on the mobility of product personnel, increase ability to interact with remote buyers, continuing wide disparities among nations in the cost, quality, and range of product available from local firms make the internationalization of competition in services in becoming intensive (Porter, 1998). Therefore, those which are available for manufacturing sectors are only contractual and investment entry. However, some argue that it is possible to separate production and consumption of some services. The empirical study shows that entry methods of manufacturing firms are varied and diverse, and exporting is very common especially in computing and engineering (Erramilli, 1990).

Based on the entry mode classification, it is suggested that international trade and foreign investment are those chosen by MNCs. According to Porter (1998), a manufacturing firm competes internationally by spreading activities on a regional or worldwide basis and coordinating activities dispersed in different nations. The nature of most production services requires that the activities, which are part of a firms value chain, should be conducted where the buyer is. As a consequence, firms have set up offices or units in various nations to provide service.

There are three pure types of international service competition. The common case is that one firm is intertwined with another in a particular service industry. The first type takes place when mobile buyers go to a country to have service performed. The next type is when firms provide services from home country to other countries by using domestically based personnel and facilities. Final, the last part takes place when a nation s firms provide service in other countries through setting up foreign service locations and recruiting either expatriates or local people. The first two are categorized in international trade, while the third one is regarded as foreign investment. Due to different competitive advantage of different nations, the activities composing of value chain tend to be. Furthermore, the protectionism which is very widespread gives international competitors

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more hindrances.

Some academicians propose other means when it comes to the dimensions of each mode, such as trade-off between control and risk. Palmer (2001) believes that, in the case of separable service, to provide the target market from domestic base can avoid most risks. Even for financial and information services, the business can be done through post or telephone. Local facilities are necessary for those companies which are involved inseparability of services. To establish temporary facilities is viewed as less costly and risky way to transfer physical and human assets from one place to another. This strategy is called market-entry risk reduction. However, to really reduce the risk, the methods suggested should be closely related to a time dimension. Root (1994) believes strategies designed for future development are two aspects: content supply and distribution. Content production is important since it serves as the means in the spread of the content. To generate profit from differentiating products is a good way; however, the cost of distributing content cannot be underestimated. In order to diversify risks, it would be better to develop both content and distribution network concurrently.

According to the research (Pan and Chi, 1999), there are three common modes for multinational corporations performing in China. The most popular one which makes up more than 50% over total operations in the last 20 years is equity joint ventures. Wholly foreign owned companies are the second most popular followed by cooperative operations such as contract manufacturing. Therefore, the role of local partners is very important for foreign MNCs. Furthermore, those local-market oriented MNCs are often more profitable than those export-oriented ones.

2.4.2 Market Entry Stages If the choices of entry modes give a rough idea about how to enter the market, the stages are more concrete access to go on foreign market. Literature rarely discusses the entry stages to Chinese auto industries. Auto internationalization in China is employed here which can reflect the activities of foreign companies. Auto internationalization in China includes five major stages (Chen, 2002):

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1) Offering of sponsored products is a mode is most preferable especially in manufacturing and service industries when the regulation over trading is comparatively tight. 2) Regulated trade is a mode done officially through formal agreements and recognized brands. The presence of foreign auto promotions on Chinese market can catch multinational advertisers attention and the business reputation and fill up the market time. 3) Competition is the result of the pressure coming from foreign auto promotions on the recipient country. Chinese car market out that it was urgent to flight for the market with foreign rivalries. 4) Demonstration is done in response to the intensive competitive from foreign auto companies, the host country auto companies consider the foreign fare as successful models. The formal trade between foreign auto companies and adopters enhanced the demonstration effects. 5) Cooperation materializes through cooperative approaches such as co-production or joint venture. The foreign partner generally provides capital and expertise while the Chinese supply general personnel and local support.

As Keegan (2001) notes, with the steady increase of export, a foreign office to deal with the sales and services of its products are established, this is quite flexible and highly independent. When the market grows mature and the competition between local and foreign firm tends to be intensive, more comprehensive global strategy is required. Kwon and Konopa (1992) notes, although exporting is generally the initial step, firms are more willing to set up a producing subsidiary in the target market to seek maximum profits after some time.

2.4.3 Market Entry Strategies: Joint Venture & Wholly Owned Subsidiary Deresky (2003) suggests that managers must have a global vision for the company and it should start with the skills and tools of managing in a global environment. In the growing globalizing market, expansion becomes an essential strategy for multinational companies. Technology, culture, market needs, cost, free markets, economic integration, peace, management vision, strategic intent and global strategy and action are the driving forces for companies to go global (Keegan, 2001). Meantime, it is important for these multinational companies to choose an entry mode when they make a determination to invest in one country. A well-chosen mode can enable a

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firm to gain competitive advantage, while poor model choices can lead to sinking the boat or missing the boat (Dickson and Geglierano, 1986). A variety of mode choices exist for a firm, which range from no international involvement, to exporting, licensing, to direct investment via joint venture or by wholly owned subsidiary (Holt and Karen, 2002).

A joint venture is a particular form of strategic alliance involving the formation of a new joint organization (Killing, 1983). It is one of the most popular strategic tools employed by MNCs to enter into new markets by establishing relationship with local partner, to achieve significant economies of scale for development of a strong competitive position, to secure access to additional raw material, to acquire managerial and technology still and to spread the risk associated with operating a foreign environment. Joint venture is also considered as an effective way of managing the increasing competitive and technological challenges of volatile international environment (Hu, 1996). Wholly owned operations are subsidiaries in another nation in which the parent company has full ownership and high control over operations, high mobilization of resources, and low technology dismissing risk, but bearing high risk (Lasserre, 2003).

2.4.4 Entry Timing The proper entry timing entry is crucial for MNCs. According to Erramilli (1990), early entrants are regarded as Client Followers .The latter refers to the firms primarily intend to serve the domestic clients overseas while the later entrant is described as Market Seeker who wants to attract foreign customers. Generally, a government opens up an industrial sector when it is confident about the domestic companies competency. Sometimes, even if the internal factors are not ready, many external forces may force the government to open up the industry. In this case, foreign companies are able to enjoy the monopolistic opportunity to develop the market, promote the product, and tap into a variety of strategies to preempt the future entry companies (Li, 2000).

Johansson (2000) suggests that, first mover advantages are striking in emerging market: higher brand recognition; more positive brand image; more customer loyalty; more distribution; longer market experience. In addition, to get into a market early, the MNCs can have adequate time to

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choose partners (Li, 2000). Being first provides the opportunity to establish a market presence and sign up potential customers while others are still getting started (Keegan, 2000). The earlier MNCs entered into Chinese market, the more profit they could gain. The late entrants have to catch up quickly and possibly will be forced to survive at the margins of the industry (Pan and Chi, 1999).

3. Methodology

In order to understand the theories from literature review, qualitative research method was introduced in this paper.

In making this research persuasive, two real case studies in Chinese car market has been chosen as part of the research. The main approach for information gathering is second data collection. The following sections would tell the reason to choose this qualitative research method and explain the data analysis methods.

3.1 Qualitative Research

Research methodologies are divided into two categories, qualitative research and quantitative research. Denzin and Lincoln (2000) define qualitative research by indicating that qualitative research is a situated activity that locates the observer in the world, which consists of a set of interpretive, material practices that make the world visible. Another definition given by Preissle (2004), which seems more specific, suggests that qualitative research is a loosely defined category of research designs or models, all of which elicit verbal, visual, tactile, olfactory, and gustatory in the form of descriptive narratives like field notes, recordings, or other transcriptions from audio-and video-tapes and other written records and pictures of films. In a word, qualitative research is basically an investigative process where the researcher explains a social phenomenon by collecting and interpreting a variety of empirical material case study; personal

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experience; introspection; lift story; interview; artifacts; cultural texts and productions; observational, historical, interactional, and visual texts that describe routine and problematic moments and meanings in individuals lives (Denzin and Lincoln, 2000:8).

3.2 Secondary Data Collection

This paper is, to a large extent, principally based on secondary data research, where in all the data and information came from second-hand sources. This is done due to several reasons related to the characteristics of this research. To begin with, the dissertation mainly studies the issue of the situation of Chinas automobile market after the WTO accession, especially from the perspective of foreign automobile corporations, which is a very broad topic on macro level. If the primary research is conducted, only those in high management level of a firm, even government officials will be appropriate to be involved in the research. However, ordinary people in China lack access to those high level managers and officials, and they will often be reluctant to offer any relevant information by themselves. Secondly, while the researcher finished this dissertation in UK, it will cause much difficulty and bias to conduct any primary research such as interview. Electronic mail and telephone interviews are prone to misunderstanding, and will hardly be easy to get deep understanding of the interviewees. Lastly Hollifield (2001) has studied 73 books and journals related to transnational media companies in overseas markets from 1978 to 2000. He found out that nearly half of the studies did not involve primary data collection, which indicates the secondary sources such as news accounts and the trade media, were widely used.

