Deadly Sins of International Business Blog

There’s something remarkable going on in China’s automotive industry. Yes, there’s growth, but there’s more to it. Chinese automaker BYD that is backed by Warren Buffet’s Berkshire Hathaway, Inc has set up a Chinese 50-50 joint venture with Daimler in late May. The goal of the joint venture is to jointly design and produce an all-electric vehicle for the Chinese market. This will add a new dimension to Daimler’s expansion in China. Having recently experienced above average sales growth, Daimler also has plans for an engine factory in China – the first one ever outside of Germany. Naturally, Daimler as a corporation thinks of opportunities first and I, as an academic, think of the risks first. Joint ventures haven’t been known to be among the easiest ways to cooperate across borders, especially in China. This one, however, seems to be on a straight trajectory to success. The Chinese government is reported to have announced that it will order 100,000 of the new vehicles come out of the Daimler-BYD joint venture. Although details of the agreement haven’t been made public yet, the government is expected to honor its commitment by 2012. What’s interesting about this is that initial plans to subsidize private consumers for buying electric cars seem to have been scrapped after they drew criticism from the Chinese Communist Party for benefiting mostly the nouveau riche in China. Someone has been doing an excellent job lobbying the Chinese government. For once, it seems that what’s good for an automotive manufacturer will also be good for the environment. And for BYD, the deal is a godsend, too. After record increases in 2009 (by an astonishing 160 percent), it had to announce in early August that it’ll cut its sales targets by 25 %. Obviously, ‘too big to fail’ exists in other countries, too…

Of course, what is commonly referred to as the Chinese phoenix, the fenghuang, only distantly resembles the phoenix of the West. So, erudite reader, please forgive the amateurish use of the phoenix as a metaphor for what’s going on in China’s automotive sector. Mercedes, BMW, or Audi are all reporting very positive developments from the Chinese market. This confirms what insiders to the automotive industry and experts in cross-cultural marketing have long pointed out silently. It’s not necessarily (only) available income that drives purchasing decisions, but national culture plays a big role, too. Income levels in China would suggest that smaller models are sought after, but the opposite is true. Status, power and prestige are very important elements of Chinese culture. Several years ago now, Volkswagen had planned to rapidly increase market share in China by offering a small car – assuming that with rising levels of affluence, everyone would buy a small, entry-level car. Guess what, they didn’t. The polo was simply too small for the Chinese market. Today, larger Volkswagen models such as the Passat or the Tiguan are doing a lot better. Owning a luxury car is the ultimate sign of social status, and so demand in the premium automotive segment is on a constant rise. In July, Audi sold about 50 percent more cars in China than last year, BMW about 80 % more and Mercedes-Benz even tripled its sales. And all of this despite the rather high luxury taxes in China which raise the prices of the flagship models – the S-Class, the 7-series, or the A8 – to about double from what they are in Europe. These developments certainly come at the right time for luxury carmakers whose sales have been less than favorable in their core markets in the West in past years. The Chinese fenghuang is a symbol of virtue and grace – very similar to what the Mercedes brand stands for. Maybe my use of the metaphor isn’t that off after all.

Inspired by the recently announced sale of Volvo to Zhejiang Geely by Ford Motor, I tried to find out what’s happening to British Jaguar Land Rover that has been acquired by Tata Motors of India in 2008. Well, the news has been mixed. In fall 2009, Tata Motors has announced plans to close one of two Jaguar Land Rover factories in England by 2014. This didn’t seem surprising for ailing car brands. It made even more sense when the year-end results showed a loss of $565 million. Most recently however, in March 2010, the US magazine BusinessWeek reported that sales are picking up and Tata’s luxury division has even turned a profit of $141 million in the most recent quarter. New executives have been hired away from GM and BMW, so everything looks good. This will certainly be a transnational acquisition that continues to be of interest.

