#66 Honda’s painful experience in China
It looks like Honda’s China troubles are over for now. Its Chinese joint ventures, Guangqi Honda Automobile and Dongfeng Honda Automobile, will resume operations after having made significant concessions to workers who went on strike mid-May. There were complaints of working conditions and low wages. Honda agreed to raise wages by 25 %. Yes, twentyfive percent. Such a significant increase can only mean (or at least hint to) that Honda has been doing what many multinationals are often accused of – the exploitation of cheap local resources, such as labor. And in fact, workers at Honda or at similar plants earn as low as 1,000 Renminbi monthly, about 150 US$ and have not received a wage increase in five years. What’s the lesson to be learned? Moving production to a low-cost location is not necessarily a bad thing – after all, there’s very little choice for companies in some industries if they want to stay competitive. Besides, foreign direct investment is also helping the development of local economies. However, creating ever worsening wage disparities at foreign subsidiaries of multinational companies over time makes them less welcome than they may have initially been. Besides, in Honda’s case, the company has ambitious plans of growth in the Chinese market. Last year, it produced about 600,00 vehicles in China, but it is looking to increase its capacity by 30 percent to more than 800,000 cars by 2012. The expansion banks on increases in domestic purchasing power. And this is where being not locally responsible becomes a very short-sighted strategy – not only did Honda nothing to contribute to increases in purchasing power, it is also slaughtering its own image.
Other Japanese multinationals in China have recently announced similar increases in output – Nissan plans to produce more than one million cars by 2012, Sharp will double the number of retail outlets, fashion retailer Uniqlo intends to open 1,000 stores by 2020. What happened to Honda recently provides a good lesson for these Japanese companies and for all multinationals from other countries.
November 5, 2010 @ 7:47 pm
After Honda’s strike, many Japanese companies in China may need to rethink their plans in a growing market with low-wage workers fighting for their rights. These companies should focus on other factors besides high profit margins and increasing production capacity. They should direct their attention to how they achieve profits and what issues can affect the company’s performance. Not only did Honda’s strike put a halt on production, but it also affected Honda’s reputation as a company. Honda’s response was to increase wages in China to fix these problems. The company realized that these higher wages would contribute to increasing the purchasing power in China, leading to a rise in demand for high-quality goods which include Honda automobiles.
With this increase in purchasing power, Japanese companies like Honda need to target the mid-to-high level consumers in China. They can stay ahead of the competition by implementing new and advanced technologies. For example, Honda plans to make gas-electric hybrids more affordable and accessible in China by producing them locally, rather than have them imported from its factories in Japan. Therefore, sales of hybrids in China are expected to increase significantly.
Maintaining a good reputation is an important factor for companies to consider when implementing their business strategies abroad. Companies need to not only be socially responsible, but environmentally responsible as well. Honda is becoming more environmentally-friendly with the construction of its new plant in China to expand its operations. According to a recent article from ReliablePlanet.com, Dongfeng Honda – one of its joint ventures in China – is beginning construction on a new automobile plant. Dongfeng Honda set the annual production capacity of the new plant at 100,000 units which is an increase from the original plan of 60,000 units. In the future, the joint venture company plans to increase the capacity to 120,000 units in 2013, and up to 240,000 units in the future. The initial investment of the plant is about 2 billion Renminbi or 300 million USD. The plant will have the most advanced environmentally-responsible plant in China by using solar power generation for certain production processes and reducing CO2 emissions by 600 tons annually. After the completion of this new plant at Dongfeng Honda in 2013, “Honda’s overall annual automobile production capacity in China will reach 890,000 units including 480,000 units at Guangzhou Honda, and 50,000 units at Honda Automobile (China), an export automobile production joint venture.”
As Honda has patched up its relationships with its Chinese workers and its global reputation, it must continue to improve its business methods in the growing economy of China in order to be successful in the future.
January 12, 2011 @ 5:33 pm
This matter is another example for multinational companies which tend to exploit resources in growing markets such as China and India as efficient as possible. The wage increase of 25% which is definitely a remarkable amount shows again that there is a huge gap between the wages which are paid in many cases and the wages which should be paid in terms of fairness. Of course companies are interested in low costs and cheap resources like labor in countries such as China, but in the end it is a questionable development as soon as circumstances lead to the suggestion that local work forces are exploited and not paid according to their performances. Furthermore, international companies, well known all over the world, have to make sure that they provide working conditions which are appropriate and enable their employees to work in an adequate and secure environment.