Comparing with primary data, secondary data, resulting from a wide and deep scope of issues, have a broader range of cover on the research questions. However, it should be admitted that the wide use of secondary data incurs some problems. Some data might be outdated and unreliable in many cases. In order to reduce such problems the study carefully selects the latest data, which reflect the present market and predict the trend of investment. Despite of choosing up-to-date information, data have been filtered according to the priority of reliability. The important data is usually from corporations annual report or official websites, including the Ministry of Commerce Development webpage, the Ministry of Information Industry (MII) webpage, the WTO official website, the websites of each main Automobile Corporation and major foreign

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companies in the Chinese market. Therefore, the main research method adopted in this dissertation is to make in-depth analysis of large amount of secondary data related to the topic. Huge amount of data have been reorganized and carefully analyzed to formulate the arguments in this paper. Several frameworks, namely Case Studies, PEST Analysis and strategic group analysis are used in order to study the Chinese car market and its environment and the automobile corporations entry strategies.

3.3 Case Study Research

Yin (1994) identifies the case study research method as an empirical inquiry that investigates a contemporary phenomenon within its real-life context that is when the boundaries between phenomenon and context are not clearly evident. And in which multiple sources of evidence are used. The case study inquiry copes with the technically distinctive situation in which where there will be many more variables of interested that data points, relies on multiple source of evidence, with data requiring converging in a triangulating form, and benefits from the prior development of theoretical propositions to guide data collection and analysis.

Therefore, the case study is not either a data collection tactic or just a design feature, rather a comprehensive research strategy. It is a systematic way of finding out what is happening, collecting and analyzing related data, and reporting the results. Rather than using large samples and following a set routine to examine a limited number of variables, case study methods involve an in-depth examination of a single case or event.

3.3.1 Strengths of Case Study 1) In-depth understanding

Researchers can understand as much as possible about the single subject or a small group of subjects, and obtain information based on particular contexts (Hammersley, 1995). Moreover, because of the universality and importance of experiential understanding and their compatibility with such understanding, case studies can be expected to continue to have an epistemological

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advantage over other inquiry methods as a basis for naturalistic generalization.

2) Flexibility

Case study is usually projected with the emphasis on exploration rather than prescription or prediction (Yin, 1994). Hence the researcher has more freedom, comparatively, on addressing and uncovering problems as they found in their experiments. Moreover, there is no settled format for case studies. It allows researchers to start from a broad topic, and narrow down as their researches progress.

3.3.2 Weakness of Case Study 1) Narration

Normally, case studies are narrative constructions by nature (Gerring, 2007) because they use chronology as a mina organizing device.

2) Generalization

A common concern about case study is that they provide little basis for scientific generalization. How can you generalize from a single case? is a frequently heard question. In fact, scientific facts are rarely based on single experiments; they are usually based on a multiple set of experiments, which have replicated the same phenomenon under different conditions. The same approach can be used with multiple case studies but requires a different concept of the appropriate research designs. The short answer is that case studies, like experiments, are generalizable to theoretical propositions and not to populations or universes. In this sense, the

case study like the experiments does not represent a sample, and the investigators goal is to expand and generalize theories and not to enumerate frequencies (Marschan-Piekkari, 2004).

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3.3.3 Case Selection Case study method can provide rich information and in-depth analysis of the business strategies and operations in most of the worlds automobile corporations. The comparative case study method can identify organizational behaviors across corporations. Therefore, two automobile multinational corporations are chosen as basis for comparison and discussion. The case

selection is based on the above features of case study method. General Motor Corp. and Volkswagen Corp. are selected as the case sites. Because these two corporations have entered into Chinese car industries, and there are similarities and differences on the entry strategies which are driven by these two corporations.

The following chapter will discuss the Chinese car market first, and then turns to specific cases, which is trying to demonstrate the current situations of automobile MNCs in China. Given that this is a case study and comparable data across corporations were not available, the analysis remains descriptive.

3.4 Summary of Methodology

This chapter gives an overall description and explanation of the methodology adopted in order to conduct this study. Reasons have been given in detail for choosing qualitative research method and pure secondary data as the source of information. Admittedly, using qualitative research on its own will cause some problems, such as lack of rigidity and biases are also likely to happen. Furthermore, using secondary data makes it more difficult to conduct the analysis, because the previous analysis and arguments may affect the present study. Due to the lack of access to the information, there seems to be no sufficient data to support that the future research will more convenient and be better developed with access to large amounts of data as more foreign automobile participants entering the Chinese car market.

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4. The Case of Chinese Car Industries and Foreign Direct Investment

The flow of Foreign Direct Investment (FDI) in developing countries has been tremendously increasing since in the 1990s. Its role and impacts of Foreign Direct Investment in these countries have led to the development of a number of controversial theories. These theories discuss the positive consequences as well as some negative consequences of FDI in the growth and economic development of developing countries. Before this can be addressed, however, it is important to

understand more about foreign direct investment.

The issue of foreign direct investment is one that has been misunderstood for many years. There are individuals that study it and discuss how significant it is, and there are others that see it as some kind of made-up problem that is really not important enough to focus on. Both of these

are valid points of view but, in recent years, it has generally been accepted that foreign direct investment is growing, and that the study of it is important. While this particular paper deals

with the experience of foreign direct investment when it comes to the auto industry in China, it is important to remember that this is not the only area of the world or the only industry that is affected by it.

Sovereign ratings are also important, as they help to show the credit ratings of countries and whether they are strong credit risks where investment is concerned. Sovereign ratings have only

been around since approximately 1979, but they have begun to rise dramatically in recent years and the demand for them is only going to increase (Altman & Kao, 1991; Billet, 1996; Lamy & Thompson, 1988; Ederington, Yawitz, and Roberts, 1987). These ratings help to reduce the

uncertainty that investors have regarding their exposure to risk and so getting a strong sovereign rating has enabled quite a few governments to get access to ratings on an international scale (Kaplan & Urwitz, 1979; Weinstein, 1977; Wakeman, 1984). This is particularly important to However,

developing countries that still have relatively strong economies (Saini & Bates, 1984).

the sovereign ratings, while significant, will not be the purpose or the topic of discussion here.

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The purpose of this paper is to not only show the seriousness of the problem in question, but to come up with ideas that will help to show how this problem can be reduced in size. The best

way to do this is to first analyze the problem in question to determine just how serious it actually is, and then use that seriousness as a wake-up call for those that have been looking the other way and avoiding dealing with the issue. is changed. There are many of these individuals, and it is time that this

These developing countries are not able to provide the local companies and businesses that they have with as much growth and development potential as developed or industrialized countries can, because they simply do not have the resources available. This is unfortunate, but it is also Were it not

somewhat offset by the FDI that is sent to these countries from developed countries.

for this FDI, the developing countries in this world would not have a lot of chance of rapid development, because the availability of funds would not be there.

After the Asian financial crisis of 1997, many countries are still somewhat nervous about providing funding for businesses in these developing countries, because they are worried that their economies could collapse again. will take place. While this is always a possibility, it is not likely that this

The governments of these countries have been changed and adjusted, and this In addition to this, the governments

has helped to avoid the problems that were seen in the past.

in these developing countries are also more aware now of what could happen, and they can take steps to stop this from occurring again.

While not all investors feel safe yet, there are many that do, and this has helped contribute to the FDI that is seen flowing to these developing countries, especially China, where the economy is growing more rapidly than other developing countries. The longer that this goes on without

large economic problems the safer that other investors will feel, the more money will go to these countries and the faster the development will be seen. This is encouraging for both the investors

and the countries that are beginning to rely on this money to fund their economies and build their countries.

This research will analyze the role of FDI in the economic development of Chinas car industry. It

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will also discuss both the positive impacts and negative impacts of FDI in order to determine whether the positive impacts will outweigh the negative consequences or vice versa. The main question for those that want to invest in Chinas auto market is: Does Foreign Direct Investment (FDI) promotes economic growth and development?

The answer to this question is crucial not only for policymakers and governments of the host countries but also for multinational corporations, investors, workers, and individuals, and it is important to understand why this is the case. If it is seen that FDI does actually promote the

economic growth and development of these countries overall, than the policymakers and governments of these host countries will want to attract more FDI as quickly as possible to continue that growth. These governments will also likely change some of their policies toward

investment so that investors from foreign countries would be more likely to send money to that country and develop their businesses to some degree in that country.

