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Andreas Hirschbrunn
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Business Dissertation Andreas Hirschbrunn
Acknowledgements
Writing the dissertation completes four years of a very special learning experience. The
author would like to use this opportunity and thank those people who made these four years
an experience never to be forgotten.
First and foremost, the author would like to express immense gratitude to his parents who
gave him the opportunity to study at EBS London and provided unconditional support during
these times. Besides this the author would like to seize this opportunity to thank Tatiana
Turck, Thomas Doering and Dr. Wolfgang for their support of my work providing giving me
the chance to interview them. Additional gratitude to Mrs.Traub for establishing the contacts
and helping me with the networking.
In addition, the author would like to thank his other interview partner Dr. Hans Moritz, who
dedicated his valuable time and input to the project. Last but not least, the author highly
acknowledges his tutor Oscar Soler-Canela for his interest in the topic and the steady support
during the progress of writing the dissertation.
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Business Dissertation Andreas Hirschbrunn
Executive Summary
The Chinese market for commercial vehicles in the heavy duty truck segment has
demonstrated significant growth rates and the demand for this type of vehicle is estimated to
be 500 000 units over the next three years. This dissertation focuses on the Mercedes truck
group’s heavy duty segment. Mercedes currently using an export mode as market entry
strategy sells on average 1500 units a year. They have engaged into a Joint Venture with the
Foton to build a joint product on the Amuna platform with Mercedes motor technology in the
initial phase. In the next phases this collaboration theoretically should evolve further with
joint production facilities and non technical knowhow exchange. The prime objective is the
market leadership and to use this position in the third phase to export the joint product
globally. At this moment in time these objectives are far away from the reality of a joint
venture which struggles even to fulfil the first phase. A thorough analysis has depicted that
exporting must be continued, whilst establishing a Joint Venture to enter the Heavy duty
truck mass market. This type of entry mode is more suitable then the wholly owned
subsidiary, because it involves less risk, bureaucracy and gives a better chance to cross the
cultural barriers posed by the Chinese society. The external analysis has shown that there is a
strong need to create a joint venture. Both of the companies are confronted with competitors
who engage in similar partnerships and threaten to outperform Mercedes and Foton. The role
of the Chinese government as a driving force behind the changing automotive industries
environment has been identified and its impact analysed. Mercedes and Foton have
complimentary value activities, but they must engage in a proactive dialog on how to solve
problems which threaten the success of the joint venture. The key areas of concern identified
in this early stage are of a cultural nature. In particular the clash of a formerly publicly
controlled and product output orientated company versus the private and profit orientated
company proofs to be a significant problem. The socio-cultural and legal barriers of the
Chinese market are also part of the Joint Venture operation. In particular the legal constraints
which where supposed to be avoided via this entry mode are still in place. The ministry of
commerce proves to be the most obstructive force to the joint venture. Mercedes-Foton must
diffuse the cultural differences. The management has to initiate, foster and direct a unique
Foton-Mercedes business culture. To succeed in this a diplomatic approach to change
management has to be applied. This process is fairly difficult as the Chinese government; the
main stakeholder asserts a serious influence on the joint venture which is in adverse relation
to the modernization efforts introduced by Mercedes.
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Table of Contents
1.1. Company background ...................................................................................................................... 9
1.2 Objectives........................................................................................................................................ 10
2.6. Reasons why foreign and Chinese firms establish Joint ventures ................................................. 14
2.8. Matching foreign investors and Chinese companies expectations from a Joint Venture ............. 16
2.14.H.R.M. ........................................................................................................................................... 21
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2.15. The transfer of technical knowhow versus non technical know how ......................................... 22
3.5. Interpretivism............................................................................................................................. 27
3.13. Reliability...................................................................................................................................... 29
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4.6. Quanxi ........................................................................................................................................ 33
4.8. Analyse whether the IJV is the most suitable market entry mode for Mercedes ......................... 34
4.11. SWOT Analysis of the Joint Venture between Foton and Mercedes. ...................................... 37
4.12. Key Drivers of change for the Chinese automotive industry ....................................................... 37
4.15. Foton and Mercedes analysed with the Value Chain .................................................................. 41
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5.1. Recruitment .............................................................................................................................. 52
5.2. Continuity.................................................................................................................................. 53
6.0 Conclusion..............................................................................................................................................................55
Bibliography
Appendices
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Abbreviations
H.D.T. Heavy Duty Trucks
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1. Introduction
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1.2 Objectives
This dissertation analyses to what extent the exporting entry mode is viable anymore. It
analyses the various market entry modes for their suitability. Furthermore the two partners
Foton and Mercedes will be analysed regarding their suitability for a Joint Venture. The
various phases of the joint venture will be explained and possible problems during them shall
be analysed. The stakeholders influence will be determined and their influence shall be
explained. Furthermore the key challenges to the management to make the joint venture work
in practice shall be analysed.
Investigation into the Mercedes Heavy Duty truck operation in the Chinese commercial
vehicles market:Is exporting outdated and is the proposed joint venture with Foton an
adequate market entry mode to overcome Socio-cultural and legal barriers of the
Chinese market?
Analyse whether the IJV is the most suitable market entry mode for Mercedes
Identify to what extent Foton and Mercedes do have complementary activities which
make them suitable partners for a Joint Venture.
Identify Key sociocultural and legal problems of the initial phase and comment on the
issues which will arise during the second and third phase.
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2. Literature Review-Section I
This part shall provide the author with the theoretical framework to write this dissertation.
Besides this it will provide me with the necessary ammunition to carry out adequate primary
research.
“CHINA has begun to enter the age of mass car consumption. This is a great and historic
advance.”(Economist A, 2005) In 2002 demand for cars in China increased by 56%.”The
next year growth quickened to 75%, before slowing in 2004 (when the government tightened
rules on credit for car purchases) to around 15%. In a sluggish global market, China's demand
remains mesmerising (economist a, 2005).” According to the economist car sales are
expected to increase by 10-20% annually for several years to come. With 5m car in 2004,
China is the world's third-largest car market, after America (17m) and Japan (5.9m). “China
is going to become the second-largest market in the world sometime over the next two or
three years,” says David Thomas, head of China distribution for Ford (economist A, 2005).
