Business Analysis of Ford in China

Uploaded by anavrin on Aug 27, 2006

Business Analysis of Ford in China

Ford Motor Company is looking forward to celebrating its 100th anniversary. In the past nearly 100 years, Ford
has developed with the progress of car industry and become 2nd largest car manufacturer in the world. Today, the
American & European car industry faces problems of over-capacity and oversupply. This causes the intense
competition in this industry. The world car industry is encountering its biggest changes in history. Globalization is
the most remarkable among those changes. We believe that the worldwide market competition causes the
accelerating of globalization. This tendency makes the business environment more competitive and attractive.

Ford should take the chance of globalization to enter other markets outside US. Some opportunities clearly exist.
China has a huge family car market. Ford should take this opportunity to enter the Chinese market.

In this report, the PEST analysis is carried out on the Chinese business environment so that the following
questions could be addressed:

i. Whether the political, economical and legal system in China is favorable for our investment or not?

ii. Whether the Chinese car market is big enough or not? Will it keep on growing?

iii. Whether Chinese consumers will accept our products or not?

iv. Whether the human resources in China is suitable or not?

v. What are the benefits, costs and risks of producing family car in China?

In conclusion, the report suggests that Ford should invest in China to establish a family car factory.
Recommendations on this project are given.

BUSINESS ENVIRONMENT IN CHINA

1. POLITICAL ANALYSIS

1.1 General

China is in a state of transition now. Being a socialist country, China has carefully changed its political system in
recent years, while dramatic changes have taken place in its economic system. In 1979, China started its open
policy and economic reform. The Chinese government persisted on carrying out the political guideline of
developing economy and enriching Chinese people. In these years, although the leadership of this country had
been handed over from Mr. Deng Xiaopin to Mr. Jiang Zeming and the world political environment had changed
rapidly, the Chinese economy survived and kept going after the major world turbulences such as the collapse of
Soviet Union and Eastern Communist countries, the Tiananmen massacre in its own country in 1989 and the
1997-1998 financial crisis in Southeast Asia. Being the largest developing country in the world, China has
achieved an average annual GDP growth of nearly 8% in recent years. The living standard of Chinese people has
been improving steadily. Now there is a remarkable shift away from command economic system toward mixed
economic system in China. Such a transformation has also affected the current state policy related to car industry.

1.2 The Impact of China’s Entry into WTO on Car Industry

China has promised to break the tariff barrier on car-imported and spare parts after join WTO. First, there will be a
drastic reduction in customs duties on imported cars from the current 100% to 25% by 2006. Second, the tariff on
car parts will be reduced gradually down to 10% in 2006. Third, the import quota system will be abolished in 2005.
These measures will lower the costs of the car-imported. It’s no doubt that the reduction of tariffs will intensify the
competition among the foreign and domestic motor companies in the future automobile market. China’s entry into
WTO will lead to a significant reduction on the cost of selling cars manufactured overseas. It may be a problem
that we should take into careful consideration before we make a investment decision. However, the tariff reduction
is in a gradual procedure stepped through five years, we should have time to occupy enough market share and
gain reputation on our products in the first two years. We can also make the price of our products very competitive
even the car tariffs would slash to 25%, because we can benefit from the relatively low labor cost and cheap spare
parts in China. Generally, we tend to believe that WTO will not pose significant problem for our investment in
China.

China is successful in attracting foreign investment. The Chinese government has given some tax reduction
policies for foreign owned companies. These policies include income tax exemption in the first 3 years and another
2 years with half of income tax. On the other hand, the Chinese car industry has been protected by special policies
that limit foreign investment, some examples are the local content requirement (40%), the minimum share
percentage (50%) held by Chinese partners, etc. These policies might be unfavorable factors to our investment in
China, but we can expect taking a turn for the better after China enters WTO.

1.3 The Impact of Chinese Government’s 10th Five-Year Plan for National Economic and Social Development

The Chinese government has declared its 10th Five-Year Plan for National Economic and Social Development.
Accordingly the Chinese National Economic and Social Committee announced the tenth Five-Year Plan for car
industry and stated three principles in this document. These principles are self-development, fair play and
openness. According to these principles, we can know that the Chinese government has the intention to introduce
overseas capital and technology to develop its car industry. The government is also keen on attracting and utilizing
Foreign Direct Investment.

