#71 The Shape of Things to Come
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…
January 12, 2011 @ 10:27 am
In my opinion, a joint venture between BYD and Daimler has to consider various cultural differences. First, I would like to mention that concerning Hofstede’s dimensions China and Germany are no equal countries.
If we consider e.g. the part “Power Distance”, which is very high in China, the companies also have to be aware of the fact that this is rather low in Germany. This means that Chinese people do not show their wealth or success in the same extent than in Germany, which is due to the big disparity between the poorer and richer population. Related to the next dimension, which is called individualism, the specification is also different between the countries. China is very low in this dimension, which means they are collectivistic orientated. In contrast, Germany is very individualistic orientated. So for Chinese people it is important to support the common goal and work together towards it. The Germans lay their emphasis on personal success and career.
Another significant dimension, which differs very much, is the long-term orientation. This part is very important for China while Germany’s orientation is not that much long-term orientated. In my opinion, it is very important for the two different companies from two different cultures to consider this facts. As we can read in the article, there were already some struggles related to cross-cultural differences. E.g. the Chinese Communist Party criticized the joint venture for supporting rich people which is due to the high rank on the collectivistic dimension, which is the opposite of the individualistic one.
I think it is a very hard way for Daimler to be successful in China, especially in the long-term run. Maybe this two cultures are too different for cooperating that much. Hopefully, Daimler considered this when they decided to choose this strategy for entering this new market.
November 19, 2011 @ 10:52 pm
The joint venture deal is exactly what is required. BYD still has a reputation in China as a low end, low quality car. By utilizing the resources from Daimler and implementing certain quality and manufacturing process requirements, BYD can certainly provide a higher quality product.
My second thought, if you have ever been to China or purchased things from China you know foreign products are subject to a non rebatable VAT Tax. The Chinese government is doing everything possible to encourage local company support. The price of a U.S or European car in China is almost double the price. The Iphone which is made in Shenzhen is almost 33% higher in cost in China compared to U.S. To get the best benefit out of the explosive growth in the car market in China its critical that foreign cars use a split approach to penetrate the market. Continue to sell your core cars to cater to the richer population and then have joint 50/50 with a local car company to get the most out of the mass (general) population
THe traditional power distance in Chinese culture is still very much present, but not to the extent that even existed 5 years ago. The rich are flashing their wealth and becoming more extremely materiallistic such as other western cultures i.e ( look at the explosive growth for LV and other designer products).
Germans and Chinese have been working together quite succesfully for hte past 10 years. If you go to any top tier company that requires any type of high level engineering you will find Germans on site constantly. (injection molding tools, manufacturing equipment) etc…
We are faced with a growing middle class in China, explosive growth opportunity, foreign competitors must work with the local chinese to maximize growth and profit. IF your not in China you are already losing.
April 10, 2014 @ 6:23 pm
With the establishment of the joint-venture with BYD, it seems that Daimler did a strategic important move. Being present in China with another local partner already for production and distribution of their ‚normal‘ vehicles (BAIC), the development of an electric car is a promising opportunity.
Let’s shortly analyse the important steps for each market entry, in relation to this example:
1) Corporate Readiness: It can be assumed, that a global corporation like Daimler is ready for entry into any new market. They have resources (financial and human), experience, international mindset etc. Motivation for Daimler in that example was probably the increase of global market share (in electric cars and overall), acquisition of specific know-how in battery business (provided by the local partner), access to cheaper workforce, participation of growth in emerging markets and economies of scale. However, critical issue at this stage is the full commitment, especially as the joint-venture was established for production of the first electric car in the group.
2) Product Readiness: Daimler’s core products have been ready for the market in China, being a prestigious symbol of wealth (at least for the upper class). Daimler was in a joint-venture already with BAIC for production, import and distribution of their regular cars. Without specific know-how in battery business – which is essential for electric car production – , the development of a new product together with a reputable partner was logical choice.
3) Target Market Selection: Being not present in China at all, is definitely no option for any car producer, who wants to call himself ‚global‘ – simply, due to the size of the market and its unquestionable potential. So, here Daimler was more or less forced to start any kind of operations in China, the question was rather about the mode of entry. Comparing market attractiveness (which is high in the case of China) with market entry barriers/risks (which are also high), China could be defined as ‚Future hopeful‘. By entering into joint-venture with BAIC, the entry barrier/risk was significantly reduced, so for Daimler I would consider China being now a ‚Core Target Market‘.
Regarding the target market selection for electric cars, it requires a more critical view. On my opinion, it’s questionable if the demand for electric cars will be really that high in China, as in general the awareness about environmental problems (which is probably one of main decision criteria for buyers) is rather low. On the other hand, the partner of Daimler is very well experienced in battery production, and has its main seat in China – so, the choice is somehow logical. Apart from that, development costs of a totally new product are in China significantly lower than in other countries, and in todays globalized world know-how can be transferred later relatively easy to other production units.
4) Entry Mode Choice: Starting a joint-venture, is usually not the least complex task. In this case – at least on my opinion – it was a smart decision, as such approach reduces entry barriers in a market like China significantly, and Daimler obtained desparately needed know-how about batteries on this way. As well, they had some positive experience from the joint-venture with BAIC, so some potential troubles could be avoided by applying best practise from the former procedure.
5) Implementation: With establishment oft he new brand ‚Denza‘ and presenting the first vehicle on a carshow now in April 2014, the joint-venture is showing first success after few years. However, if this will become a real success story in economic terms for Daimler, is still questionable on my personal opinion.