For corporations and investors, whether FDI promotes growth and development is also important. These are the companies and the people that will be providing the money to these countries, and they certainly want to get something back for their investment. hand money to another country and make it a gift. They do not want to simply

If investing in developing countries does not

help the growth and development of those countries, there would be little point in investing in them in this way. The growth and development is necessary for the business to grow in that These kinds of issues must be studied thoroughly

country and a return on investment to be seen.

before a corporation or an investor can actually determine whether it is wise to invest money and human capital into a particular developing country, or whether that money would best be spent elsewhere.

For workers and other individuals in the developing country, the FDI that comes into that country could potentially allow for more jobs, higher income, and more goods and services that can be easily acquired. Naturally, this is also seen as significant, because these individuals wish to

have many things and they have many goals and dreams, although these may not be the same as the goals and dreams of those in already developed countries. This is especially true in China,

where many of the younger people like to try new things and would therefore be very interested

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in the goods and services that could be brought into their country from the developing nations through FDI and multinational corporations.

It is necessary and pertinent to discuss benefits, and this particular study is important to many people across the world. Not only does it have importance for those that are involved in FDI

now, but it also has importance for those that are considering FDI in the future, especially where developing countries are concerned. The reason behind this is that foreign direct investment is

something that is continuing to grow, and companies that wish to grow and expand should examine in more thoroughly as a potential for that expansion as the world becomes more of a global society.

An important part of the rationale behind this study is that there have not been any other studies done specifically like this one. Doing a study like this therefore provides new and unique

information, but it can also be difficult, since there is really no strong precedent for this type of study that the researcher can thoroughly follow.

The further benefits of a study such as this one indicate that other countries can learn from what is discovered here where FDI is concerned. All developing countries are involved with FDI to When it can be

some degree, with some countries being much more involved than others.

determined exactly what effects FDI has on developing countries, then it is quite likely that these countries' governments and policymakers will be better equipped to handle the ideas and plans of investors and multinational corporations when they want to move into a particular country.

4.1 Analysis of External and Internal Environments in the Chinese Car Industry
In general, an auditing of environmental influences that affect the organization needs to be undertaken so that reasonable competitive strategies can be put forward. This indicates that a strategist should try to get a feel for the environmental factors that are currently or that will be important to a specific organization. The process would then need to continue so that the changes that can be seen in the environment can also affect the changes in entry strategies.

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Environmental factors, economic factors, political/legal factors, social/cultural factors and also technological factors should all be considered. The legal factors that need to be addressed include issues in employee law, monopolies and mergers legislation, environmental protection laws, and wider issues such as foreign trade regulations. The political factors refer to the stability of the government. The taxation policy, the government spending, the relationship that the government has with other countries, and the industrial policy and all issues should be considered.

The economic factors that need to be addressed refer to inflation, disposable income, unemployment, business cycles, GNP growth rates, interest rates, exchange rates, energy, and the basic prices for raw materials. Factors from cultural and social standpoints include population demographics, the income distribution, what levels of education are seen, lifestyle changes that are being made or that need to be made, attitudes toward work and leisure, consumerism, and the social mobility of individuals in that area. The technological factors addressed include new discoveries and developments in the industry or in related industries, that speed at which technology transfer (diffusion) takes place, that amount of money that the government spends on research, and the rates of obsolescence that are seen. a PEST analysis. An analysis of all of these issues is called

4.1.1 General External Environment Analysis Where the Chinese car industry and its external environment is concerned, the political environment should be the first one to be addressed. In 2001, China was declared a member of the World Trade Organization (WTO). Chinas entry into the WTO indicated that there would be a gradual opening of the Chinese market where cars were concerned. Some protection from the government will be gradually cancelled so that the responsibilities of a WTO member can be undertaken.

The development of the Chinese car industry will also help to accelerate the development in various industries such as raw materials, electronics, automation, transportation, financial services, tourism, and insurance. In the US, Japan and Germany about 10% of the population is employed by car or related industries. Taxes related to cars occupy 10% to 18.6% of total

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financial income of government. Export of car ranges from 10% to 24% of total export (Chen, 2002). The global market for cars has not yet reached saturation. In some countries, especially in China, the potential demand for cars is very large as the population continues to grow. According to Chen (2002), 1 percent increase in gross national income may result in 1.3% increases in the demand of car. In more recent times, many foreign investors have hurried into the Chinese car industry, as they sense the huge potential demand that could result from the rapid increase in the GDP. It is very attractive for foreign investors.

4.1.2 Internal environment analysis In China, consumers were starting to demand better quality cars, and as this was taking place there was increasing pressure on the domestic products that were available, while doors were being opened for foreign companies that were able to offer higher quality. I see a watershed point in the auto industry here, said Michael Duune, who is the managing director for Automotive Resources Asia LTD, a consulting firm based in Beijing and Bangkok. Many auto companies such as Volkswagen, Audi, Honda, Citroen, Daihatsu, Suzuki and Subaru have manufacturing plants located within China as part of their growing companies.

In addition, Japanese car makers have been selling their vehicles within China since the 1970s. Toyota has decided that China is beginning to prosper and has begun selling trucks, buses, luxury cars, taxis, and motorcycles to consumers in that country. Soon after, Nissan, Daihatsu, Suzuki, Mitsubishi and other car companies followed that lead. In 1983 and 1984, Japans car exports to China increased by seven times, from 10,800 to 85,000. In addition, China became Japans

largest market for foreign cars, excluding the United States. Because there were so many massive imports of all types of autos, foreign currency reserves were rapidly depleted and further licenses for importation were cancelled. The government of China also established various incentives, including taxes, bank loans, and foreign exchanges, in order to encourage more foreign companies to operate in China and to reinvest their earnings and/or export their products. For example, there is a new law which allows joint ventures to avoid tariffs on imports when at least 40 percent of the value of a specific vehicle has been produced within China.

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In 2000, the car industry in China was very fragmented. There were approximately 136 domestic producers of vehicles within the country. However, around 40 percent of the capacity was idle, and half of all of the car manufacturers were simply losing their money (Hitt, Ireland & Hoskisson, 2003). The firms that remained tried to improve their efficiency; however, because it was believed that there was going to be a major consolidation within the car market in the next few years because import tariffs were being reduced and economies of scale were changing. In July, 1999, the State Council of the Central Government made an announcement that it intended to take steps to speed up a restructuring of the vehicle sector. Once Chinas entry into the WTO seemed more likely, the government planners began to realize that Chinas domestic auto industry was not prepared for the global competition that it received. It was hoped that a new plan would therefore reinvigorate the ongoing efforts which were used to eliminate duplication of investments and accelerate consolidation. This new plan also coincided which a promulgation of Chinas 10th Five-Year Plan and an announcement for a new Guiding Catalogue for Foreign investment which was designed to be released in 2000. Both of the documents would then reportedly be very critical in setting a future course for the auto industry.

4.1.3 Before WTO Until 2000, Chinese car tariff items are totally 165 and car-related tariff items are 99. The average tariff of car products is 38.89%. Average tariff of 65 tariff items about integral car is 55.94%. The highest tariff ranges from 80% to 100%. The highest tariff of part is 50%. On 1st January, 2001, the tariffs of cars are reduced to about 70%-80%, while the tariffs of car parts are reduced to 30%-40% (Guo, 2003).

Before WTO, several non-tariff regulations are applied in the import of cars. The first is quota permission regulation. In 1998, 85 car products are listed in <Quota Product Catalogue> and <Special Product Catalogue> that are issued by trade administration. Secondly, Chinese government put limit on import of car products through import ratification process. Annual import must be compatible with national car manufacture plan. At that time, only trade companies can do the trade business, more convenient for government to control car imports. Thirdly, import ports are confined to specific ports. Finally, made-in-own-country encouragement

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policy was applied. According to those policies, the import tariffs on parts of a car depended on how many percent of parts in a car are produced in China. This policy aimed at reducing car or car-related parts imports. In addition, there were regulations on foreign direct investment in Chinese car market. In the car joint venture or cooperation companies, Chinese side must hold at least equal to or more that 50% shares. One foreign car company can not establish two joint ventures or cooperation companies in China to produce the same integral car.

Before China entered the WTO, there were several non-tariff regulations that were applied to the import of various cars, and those have been adjusted now because of the WTO entry.

4.1.4 After WTO According to WTO agreement, the average import tariff on cars will reduce from 80%-100% in 2000 to 25% in 2006. Especially, on 1st January, 2005, the average import tariff on cars should reduce to 30%. On 1st January, 2006, the average import tariff on cars should reduce to 28%. The average import tariff of car parts must reduce to 10% on 1st July, 2006 (Guo, 2003).