2.LEGAL ANALYSIS

Legal system also plays a very important role in the international business. In order to establish a well-functioned
market economy, the Chinese government has emphasized on drawing up laws. These laws include “The Law of
the P.R.C. on Joint Ventures Using Chinese and Foreign Investment”, “Company Law of P.R.C.”, etc. China has a
stable government, the protection of private property is adequate. China also has laws protecting intellectual
property, but these laws are not well enforced by the authorities. The property rights (specially intellectual property
rights) are routinely violated. Regarding the car industry, we think that also China has enough laws to protect our
investment, it maybe not so easy to execute those laws.

3.ECONOMICAL ANALYSIS

3.1 Macroeconomic

Twenty years ago, China was among the world’s poorest countries, with 80% of the population having incomes of
less than US$1 a day. However, since economy reformation, the living standard of Chinese people has changed a
lot and most people are able to earn more and more money than ever before. From 1979, China’s gross national
income (GNI) per capita has increased rapidly (see graph 1), gross domestic product (GDP) has reached US$1.1
trillion in 2000, and the foreign exchange reserve is also significant and has increased to US$190.05 billion at the
end of August 2001, which is the second largest country of the world. Meanwhile, the exchange rate of RMB has
been keeping stable. All of these show the strong domestic and foreign confidence in current China’s economy.

From 1997, the economy of almost all the countries in Asia had been influenced by the financial crisis, including
China. Since then, China entered deflation. In order to stimulate economy and encourage consumption, the
authorities adopted a series of financial and monetary policies. One of these policies is to reduce the interest rate.
For instance, the average deposit rate per year decreased from 7.47% in 1996 to 2.25% in 1999, and the loan
interest rate (over 5 years) from 12.42% in 1996 to 6.21% in 1999 (see table 1). Accordingly, the deflation has
been controlled.

3.2 Microeconomics of Car Industry

Nowadays, the consumer market of cars in the world trends to be saturated, and the overproduction of cars is
about 20 million, while China has great potentialities of the cars market. From 1978, the number of cars in China
has been increased by 12% every year, which is a little bit higher than the rise of China’s GDP. In addition, the
growth rate of China’s total car output in 2000 was 11%, which was 7.8% higher than that of the world and ranked
the ninth of the world (see table 2). The policy of reducing interest rate not only changed the consuming habit of
Chinese people, who used to prefer saving money rather than spending them, but also improved the consuming
environment. According to the survey made by China Consumers’ Association, except buying a house, people’s
first choice to spend their money is to own a cars. This is phenomenon is good news for the constantly declined
car industry.

GNI per capita of China

Variation of Interest Rate of China from 1996 (Unit: annual rate %).

23/08/1996 23/10/1997 25/03/1998 01/07/1998 01/06/1999

Average deposit rate per year 7.47 5.67 5.22 4.77 2.25

Loan interest rate (over 5 years) 12.42 10.53 10.35 8.01 6.21

Table 1 (Source from China Central Bank)

Car Output of the World and “Top-10”Countries in 2000

Ranking Country Output in 2000 Output in 1999 Growth rate %

1 United States 12,810,140 13,024,978 -2

2 Japan 10,144,847 9,895,476 3

3 Germany 5,197,685 5,237,906 -1

4 France 3,351,929 3,180,513 5

5 South Korea 3,114,998 2,843,114 10

6 Spain 3,032,874 2,852,389 6

7 Canada 2,345,882 2,737,454 -14

8 China 2,008,500 1,804,500 11

9 Mexico 1,918,807 1,518,054 26

10 United Kingdom 1,817,059 1,973,028 -8

The total output of the world 57,539,713 55,742,856 3.2

Table 2 (Source from National Bureau of Statistics of China)

Most of the world famous car-makers (including Ford) invested China since 1998. All their plants started
production and sales within 1-2 years. The following chart (Chart 1) shows the car production in 1999 and the
forecast for 2003 and 2005.

As we can see from the chart, our major competitors are GM, Volkswagen and Toyota. Although competing with
these established market leaders is going to be very difficult, Ford should be confident to gain the market share
and achieve good profit.

