Pestel Analysis: China’s automobiles

China automobile industry, the top vehicle superpower in the world has become the backbone in the national economy due to the fast growing of the industry in 2009.

Protections and privileges have been set up by Chinese government to the foreign automakers which directly allow those foreign companies have easy access in Chinese automobile industry. Therefore, China is successfully attracted many multinational companies to enter the country such as Ford, and Volkswagen.

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Economy Factor

The open policy have brings the country rapid and continuous economic growth and today, China has playing an important role in the global economic environment.

Based on China currently growing economy position, huge market size, and the dominating position in the global economic environment which showed there are high profits potential have attracted big international vehicle manufacturers.

Social Factor

Business ethics and organizational behavior by the Chinese concept of “relationship” called “guanxi” and is completely different from the Western concept of “relationship”. Therefore, companies can gain competitive advantages by developing their networks of guanxi.

Finding local partners when begin a business in China is a sensible way. Thus, many of the multinational automobile manufacturers are choose joint venture as their entry mode where it can ease the process in both administrative and political processes, yet, cultural differences may become the obstacles for them to handle.

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Technology Factor

The technologies in automobile industry are keeps upgrading, for example, automobile makers are now designing a car with environmental consciousness in order to protect the environment and they comes up with hybrid cars.

Moreover, several automobile companies are using computers system in their car diagnosing problems.

Environment Factor

The “green car” is a must which development is the propensity not only in China but in the whole world. The overconsumption of oil, the rising air pollution, the sound pollution caused by the traffic especially in the big cities and the lack of parking spaces to meet the rising demand of the growing number of cars on the roads, these are all factors that have to be considered and have a great impact on the environment with respect to the future prosperity of the global automobile industry everywhere.

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Legal Factor

In the recent years the Chinese government has tried to make the legal and regulatory environment for the foreign investors less complicated, however many of the Chinese laws and regulations are still often unclear, confusing and difficult to understand.

Michael Porter’s 5 Forces

Threats of Product Substitutions

The factor presenting the strongest threat of substitutes in the industry is the second hand car. This may be seen in the face of used automobiles which are sold by dealerships along with new cars. Especially, in the last few years dealerships have probably sold more used vehicles than new ones due to the global economic and financial crisis.

Another substitute is the alternative mode of transport. Many of the end consumers may prefer to use public transportation instead of owning a car.

Threats of New Entrants

The entry barriers in the Chinese automobile industry have been significantly reduced due to the attracting policy of the government with regard to foreign direct investment in the sector. The factor which attracts many foreign companies is unsurprisingly the market growth. The boom of the auto industry and the increasing demand has revealed the lucrative market potential. Therefore market growth is the strongest factor increasing the threat of new entrants in the Chinese automobile industry.

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Fixed costs are another important factor which influences the threat of new entrants. To set up a large production facility meeting the needs and demands of the Chinese market requires a large investment, therefore is a major entry barrier in the automobile industry.

Switching costs could also be said that are relatively high and therefore are a barrier for new entrants the same is valid for the undifferentiated product. However, the large number of suppliers is a strong factor increasing the interest of the new entrants. On the other hand the lack of transparency in the Chinese legal system, together with the ambiguity of laws and regulations create a barrier for manufacturers. These factors are further amplified by the involvement of intellectual property by foreign companies.

Intensity of Rivalry

The high fixed costs, exit barriers and relatively high switching costs are important factors influencing the degree of rivalry in the auto industry, due to the fact that leaving it would mean a significant disinvestment and loss of revenues and assets. The high level of design and marketing costs in terms of product promotion increases the rivalry among market competitors.

The lack of diversity and similarity of players further increase competitors’ rivalry in the Chinese automobile industry. The number of players in terms of large scale manufacturers is fairly small. The Chinese market is consolidated due to the fact that manufacturers are interested to increase their market share through limited growth in large but mature markets.

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Bargaining Power of Buyers

Today the key buyers in the automobile industry in China are dealerships; however the end-user customers have also high importance.

The switching costs for the dealerships are extremely high due to the fact that the automobile manufacturers sign exclusive contractual agreements with them. Therefore, factors like switching costs and tendency to switch are weak buyers’ bargaining power determinants. Nevertheless, in order to reach the end consumers, the car producers in China rely on the dealerships. This factor makes the automobile manufacturers in China dependent on them and therefore, the bargaining power of buyers (in the face of dealerships) is rather strong.

Bargaining Power of Suppliers

Central for the automotive industry in China and the world are naturally the commodity goods like steel and other metals and more differentiated input in the face of various ready-made components. In general, these items are produced by outside companies. In this regard there are large multinational suppliers with a strong presence not only in China but the global markets, which makes them independent and very powerful.

