Ford Motor Company In China

• Presented by Team A

Source: http://topnews.us/

A Historic View

Ford Market Entry in China• Ford's business operations started in China with the

Model T in 19131

• Ford entered into a partnership with the Chinese company Changan Automotive Corporation in 1921– The joint venture was called the Changan Ford

Automobile Corporation

• Ford Motor (China) Ltd. was founded in October 1995

1Ford Expands In China to Meet Demand – Pope, B.

Ford Business Operations in China

• In 2006, Mazda joined Changan Ford Automobile Corporation.2

– The name was then changed to Changan Ford Mazda Automobile line

• Changan, Ford, and Mazda entered into a new stage of cooperation in terms of brand, technology, marketing, and resources sharing

• The three organizations work closely together to build new models and to maximize the collective group’s benefits

2 Changan Ford Mazda Automobile Sets New All Time Records – Media.Ford.com

Ford’s Success Factors

• World-class quality with low-cost production in China3 • China has a cost advantage with labor market

• Chinese Government actions• China lifted the tariff barrier on imported cars-imported

and spare parts after joining into WTO3

– The import quota system was abolished in 2005

3 Business Analysis of Ford in China – John, S.

Ford’s Future Dealership Growth in China

• Ford plans to open dealerships in Western and Northern China.

• The cities of Nanning, Shijiazhuang and Harbin are little known outside of China, but have populations well over 1 million4

4 Ford to add 66 new dealers in China by year end – Shirozu, N.

Source: www.china-map-guide.com

Modes of Entry

Exporting Facts• Exports – any good or commodity that is

transported from one country to another5

• Small and medium-sized firms account for the majority of growth in new exporters6

• Small and medium-sized companies account for nearly 97% of U.S. exporters7

• Auto exports to China increased 58% in first quarter of 20108

5 Exports – Wikipedia6,7 The Benefits of Exporting – Export.gov

8 Market Research – rncos.com

Exporting Benefits• Access to New Customers9

– New markets established

• Lower level of investment than other types of international expansion10

– Results in a lower rate of return on products

• Economies of Scale are Created11

– Companies need more raw materials to increase production–More negotiating power & better price per unit12

9,10,11,12 Exporting – clearlybusiness.com

Exporting Disadvantages• Trade Barriers

– Government measures and policies that restrict, prevent or impede the products and services13

• Tariffs– Tax imposed on domestic products before

entering a foreign market14

• Financial Management– Fluctuating exchange rates pose significant risk– Large sums of cash needed upfront and may be

tied up for extended period of time15

13,14,15Exporting – clearlybusiness.com

Exporting Considerations

• Product Adaptations– Must consider foreign culture and preferences

in automotive design and style16

• Communication Problems– Language barriers may cause confusion17

16,17 Exporting – clearlybusiness.com

Exporting to ChinaTariffs & Taxes

In 2008:

• Auto Tariffs are 25%18

• Auto Part Tariffs are 10-14%19

• Value Added Tax (for consumers): 17%20

• April 2006: China imposed a new excise tax– Cars with engines less than 1.5 liters: 3%– Cars with engines 4+ liters: Up to 20% 21

18,21 China Misses the Cut on Auto Tariffs– Zhong19 Tariff Policy– uspolicy.be20 Understanding the VAT Rebate–SmartChinaSourcing

Mode of Entry: Strategic Alliance

Strategic Alliance is a formal relationship between two or more parties to pursue a set of agreed upon goals or to meet a critical business need while remaining independent organizations21

Types of Strategic Alliances22

Joint Ventures Distribution Relationships

Outsourcing Affiliate Marketing

Technology Licensing R&D

Product Licensing

Franchising

21 Strategic Alliance – Wikipedia22 Types of Strategic Alliances – Marketing Minefield

Advantages and Disadvantages of Strategic Alliance

• Pros– Insight to the local culture

and customs

– Raise brand awareness and a way to introduce new products

– Lower costs

– Economies of scale

– Access to distribution channels and expertise/knowledge sharing

• Cons23,24

– Cultural and language barriers

– Conflicting business practices, strategies, values, and ethics

– Distrust of partnering company

– Cooperation could turn into competition

– Long-term dependency on the partnership

23 Advantages and Disadvantages of Strategic Alliance – K. Ellay24 Strategic Alliances – an Underused Marketing Tactic– Marketing Minefield