The adjustments of both non-tariff and investment policies are significant, and they include (Guo, 2003): from 2002 to 2004, the import quota of integral cars and car parts annually has increased 15% based on a figure of $6 billion. In 2005, the quota was cancelled, and the made-in-own-country requirements for car parts were cancelled immediately after China entered the WTO. After Chinas entry into WTO, any limit on share percentage held by Chinese side must be cancelled. Meanwhile, the establishment of foreign car companies should be allowed in China. Any limit on car models produced in joint ventures or cooperation companies should be cancelled in two years. Technology transfers should not be imposed as the precondition of ratifying car import and investment from foreign companies. Trading and distribution fields will be completely opened in 2004.

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4.1.5 The Impact of the Reduction of Tariffs Price differences have had an impact on the Chinese car industry. After the tariffs on cars were reduced, foreign cars gained price advantages and the prices of domestic cars categorized in the same grade were significantly higher than the prices of foreign cars in the same category. Overall, the higher the category and price of car, the larger the gap in price between foreign and domestic.

Comparing prices is also very complicated. The domestic car market has been regulated by the Chinese government for such a long term that it is insufficient where competition is concerned. Under these types of circumstances, domestic car profits are much higher than foreign car profits. Because of this, comparing the sales prices of the cars does not accurately reflect the changes that the tariffs have created.

It is found that price determines the competitiveness of a car model. If the average price differences between domestic and foreign cars are less than the tariff on foreign cars, the competitiveness of domestic cars is weakened, vice versa. For example, in 2001 the average import tariff on cars are about 80%, the domestic cars will not be influenced in the price competition only if the difference between domestic and foreign cars in the same grade is less than 80%. After 1st July, 2006, the tariff on cars will reduce to 25%, if the average difference between domestic and foreign cars in the same grade is bigger than 25%, foreign cars will have a great import on domestic cars in the price. It means the domestic cars competitiveness depends on not only tariff but also the total cost of a car.

In addition, the impacts on domestic high-grade and low-grade cars are different. When average tariff is reduced to 25% in 2006, it is possible that high-grade cars are at a disadvantage while low-grade cars are still competitive. The tendency may be that the competitiveness of domestic low-grade cars will improve through intensive competition while the reduction of cost and price of high-grade cars can not be compatible the reduction of tariff. Consequently, foreign cars dominate high-grade car market and domestic cars dominate low-grade car market.

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4.1.6 The Impact of the Change of Car Import Quota Between 2002 and 2004, the quota of import cars and car parts increased yearly by 15% based on a figure of $6 billion. In 2005, the quota was cancelled, meaning that the import quota of 300,000 to 400,000 cars per year will no longer be in effect. However, car production volume is just 605,000 in 2000. The import quota is about 50%-70% of annual car production volume (Guo, 2003). Because of this, the import quota on cars in China has produced a strong challenge for the domestic automobile companies. Because the average tariff on cars is still high before 2005, the prices of foreign cars are still higher in Chinese domestic car market. Even though foreign cars are expensive, as a whole foreign cars are superior to domestic cars in terms of performance and integral quality, including model, style, rate of gasoline consumption, rate of fault, environment protection, production life, and coziness. It can be deduced that quality improvement will not as quick as the reduction in the cost and price. Domestic cars may be at a disadvantage in the quality competition. Only with good quality, foreign cars can not have a great impact on domestic cars, even if import quota is cancelled in 2005. Under that circumstance, because of the price advantage of domestic cars caused by high tariff, the impact of quality advantage of foreign cars is limited. However, when the average tariff on foreign cars reduces to 25%, foreign cars have an impact on domestic ones in terms of both price and quality, domestic cars without protection from import quota will be heavily pressured. Especially, in the high-grade cars market, the market share of foreign cars will boost. The influence of cancellation of quota will appear.

4.1.7 The Impact of Opening of Car Trade and Service After China entered the WTO, foreign companies could distribute and trade cars themselves. Because of this, financial companies were challenged in two different ways. On one hand, the rapid opening of trade availability helps to accelerate the importation of cars from other countries. On the other hand, Chinese cars lag significantly behind oversea counterparts in terms of service, products and other areas.

In a long period, car companies were characteristic of small production volume. Trade service

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industry was separated from manufacture industry. All these lead to the immature of Chinese car service industry. The car service was featured by incomplete sale service system, weak after-sale service and non-standard car repair service. In addition, car credit, car insurance and car lease are underdeveloped. In an intensive competitive car industry, foreign car companies will challenge domestic car companies not only in products but also in service.

4.1.8 The Impact of Opening the Chinese Car Industry to Foreign Investment Because the tariff was gradually reduced and some of the non-tariff limitations were cancelled, foreign car companies have been required to make choices between exporting more cars to China or directly investing in Chinas and having cars produced there. In 2006, the average tariff on cars was 25% and the average tariff on car parts was 10%, which is still considered to be high. Under the circumstance that the supply in international car market heavily exceeds the demand, the growth of the Chinese car market is very important to manufacturers in foreign countries. Through direct investment foreign car manufacturers can avoid high tariffs, employ low-cost labours and establish the well-functioned sale and service networks. In order to gain cost advantage over others, foreign car companies will be inclined to invest in China directly. The multinational car companies that have established joint ventures in China will increase investment. Consequently, the direct investment will increase rather than decrease.

4.2 ShangHai General Motor (GM) Case

4.2.1 Brief Introduction to GM Auto Company General Motors is the world's largest automotive company. It operates in more than 70 countries and has a presence in over 200 countries. In addition, the company has more than 260 large

subsidiaries, and employs 395,000 people throughout the world. The company was founded in 1908, and GM has been a global sales leader since 1931. GM has operations in over 32 countries and vehicles that carry the company name have been sold in over 190 countries. General Motors is also involved in Telecommunications, Aerospace, Defense, Financial Services, Insurance Services, Trains, Automotive Systems, and Heavy Duty Transmissions. In all that GM does, their

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philanthropy and their commitment to helping better the environment in which they live, work, and play is completely unsurpassed within the auto industry.

4.2.2 Shanghai GM Auto - Company Overview Shanghai General Motors is a 50-50% joint venture (JV) between General Motors and Shanghai Automotive Industry Corporation Group. The joint venture is the largest passenger manufactures in China, with a market share close to 10%. The Shanghai GM factory in the city of Shanghai was set up in 1990 and it measures around 550,000 square meters and an annual production capacity of 100,000 vehicles, 180,000 engines and 100,000 transmissions (GE FAIC, 2005) and. The JV operates 3 production facilities with a total production capacity of 450,000 vehicles per year, in Shanghai, YanTai and ShenYang.

4.2.3 Analysis on Operation Performance of Shanghai GM Auto Company Increasing trade liberalization will definitely help to spark growth within the automotive industry, and this is particularly true within the growing Asia Pacific region, which is a critical region for future growth in the auto industry worldwide. China's entry into the WTO and the implementation of the AFTA will intensify competition among players in the auto industry. The growth in the automotive industry will also stimulate growth in other industries such as automotive components. Generally, most automakers are very optimistic about future opportunities in the Asia Pacific region, and it is anticipated that vehicle sales throughout the Asia Pacific region will continue to grow at a rate that is greater than the rates in Europe and North America combined.

In areas such as China, the rest of the Asia-Pacific Region, South America, and also in Eastern Europe, the strong demand for the emergence of economic areas is on a rapid increase. Because

of the increase in economy in these specific areas, they are becoming very important within the economic market. The largest of the car-producing countries Germany, Japan, the United

States, Italy, and France all are looking for investments, cooperation, and networks that they can use for parts, service, and creation of vehicles in other areas of the world. China is by far

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one of the most developed of those countries, and its rapid growth ensures that the enormous potential that is seen for automakers in that country will turn into increased demand for vehicles of all types. So far, all of the large auto companies throughout the world have been able to work

with the domestic car companies in China (Kbizzle, 2005).

General Motors has become one of the largest players within the automotive market in China. Currently, about 8.6 percent of the passenger car market in China is owned by GM. that equaled 1.1 million vehicles. As of 2002,

In addition, GM has over 3,800 employees, two enterprises The achievements that GM has

that are wholly-owned, and three joint ventures in that country.

had within the Chinese market show that the strategy of globalization that GM has been involved with has been successful. Because of this, the company has located a new and rapidly-growing

target market, which generally has one of the largest potentialities in the world (Kbizzle, 2005).