Between 2010 and 2015, it should become the biggest automotive market, exceeding both
Japan and America. At the same time, the Chinese government spent billions into expanding
its highway network. “By the end of 2004, China had 34,000km (21,000 miles) of
motorways, more than double the 2000 figure (17 years ago, it had none)”.(economist
A,2005) The Chinese road network is already the 2nd largest worldwide. “1.8m km, with
44% of it built in the past 15 years. Nor will it stop there. By 2020, China plans to double
again the length of its motorways.”(Economist A, 2005)
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cost structure for the automotive industry, because “Supply chains are inefficient and
distribution systems are fragmented” (Economist.com, 2005) furthermore he describes a VW
problem which is significant in its impact on all carmakers in china “two-thirds of the
replacement parts for VW's Santana are pirated, and a “VW” headlight retails at about a tenth
of VW's official price tag” (Economist.com, 2005 M). The car manufacturers are missing out
on the highly lucrative after sales market. The expected synergies with the Joint Venture
partners are effectively not happening “There is not a single car plant in China, says Paul
Gao, a consultant from McKinsey's Shanghai office, that has economies of
scale.”(economist.com, 2005 M) Local production is in a stage where the automotive industry
is anything else then ready to reap profits from the Joint Ventures. The prenatal state of the
operations will need lot patience until it develops into the market expected by analysts. Mr
Gao recommends the foreign car makers to concentrate on after sales service, providing
finance to Chinese car buyers via loans as well as marketing car designs and brands, whilst
completely outsourcing the assembly to the Chinese. He strongly beliefs this would enable
rapid and sustainable long term growth. (economist.com, 2005 M)
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owned subsidiary affords no realistic means of establishing a successful presence in china
and overcoming the formidable language and cultural barriers involved” Wong emphasises
that the “quan xi” policy is the strongest advocate for JVs, because the Chinese prefer to do
business through personal connections with mutual trust. Although the consequences of the
“quan xi” policy are catastrophic when applying western standards it is inevitable part of
Chinese culture. In this environment foreign investors need Chinese partners. This factor is so
important that it outweighs any benefit which is provided by a wholly owned subsidiary.
(Wilson/Brennar, 2002)
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2.6. Reasons why foreign and Chinese firms establish Joint ventures
Wilson and brennan researched the joint venture opposed to the wholly owned subsidiary
entry mode. In this table they identify the main reasons to establish a joint venture.
The market potential is undeniable as it was demonstrated in the abstract about the future of
the Chinese market. On the contrary the suitability of the JV into the business portfolio,
including the risk involved with sharing technology is outbalanced by the potential revenue.
The competitor’s pressure to enter the market is an important factor to consider.
Due to the stringent political system and its implications in combination with the competitive
environment Mercedes selection of JV partners was limited.
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for joint venture candidates. These are generally found in one of these groups:
Competitors/Suppliers/Customers/Related industries/Trade association members
Mercedes had only a limited choice, mainly due to being the last to establish its presence in
the market. Foton must be classified as a competitor.
The Corporate points are the Ownership split, the Management which includes the board
composition and directors as well as the organization. The other organizational level is
composed of the Production, the installation of machinery and training of staff (Hollensen,
2002) The Marketing and exchange of non technical knowhow is a particularly interesting
point which will be discussed further in a separate part of this literature review.
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Table 1
This table demonstrates the result of a survey carried out in 800 joint ventures located in the
golden triangle to investigate the different expectations from foreign investors and the
Chinese partners. Yang and Lee have compiled a very interesting set. They use the
expectations before a possible Joint venture and match them in the next table where they
combine the need of each side.
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Incentive policy Gain tax and all other governmental Support from governmental incentive
incentives policies
Global Market Expand new market and improve Enter international market and become
competiveness more competitive
Reduce risk Diversify Investment and share Improve management system and
potential risk control investment risk
Increase profit Invest in fast growth area for high Experience fast growth and profit
returns recapitalisation
(Yang/Lee, 2002)
The survey results revealed that those different expectations have a compensatory positive
effect on both sides. Yang and Lee point out how interlinked expectation 1 and 2 are, they
emphasise that the upstream/downstream relation is positive and matches Chinese and
foreign partners perfectly. However they do not mention at all that the second point, to
overcome the trade barrier and to successfully open the market for its product is a homemade
Chinese speciality. Basically the compensatory effect appreciated by yang and lee is only
existent because foreign investors have to bypass the Chinese regulatory body via a joint
venture. The positive effect for point 2 is definitely on the Chinese side. The third point is
relatively far off from being a positive effect on the automotive industry as the motors
provided by Mercedes are produced by highly sophisticated machinery which relies on robot
technique. The labour involved is concentrated on the machinery supervisors. The fourth
point is valid for the automotive industry as well as others which have a cutting edge
production technology. Lee and yang point out that the lifetime of the production facilities is
extended due to the prolonged competiveness whilst reducing the financial risks. According
to the authors of this study the financial risk reduction is a result of the diversification of the
production into different worldwide locations. In the compensatory factor for the Chinese
side in point number 4 yang/lee underline that the search for global allies is particularly
strong because of the need for a partner with high financial resources. Expectation number
four is the last one covered by yang and lee. Point’s five to eight could have used some
further elaboration to enhance the readers understanding of them. In particular the
compensatory affect in between “reduce financial risks” and “add new financing sources”.
First of all every expansion into a market abroad is expensive and a Joint venture involves
high risk as the initial investment is high, whilst the outcome and failure rate is high as
well.(Hollensen)A other point where further elaboration would be useful is the “protect
copyright for intellectual products” and “increasing firms reputation from famous brand”
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point. Because as Griffith” points out the foreigners loose the copyright to the Chinese whilst
the Chinese gain from the enhanced reputation.”(Griffith,2006)
“Partners sometimes have different views on how successful their IJVs are, because they use
different criteria to evaluate their performance (luo, 1995). Chinese partners focus on long
term objectives such as the technology transfer, exports and managerial learning. In contrast
to this foreign partners use profitability and market share to evaluate performance.(Yan and
gray,1994) Yan and Grays statement on the performance appraisal is principally true, but
other writers such as Hollensen at least recommend to be patient with IJVs and evaluate their
performance not like the one demonstrated by a internal division(Hollensen,2003). Kotler
recommends that both partners to find common measurements on how to evaluate
performance
Different evaluations come to conclusions about the effectiveness of the operation. Key
problems are identified thereafter. The problem is that these areas might be subjected to the
point of view of the respective partner. A problem area for Mercedes might be of less interest
for Foton and vice versa.
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“No possibility to exploit economics of scale due to the plant sizes”. Not only plant
size but also a inefficient supply chain and mediocre operational management which
links into.(pamell,2002)
“Bad planning”. Which is a result of the reluctance to change by the Chinese caused
by the foreign partners strategy to change.(pamell,2002)
“Competition too strong” .The competition grows strong if companies do not utilize
on economies of scale and fail to realize expected JV synergies. Therefore this point
must be considered a result of the former two.(pamell,2002)
Infrastructure problems
Product quality
The differing goals of the collaborating partners-indeed this latter factor (according to
59 percent) along with false expectations (63%) was/were the main reasons for
ventures to fail.
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This section has demonstrated the key problems faced by the JV operation. In the next
section the main problems will be discussed further in respect to strategies and tools to
overcome them. If these strategies are applied from the start of the operation there is a
chance to avoid the problems described above. However the implication of these
strategies might prove extremely complicated.