However, the bargaining power of suppliers is slightly reduced due to the low differentiation of raw materials making it difficult to distinguish between them. On the other hand the significance of high quality raw materials and readymade components and parts to automobile manufacturers, increase suppliers’ bargaining power, together with the fact that there are no substitutes for the needed raw materials and what is more the relatively small size of the reliable suppliers in the industry offering high quality components at a competitive price.

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Michael Porter’s Diamond Analysis

Factor Conditions

The large population of the country together with its increasing purchasing power has made China extremely attractive to the big multinational companies in the sector.

In March 2009, the State council of China has issued a new development outline (the Outline) for the automobile industry 2009-2011. The above mentioned Outline presents comprehensive development tactics including: industrial upgrading, technological enhancement and promotion of new engines.

Demand Conditions

The fast economic development of China has increased the purchasing power of consumers together with the sophistication level of their needs and wants. Buyer’s profile has been modified with the increase of private consumption as a result of the withdrawal in the Chinese economic life of state power. Today, the financial independence of end-consumers is enhancing due to the progressive credit solutions and the fact that some of the Chinese banks are authorized to offer credit especially for the purchase of vehicles.

The demand in China was especially heavy for cars that were perceived to be of higher quality than most of those produced by Chinese government and in China only about 20% of people owned car.

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Related and Supporting Industries

China has realized that the reliance on low-end and labor-intensive manufacturing which use mainly imported technology is being no longer sustainable. Therefore, the development of the automobile industry shall involve restructuring of the production and technological advancement.

The presented Outline by the Chinese government entails that passenger cars produced with domestically independent brands shall account for over 40% of the total car market, comprising about 10% (around one million) of the whole export production and sales in 2011.

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Firm Strategy, Structure, and Rivalry

In terms of market expansion it is a moderate factor influencing rivalry among competitors due to the established powerful brands in the industry, nevertheless some companies engage in more than one segment by utilizing different brands, e.g. BMW and Mini.

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Rivalry among competitors is also little reduced through a degree of differentiation in few diverse segments within the automobile industry like luxury cars and budget cars.

The models offered by Changan-Ford in the Chinese market sold well because they appealed to a sophisticated segment of buyers, who saw Western-designed cars as differentiated because of their overall superior quality, innovative technology and aesthetic appeal.

Hofstede’s Dimension

Social Orientation

At a score of 20 China is a highly collectivist culture where people act in the interests of the group and not necessarily of themselves.

The United States, with a score of 91 on this dimension, is a highly individualistic culture.

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In order to solve the problem between collectivist and individualistic culture, Changan-Ford can held workshops or seminars which are able to educate their employees about the important of teamwork (ie. Team building).

Power Orientation

At 80 China sits in the higher rankings of PDI – i.e. a society that believes that inequalities amongst people are acceptable. The subordinate-superior relationship tends to be polarized and there is no defense against power abuse by superiors.

The United States score low on this dimension (40) which underscores the American premise of “liberty and justice for all.” Within American organizations, hierarchy is established for convenience, superiors are always accessible and managers rely on individual employees and teams for their expertise.

Changan-Ford may benchmark the Toyota lean productions strategy whereby Toyota is believed in bottom-up report and this beside can formalized the process but also can decentralized the organisation.

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Uncertainty Orientation

At 30 China has a low score on uncertainty avoidance. The Chinese are comfortable with ambiguity; the Chinese language is full of ambiguous meanings that can be difficult for Western people to follow. Chinese are adaptable and entrepreneurial.

The US scores 46 on this dimension and therefore, American society is what one would describe as “uncertainty accepting.” Consequently, there is a larger degree of acceptance for new ideas, innovative products and a willingness to try something new or different, whether it pertains to technology, business practices, or foodstuffs.

Goal Orientation

At 66 China is a masculine society -success oriented and driven. The need to ensure success can be exemplified by the fact that many Chinese will sacrifice family and leisure priorities to work.

The United States score 62 on this dimension and is considered a “masculine” society. Behavior in school, work, and play are based on the shared values that people should “strive to be the best they can be” and that “the winner takes all”.

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Time Orientation

With a score of 118 China is a highly long term oriented society in which persistence and perseverance are normal. The Chinese make decisions as a ‘group’ or organisation; as a result the process is long.

With a score of 118 China is a highly long term oriented society in which persistence and perseverance are normal. Americans tend to make decisions individually, so decision-making is quick.

The suggestion for Changan-Ford to solve this problem is they may set dateline to all decision-makings that all managers need to make.

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