Special Considerations for Strategic Alliances

Intellectual Property Rights:– Includes technology transfer, patent, trademark, and copyright protections

– Can be risky to the country entering the foreign country

– Legal counsel and careful document drafting is imperative

Finance:– Includes currency, exchange rates, inflation, and interest rates

– Can be risky because all the including financial considerations can fluctuate frequently and dramatically

Political Instability:– Can be risky to countries who want to form an alliance with countries in

political turmoil

– Can be less risky if the foreign countries are part of the World Trade Organization (WTO)25

25 Strategic Alliances – Reference for Business

Example of a Strategic Alliance between Ford and China

Ford has entered in a strategic alliance with three Chinese Universities:– Chongqing University

• Known for its location as one of Ford’s most important production bases

– Nanjing University of Aeronautics and Astronautics

• Known for its aluminum profiling and diesel motor performance improvement

– Shanghai Jiaotong University

• Know for its strength in material and mechanical engineering

Example of a Strategic Alliance between Ford and China (cont’d)

The purpose of the alliance for Ford is:– To perform and accelerate scientific research and talent

training for:

• Car weight reduction

• Enhanced fuel efficiency

• Advanced car material

• Manufacturing processes

– To establish long-term development in China

– To establish a foundation for the corporate social responsibility of Ford

Example of a Strategic Alliance between Ford and China (cont’d)

In return, Ford will help the Chinese Universities:– To promote education and search on automotive

technology

– To provide training on automotive capacities26,27

26 Ford Joins Hands with Chongqing University– China CSR27 Ford Enters Strategic Alliance with Chinese Universities– China CSR

Mode of Entry: FDI, Greenfield, and Wholly Owned Subsidiary

• Foreign Direct Investment (FDI) is the direct investment of a domestic company into a foreign country where the investment is controlled by the domestic company. 28

• Greenfield Investment is a special type of FDI where a foreign country invests in another country by establishing a new facility, equipment, etc. It generally involves the creation of new jobs as well. 29

• A wholly owned subsidiary (WOS) is a company that is technically publicly owned, however all of the common stock is owned by the parent company and is not available for public purchase.30

28 Foreign Direct Investment– Investopedia29 Greenfield Investment– Investopedia30 Wholly Owned Subsidiary– Financial Dictionary

Advantages and Disadvantages of FDI

• Pros– Establishes a longer

term commitment than stock market investments

– Can create jobs in the host country

– Local presence avoids import costs

• Cons– Can take away from

opportunities for local businesses due to technological superiority

– Profits are sent back to the host company’s country

Advantages and Disadvantages of FDI (cont’d)

• Pros– WOS avoids ability for

foreign country to make business related decisions

– Provides a high degree of control over operations

• Cons– Risks making poor

decisions due to lack of local knowledge

– Requires a large capital investment

Reasons for Selecting FDI

• FDI is a favored mode of entry when there are:– Import barriers

– High sales potential

– Low political risk

– Risks of releasing trade secrets or technological advantages

Preferred Mode of Entry• Based upon understanding of the pros/cons of

each mode of entry, as well as institutional restrictions, our preferred mode of entry into China is a combination of a joint venture and Greenfield investment:– Building a plant locally would eliminate export costs

and trade barriers on the car as a whole. However, this will not resolve issues regarding importing of components (which is a consideration that would need to be accounted for--potentially through use of Chinese suppliers)

Preferred Mode of Entry (cont’d)

– The creation of jobs for local workers should be appealing to China.

– By establishing a joint venture, both countries share in profit, not simply the investing country (as would be the case in a Greenfield investment only)

– The income gained by the local Chinese workers will get pumped back into the Chinese economy.

Preferred Mode of Entry (cont’d)

– Use of local workers (including product designers, as well as laborers) would help to account for local style preferences, as well as help to eliminate the language or cultural barriers that could exist between American and Chinese workers

– There is a minimal risk of having to share technology with the Chinese. In general, automotive technology advances across all companies at relatively the same pace. Any technological secrets, etc could be developed in the U.S. at Ford's domestic R&D facilities.