In Sino-Chinese Joint Ventures there is often a very tight schedule for the implementation;
therefore Tsang classifies the change as radical and discontinuous. The level of staff
participation is very limited due to two factors. First of all the lack of time and the tight
schedule, secondly the fear by the foreign investors that local staff might demand substantial
modifications.(Tsang, 2002) According to dunphy and Staces(1990) this approach is
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transformative and coercive, they refer to this strategy as dictatorial transformation. Due to
the low level of participation substantial resistance from local staff can be expected. The
problems which arise are apparent on every level. Both managerial and on the factory floor.
First of all the Chinese stick to their old routine although having agreed to the
implementation of change. This in turn leads to poor performance and a low level of mutual
trust which furthermore complicates the relationship and leads to the failure of the venture.
2.14.H.R.M.
Tsang summed up all the factors of HRM which are a problem in a Joint Venture. He used
these factors and outlined possible solutions. According to him the solutions are rather hard
as the “Chinese partner frequently maintains that the personnel is an internal matter and shall
therefore be off limits to foreign scrutiny” (Tsang,2003). Additionally there might develop a
mix up of management styles if the foreign and Chinese partners assert equal influence on
HRM matters.
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practices/Cultural misunderstandings
Training A.: Heavy training cost Similar to the recruitment problem A.:
B.: Danger of losing well trained staff Intention of the Chinese government to use
joint ventures as a training ground/More
dynamic labour market.
Trade Union Danger of a powerful and uncooperative trade Powerful workers congresses in Chinese
union enterprises
The companies analysed by the author are not exactly the perfect match for a comparison
with the Mercedes/Foton joint Venture. On the contrary they show the illnesses of a lot of
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IJVs in China. A separated culture inside the companies where know how exchange is not
happening due to cultural reasons. Management could take influence, but due to a lack of
strategy and frameworks and mechanisms which might encourage the exchange a lot of JVs
do not exceed the primary function for which they where set up. (Maher, 2002)
The value chain analysis is a tool to analyse strategic capabilities.”It analyses how value is
created or lost in an organization in terms of activities undertaken”(Scholes,2006).The cost of
value activities and the value they deliver determine whether best value products are
developed.(Scholes,2006) In an joint venture the core competences of each other are
evaluated by the value chain. The final outcome should be complimentary value activities.
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HIGH
Chinese
Arabs
Spanish
Context
North-Americans
Germans
Swiss
LOW
Messages HIGH
At one extreme are the low context cultures of northern Europe and on the other end are the
high context cultures of the Arabian and Asian world. “The greater the context differences
between those trying to communicate, the greater the difficulty in achieving accurate
communication”. The relation between agents and their networks is critical for the success of
operations in high context cultures. , (Solberg, 2002)
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to national territory, neglecting the fact that one country might have a variety of different
cultures. Besides this Hofstedes model is based on one industry. Besides this the definition of
the dimensions might be different from culture to culture. An other limitation is that the
model neglects entrepreneurs and focuses on the corporate world.
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3. Research Methodology
Investigation into the Mercedes Heavy Duty Truck operation in the Chinese commercial
vehicles market: Is exporting outdated and is the proposed international joint venture with
Foton an adequate market entry mode to overcome Socio cultural and legal barriers?
3.4. Positivism
This philosophy is also referred to as the traditional scientific approach to research (this
approach is very useful because it is a very objective way to conduct research with
quantifiable data. A positivist researcher will use a “highly structured methodology” to
enable exact replication of the research (Saunders 2003). It leaves no error margin because it
is supposed to be done in a “value free manner” and is therefore extremely reliable in
theory(Saunders,2003).Positivism is criticised for leaving a very low possibility for errors, it
assumes that the data accumulated is completely valid and neglects the business
environments subjectivness. Both can have a significant influence on the research outcome.
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I will limit the use of positivism because of the low availability of objective resources from
Foton and the dynamic macro environment of the Chinese economy. The analysis of the
situation in a cross-cultural joint venture is subjective. Therefore little use of positivism will
be made in this dissertation.
3.5. Interpretivism
This philosophy is the opposite of positivism. It advocates a more subjective approach to
research. It believes that the world, in particular socio-cultural issues cannot simply be
analysed with an objective approach. The advantages of interpretivism are the subjectivity
which focuses on the different interpretations of a business research. Depending on
experience and background these might differ substantially. On the other hand interpretivism
might ignore the relations of power, because an interpretist does not aim to explain the topic
in terms of laws or institutional structures.
3.6. Realism
Saunders defines it like this: “the essence of realism is that what shows us as reality is truth”
(Saunders, 2003) Realism must be divided into critical and direct realism. Realists belief that
researchers can only understand situations if they analyse the macro environment of society,
in particular the social structures. Generally speaking human beings are far too complex to be
studied in a purely scientific way. My report is based to a large extent on interviews. This is
the reason why a subjective view must be taken as well. To a certain extend realism is a
mixture of positivism and Realism. In this dissertation the author will apply a variety of
research methodology
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For this dissertation mainly interviews and qualitative data have been the main sources to
establish a theory. Therefore an inductive research approach has been selected by the author.
Adequate literature
Exploratory research is highly flexible, allowing the researcher to start from an open minded
and broad perspective, change and adapt the direction from there onwards as new insights are
found. (Saunders, 2006)
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contemporary writers which include the latest research into their work. The primary
researches quality will be guaranteed by the quality of managers interviewed. Tatiana Turck
is the director of corporate controlling for the Daimler holding. She used to be in charge of
strategic planning in the Chinese market until November 2006. Thomas Doering is the
director in charge of the strategic planning commercial vehicles division of Daimler. He is an
expert of the Joint venture and has accompanied the negotiations for the last five years. Dr.
Wolfgang is a recently retired personnel director whom I interviewed for cultural and HRM
issues. Dr. Moritz is a corporate trade lawyer who specialized on Euro-US transatlantic
contractual negotiations.
3.13. Reliability
Although my interview partners are experienced professionals in the segment, they are
human and therefore subjective. Besides there are compliance issues which will prevent my
interview partners to address problems freely. I will try to circumvent this via detailed
questions and guided interviews.
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4. Findings-Section II
In this section the author will apply a variety of business modules via the use of the primary
data acquired during the interviews. The result of this section shall be used to derive
appropriate recommendations in concordance with the literature reviews background.
4.1. Exporting
For the investigation it is necessary to analyse the entry mode strategies for their suitability
and determine the advantages and disadvantages of the current strategy. This part of my
investigation will identify the reasons as to what extent a change of the market entry mode
strategy is necessary.