China, with a population of 1.3 billion and growing, an abundance of many important natural resources, and a rapidly expanding economic vitality, has heavy importance in the global economy of today, and should not be ignored. From a more commercial perspective, however,

China is representative of the importance of emerging markets for a large number of products and services that can now be offered much more globally. Where motor vehicles are concerned,

China is still considered to be a very small part of the auto market in the world (about 7%), but China is also expected to account for over 25% of new global demand for vehicles through the next 10 years. Because of this, and influenced by an economic environment, China has now

become a very attractive new market for carmakers around the world (Kbizzle, 2005). General Motors has also developed very rapidly within the market in China. In 2002, for The rapid

example, sales were up over 40 percent when compared with sales from 2001.

growth that has been seen in Chinese sales indicates that General Motors is doing very well in China. GM has engaged itself in a series of positive ideas and activities in order to adapt and For example, in 1997, GM had a fifty-fifty

hold onto the car market in China (Kbizzle, 2005).

joint venture company with Shanghai Automotive Industry Corporation (SAIC), and it also built Shanghai GM (SGM)'s plant. This plant consists of assembly operations for vehicles, engines, The total The plant is

and transmissions, and also has headquarters for administration and marketing. investment that was made into this venture was approximately 1.5 billion dollars.

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capable of running two shifts a day for 100,000 cars, and in 2002 the company exceeded this in sales (Kbizzle, 2005).

In 2005, the JVs vehicles sales volume reached 320,000 vehicles. The market forecasts are very promising, pointing to a boom in vehicle sales for the Asian region. GMs sales accounted for 12% of automotive industry sales in this region in 2005 and the Asia-Pacific markets represented 28% of the worldwide sales in the same year (GM, 2005).

In terms of product line, Shanghai GM is manufacturing a few Buick models and Xin Shi Ji (New Century) and the manufacturing system is the top in the industry. The company adopted SAP Advanced Planning & Optimization to ensure lean manufacturing in 2005 to help reduce volumes and long shipment times (SAP, 2005).

Contrary to the operation performance worldwide, GMs operations in China started to payoff in 2003, when the profit per vehicle sold was $1,200. The results reflect sales in the local markets because the exports are restricted to a given number at this point. US concerns are that the unsold cars in the Asian markets will be exported eventually, following the Japanese and Korean export patterns (ITA, 2004).

4.2.4 Bottle-Neck Problems of Shanghai GM Auto Company China has a restrictive policy regarding the construction of diesel engines, in particular for cars. The oil consumption grows larger as the market demand for vehicles increases and diesel engines are more efficient from the fuel consumption point of view. In Chinas case, given that the resources are limited and scarce, the policy on diesel engines is basically restricting the demand and therefore the consumption. A restricted consumption is synonym to restricted production growth. The studies suggest that if China has 20% of its cars running on diesel engines, it would save up to 19 million tons of oil per year (Te Kan, 2006).

Even thought the Shanghai GM joint venture was set up to serve the Chinese market, some of components end up in the American market. However, before doing so, they spend a lot of time

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on the way to the American shore and in its ports. These waiting times affect the companys speed to respond to the markets demand and all the suppliers along the value chain (Terreri, 2004). One other bottleneck that can be quoted is the documentation needed to manage the supply chain. China is not only a consumption market, but also a production market and many companies go there to manufacture their products for a lower cost and sell those back to their home countries. This makes the logistics activity crucial for the business performance.

4.2.5 JV and/or WOFE of Shanghai GM - Localization and Self-Development By competing throughout the world in America, Europe, and Japan, various automotive leaders have been trying to keep their market shares in domestic markets while still moving into foreign markets. By dealing with growing markets such as the Asia Pacific region, Eastern Europe, and South America, the leading companies are actively starting to look for ways to collaborate with local and national industries while still competing for higher market share.

Shanghai GM managed to set up 250 dealership stores in only 4 years. The way to do so was by allowing all dealers with a weak financial position to sell sedans. Given that most of the dealers are in such a position, the network expanded really fast because this was a very good business opportunity for dealers (Yuann, 2006).

To insure production growth, Shanghai GM followed a strategy of several subsequent acquisitions of spare parts state-owned companies that were later turned into profit. The market demand is growing very fast, but so is the competition. There are 3 major automotive players on the Chinese market: Shanghai Automotive Industry Corporation (SAIC), First Automobile Works (FAW) and Dongfeng. They are all trying for the same customer and the market is not regulated as it should be. Thus, a lot of companies face difficulties due to an inefficient copyright protection that ranges from music CDs to car models. GM was put in the situation of suing the Chinese automaker Chery because the latter manufactured a car model similar to Daewoo Matiz. To ensure workforce talent, GM entered a very convenient JV with SAIC that owned a very large pool of talents at the moment when the venture took place. On the financial side, the company

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beneficiated from a lot of bank loans that with the help of a local partner became easier to reach. In terms of brand management, the JV manufactured vehicles under Buick brand for the domestic market that targeted low and middle class population and for the external market, spare parts were produced for a wide range of GM brands. However, the latter ones had to have the assembly done in US due to market regulations. Shanghai GM managed to hold the sales record on the Chinese market in 2006 in terms of units sold. The company is permanently trying to expand its production capacity to cope with the increasing market demand.

4.2.6 Reflection on the development of JVs and/or WOFEs of Shanghai GM The idea of forming a JV with a local company was very fruitful for GM. The local player SAIC was well established in the automotive market and therefore familiar to the specific market characteristics in China.

Given the large cultural differences and implicitly the large business practice differences, GM minimized the liability of foreignness (Zaheer, 1995). The theory suggests that companies internationalize gradually and first enter markets that are culturally closer and as they gain more knowledge about these markets, they internationalize further to culturally more distant markets (Johanson & Vahlne, 1990; Johanson & Wiedersheim-Paul, 1975).

GMs joint venture with SAIC was first of all beneficial because the Chinese partner helped the American one to deal with the local authorities more efficiently. Thus, SAIC enabled GM to acquire state-owned spare parts companies, to get bank loans in a record time and to get preferential government treatment on a given number of issues. SAID came with a well prepared work force that helped the joint venture compete on the automotive market successfully. The talent pool was already in place and familiar to the industry activity.

The JV managed to acquire more plants than a foreign company normally is allowed to. However, the American manufacturer trusted SAIC enough to give up shareholder majority in order to make the acquisitions that were available only for local companies/major shareholders.

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Jinbei GM was probably the only GM business in China that turned out not to be profitable because the management team was inexperienced and the company had a weak financial position. The lack of experience on behalf of the management team had a fatal effect on the dealership network and the weak financial position forced the company to borrow all its capital. At this point it is obvious that a joint venture with a strategic qualified local partner is essential to have a successful performance.

The GM Company has also created some partnerships and other initiatives within China that allow for benefits above and beyond those that are seen as a direct result of their business. General Motors has played an active part in the Chinese government by addressing both current and future potential challenges on an environmental level. These concerns include a research

project between the Chinese and United States environmental protection agencies so that air quality can be sampled. By doing this, the primary sources for pollution can be located.

Through this vein, GM has shown its interest in how to advocate benefits toward the use of unleaded fuel within China. General Motors has also created a partnership with the regulatory

and safety communities in China so that research and development on safety and health standards can be ensured (Kbizzle, 2005).

The cooperation that is seen between Chinese partners can help GM to develop within China both rapidly and steadily, especially where technological development is concerned. has also helped China to develop in other fields. General Motors

GM is considered to be a geocentric car

company, and all of the decisions in the Chinese car market indicate that the GM Company thinks globally but acts locally. These kinds of positive activities show that GM is able to adapt to and

hold the car market within China (Kbizzle, 2005).

4.3 ShangHai Volkswagen (VW) Case

4.3.1 Brief Introduction to Volkswagen Auto Company The Volkswagen Auto Company is a German-based company that has been around for many years. The company sells its vehicles in Germany, the United States, and other countries. Because

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of this, the company continues to grow and expand. This includes moving into markets where expansion is important and desired, or where expansion is simply needed. This is the case with the auto market in China, because there are many more people in that country today and the region needs more options for car makers.

4.3.2 Shanghai Volkswagen Auto - Company Overview The Shanghai Volkswagen Auto Sales Corporation has been a joint-venture of three partners, affiliated with China and Germany. There was a unanimous agreement among the partners to penetrate into the automobile market of China, and explore the possible and available opportunities within the Chinese, and regional market. The Volkswagen, German unit has been serious in the progress and development of the automobile market of the region, 'through deepening its cooperation with Shanghai's auto industry'. Initially the organizations titled Shanghai Auto Industry Group, Volkswagen (China) Investment Co. Ltd and Shanghai Volkswagen Co. Ltd. invested more than thirty million dollars, under distribution of fifty percent, thirty percent, and twenty percent respectively (Yao, 2006).