Culture and Institutions

Culture and Institutions in China

• Culture influences human behavior with respect to the manner in which business is transacted, points of view and the way decisions are made31.

• The ability to anticipate and neutralize potentially negative impacts based on cultural differences facilitates achieving the level of interaction required to focus on business results unencumbered by the static created when cultures collide.

• Understanding rather than judging cultural differences is key. Cultural differences must be recognized before they can be understood32.

31 How We Communicate About Culture – Wilhelms, et. Al.32 Intercultural difference between Chinese and Americans in business – Norwak and Dong

Universalism vs. ParticularismUniversalism – applies to everyone

• The People’s Republic of China is a communist country. Communism, defined by Merriam-Webster, is a theory advocating elimination of private property as well as a system in which goods are owned in common and available to all as needed.

Particularism - applies to some

• Though communism advocates the elimination of private property ownership, state ownership is common, especially if political goals concern a property or industry.

Universalism vs. Particularism (cont’d)

Universalism – applies to everyone

• The Chinese are a universal culture historically. Chinese mothers parent their children in a manner that not only fosters success but discourages failure, shaming children who bring home low marks or fail to learn a piece of music properly. 33

Particularism - applies to some

• China has a large power distance – the degree to which inequalities exist within a culture – and prefer that degree of separation. 34

33 In China, Not all Practice is Tough Love– Staff34 Effects of National Culture– Siau, et. Al.

Universalism vs. Particularism (cont’d)

Universalism – applies to everyone

• Chinese workers are able function in a team better than their Western counterparts. 35

Particularism - applies to some

• Google and domain-name giant Go-Daddy recently decided to leave China due to its government censorship which blocked access to websites at the government’s discretion. 36

35 China Myths, China Facts– Meyer and Yi Shen36 In Quitting, Google Misses a Chance– Weihua

Individualism vs. Communitarianism

Individualism - individual focus

• Recent movement of business ownership has shifted from state-owned to state owned combined with Chinese-foreign owned. 21 Though still a joint ownership effort, this is a step towards individualism.

Communitarianism - community focus

• Chinese workers value a “sense of belonging” rather than material considerations for choosing and keeping a job. 22

• Chinese workers are able function in a team better than their Western counterparts. 23

21 Using Social Exchange Theory…– Zhang and Jia22 Using Social Exchange Theory…– Zhang and Jia23 China Myths, China Facts…– Meyer and Yi Shen

Individualism vs. Communitarianism (cond’t)

Individualism - individual focus

• In the later 1970’s to early 1980’s China’s economy shifted towards a market economy, opening the doors for personal prosperity. 37

• Chinese corporations show little regard for environmental responsibility believing the adherence to environmental standards will decrease profits. 38

Communitarianism - community focus

• Although there is a trend towards providing incentives to maximize shareholder wealth, a higher priority is placed on achieving the political objectives of the government. China is characterized by a minimal role for individual and family ownership, a limited role for financial institutions and institutional investors and a dominant state ownership position. 39

37,38 Market Strategies…– Torres39 The effectiveness of non-executive directors…– Kakabadse, et. Al.

Achievement vs. Ascription Achievement - work to achieve status

• The new generation in China are raised in a bustling economy in the information age in a country with growing exposure to foreigners and foreign markets has lead to change in the spending habits of Chinese Recent movement of business ownership has shifted from state-owned to state owned combined with Chinese-foreign owned. 40 Though still a joint ownership effort, this is a step towards individualism.

Ascription - status ascribed by birth/family

• The Forbidden City, now a tourist destination, was historically the home of the Chinese emperor. The position was passed from father to son, or brother if there was no male heir, within each ruling dynasty.

• Mao Zedong rose to power in the 1920s and 1930s through ties with various political splinter groups throughout China. He became Chairman of the Communist Party of China in 1934 and led the cultural revolution lasting from 1966 until his death in 1976.

40 Using Social Exchange Theory…– Zhang and Jia

Achievement vs.Ascription (cont’d)

Achievement - work to achieve status

• In the later 1970’s to early 1980’s China’s economy shifted towards a market economy, opening the doors for personal prosperity. 41

• Chinese corporations show little regard for environmental responsibility believing the adherence to environmental standards will decrease profits. 42They increasingly reflect those buying habits of Western youths. 43(Durvasula and Lysonski, 2008)

Ascription - status ascribed by birth/family

• To conform with Western titles and a new constitution, the PRC began electing presidents based on input from heads of state. The current head of the People’s Republic of China is President Hu Jintao.