The exporting mode which is currently the only way Mercedes serves the HDT segment in
China has various advantages and disadvantages which will be analysed. Centrally
manufacturing enables producers to make full use of economics of scale; the additional
quantity of products exported into other markets (Henessy, 2001) like china enables a
marginally high profitability of the exports as volume is simply added to the existing
production facilities in Germany(Noonan,1996).
Mercedes uses direct exporting in collaboration with local distributors. These distributors are
either tradesmen who sell directly to the customers in spot businesses or they own multiband
saloons in which they present and sell the Mercedes truck range (Doering, 2007).
In the next section it will be analysed how effective these channels are.
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customer information to Mercedes. Most likely cause they are afraid of losing future business
once Mercedes established a close relationship (Doering, 2007).
Due to the simple nature of the transaction and the complexity caused by the middleman
there is almost no way to implement contemporary strategies such as relationship marketing.
(Doering, 2007)
4.3. Distribution
There are currently five saloons selling the HDT line of Mercedes. Sadly their core business
are the vans and MDTs. As described beforehand the most profitable segment is dominated
by spot business and respectively of the middlemen who dominate this market (Doering,
2007). Not even the distributors have a permanent relationship with the buyers. During the
interview the enquired how this could be possible, because you would expect customers to
have their maintenance done at the mechanics enclosed into the distributor. The answer was
that it is a homemade problem, because of the nature of the product and the included sales
and infrastructural barriers (Doering, 2007). Due to only having five repair shops Mercedes
early on offered the flying doctor service known from the outback in Australia. The only
difference is that they are not using planes. They are located at strategical positions in the
golden triangle. Once needed they are on site in a matter of a few hours (Doering, 2007).
These people have personal contact with the driver, but not the owner/repurchaser. The
second problem is more of an infrastructural problem. The sheer size of the country in
combination with the enormous complexity of an actros leads Mercedes to the principle of
selling a mechanic together with the trucks (Doering, 2007). Certainly not one mechanic a
truck. However large customers, which the actros customers usually are can send a mechanic
to Germany where he receives a 10month long training and returns to service the trucks for
their product lifetime. (Doering, 2007). So basically the largest customers don’t need a direct
line to Mercedes anymore because they have an in-house mechanic with all the necessary
equipment.
Successful marketing depends on the viability of the relationship between the company
exporting and the local distributor and/or importer (Henessy, 2001). In the next section the
author will assess the relationship between Mercedes and the intermediaries in China.
The regulations and obligations are against marketing objectives. For instance the sale of
Mercedes trucks in multi brand saloons is negative in regards to the separate identity of
Mercedes (Kotler, 2006). On the other hand there is given proof that competitors cut their
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margins and give higher commissions to the multi brand dealership (Turck, 2007). This
practice encourages the dealerships to over sell a certain brand due to the higher profit margin
achieved, whilst neglecting the sale of other brands in the saloon. This is a legal practice and
can only be tackled via matching the offered commissions. The problem is that this is done
secretly (Turck, 2007). Therefore it takes time and the in-depth analysis of sales figures to
realize the competitors advance. An intermediary with integrity would at least inform
Mercedes of this situation and offer them the chance to match it (Turck, 2007). The Chinese
partners of Daimler do not adhere to this part of western business culture.
The European and North American automotive distribution intermediaries are in an awkward
situation. Customers demand discounts whilst the producers reduce commissions (Doering,
2007). Their margins are shrinking and the main revenue is generated from repairs and
maintenance, not from the actual sale. Chinese distributors are overpowered due to the
partnership agreements necessary to open up a business. Therefore the control asserted by
Mercedes on its distribution partner is rather limited. Mercedes is seen to be rejective of
distributor’s demands and there are a few problems which have aroused in the past and will
continue to happen if the Chinese government is not willing to implement an objective and
fair legal system (Doering, 2007). For instance a distribution partner has apparently dumped
Mercedes for another brand with a completely unreasonable justification, although the
contract in place was supposed to be running for another three years (Doering, 2007).
Mercedes did not even try to take its former partner to court as they analysed the chances of
winning as to low, in particular together with the possibly generated negative publicity and
almost certain unwillingness to pay compensation from the former JV partner. This is
certainly an exception and not the normal business practice, but it happens in a significant
quantity Mr Doering did not want to specify due to confidentiality issues.
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filled (Turck, 2007). Mercedes rather seeks a strategy to enhance its position in the Chinese
market and to get a larger share of it via a different entry mode.
4.6. Quanxi is the term describing a system in which social networks determine business
success. It is a favour doing system. The longer people have been involved with each other
the more trust they share. Quanxi is essential for Chinese businesspeople, building it up takes
a lot of time and patience. It is very difficult to be obtained by foreigners. In particular as
bribes are not possible anymore due to corporate social responsibility regulations Mercedes
accepted to adhere to. (Turck, 2007)
4.7.1. Licensing
A company assigns the right to a patent (products, technology or process) or a Trademark
(which protects the name) to another company in China for a fee or royalty. The advantage is
that Mercedes could gain market share without equity investment (Henessy, 2001). This
method is unsuitable due to the complexity of the product and copyright issues. According to
Mrs.Turck an actros truck is far too complex; besides this she was concerned about the
copyright as there is no protection of intellectual property in china. At least not as in the
United States or Europe. Therefore Licensing is not a viable option.
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4.7.2. Franchising
This option is not possible due to the product nature. Franchising might be appropriate for
food or cosmetic chains, but in the automotive sector they make less sense.
4.7.3Local Manufacturing
Contract manufacturing and assembly could work in theory as long as the owner of the plants
is Chinese, however as analysed beforehand the complexity of the product as well as
copyright issues are against this entry mode. The Full-Scale integrated production requires a
substantial investment (Henessy, 2001). Mr. Doering identified a missing supply chain as the
main problem to establish this type of local manufacturing.
4.8. Analyse whether the IJV is the most suitable market entry mode
for Mercedes
The exporting mode is convenient to fill the productions capacity with a fairly low risk.
Various problems with the Chinese intermediaries and the wish to profit from the strong
demand of Chinese customers call for a new strategy to conquer a larger share of the market.
The wholly owned subsidiary and the foreign production entry modes are not suitable due to
the complexity of the product, copyright issues and the political framework of the P.R.C...
The main factors opposing the wholly owned subsidiary are the Cultural barriers, in particular
the language and “quanxi”.
Joint Venture C
Chart adapted from Hollensen
There are three major types of joint Venture. In an upstream based JV company A and B
collaborate on Research & Development. They might include production as well (Hollensen,
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2006). This type is not suitable for Mercedes as they do have upstream competences
(Doering, 2007), but according to Mrs Turck there are no suitable upstream partners available
in the Chinese market. In a downstream based JV company A and B collaborate on
marketing, distribution, sales and service. This type of Joint venture is unsuitable for
Mercedes, because the Actros line in itself has a “product mix” which is yet unsuitable for the
H.D.T. mass market in China. It is too expensive in production. Therefore Mercedes seeks an
upstream/downstream coalition in which company A and B carry out complementary tasks.