Chart 1. (Source http://autoworld.com.cn)

4. SOCIAL AND CULTURE ENVIRONMENT ANALYSIS

The survey of the basic condition of 150,000 urban citizens in China that is made by National Bureau of Statistics
of China shows every 10,000 urban citizens just have 114 cars. Furthermore, a new research made by Roland-
Berger predicts that the car sales in Chinese market will reach to 1,000,000 in 2005, and 2,000,000 in 2010 after
China enter WTO. The demand of 1.2 litres exhausting private car will increase fastest among all the automobiles.

4.1 Consumer’s Psychology

One of investigations made by China Consumers’ Association shows that approximately 20% of Chinese
consumers will prefer to buy imported cars, even though the price of them are higher than domestic cars. There
will be 80% of consumers choosing to buy imported cars on the condition that the price of imported cars is almost
as same as that of domestic cars. According to this investigation, it seems that band is more important thing to be
concerned by consumers besides price.

4.2 Car Purchasing Power

In 2000, China’s GDP per capita reached over US$ 800. In terms of economic principle when GDP is at this level,
or family annual income is the half of the car’s price, this kind of family is suitable to buy a car. At present, there
have been more than 500,000 families having US$5400 annual income, which is the half of the car’s selling price,
in Beijing. Shanghai, Guangzhou, Shenzhen, and economic flourishing district in southern of China also have the
same situation. This means China has had the basic conditions of developing cars for family-use, and at least
300,000,000 citizens have the capability of purchasing cars according to the income of urban citizen. This situation
will climb to the peak during the period from 2005 to 2010.

4.3 Environmental Factor Influence on Car Consumption Behaviour

4.3.1 Car Consuming Environment

According to the present situation, demand of cars is constantly growing, as well as the consuming level of
Chinese people. There are approximately 20% Chinese urban families, in other words about 26 million families will
want to buy cars, which is equal to the total outputs of automobiles in world. On the other hand, the infrastructure
of road in most China’s cities has been getting better and better, which enhance people’s confidence of buying
cars.

4.3.2 Political Influence on Car Consumption

The planning for the tenth five-years of automobile issued by China Economy and Trade Committee points out that
China will focus on developing car which is under 1.3 liters exhausting private cars and will provide a series of
preferential policy to encourage people to buy cars. Under that conditions almost all the automobile producers will
manufacture this kind of cars to dominative this huge market.

4.3.3 Car-buying Tax

At the beginning of 2001, Chinese government announced to use the car buying tax instead of the car-buying fee.
This change can reduce the unreasonable charges, such as in Chengdu (one of biggest city in South West China),
people who want to buy a car must be charged 10% - 15% of car buying fee, which is repealed now.

4.4 Influence of WTO on Car Consumption Behavior

It is no doubt that the selling price of car will decrease gradually after China enters WTO. Consumers who want to
buy a car will be delighted to see this situation. On the other hand, the Chinese government has got ready for
policy and consumption system to make a suitable environment after entering WTO. It can be seemed that the
market of car consumption will be triggered in the future.

5. HUMAN RESOURCES ANALYSIS

With the development of high-education and skill training, China has prepared a pool of well educated and trained
people that they have sufficient skills to meet our requirement. The labor cost in China is relatively lower than
many developed country because of the abundant labor. Moreover, China also has a mature human resources
system for foreign investment. We can believe that China has a good human resource for our company’s
development.

RECOMMENDATIONS AND INVEST PLAN

1. OVERALL ATTRACTIVENESS AND CONCLUSION

According to the above analysis, it seems that it should be beneficial for Ford to invest a family car company
because of its large market and strong consuming power.

We should also look into the costs and risks. Someone may doubt whether the Chinese market will ever really
take off and reach the enormous volumes predicted, or the Chinese will get all they need to know about building
and selling cars and then somehow evict their Western partners. These are the concerns many have about doing
business in China.

China has experienced a stable political system (which is considered totalitarian) with rapid economic growth for
more than 10 years, but some political risks still exist. The Chinese government is still insisting on its communist
and totalitarian policy, there is no guarantee that China will continue to its open policy and maintain the rapid GNP
increase. China also has an unsatisfied human right record; corruption exists in some economical activities in
China, all these will be obstacles to foreign investments.