These measures will improve motivation of workforce and also local acceptance and sympathy and could furthermore boost local demand. Companies, as big as Honda, have social responsibility and should find other ways to compete. Many companies are being criticized for similar behavior as more and more unions protest against their approaches and hopefully this will lead to change sooner or later.
Chun Lung Li
October 25, 2011 @ 1:15 pm
Since Chinese government has opened the growing market, many multinational companies have planned to invest their production lines in China. Many multinationals are looking for low wages of labor and higher purchasing power in China. Why did these labors would like to complaint of working conditions and low wages? The reason is that most Chinese workers of young generation have ambitious perspective in their career development; moreover, they expect higher wages and benefits. In fact, multinational companies, such as Honda brought working opportunities into local and helped the local economic development. It’s important to balance and maintain the competitive advantage and performance in growing markets. First, companies should face the cultural unique of labor. For instance, Honda might focuses on how to motivate their employees. If senior generation Chinese workers, they will be sufficed by stable but lower level incomes with comfortable working environment. Chinese workers will retain in the corporation by motivational factor. On the contrary, the new generation of singles and single child family will be a tendency towards Chinese community. That’s why Chinese employees prefer to spend more time on work and individual development. Based on traditional education influences, wages and benefits can motivate Chinese employees and more securely on working place. No matter what new production lines will be developed in China, companies should pay attentions on employees’ management and performance with adequate cost. It will be improved the competitiveness by implementing business strategies. Moreover, the profitability and production capacity will be increased with great investment in China.
November 6, 2014 @ 6:49 pm
I think that a joint venture is a good way for a company to enter in a new and unknown market like China. Through this solution you have the possibility to gain insider information about the market, customers, competitors, trend and technology from your partner in this country.
Concerning the wage disparities mentioned in the article I think that huge wage differences could lead to a failure of the joint venture. Huge salary differences between the workers lead to discrepancies between the workers because they are not willing to accept these high wage differences. All employees have to bring good performances independent from their salary. As a consequence, when there are problems between the two cultures it is much harder to work together to find suitable products and marketing ideas adapted for this market. For Honda it would be necessary to find other ways to motivate their employees. But concerning the dimension of Hofstede the power distance in China scores 80. This implies that employees in China are more motivated by a higher salary and not by more responsibility or empowerment. This leads to the fact that it is very difficult to find other ways to motivate them.
For a company it is important to have a good image in the foreign country to increase the purchasing power. For this reason they should reduce the wage disparities and also they should not show the impression that they have a competitive advantage only through an exploitation of the local low labor costs.
Concerning the dimension of Hofstede a lot of differences between the home market of Honda Japan and China could be identified such as uncertainty avoidance, individualism and power distance. The uncertainty avoidance in China (30) is much lower than in Japan (92). Furthermore, the dimension masculinity is lower in China (66) than in Japan (95). In order to be able to increase the purchasing power in China it is necessary to consider these dimensions. Like mentioned above the power distance in China is very high. For the advertising in this country it would be important to promote the cars power and prestige. Furthermore, the masculinity is high in China. This means that for advertising values like competition, achievement, success and aggressiveness should be communicated. Moreover, in order to increase the purchasing power also a product adaption is necessary. The cars should be bigger to show prestige and power. Finally, it would also be important to work together with people from the foreign country to decide about a marketing-mix which is adapted for the local customers to be more successful.
Finally, it can be said that it is important to understand the different culture from the other country before entering it. It is necessary to adopt the marketing-mix on the customer’s needs to be able to increase the purchasing power and attract their interest.
December 11, 2021 @ 10:44 pm
From the time the article was written (2010) to now (2021), major changes have occurred. The average wage in China has more than doubled, and Japanese companies can no longer expect cheap labor costs. As a result, businesses seek cheaper competitiveness from other neighboring countries. But as this example in China shows, the value of the workforce fluctuates wildly. Moreover, the different cultures of Japan and China will make this problem even more complicated. Companies should be careful when deciding how to produce. But the value of China as a market is getting bigger and bigger. China’s consumption is steadily increasing due to the huge population and the increase in disposable income. Right now, companies are looking for China as a market, not a labor force. In this situation, this past failure may have damaged Honda’s brand image more than expected and left a scar on it.