These three types of joint venture are according to Mrs. Turck not possible in the Mercedes
practice.
Upstream Downstream
1 3 4 2
Upstream Downstream
X and Y Coalitions
According to porter, 1986 1 and 2 are y coalitions where partners share one or more value
chain activities. In the short run Mercedes wants to build up a joint production and share
technology with its Chinese partner. In the long run this collaboration shall be extended to all
areas of the value chain (Turck, 2007). Points 3 and 4 represent an X coalition in which value
chain activities are divided amongst the partners focusing on the respective core
competences. In the short run Mercedes will provide most of the R&D know how whilst the
Chinese partner does the marketing of the joint product. (Tuerck, 2007)
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Fairly low as the components of a Foton are easy to copy, besides this there is no intellectual
property to speak of which would enhance the level of bargaining power. An other factor is
the fragmentation of the supplier industry.
Potential Entrants
Can be described as fairly low as the Chinese government sees Foton/Beiqi as some sort of
national champion. Besides this the automobile industry needs economies of scale and the
capital requirements to enter the market are fairly high, something a new entrant couldn’t
achieve at least initially. Therefore the threat of a new Chinese competitor is rather low.
Substitutes
The substitute is the railway system. China is investing strongly in the rail work network
(anderlini, 2007). The threat is low.
Buyers
The Chinese customer is spoiled by choices. However they are not very differentiated and the
demand for trucks is expected to grow significantly. Therefore their power is medium.
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Competitive rivalry
At the moment the industry growth rate is solid enough, therefore competitors see less need
to take market share of each other. The high fixed costs of the automobile industry make
capacity fill a prerogative which therefore leads to more competition. The main reason for the
Joint Venture is the competitive rivalry, because each Chinese truck corporation is either in a
joint venture with a foreign investor or plans to do so in the proximate future. Volvo and
MAN-Scania have already entered joint ventures and thereby increase the peer pressure on
Mercedes which has been last in a JV (Reuters.com, 2006). The competitive rivalry is high.
4.11. SWOT Analysis of the Joint Venture between Foton and Mercedes.
Strengths (Doering,2007) Weaknesses(Doering,2007)
Guanxi Production
Finances Organization
Product Development Double management/Culture
Legal conflicts
High Staff turnover
Opportunities(Turck,2007) Threats(Turck,2007)
Enhancing the quality to compete not only locally but globally with products which are
adapted rather than standardized. This process is instigated by both the local Chinese
competitors as well as the foreign companies investing in China.
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Government objectives to establish national champions will conflict with the aim to
rebalance the slowly overheating economy via fiscal and monetary measurements. The
governments influence is and will continue to be very dominant in every aspect of the
Chinese automotive business.
The Chinese partners for a joint venture are limited, in particular considering that Mercedes
main competitors Man Scania and Volvo (Reuters, 2007) have entered into the market at an
earlier stage. Thereby they have limited the choice for Mercedes down to Foton. Foton is part
of the Beiqi group with which Mercedes already produces C and E class sedans. In the next
paragraphs the author will analyse how Foton and Mercedes fit together and what they expect
from each other.Hollensen used this factors as the main driving forces for IJVs. In practice
they are split like this:
More specifically both partners have needs which they hope the other partner could fulfil
(Yang and Lee)
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opportunities
Capital resource To diversity its global investment More capital to improve facilities and
portfolio. technology upgrades
Information Establish itself in the Chinese market Need connection with global business
Channels network
Global alliance A partner in China and operations in Globalization expertise
other emerging markets
Incentive policy Gain tax- and other governmental Support from governmental incentive
incentives policies
Global Market Expand more deeply into the Chinese Enter international market and start
market and improve competiveness competing on a global scale.
Reduce risk Diversify Investment and share Improve management system and
potential financial risks reduce investment risk
Profit Expand the share of the Chinese Experience fast growth and profit
market and increase profit recapitalisation
Foton needs substantial investment into its production facilities (Turck, 2007). It needs to
enhance its existing product range with new technology and it wants to improve its
management applying adequate strategies to compete on a global scale (Turck, 2007).
Mercedes needs to enlarge its market share in the Chinese market, due to various factors
identified in previous sections there is a need for a partner with the distribution system, low
cost labour and expertise in the Chinese market. Mercedes primary objective is to
successfully enter the local market, whilst Fotons key objective is the restructurisation of its
operations. Both have in common that its competitors who are doing the same assert a level
of pressure to do likewise.
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SWOT of the Mercedes H.D.T in China
Opportunities(Turck,2007) Threats(Turck,2007)
Opportunities(Turck,2007) Threats(Turck,2007
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The aim of the HDT group is to collaborate on both up and downstream activities, in
particular in the long term strategy for the Chinese market and the expansion thereafter into
markets such as India and Russia. (Turck, 2007). However in the short run they will have an
asymmetric relationship where Mercedes takes significant influence in the production
processes and provides the technological knowhow, whilst Foton distributes and assembles
the product. For the next five years the Value Chain would look like this if each partner sticks
to his core competences. This value chain demonstrates the initial phase.
Besides this there are Support activities such as HRM, which is rather underdeveloped in the
first stage due to the cultural diffusion. The firm infrastructure will not be joined as the main
production facilities of Foton will be used while a new plant is built (Doering, 2007). The
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technological development is limited to motor technology, not the whole product. The
procurement will be dependent on the organizational planning. (Doering, 2007)
This value chain shows that the planned initial phase will be an X-coalition where each
partner focuses on his core competences whilst learning from each other. The final result will
be a new product in the H.D.T. segment. A Foton Amuna truck with a Mercedes motor which
is qualitatively similar to the Actros yet far cheaper and with low cost components. An area
which will be targeted directly is the Sales and Service sector where Foton seems to have the
largest deficits. In particular as a Mercedes motor will be impossible to be repaired by
unqualified staff. The decision to supply Foton with Actros similar motors, but not the
original derives from the fact that they too complicated and expensive in production. Besides
this there are copyright concerns and the mutual trust is not yet established to such a high
extend.
In the second phase the joint product will be enhanced significantly. Expertise in other fields
of R&D will be shared with Foton and incorporated into the product. According to
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Mr.Doering these will incorporate modifications necessary to enhance the performance of the
trucks. Due to confidentiality issues he would not specify them to the author. However the
idea is to basically create a whole new truck instead of supplying motors and building them
into the “Amuna”. This new product shall be the key to conquer the Chinese market and
expand the joint operations to markets with similar demands such as India and Russia
(Doering, 2007). To succeed with this they must improve the production methods
significantly whilst still maintaining the low cost basis. Therefore Mercedes will improve the
value chain via improving the production methods with adequate technique and processes
(Doering, 2007). On the other hand they have to improve the marketing, which lacks
significantly, in particular for the global expansion wished for by Foton. Besides this a joint
new product needs significant alterations to the marketing mix to succeed. The firm
infrastructure will be enhanced significantly through the joint new plant. The procurement
will be better due to the introduction of principles such as just in time management (Doering,
2007).