Chinese carmaker Zhejiang Geely will acquire Swedish Volvo from American Ford Motor. Geely has come a long (and fast) way from its modest beginnings as a motorcycle parts manufacturer to what is now China’s 12th largest automotive manufacturer. Being the 12th may not mean a lot in other markets, but consider two things: First, China is a huge market. Second, Geely has impressed at many car shows with high-powered concept cars and seems to be determined to grow further and gain market share. For Ford, selling Volvo is not only part of its recent strategy to sell off non-core brands (it earlier sold Jaguar and Land Rover to Tata of India), but it’s also quite an infusion of liquidity – out of the reported selling price of 1.8 billion US$, 1.6 billion will be in cash. For now, Geely has promised to leave Volvo alone, but it has also not failed to mention that it has already recruited a new team of executives to ‘oversee’ things at Volvo…!

It seems that Spyker and GM have finally reached a deal. After initial rumors that the deal is off, Reuters reports of signs that GM has agreed to sell the Saab brand to automaker Spyker of The Netherlands for a total of US$ 400 million.

As the German paper Handelsblatt reports, Volkswagen intends to increase it’s marketshare in India from currently less than 2 percent to about 10 percent. Ambitious plans, especially when one looks at the competitive environment. Although Volkswagen will be introducing the base model of its new Polo at just under 7,000 Euros, its competitors are still ahead in the marketing battle based on price. General Motors’ Beat base model will cost only about 5,000 Euros and Tata’s Nano starts at 1,700 Euros. Other competitors such as Renault, Nissan, Toyota and Honda are on the way to position cheaper models as well. India will be a difficult nut to crack for Volkswagen. Then again, to which other markets would carmakers turn to nowadays. Despite the global economic crisis, India’s market for cars grew by an astounding 16 % in 2009.

Volkswagen just announced that it will acquire a 20 % stake in Suzuki of Japan. The move is expected mainly driven by VW’s intent to increase its presence in the Asian market for small trucks.

Something may have gotten past me, but does Chrysler really have a lot of wiggle room for experiments on their customers? It’s recent commercial for the Chrysler 300 features former Soviet leader Mikhail Gorbachev, former Polish leader Lech Walensa and is a call for freedom for Burma’s Aung San Suu Kyi. The commercial is an adaption of what Fiat’s ad agency Armando Testa has done in Europe for its Lancia brand. While the commercial is edgy even for the European market, it may fly there. As noble as the cause is, there is serious reason to believe that it is a total waste of advertising dollars in the US market. Many Americans either won’t know who Aung San Suu Kyi is or they couldn’t care less. Some may not even recognize Walensa or Gorbachev. It may even hurt Chrysler in some Asian markets that take a more authoritarian stance at opposition leaders. What was Chrysler thinking? Or was it Fiat that was doing the thinking? Watch it here: http://www.youtube.com/watch?v=ftJ9nTBDx2E

As reported earlier (on this blog and elsewhere) Chinese automaker SAIC will enter into a 50:50 joint venture with GM to sell small cars and light trucks in India. There’s not only the GM angle to this move. Viewed from the SAIC angle, memories from the recent past arise. In 2004, SAIC purchased a majority stake from Korean Ssangyong motors which ended in one big disaster with Ssangyong seeking bankruptcy protection. Most recently there have even been allegations of intellectual property theft. The Koreans blamed the Chinese, and the Chinese the Koreans – just what you would expect of two countries that haven’t head the best of relations throughout history. Now, what about India? What makes SAIC confident that the same challenges won’t emerge in India. Or, if they emerge, what makes them believe that they’re now better at handling them. And, would Indian consumers be interested in a predominantly Chinese car?

Over the years General Motors (GM) has become China’s second largest automaker, mainly through a 50:50 Joint Venture with Shanghai Automotive Industry Corporation (SAIC). This is an achievement for which GM should command a lot of respect as joint ventures with Chinese partners have been known to be tricky at times. Now GM has just announced that it will not only sell parts of its Indian operations to SAIC, but that it would also transfer an additional 1 % of the stock in the joint venture to them, thus raising their stake to 51 %. After this move, GM China has finally become Chinese, and this is may be a whole different ball game. To some degree the move is understandable as GM has been desperate for cash recently, but strategically the deal does not make an awful lot of sense (unless you’re SAIC, of course).