4.3.3 Analysis on Operation Performance of Shanghai VW Auto Company Initially there has been a rumor that German Volkswagen intended to purchase more number of shares towards acquisition of Shanghai Volkswagen and FAW Volkswagen, another joint venture by German Volkswagen in northeast China. However, such rumors have been refuted by the officials from the German Volkswagen, rather the officials have stressed over the need to secure market shares and achieve customer satisfaction. The company has adopted and implemented 'the use of operational ideas and successful experiences from German Volkswagen' (Jonathan. 2005), and has integrated the after purchase services with the sales network, aimed at the establishment 'of a comprehensive and high-efficiency sales-service network' (Mark, 2006).

The Chinese-German automobile venture has recorded sales of more than twenty thousand units on monthly basis, which is forty percent greater than the previous solo performance of the automobile company, excluding Volkswagen. Presently, the Shanghai Volkswagen has

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manufactured more than 2,000,000 units of cars. The special event was commemorated by Chen Xianglin, Chairman of SAIC, Mr. Weissgerber from German Volkswagen, Mr. Tang Dengjie, director of Municipal Economic Commission, Mr. Chen Xianglin, Chairman of the board and Secretary of Party Committee of SAIC, Mr. Hu Maoyuan, the President, and other leaders of the Group and the Party Committee and Chinese at final assembly workshop of Shanghai Volkswagen No. 3 Plant. The event was the reflection of the fact that the members of the company are deeply associated with each other, and its more like a family of professionals serving the company. Recalling the events of the past, when the company first launched Santana i.e. Shanghai Volkswagens simple and crude production line, the critics were reluctant to welcome and honor the company for the milestone, it observed that the company has 'produced cars in a ruined, unsupported and isolated island, the experiment was doomed to fail' (Mark, 2006).

4.3.4 Bottle-Neck Problems Shanghai VW Auto Company Volkswagen has felt victim of the sociolinguistic challenges within China market. The multinational companies including Volkswagen have been accused for their involvement in such practices which generate 'creativity-driven shock values, controversy and extreme individualism commonly accepted in the North American and Western European markets'. Volkswagen has experienced severe tribulations due to its advertising language as culture-blind and bona fid, and Chinese market created great hurdle for the Volkswagen industry. It has been important for the company to implement congruence of the values, and avoid the existence of the cultural values in the organization in an implicit manner. It has been observed that the categorization of the organizational, departmental and employee values and behaviors on the basis of the cultural affinity has generated satisfaction among the employees, and has developed positive impact on their 'commitment, absenteeism, turnover, morale and perception of feeling involved in an organizations decision-making process' (David, 2002).

4.3.5 JVs of Shanghai VW - Localization and Self-Development The unexpected success of the Shanghai Volkswagen is credited to the Shanghai Municipal Party

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Committee and government and under wise leadership of SAIC, Shanghai Volkswagen staff. The entire unit as a team worked hard in order to achieve 'series of glorious accomplishments' (Eric, 2006). The efforts of the professional family materialized and resulted in the 'localization of Santana from the initial 2.7% to 95% and above, and localization of Passat, Polo and other new versions was 40% at the beginning; the model was developed from the only Santana to Santana 2000, Passat, Polo, totally four production platforms, with more than 10 varieties'.

The company took considerable measures towards after-sales service, and implemented a network which was spread all over the country. The company achieved another milestone after the establishment of 'first class technical center including test drive park and laboratory' (Richard, 2005). All these efforts brought unprecedented fame and success to the company, 'and the registered capital increased from the initial RMB 160 million to the current 63 billion' (Birgit, 2004), Shanghai Volkswagens technical development, management and equipment capability all achieved a new level which was closer to the world leading standard, and it emerged as the most competitive pioneer of auto industry in China (Richard, 2005).

Volkswagen dominated the China auto market with about 55 percent of sales. The company was bringing on production of five modern vehicles over the next three years, including the luxury Audi A6 and the VW Passat and Jetta. The No. 1 German automaker was doubling its investment in China to six billion makers ($3.28 billion). Still, Volkswagen was not resting on its laurels. China is becoming much more competitive, with demand more like it is western marker, said Stefan Jacoby, the VW vice president in charge of the Asian-Pacific region.

Much of Volkswagens success had been in supplying Chinas demand for taxicabs, as anyone who visited the mainland in 2000 could determine; most of the taxi in use in the urban areas were Santanas or Jettas. Shanghai Volkswagen catered to this large market segment. For example, in June 1999, Shanghai Volkswagen began a new policy to expand its sales to the taxi service sector. Under the new policy, any local taxi company that bought 100 units of Santana cars or 50 units of Santana 2000GLS would get an extra unit of the same model. Also, the sales corporation offered a 15,000 kilometre, third class, free maintenance warranty in addition to the 7,500 kilimetre, first class, free maintenance for any Santana 2000GLS used as a taxi. Approximately 40 percent of

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Santanas made in 1998 went to the taxi sector. VW Santanas accounted for over 80 percent of the taxis in Shanghai. Volkswagen did not offer a sports utility vehicle, and thus did not compete directly with the Cherokee or BJ models.

4.3.6 Reflection on the Development of JVs of Shanghai VW SAIC Motor is the local associate of the General Motors Corp and Volkswagen AG in China, whereas the Shanghai Automotive fabricated the parts for the joint ventures. In 2005, the company 'posted a 44 percent drop in net profit for 2005, posted a higher first quarter earnings due to the buoyant auto sales of its parent's two joint ventures'. The Shanghai Automotive, a branch of the China's second largest automaker SAIC Motor Corp achieved the net profit of more than fifty percent, and reached the mark of 223 million Yuan, from the initial figure of 152 million Yuan last year.

According to the Shanghai Stock Exchange, the company 'generated revenue of 2.08 billion Yuan, up 39 percent year on year'. Unfortunately, the performance of the shanghai Automobile industry exhibited the profit decline of in five years in 2005 i.e. 'net profit slumped 44.16 percent to 1.1 billion Yuan last year' (Nicholas, 2002), the justification for such declination was attributed to the competitive forces which the company was subjected to, 'the company was struggling with soaring prices of raw materials, price discounts and intense competition'. The performance and the financial results of the company were contributed by the 'Shanghai General Motors in which Shanghai Automotive controls 20 percent' (Richard, 2005).

The management of the Shanghai General Motors was successful to topple 'Shanghai VW to be China's top auto seller for the first time in 2005' (Nicholas, 2002), the sales of the company rose significantly by '104 percent to 81,200 units in the first quarter, and profit totaled about 1 billion Yuan'(Nicholas, 2002). The performance of the Shanghai Volkswagen, a joint venture of SAIC, was successful in the securing the market share in tangible proportion, and rise of 115 percent was materialized through consistent efforts and comprehensive strategy. According to the National Bureau of Statistics, the investment and the interests of the Chinese automobile companies resulted in the estimated profit of 3 billion Yuan during the first two months of the

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current year, which is relatively 300 percent more than the results marked in the last year.

5. Findings & Discussions

5.1 Weaknesses of Chinese Car Industry

The Chinese car development has recently been through a long and difficult time. Until now, however, China has been among the ten biggest car manufacturing countries. In the last five years, however, the Chinese car industry has found itself in a bit of a golden age. Manufacturing and the portfolio of offered products have largely improved. Some types of technologies have reached higher levels in the 1990s. However, there are many gaps still within the technologies and management issues between the Chinese car makers and the foreign car makers. Overall, therefore, it is a rather immature industry, and gaps still exist in areas such as technology, price, and scale of the economy.

5.1.1 Economy of Scale Since the 1980s, the economy of scale that is seen within international car companies has continued to improve rapidly. There are two reasons for this. One of these is that globalization has affected the car industry. Another is that there have been mergers and acquisitions within the car industry internationally. Because the car industry is both a technology industry and a capital concentrated industry, the scale of economy is very critical to the survival of the Chinese car industry. However, there is also a very large gap between the Chinese car industry and the foreign car industry within the scale of economy. According to the international rules, the scale of economy for a car company to operate must at least equal 300,000 per year. Until now, there has not been a car company within China that has been able to reach this criterion. In the United States and Japan, all of the car companies are able to reach this goal. A poor scale of economy in China helps lead to higher costs of fixed assets per unit, which lowers the advantage of having low cost labor within that country. In 1998, the total production volume of the biggest six car

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companies was only about 1/4 of Toyotas. The total fixed assets are only about Volkswagens (Guo, 2003). There are, however, three main problems with this: there are too many different car companies, a low concentration of manufacturers, and low productivity.

5.1.2 Technology Overall, the technological development that is seen in the Chinese auto industry is well behind what is seen in the auto industries of other countries. With the exception of a couple of companies, most are not able to develop new cars. Mostly, the Chinese auto industry imported and imitated techniques, and it did very little on its own. Such a low investment in creating new techniques and ensuring that cars were keeping up with the times lead to the large gap between Chinese cars and foreign cars.