In the third phase Mercedes will exchange non technical know how to improve the whole
operation in exchange for more influence (Doering, 2007)? Whether this influence is
tolerated will depend on the stakeholders involved.
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High power
Suppliers
Large shareholders
Bond holders
Media
Small shareholders
Monitor Keep informed
Low power/interest
High Interest
The small share- and bondholders of are no influential stakeholders as the operations scale is
limited seen in contrast to the corporate activities of the parent company. The Chinese side
has only one shareholder, the Chinese government; the influence will be discussed by the
author separately.
The financial markets do not expect much from china joint ventures, as the past failure rate
has been high.But if significant company resources are employed into a continuously loss
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making operation they could react by downgrading ratings and other measures which have a
strong effect.Therefore Foton-Mercedes must keep them satisfied.
Large shareholders, the media and suppliers have a higher interest, but their power is
limited. In particular the Chinese media which is controlled by the government. Suppliers
only have power if they own unique intellectual property (Dr.Moritz, 2007). However due to
the simple nature of the product and the low level of legal copyright protection they have
only a limited short term power. In terms of enhancing the relationship Mercedes-Foton must
keep them informed.
Major suppliers are in this group as they are not as easy to replace as the small ones due to
the extent of the operation. Therefore they can assert pressure on management and must be
managed closely. Employees are a very interesting group as they are the backbone of the
joint venture. Therefore the success depends largely on them. However as the core part of the
employees is Chinese it will be very interesting how they work together with the Mercedes
staff. The author will discuss this topic separately later on in the text. The Main Board of
Daimler is supervising and controlling a lot of operations which are more important then the
china joint venture (Dr.Wolfgang, 2007) as it is in the initial stage. However should it
succeed and the planned global expansion of Foton-Mercedes works out this might change.
The Chinese government/76% shareholder has the highest interest and power in this
operation. This is underlined by the fact that the whole Chinese senior management are either
party officials or involved with it (Turck, 2007). Although the liberalisation driven by the
WTO membership should limit the governments influence in theory at least. This is not the
case; the Chinese government influences the business in a decisive way. Even now after the
joint venture agreement there are daily changes and amendments to the existing contracts
which are directed by mofcom, party officials and other regulatory bodies (Turck, 2007).
Even decisions by senior management are reversed as terms of them do not suit the
regulators. This environment is harmful to the whole operation and the resulting process
delays are harmful to the whole joint operation (Turck, 2007).Therefore a repositioning of
this stakeholder into the keep informed segment is desirable, yet not possible due to the
ownership structure.
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Power Distance
China has a high power distance. The inequalities in between the ones who assert power and
the ones on the receiving end are very high. The ones on the receiving end accept this and
follow orders, the result is that decisions are made by a few and the autonomy level of mid
management is fairly low as they have to double check everything with top management
(Doering, 2007).
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Business Dissertation Andreas Hirschbrunn
Uncertainty avoidance
China has high uncertainty avoidance. Individuals don’t want to take risks, because the
punishment for failure is higher then the merits of succeeding. This sharply contrasts with the
Mercedes manager’s sharp and self-conscious use of their span of control (Doering, 2007)
Individualism
The Chinese side demonstrates a high level of collectivistic behaviour whilst the Mercedes
side comes from an individualistic background. The Chinese have a group mentality and they
are interdependent on each other. Hey have high levels of loyalty to their organizations and
the country. (Hollensen.2006)
Masculinity
In masculine societies values such as achievement, performance, success and money exceed
the feminine values such as quality of life, warm personal relationships and preserving the
existing. China has a rather masculine society; however the collectivistic belief reduces the
extent to an acceptable level. (Hollensen.2006)
Time Perspective
This dimension considers the perspective of the future. Long term versus short term
orientation. Principally Asian countries have a core focus on the long run whilst Europeans
and northamericans have a short term orientation. (Hollensen.2006)
Considering these cultural differences there is a tremendous task ahead to manage this joint
venture and to implement change.
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Japan
Africa
In this internal paper the failure quota was analysed. 40 out of 100 euro-sino joint ventures
and 48 out of 100 US-Sino joint ventures collapsed in the first three years. European and
Chinese Joint Ventures have a very high collapse quote. There are no apparent problems in
between sino-japanese operations. Interestingly enough there is fairly high quota of collapsed
joint operations in between the Japanese and American/European partners. The largest the
cultural difference, the larger the collapse quote.
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4.25. Personnel
Training personnel is extremely expensive and time-consuming. The cultural factor is the
most complicated aspect as there are rarely people experienced in modern sales techniques
(Dr.Wolfgang, 2007). The training of a German sales representative is done in 3months time.
Including a few short courses and practical experience in the saloon (Dr.Wolfgang, 2007). In
china the situation is different. Training is far harder and longer. It takes up to a whole year
before a sales representative meets the Mercedes standard expected by both the company and
customer. The situation worsens when looking at car mechanics. Quality cars need quality
mechanics. The educational level in the west is not yet matched in China (Dr.Wolfgang,
2007). Potential car mechanics are an investment which takes up both time and money. The
worst thing is something observed by Daimler in the past two years. Experienced mechanics
and sales representatives are lured away to other European or American competitors with
more attractive sales packages (Turck, 2007). Thereby the unnamed competitors save
themselves the time and money needed for training. This strategy strengthens the competitor
whilst weakening Daimler. Another serious problem which is interlinked to the low level of
loyalty is the salary policy. Only minor wage increase offers from competitors or the
knowledge of colleagues who earn more cause disloyalty. The Chinese workforce will either
take any competitor’s offer which is slightly higher or demand increase of salary without any
justification (Dr.Wolfgang, 2007). At Daimler the Chinese senior manager in charge of
competitor analysis left the company from one day to the other without even mentioning the
reason or giving Daimler the chance to match the competitors offer. She did this after seven
years in the company, where she was according to Dr.Wofgang extremely satisfied. The low
level of loyalty is a serious problem both in the white collar and to a certain extent in the blue
collar sector as personnel know how is lost to the competitor and all the tangible and
intangible investment into the person is gone forever(Dr.Wolfgang,2007).
