Volkswagen, GM, Japanese and Korean companies have all entered the Chinese market through JVs with local concerns (Ibid). The trend towards consolidation is driven by the increasing dominance of the world's largest automakers. Smaller national automakers are becoming obsolete, and some nations have seen their automobile production decline to almost nothing (Finland, Serbia and Egypt for example, OICA, 2011).
Foreign automakers typically make use of joint ventures for a couple of main reasons. As the Chinese example illustrates, market access is a key factor. Many nations have highly protected auto industries or auto markets that make it difficult to set up greenfield subsidiaries. As a result, joint ventures with local firms are necessary to get around foreign ownership laws. In addition, joint ventures give the company better access to local parts suppliers, better access to local labor and helps them to overcome political and cultural barriers. The high risks inherent in the auto industry with its high fixed costs necessitate undertaking whatever strategy will reduce the risk. Automakers typically go greenfield when expanding to safe countries, for example Canada, but in the developing world most automakers seek the security of having a local partner.
Strategy and Structure
Automakers have covered the globe using two main strategies. They produce primarily in a handful of countries -- usually major auto markets -- and do so either on the basis of wholly owned subsidiaries or joint ventures. The latter decision depends on the political environment of the country in question. This model allows automakers to reduce expenses in two ways. The first that they can avoid many of the duties and other trade barriers that are levied on automobiles by producing in the major auto consuming nations. According to OICA (2011), the top auto-producing nations are China, Japan, the U.S., Germany, Korea, Brazil, India…the major auto consuming nations. This implies that the size of the local market is of critical importance in determining where automakers will locate their production facilities.
That the type of market entry for these production markets varies indicates that the type of market entry necessary to enter is not a determining factor in the market entry decision, implying that trade barriers probably play a bigger role. Global automakers also undertake the production and exportation strategy. The way that this is conducted appears to be moving from a single production source model to more of a hub-and-spoke model that emphasizes regional production. For most of the 20th century, automakers produced in their local markets and competed in global markets largely based on exportation. Today's model still relies on centralized production and exportation, but the centralization aspect has been decentralized to regional centers of production rather than global centers of production. A nation such as Thailand has therefore become a production center for Southeast Asia, Turkey for the Middle East, Poland and Russia for Eastern Europe, India for South Asia and Brazil for South America. These regional production centers not only allow automakers to operate in the major markets, but to ship to the smaller nearby markets at a lower cost than would be possible with centralized production.
The next step in the strategy appears to be shifting production to low cost production centers and then exporting back to home nations. Should there be a shift in trade policy large enough to facilitate this, automakers would undoubtedly prefer to produce in low cost centers and then repatriate those vehicles to the home market. At present, the importance of auto industry jobs reduces the odds of gaining political acquiescence for such a strategy.
Key Success Factors
Automobile buyers are price sensitive, but firms can address this by lowering their own cost of production. They do this in part by lowering the barriers to entry with respect to key markets, usually by locating production in those markets. In addition, automakers can lower their cost of shipping by producing regionally rather than globally. This is a reasonable strategic response today because of the high volume of auto sales compared with decades past. Local production allows automakers to have better access to major markets, but it also allows in the long-run for automakers to shorten their supply chains. Suppliers are cultivated in the countries in which production is located, and the result of this is that the automakers have supplier arrangements...
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