On the economical front, China had been adopting centrally planned command economy for many years. Since
the 1980s, the government has been encouraging the establishment of private-owned enterprises. In the 1990s,
China established its own stock exchange and started to sell state-owned business to private investors. But the
policy is still not clear and produced a lot of turbulence in the stock market. The delay of political reform may also
effect the development of economy. It is still doubtful whether or not China will keep on its economical renovation
toward a market economy.

Although the legal system of China is adequate to protect foreign investment, the violation of laws by some local
authorities will be a potential risk to our investment.

The overall attractive of China as a investment site depends on balancing the benefits, costs and risks associated
with doing business in China. Despite all the above risks, we still consider China as a suitable country for our
investment.

2. INVESTMENT STRATEGY

We shall establish our business gradually, in a steady way. The first step is to establish a joint venture with a local
Chinese car manufacturer for producing our “Ka” family sedan car and spare parts. The plant should be put into
production within 2 years at a capacity of 50,000/year. If it’s guaranteed by the government policy after China joins
WTO, we shall introduce our car-rental (Hertz) and financial service (auto loan) in the future.

2.1 Entry Time

Although the car industry is declining in the US and Europe, it is still a suitable time for Ford Motor Company to
invest in China. As the 2nd largest car manufacturer in the world, Ford had been waiting patiently to enter the
Chinese Market for more than 20 year. Some other world-famous car manufacturers (such as Volkswagen,
General Motor, Toyota, etc.) had already started their business years ago, but we do not consider that it is too late
to enter the Chinese family car market. Because we are quite confident with the potential of the Chinese market
and also the Ford company, we should not care too much about where we enter this market early or late, we
should improve ourselves progressively toward the purpose of surpass our competitors. We have the ability to
achieve that. Actually there are also some advantages of enter the market late, such as we can learn the lesson
from some other unsuccessful car manufacturers like Peugeot, which closed it’s plant in Guangzhou. We can also
be beneficial from the intelligent and skilled workers who have a lot of experience in the car-making field.

2.2 Entry Procedure

Ford has been producing its Transit van in China for many years. The productivity and sales are not as good as
expected because of the high cost (price) and limited production. We suggest choose “Ka” family sedan as our
major product for this project. The car will be sold at a price around RMB100,000 (USD12,000).

According to the current Chinese policy on motor industry, Ford will establish a joint venture with 50% share with
Chang An Automobile Company in Sichuan Province. Chang An Automobile Company is the 3rd largest car
manufacturer in China, which has the experience of car-making for more than 20 years. The place that Ford will
build its plant is located in the west part of China, which will benefit from the favorite policy of “Developing West (of
China)”. In the future, if permitted by the Chinese policy, we can increase of share percentage and wholly own this
company.

Ford will introduce it car-rental service (Hertz) after China opens its car-rental market. We will also set up our
financial service in China in the future.

Ford should invest China “slowly but steadily” and should always consider there would be political or economic
problems down the road. China demands a cautious approach. We have to be careful in deciding when and how
much to invest in China. We should take a lot of patient to do business in China.
SUMMARY

To sum up, we believe that Chinese business environment is suitable for Ford to establish a family car factory.
With a caution and steady investment strategy, Ford will gain satisfactory benefit in the future.

REFERENCES

Hill, C. W.L. (2001) International Business, Irwin/McGraw-Hill, New York.

Needle, D. (2000) Business in Context, Business Press, London.

Pettinger, R. (2000) Investment Appraisal: A Managerial Approach, St. Martin’s Press, New York.

Fahey, L. and Narayanan, V.K. (1994) Global Environmental Analysis, in Segal-Horn S. (ed.), The Challenge of
International Business, Kogan Page Limited, London.

Deng, P. (2001) WFOES: The Most Popular Entry Mode into China (wholly foreign-owned enterprises), Business
Horizons, July

Min, Z. (2000) Family Cars Predicted to rev up Auto Sales, China Daily, 01 March.

Nie, Y. (2001) The Investment Tendency of Multinational Auto Companies in China,

http://autoworld.com.cn/

Ford Motor Company: http://www.ford.com

China Consumers’ Association: http://www.cca.org.cn

National Bureau of Statistics of China: http://www.stats.gov.cn

China Automobile Information Centre: http://www.autoinfo.gov.cn

World Bank: http://www.worldbank.org