• Ford says it is vital to resist the Chinese tendency to overstaff the operation right from the outset, as the Chinese tradition of lifetime employment makes it difficult to 'rightsize' the venture once workers are in place”. 44

41, 42 Market Strategies…– Torres43 A Double Edged Sword…– Durvsula and Lysonski44 Why expatriates…– Bolger

Achievement vs.Ascription (cont’d)

Achievement - work to achieve status

• In the Zhejiang Province, private entrepreneurship grew more than 104% from 2002 to 2006. During the same time frame there was an increase in positions related to autonomy such as marketing and technicians. The number of those employed in more collective, service jobs were cut nearly in half. 45

• From 2002 to 2006 the percentage of degree-holders in the region more than doubled. 46

Ascription - status ascribed by birth/family

45,46 Methods and Characteristics…– Wu

Inner Focus vs. Outer FocusInner – directed to act from within

• When offering business cards the Chinese present them with both hands to show respect and then read them carefully to commit the details to memory which supports showing personal interest when business partners meet again. 47

Outer – act because others direct or expect it

• Conflicts between two Chinese channels are resolved through interpersonal relationships, i.e., mediation by friends or friends of friends (guanxi) to restore balance in the relationships. 48

47 Volvo’s Big China Gamble – Norwak and Dong48 Interpersonal Influence…– Su, et. Al.

Inner Focus vs. Outer Focus (cont’d)

Inner – directed to act from within

• The influence of Taoist philosophy on Chinese culture encourage the individual to be calm and to avoid pushing others too hand. It is considered a strength to remain silent when enduring the anger of others. 49

Outer – act because others direct or expect it

• In China an applicant for a job is expected to present a modest and courteous demeanor at the interview. An applicant who is aggressive or boastful is considered arrogant or conceited and is not likely to be considered a viable candidate for the position. 50

49 Developing global leadership competencies - Chin, et. Al.50 Intercultural differences….– Nowak et.al.

Inner Focus vs. Outer Focus (cont’d)

Inner – directed to act from within Outer – act because others direct or expect it

• Saving face is closely related to honor, shame and obligation. In a high context culture such as in China It is expected that care will be taken not to injure someone who is in currently in a lesser position. 51

51 Resolving Conflict…– Johnston, et. Al.

Specificity vs. Diffuseness

Specificity - focus on details

• Ford uses local (Chinese) managers for its Chinese plants, but claims they are “transaction-focused” and not good executive communicators. 52

Diffuseness - look at big picture

• Ford plans to make less expensive cars to market in China given that the average price of an “affordable” car in China is lower than those currently offered by Ford. They are doing this because of the anticipated growth in the average consumer’s income as well as the sheer size of the market. 53

52 China Still Welcomes Western Faces - Hille53 Ford to add 66 New Dealers…– Shirouzu

Specificity vs. Diffuseness (cont’d)

Specificity - focus on details

• In China the business organization consists of two systems: The business system and Chinese Communist Party (CCP) system. The business system operates in a manner that is much like a western business; however, the CCP system is more narrowly focused on ensuring work being completed according to “the central plan” and with performing a social control function. 54

Diffuseness - look at big picture

• Guanxi creates a link between individual or which support reciprocal social interaction and exchange. As iterations of reciprocity occur personal guanxi increases leading to a greater ability to obtain information, negotiate business transactions and move influence the decision making process. 55

54,55 Cross Cultural Management in China– Dong and Liu

Sequential vs. SynchronousSequential - time viewed as linear

• The Chinese value seniority and respect older employees for their knowledge and work experience. 56

• Punctuality is valued in Chinese culture for both business appointments and social engagements. Guests may arrive early at the host’s home for a social engagement without creating a problem. 57

Synchronous - past, present, future combined

• As a long term oriented society the Chinese value investing in the future which can require working long hours in the present. The long term orientations is also reflected in the value assessed to long term relationships and respect in status that gained with time and perseverance. 58