4.26. Recruitment
There are two key problems with the recruitment. First of all there is a shortage of qualified
managers and workers (Dr.Wolfgang, 2007). This is the result of the under deployment of
higher education in the P.R.C. and the long term result of the damage inflicted by the cultural
revolution initiated by Mao(Tsang,2003). Secondly there is pressure to overstaff the joint
venture due to Marxist/Maoist/communist ideology and their respective government policies
(Tsang, 2003).
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5. Recommendations
As analysed beforehand there are two separate cultures at work. The collaborational efforts
are undermined by a “them vs. us” atmosphere. It is necessary to remove this sentiment and
replace it with one joint culture. It is therefore imperative to diffuse both the Foton and
Mercedes culture and provide the employees with a new framework which shall take
influence on their mindset and encourage a new way of thinking. In this section the author
will give practical solutions on how to overcome the difficulties. These recommendations
shall serve as a base on how to implement a joint culture with one identity.
5.1. Recruitment
The Joint operation needs fresh and young minds with a sophisticated education. There is a
strong need for young people as their minds have not yet been pressed into an organizational
framework. The origin of these recruits should be 50/50% Chinese and international. It is
imperative that these recruits have been exposed to various cultures during their formation, as
this will increase the speed with which they adopt to the new Sino-international
organizational culture. The Chinese recruits must be fluent in English, whilst the international
recruits should have at least a basic understanding of mandarin, the official language. These
basic language skills would already underpin the effort made to engage into the Chinese
culture. The practical problem is that this type of graduate is hard to find and that the
international competition for these individuals is tremendous. Resulting in high employment
costs in respect to the salary and a high staff turnover due to competitors offering even better
pay packages and opportunities.
5.2. Training
The existing managers should be sent abroad for extensive training programmes where they
learn modern management principles and get a feel for the joint venture partner’s culture.
This training should also be done with new recruits to provide an extra incentive to start
working for Mercedes-Foton. Training of managers in an environment abroad might be one
of the best, yet very costly actions to undertake to enhance the mutual trust and knowledge.
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5.2. Continuity
In the last five years the director of the Mercedes China division was changed three times. In
the Chinese culture where personal relationships are valued tremendously it is imperative to
enhance the relationship with the Chinese stakeholders via one top management team with
long term visions of the Chinese market and the expressed will to stay for a long period of
time. Rotating expatriates must therefore come to a stop. Only a long term relationship
between Chinese and Mercedes executives will encourage mutual trust which is decisive to
overcome the difficulties of double management. Only a united effort will lead to a
successful cooperation.
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6. Conclusion
The exporting entry mode used by Mercedes has reached its limit. Various problems with the
intermediaries and the expressed motivation to enter the Chinese market in a large scale make
the joint venture as an entry mode a necessity. Other entry modes have been analysed, they
are not adequate due to various limitations, cultural and legal barriers. The suitability of
Mercedes and Foton has been proven through the value chain analysis and the key drivers of
change for the Chinese automotive industry gave further evidence for the necessity of a joint
venture. Foton will gain technological knowhow in the initial phase, production facility
updates in the second and finally non technical expertise for the global expansion in the third
phase. There are various concerns about copyright caused by the high R&D input of
Mercedes. These shall be limited via the use of slightly adapted technology which shall
guarantee that an Amuna truck will never have the same product sophistication as an actros
truck. The main benefits for Mercedes are that they get a local partner with extensive
knowledge of the Chinese market. Besides this they gain a strategic alliance in the Asian
market which might be decisive for the future of the Mercedes truck operation all over Asia.
However this vision proves difficult to be achieved as there are various problem areas which
delay processes and make it very complicated to realize the objectives. The collaboration
between Foton and Mercedes is very complicated due to cultural factors. In particular the
language, managerial background and the decisively different societies make it extremely
complicated to get the partnership on a profitable base. The results are miscommunication
and mistrust. This is further enhanced by a Chinese government which in its role as the main
shareholder asserts a high level of control and pressure on management. Mercedes executives
have to satisfy various stake holders. In particular the political stakeholders prove to be
disruptive of the joint operation and demand changes to existing contracts, thereby causing
substantial time lags.
The JV is not an adequate market entry mode to overcome the cultural and legal barriers of
the Chinese market, at least not in the initial phase. But of all the possible modes it is the best
one for Mercedes at this moment in time. In the long run these difficulties might be overcome
and the Joint Venture is a great success or they become more serious which will ultimately
cause a collapse.
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The joint venture is in its initial phase, therefore the performance evaluation must be carried
out once the operation is running. At this early stage it cannot be determined whether it will
be a success or failure. The most important task for management is to implement change in a
diplomatic manner. Mercedes must be careful not to overload the Chinese partner with
western style management techniques as the Foton executives will need time to adapt to the
new corporate culture. The key areas of concern identified are in HRM. The way the
personnel are managed will be decisive for the success. The main objective at this early stage
is the implementation of a common organizational culture. The author recommends a very
determined recruitment process in which young talent that can grow into the new corporate
culture is employed. The continuity of service for the Joint Venture by Mercedes expatriates
is imperative, both for adapting to the culture and building up the necessary relationships
with the key stakeholders of the operation. The author recommends following a very
diplomatic approach to manage the change necessary to succeed not only in the Chinese, but
also in the global market.
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Bibliography
Books
Johnson, G. & Scholes, K., (2002), “Exploring Corporate Strategy: Text and Cases”, Prentice Hall
International (UK) Limited, 6th Ed.
Bensoussan, B., and Fleisher, G., (2003), “Strategic and Competitive Analysis: Methods and
Techniques for Analysing Business Competition”, Prentice Hall
Hollensen S.(2004)”Global Marketing, a decision making approach”, Pearson education Ltd. 4th
edition
Noonan, C. (1996)” The CIM Handbook of Export marketing”, Reed educational publishing Ltd.
Websites
Anderlini, j. (2007), FT.com “Environment: Devastating price to pay for rampant growth”
Available URL:http://www.ft.com/cms/s/1/9566a176-7561-11dc-b7cb-
0000779fd2ac,dwp_uuid=07c92c3a-757f-11dc-b7cb-0000779fd2ac.html
Available URL:http://www.ft.com/cms/s/0/cb8d3138-907e-11dc-a6f2-0000779fd2ac.html
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Daimler.com
Available URL:
http://www.economist.com/countries/China/profile.cfm?folder=Profile%2DEconomic%20Data
Economist.com,(2005 Y)”Shanghaied”
Economist.com,(2007 Z)“Governing China:caught between right and left, town and country”
Available URL:
http://www.economist.com/research/backgrounders/displaystory.cfm?story_id=8815195
Available URL:
http://www.economist.com/research/backgrounders/displaystory.cfm?story_id=9861591
Economist.com, (2002 B)” Is there any point in manufacturing cars in china? Leave it to the locals!”