5.1.3 Price At the present time, excluding issues such as quality, performance, and branding, the average price of the domestic cars in China is 40-100% higher than the prices for foreign cars. According to prices listed on www.sina.com, both Audi and Jetta were sold at almost 370,000 and 170,500 in China, while similar Korean cars were sold at 20,000 and 10,000 dollars in Korea. Buick was also sold at nearly 44,600 dollars in China, while in the United States it sold only at 20,000 dollars. The price of Chinese cars is so high, however, that they cannot compete with

foreign cards, even when considering service and quality.

5.1.4 Ownership In car companies that are operated by the state, the ownership is often unreasonable and it prevents a lot of the healthy development that would otherwise take place. China is a communist country, and much of what they have is characteristic of planning economies that took place and were created before 1980. Although China began transferring from a planning economy to more of a marketing economy, many of the regulations that are put into place never disappear, and this is especially true within the auto industry. Many of the companies in this industry are state-owned

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because of a policy in the past where private enterprises were not supported. Because of this policy, the development of the Chinese car industry was slowed significantly. Top management could largely do nothing, and generally they only added or adjusted policies that were created by the government.

5.2 Strengths of Chinese Car Industry

5.2.1 Operations In operations within this industry, the most obvious advantage that is seen is the low labour cost. According to a report on www.chianren.com, the average salary in the Chinese auto industry was around 36,000 per year (4,700 dollars). In the United States, the average salary for a person with the same type of job is thought to be around 36,000 dollars. This is obviously a very large discrepancy, and it can be detrimental to those that work in Chinese car companies, because they make so very little compared to their competitors.

5.2.2 Marketing Within their marketing and sales departments, Chinese auto companies have a few characteristics that are very important. First, the retail channels of the Chinese car companies are both wide and short. Generally, every one of these channels only has two layers, which leads to low sales costs and higher levels of efficiency. For the bigger companies such as Shanghai Volkswagen, these are able to cover over 70% of China. These powerful types of channels help smooth the sales and they allow the Chinese auto companies to very easily learn about the demands that the market has. For the foreign car companies, the lack of sales channels can be extremely problematic.

In addition, because of the long-term cooperation that has been seen between the Chinese car companies and the sales agencies, a very stable relationship featuring a sharing of both risks and profits has been created. Agencies will generally only sell cars that come from specific car companies, and they exclude cars that are available but come from companies that they do not work with. For the Chinese car companies, a large number of sales agencies help to save a great

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deal of money, which is necessary in order to build strong channels. If foreign companies wish to sell cars within China, they have to spend a lot of money and time on the establishing of channels.

5.3 Joint Ventures and FDI

Joint ventures are only part of foreign direct investment (FDI), and they are becoming more popular throughout the world, thanks to the fact that they are much more beneficial for both parties than many other arrangements. It is important, therefore, to analyze the various issues that come along with these things.

5.3.1 Reasons of Popularity of Joint Ventures and FDI In China, the economy is growing very rapidly. Much of this is believed to be due to the large Once the Asian

percentage of FDI that has been coming into that country in recent years.

financial crisis was over, many companies and investors started to bring their money to China and other Asian countries, and this allowed for rapid economic growth. Where China is concerned, however, the economic condition is the most important issue. It can

be seen by the data that has been presented throughout this study that China is the most rapidly-growing of the developing countries that are receiving FDI, with the country receiving approximately 25% of the FDI dollars that are flowing into developing countries, and it can also be seen that China is the country that receives the largest portion of FDI. for China's economy for many reasons. This is very helpful

The most important reason is that, when companies

bring their FDI to China and does well; other companies notice this and also bring their FDI to China. Soon, more and more companies are bringing their FDI to China because they see how This is, naturally, very good for these

well other companies are doing in that country.

companies from a financial standpoint, but it is also very good for China and its economy.

This growth is important, because it indicates strong interest in China where FDI is concerned, and also indicates that China is not limited to one type of growth. Indications from studies have

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shown that the service sector is what is growing the most rapidly in both already developed and still developing countries, but the industrial sector (both light and heavy) has also shown strong growth in China. Those companies that are interested in investing in a developing country will

wish to analyze this type of information based on what is occurring in other developing countries as well, in order to determine which country would be the strongest choice where their investment dollars and type of business are concerned.

China is a very strong country where macroeconomic factors are concerned, in that its overall economy is growing rapidly in virtually every sector that could be addressed and that a company would be interested in. However, the microeconomic factors in China are also very important,

because specific businesses in China are performing well, and viewing the economy on a smaller level helps specific businesses to determine how well they will perform, should they decide to send their investment dollars into the Chinese economy. The main areas that can be seen to

have contributed to microeconomic growth in China are: a high degree of education, a high growth rate for productivity, a high rate of savings, and an income distribution that is judged to be relatively equitable.

Economic growth is achieved through an influx of money and other capital, proper tax rates, proper exchange rates, low rates of unemployment, and other factors. The FDI that has been

coming into China so strongly in recent years has helped to produce all of these things, and this has allowed for the strong economic growth that has been seen. China has generally done well

economically anyway, because it exports so many goods to the United States and other countries, but the FDI that has been seen has only further boosted an already growing economy, and made that economy's growth rate almost explosive by comparison to what it used to be and by comparison to other countries.

A strong economy is not the only issue, however, where FDI is concerned. climate is also very good in China.

The investment

The investment climate is the 'gauge' of whether investing Right now,

in a particular country is welcomed or not welcomed during a certain time period.

investing in China is strongly welcomed by that country, so therefore it has a good investment climate. This is very important, because a country that does not welcome FDI is certainly not

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the country that a company wants to try to move into, as there would be too many problems associated with this type of move.

The policies that governments have toward FDI are also significant when it comes to whether a company moves into a particular country or decides to relocate somewhere else where the restrictions are not so strong. Where China is concerned, the government policy is very friendly

toward FDI at this time, especially for companies in the United States and other developed countries. China exports so many things to the United States and imports from that country as

well, so there is a good trade agreement seen between the two countries.

China also has a good trade agreement with many other developed countries, and this allows for a comfort level between the governments of these countries that encourages the idea of multinational corporations bringing FDI to China. There are, of course, no guarantees that this

will continue indefinitely, but for right now there do not appear to be any barriers to trade and investment, and there are no government policies at work in China that would slow down the FDI that has been pouring into that country. The Chinese government realizes the benefits that it

gets from the FDI that it allows in, and therefore also acknowledges the idea that creating government policies that would restrict FDI would be harmful to the Chinese economy in general.

Car makers are by far not the only multinational companies that have some of their service sector in developing countries, however, and it is important to realize that more and more companies are outsourcing much of what they do to these other countries. When these companies outsource to

China, that country's economy gets a strong boost from the FDI that comes into it, as well as the money that it receives through the purchase of land, buildings, materials, and so on, and the people of that country have jobs that pay better than what they could have found elsewhere, but yet still pay much less than the company would be required to pay individuals within a developing country. It appears to be a 'win-win' situation for both the company and the country,

making it very beneficial to all involved.

The economic performance of the company is important, as well.

In China, there are so many

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people and so many businesses that almost any business that is good and fair can survive. While the economic performance of some of the local businesses may go down slightly, it may also go up (as in the case of a corner store located next to a new FDI-created business, for example). The economic performance of the multinational corporation also rises, because it is

paying less money for the same work and therefore making more of a profit than it would otherwise have done. However, in some of the smaller countries that are less-developed than

China, have less money and resources, and have a smaller population, the economic performance of a large, multinational corporation can come at the severe expense of many of the smaller, locally-owned and operated businesses.

5.3.2 Problems in Joint Ventures and FDI

5.3.2.1 Organizational Control In a joint venture, many control issues are found at the heart of the management conflict that is seen between partners. Schaan (1983) defines joint venture control as: the process through

which a parent company ensures that the way a joint venture is managed conforms to its own interest. Management control plays a very crucial role in the performance of any joint venture

because the partners differ in many areas such as experiences, strategy, social background, culture, and objectives. There is a 60% international joint venture rate of failure, which indicates that

most partners in joint ventures generally do not spend enough time considering monitoring and control decisions (Kogut, 1988). Often, there is both insufficient and ineffective control in an

international joint venture, and this can easily limit a companys ability to coordinate activities. When this happens, the company is not able to utilize resources efficiently and implement strategy effectively (Geringer and Herbert, 1989).

The main problems that are seen where managing joint ventures are concerned come from one main cause: there are too many parents, or people/companies that are trying to remain in control (Killing, 1983). According to Vanhonacker (1997), one of the key problems is a conflict of The different managerial styles

interest between the foreign investors and the Chinese partners.

that foreign investors have when compared to their Chinese counterparts are often problematic,

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and clashes are seen over how the joint venture should be operated.