• The past influence of Eastern philosophy and Confucianism reflected in modern Chinese culture impacts current business practices and values such as courtesy, duty, wisdom, and trustworthiness. 59

56,57Intercultural differences…– Norwak, et. Al. 58,59 Resolving Conflict…– Johnston and Gao

National Institutions Impacting Operations

Property Rights-Current assembly and motor plants are high quality, low cost

producers-Government is heavily involved with business

-Local country’s tariff agreement-Car-buying tax 60

-Laws and changing laws- Environmental organizations-Safety organizations-Governance committees and boards

-China’s Ministry of Commerce 61

-Changing leadership60 Car-buying tax – Johns, Serah61 China’s Ministry of Commerce – Tita, Bob

Property Rights (cont’d)

-Education and Technology has a stake in auto manufacturing 62

- Example is the Chinese Academy of Engineering

-Eco-Boost Engine Technology

-Power Shift Transmission Technology

-Business has responsibilities to deal with

-Investors

-Legal and ethical organizations

-Automotive suppliers and distributors

-Competition

-Contracted and partnership companies

-Dealerships

62 Example is the Chinese Academy of Engineering - Seetharaman, Deepa

Property Rights (cont’d)

-Other partnerships indirectly related to the joint venture

-Vendors and other third party affiliates

-Markets and Marketing 63

-Government Market sector

-Commercial Market sector

-New Markets

- An example of entering a new market would be the private sector

-Family car penetration63 Markets and Marketing – Ford Motor Vehicles (2009)

Capital Acquisitions-Expansion into new territories 64

-Banks and credit companies would be involved

-State controlled banking or other forms of government investment control

-Building a new plant will create jobs, partnerships, and communication

-An example of a New Joint Venture with Changan Ford Mazda Automobile (CFMA) 65

-Cost is $490 million

64 Expansion Into New Territories - Dorsch, Jeff65 New Joint Venture with Changan Ford Mazda Automobile – Ford Motor Company (2010)

Administration-Ford uses their own global manufacturing

processes and systems

-WTO Foreign Direct Investment negotiations

-China has a transitional economy, many restrictions, and more government involvement than the U.S.

-Ford’s holds wholly owned subsidiaries, joint ventures, and investments

Human Resources-Universities in China are business partners and assist with HR training programs-Ford Foundation helps women and minority organizations grow and build a better life for themselves and their community 66

Foreign Involvement-European auto suppliers-World Trade Organization-After-market car accessories 67

-Regionalize products that can be used internationally-Chinese 10th 5-year plan for Economic and Social Development; 3 components: 68

1.Self-Development2. Fair Play3. Openness 66 Ford Foundation helps women and minority organizations – Ford Motor Company (2011)

67 After-market car accessories - Focus Taiwan News Channel68 Business Analysis of Ford in China. – Serah, John

International Institutions Impacting Operations

World Trade Organization (Trade Flows)-China’s entrance in to the WTO - The WTO will have minimal impact on Ford in China

- Selling prices will decrease as China increases WTO involvement- To gain admittance to the WTO, China agreed to reduce tariffs-Tariff reduction will be gradual

-Ford will be able to take advantage of low labor costs to offset tariffs 69

International Monetary Fund (Financial Flows)-Have an indirect influence on Ford

-Biggest impact around IMF involvement in exchange rates 70

69 Business Analysis of Ford in China. – Serah, John70 What we do: Overview – International Monetary Fund

Intellectual Property Rights (Technology Flows) - The TRIPS agreement protects the intellectual property

rights for all citizens of the nations in the WTO 71

-Foreigners must be treated equally with domestic companies or citizens- China has shaky execution of intellectual property right

laws- There are laws in place, but they are not always

enforced 72

World Bank (Developmental Flows) - No direct influence on Ford's entry

- Ford will benefit from the World Bank's investment in growing China, resulting in more citizens being able to buy cars

71 Intellectual Property Protection and Enforcement – World Trade Organization 72 Business Analysis of Ford in China. – Serah, John

Foreign Investment

• China is focused on obtaining direct foreign investments• Still some concerns around protection

• Legal system can protect foreign investors, but there are consistent violations.

• Local authorities are often the cause of violations 73

73 Business Analysis of Ford in China. – Serah, John

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