Economist.com(2005 M),”Dreammachines”
Available URL:http://www.economist.com/world/displaystory.cfm?story_id=E1_QDPNRQN
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Finfacts.com (2007)”world Bank China update-Short term macro challenges are manageable”
Available URL:http://www.finfacts.com/irelandbusinessnews/publish/article_10008039.shtml
Reuters.com
Available URL:http://uk.reuters.com/article/basicIndustries/idUKL1284537520070212
Journals
Brennan,R.,Wilson,J.(2003),Market entry modes for western firms in China, Asia-pacific
journal of Marketing and Logistics, Volume 4,issue 2, pg, 3-18, Barmarick Publications
Griffith, D., Chen, H. (2006). The influence of liability of foreignness on market entry strategies. An
illustration of market entry in China.International Marketing Review. Emerald group publishing Ltd.
Volume 23, issue 6, page 636-649.
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Maher,T.,Sheriff,T.K., Wong j. (2002) The hesitant transfer of strategic management knowledge to
international joint ventures in China: greater willingness seems likely in the future, Volume: 25
Issue: 1 Page: 1 – 15, Barmarick Publications
Parnell,M.(2002) Doing business in China – the modern German experience, Volume: 14 Issue: 5
Page: 351 – 363, European Business Review, MCB UP Ltd
Yang,J. Lee,H.(2002), Identifying key factors for successful joint venture in China, Industrial
Management & Data Systems journals, Volume: 102 Issue: 2 Page: 98 – 109, MCB UP Ltd
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Appendices
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Political
Economical
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“China's trade surplus in January-September, at US$185.8bn, was up by 69% year on year”.
(Economist.com, 2007 X)
“Real GDP growth is forecast to ease to 10% in 2008 and 9.3% in 2009. The forecast for 2009
is marginally higher than the 9.2% forecast last month.” (Economist.com, 2007 X)
“Real growth in exports of goods and services is now expected to reach 14.7% in 2008, down
from last month's forecast of 16.4%, owing to weaker global demand”. (Economist.com,
2007 X) As the chinese automotive industry is not yet in a state to export on a large scale,
the lower global demand is a low risk factor.
“Appreciating Yuan gradually against the dollar”. (Economist.com,2007 W) Exports into the
US, aswell as Europe will become slightly more expensive, whilst the imports price will
decrease gradually.
“In August consumer-price inflation jumped to 6.5%, up from 1.3% a year earlier and its
highest for more than a decade. Food prices responsible due to supply shortages.”
(Economist.com,2007 W) If essential goods increase in price they cause fear amongst
consumers and therefore reduce spending
“Share prices have risen by 400% in just over two years. This bubble might burst. Chinese
firms have invested in other Chinese companies' stocks, a slump in share prices could
directly hurt their profits and hence their investment just like in the 90s in japan.”
(Economist.com,2007 W) Depending on the amounts of investment this can cause serious
problems for the comercial vehicle automotive sector because of its dependency of B2B
customers.
“The chinese road network is already the 2nd largest worldwide. 1.8m km, with 44% of it
built in the past 15 years. Nor will it stop there. By 2020, China plans to double again the
length of its motorways.”(economist A,2005) The more extensive the road network, the
higher the demand for trucks Hill become as new zones are connected and invested in.
Socio Cultural
Educational inequality(Lijun,2004)
The one child policy leads to significant changes in the agestructure. The present generation
will be the largest ever. (Economist.com,2007 W)
Income disparities between rural and urban areas fosters the move of population towards
the east and into the cities. (Economist.com,2007 Z)
corruption is rampant. (Economist.com,2007 Z)
Ideological battles between free-marketeers and left-wingers threaten to impede reform.
(Economist.com,2007 Z)
Excluding food, inflation is only 0.9%. This does not mean that food is unimportant: it
accounts for one-third of the inflation basket, and rising prices could trigger social unrest.
(Economist.com,2007 W)
Equities account for less than 20% of Chinese households' total financial assets.
(Economist.com,2007 W)
China's fragile and inefficient banking system is certainly a drag on its economy, but the risk
that a banking crisis could bring down the economy seems small. China has huge foreign-
exchange reserves available to protect its banking system. (Economist.com,2007 W)
Technological
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Rather then Capital intensive production methods with robots, Chinese producers rely
heavily on labour as it is cheaper. average wages have risen by around 15% over the past
year, but labour productivity in manufacturing has risen even faster. (Economist.com,2007
W)
Environmental
Water scarcity
The problem is not China’s environmental laws, many of which are copied in their entirety
from European legislation and are some of the best in the world. The fault lies in a lack of
enforcement at all levels. (Anderlini, j. 2007)
The government neglected the environmental and health implications of rapid economic
growth until recently(Anderlini, j. 2007)
The economic costs of toxic growth are huge but hard to calculate. The World Bank report
estimates the health costs of pollution at about 6 per cent of gross domestic product in
2003, or Rm781bn, but that does not include clean-up costs or the future costs to industry of
current unsustainable development. (Anderlini, j. 2007)
Having decimated much of its own environment through economic growth at all costs, the
Chinese government has introduced some policies in recent years that essentially export the
problem abroad. (Anderlini, j. 2007)
Legal
“A record US$45m judgement for patent infringement was awarded against a French firm,
Schneider Electric, in favour of a Chinese one. Schneider is appealing.” (Economist.com,2005
Y) The chinese legal system is still not demonstrating the same level of sophistication as the
European and even US law. The result are ongoing legal disputes about patents and
contracts.
“Chinese banks are officially not allowed to lend to investors to buy shares, but anecdotal
evidence suggests that households and firms have taken out loans disguised as mortgages to
buy shares. If so, the effect of the Stockmarket bubble bursting could be larger than the
direct impact on consumers' wealth.” (Economist.com,2007 W). If the middle classes wealth
is in danger, this will ultimately lead to lower spending. Lower demand for consumer goods
will lower the demand for transportation and therefore reduce commercial vehicle demand.
“Product piracy destroys margins for aftersale market” (Economist,2002 B) Both domestic
and foreign commercial vehicle producer can not capitalize on the highly profitable after
sales market.
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Apendice B: Interviews
Dr. Hans Moritz
70599 Stuttgart
Tel.:00491727372929
Thomas Doering
Tatiana Turck
Director of corporate controlling, formerly stationed in China for four years of time
negotiating the terms of the Joint VentureGuided 60 minute interview about strategic
marketing in China.Aspects covered included Long and short term strategies, Entry
modes, Objectives, Threats and opportunities,
Walter-Flex-str.38
70519 Stuttgart
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Tel.:00497114790544
Retired member of the board of Daimler Chrysler was responsible for the personnel
department.Guided 120 minute interview about HRM, Socio cultural aspects and
change management. Aspects covered in the interview incorporated
Recruitment,Training,Chinese workforce, German workforce, legalities, Cultural
barriers, Motivational aspects, salary policy, Expatriates
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