In addition to this, most

joint ventures are also characterized by definite differences within the strategic objectives of the partners. The primary motivation, therefore, for firms that are in developing countries is to The

collect technology, capital, expertise, and success in the short-term from their joint venture.

aim of those that are foreign investors, however, is to collect market access to more markets that have long-term growth potential. Because partners share the same company but have different

goals, ideas, and dreams, the expectations that they have and the approaches to doing business are usually very different, which leads to tensions in most joint ventures (Deng, 2001).

Killing (1983) says that a joint venture that has a dominant control partner is much more likely to succeed, because it will be much easier to manage. willing to have control over the company. complex rules and conditions. For the investing partners, they are usually

However, some countries have very unfamiliar and

If this is the case, allowing a foreign partner to have dominant

control might end up having a negative effect on performance, because society and culture will be very different from what that company is used to.

5.3.2.2 Managerial Corporate Culture Cultural differences, in both nations and organizations, can lead to strong conflicts in culture, and therefore have many negative effects on an organizations involvement within a joint venture (Cullen et al., 1991). International joint ventures are much more susceptible to problems with

cultural distance than other creations such as wholly owned subsidiaries, because the international joint venture generally must deal not only with corporate culture, but with national culture. Because of this, the global diversity of a large number of companies is a challenge for

the foreign investor in trying to integrate its national culture and its organizational culture with that culture of its local partner. One is left wondering how managers can address this problem.

It is without a doubt important that a business have a strong and stable culture, as this allows for the organization to perform well and strive toward excellence.

The problem of a conflict between cultures is also very complex, because there is such a large cultural difference between Western countries and Eastern countries. According to research

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done by Hofstede (2001), there are four main aspects to this issue.

One of these aspects

(individualism and collectivism) will be analyzed here in order to show what differences there are between these cultures. In societies where individualism is prized, people focus on the I

(Bochner, 1994), managers are generally assigned to individual tasks, individuals are held accountable for their own performance, and group work is minimized, since that could lead to poor efficiency and a tendency to pass responsibility off to others. On the other hand, collective

societies have people that are working in strong and cohesive groups, it is generally seen as wise for managers to cooperate and communicate with others to solve problems, and solutions are implemented that are designed to use teamwork for task accomplishment. management focuses on regulations, criterion, and systems for efficiency. much more emotion is taken into account when management goals are set. In Western countries, In Eastern countries, Because managerial

styles are so different between the two, they are often difficult to integrate into one, and because of that conflict is difficult to avoid.

5.3.2.3 Technology Dismissing Since one of main objectives of forming a joint venture is transfer of technology and managerial know-how. In such a firm, it provides a best opportunity to acquire a foreign partners intangible and tacit knowledge, which is so difficult to keep secret when working in the same place, thus their losing long-term competitive advantage. The firms with a global strategy would favor high control entry mode. They also argue that the more tacit the know-how, the more favored is a high control mode. In most developing countries, because of lack of well-established intellectual property law system, there is a high risk of misuse of transferred proprietary know-how by a local partner. Hamel (1991) suggests that technological and marketing know-how are the core competence to long-term competitive advantage of many multinational firms. In this case, to some extent, technology dismissing means loss of competitive advantage in long term. Actually, the investing structure of foreign firms become optimizing and the quality and level are improving step by step. According to the relevant information, in 2000, the percentage of foreign investors use most advanced technology of parent company occupy 42%, and use rather advanced technology account for 45%. With the changing of invest, multinational firms shifts from labour denseness with low technology to high added value with technology denseness and

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capital denseness. Then, foreign investors have to prevent technology dismissing. On the other hand, these companies begin to shift the core department to China, from produce to brand, showing localization. In joint venture, it is almost impossible to avoid Chinese partner obtaining core technology by means of learning and working, as a result, there will be competition for foreign investors.

6. Conclusion

In this dissertation, through out case studies, findings and discussion are confined to how can foreign auto companies select the entry mode to compete with other auto companies in Chinese car industry. Chinese GDP had increased for over 20 years and will continue increasing. The Chinese car market had become a giant latent target. Every large auto company wants to get enter of this market. How can they defeat to Chinese auto companies and other similar foreign auto companies in the Chinese market, selection of entry mode is the first and key step for those foreign auto companies.

The external environment of Chinese car industry includes governmental, economical, social and technological factors. In political environment, Chinese accession to WTO was one of the most important events. The accession facilitated China to give up the protection policy of car industry. This affair completely changed the environment in Chinese car market. Average tariffs on foreign cars were reduced to 25% by the end of 2006. Because of the protection circumstance of Chinese car industry in a long run, the competition in Chinese car market is insufficiently severe so that the costs and prices of domestic cars are significantly higher than that of imported ones. The reduction of average tariffs on cars can have an evidently positive impact on the competitiveness of foreign auto companies. Other factors such as stable economic environment significantly improve consumption confidence, resulting in booming of car demand. Therefore, the external environment the fast development of Chinese car market provides a good chance to exotic companies.

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Moving to the internal environment of Chinese car industry, it is found that the history of Chinese car industry is rather short comparing with foreign car industries. In the findings part, the weakness and strengths of Chinese car industry and market are analyzed. The gap between Chinese and foreign car industry is formed by many aspects including economy of scale, technologies, price and ownership. Economy of scale can not be reaped. Even though Chinese car industry is incompetent in many aspects, it also has some competitive advantages such as low cost labours, accumulator techniques and complete marketing channels. Compared with foreign car industries, Chinese car industry is an immature industry as a whole.

On the basis of the case studies and the analysis of Chinese car industry, in the discussion part, the reasons why joint venture and FDI were so popular at the beginning of implementation of opening policy until last century will be analyzed through the theories of transaction cost, FDI and institutional environment. There is a big cost for foreign investors when they just entered into Chinese market, which is an unfamiliar place, such as culture, negotiation style, Chinese managerial method. Further, as the result of legal barrier, it is little chance for foreign companies to establish wholly foreign owned enterprise in a great number of fields. Again, the particular culture in China Guanxi, is also a great barrier for foreign investors to do business. Thus, foreign investors were like to find a Chinese partner to entry a new market, decrease its transaction cost, and deal with conflict of culture and managerial style. It is a great opportunity for multinational companies to establish joint venture and gain their profits. There are a numerous successful examples in China, such as Shanghai Volkswagen and GM.

According to the intrinsic reasons of lessening popularity of joint venture are analyzed through three points. Control issue is the key problem in joint venture, since control plays a crucial important in performance of a joint venture due to the partner differences in objectives, strategy, culture, and experiences. Benefits conflict pricks up this issue. The place is managerial corporate culture. The big different national culture makes it a hard conciliating point, and this conflict plays a negative effect on the operation of joint venture. The last and most important is technology dismissing. In recent years, the interesting of foreign investors investing China has shifted from producing products in low cost and export to occupying Chinese market by means of high technology. In order to take the place of inside track, foreign firms use most advanced

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technology. Then, to avoid conflict of control and managerial style, which lead to low efficiency, and technology dismissing, which causes losing competitive advantage. Therefore, some foreign investors prefer wholly owned foreign enterprise.

Through doing business in China, foreign investors have, to some extent, understood the Chinese market. In most cases, they can do business in Chinese way. Thus, to decrease the transaction cost which in caused with conflict of control and managerial style, multinational companies prefer to choose wholly foreign owned enterprise. Further, with doing business in China, a Sino-foreign managerial team has already established which can help foreign company to relieve cultural barriers.

In Chinese car market, joint ventures are still playing leading role in this area. Currently, although there are 130 auto producers in China, a few Sino-foreign joint ventures control over 90% of the market share. MNEs may find the acquisition mode increasingly attractive as well, since the Chinese government realizes that 130 auto producers cannot all survive after WTO accession. Although joint ventures are the only mode permitted, MNEs equity position will be allowed to increase gradually. China will allow 49% foreign ownership in all services by 2007, and 50% foreign ownership for value-added and paging services by 2006 (Zhu, 1998). In terms of MNEs entry mode, wholly owned subsidiaries will not be allowed even six years after Chinas WTO accession. The other three modes will be viable choices. Joint venture will be continuous to flourish, and it will now expand to the newly opened segments.

Due to the limited time and materials, this dissertation only generally discusses about the Chinese car industrys environment and entry mode selection of foreign auto companies before entry into Chinese car industry. In reality, before the implementation of entry mode and competitive strategies, more details of external and internal environment of Chinese car market will be considered. Entry mode selection and competitive strategies are not static. Even during the implementation, entry mode selection and competitive strategies can be amended due to the change of environment. The dynamics of entry mode selection and competitive strategies can be discussed further. This dissertation just gives readers a hint of further research and discussion.

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