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Business Dissertation Andreas Hirschbrunn

Investigation into the Mercedes Heavy Duty Truck


operation in the Chinese commercial vehicles
market: Is exporting outdated and is the proposed
international joint venture with Foton an adequate
market entry mode to overcome Socio cultural and
legal barriers?

Analysis and Recommendations


Autumn Semester 2007
European Business school London, UK

By

Andreas Hirschbrunn

Supervisor: Oscar Soler-Canela

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Business Dissertation Andreas Hirschbrunn

Acknowledgements
Writing the dissertation completes four years of a very special learning experience. The
author would like to use this opportunity and thank those people who made these four years
an experience never to be forgotten.

First and foremost, the author would like to express immense gratitude to his parents who
gave him the opportunity to study at EBS London and provided unconditional support during
these times. Besides this the author would like to seize this opportunity to thank Tatiana
Turck, Thomas Doering and Dr. Wolfgang for their support of my work providing giving me
the chance to interview them. Additional gratitude to Mrs.Traub for establishing the contacts
and helping me with the networking.

In addition, the author would like to thank his other interview partner Dr. Hans Moritz, who
dedicated his valuable time and input to the project. Last but not least, the author highly
acknowledges his tutor Oscar Soler-Canela for his interest in the topic and the steady support
during the progress of writing the dissertation.

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Business Dissertation Andreas Hirschbrunn

Executive Summary
The Chinese market for commercial vehicles in the heavy duty truck segment has
demonstrated significant growth rates and the demand for this type of vehicle is estimated to
be 500 000 units over the next three years. This dissertation focuses on the Mercedes truck
group’s heavy duty segment. Mercedes currently using an export mode as market entry
strategy sells on average 1500 units a year. They have engaged into a Joint Venture with the
Foton to build a joint product on the Amuna platform with Mercedes motor technology in the
initial phase. In the next phases this collaboration theoretically should evolve further with
joint production facilities and non technical knowhow exchange. The prime objective is the
market leadership and to use this position in the third phase to export the joint product
globally. At this moment in time these objectives are far away from the reality of a joint
venture which struggles even to fulfil the first phase. A thorough analysis has depicted that
exporting must be continued, whilst establishing a Joint Venture to enter the Heavy duty
truck mass market. This type of entry mode is more suitable then the wholly owned
subsidiary, because it involves less risk, bureaucracy and gives a better chance to cross the
cultural barriers posed by the Chinese society. The external analysis has shown that there is a
strong need to create a joint venture. Both of the companies are confronted with competitors
who engage in similar partnerships and threaten to outperform Mercedes and Foton. The role
of the Chinese government as a driving force behind the changing automotive industries
environment has been identified and its impact analysed. Mercedes and Foton have
complimentary value activities, but they must engage in a proactive dialog on how to solve
problems which threaten the success of the joint venture. The key areas of concern identified
in this early stage are of a cultural nature. In particular the clash of a formerly publicly
controlled and product output orientated company versus the private and profit orientated
company proofs to be a significant problem. The socio-cultural and legal barriers of the
Chinese market are also part of the Joint Venture operation. In particular the legal constraints
which where supposed to be avoided via this entry mode are still in place. The ministry of
commerce proves to be the most obstructive force to the joint venture. Mercedes-Foton must
diffuse the cultural differences. The management has to initiate, foster and direct a unique
Foton-Mercedes business culture. To succeed in this a diplomatic approach to change
management has to be applied. This process is fairly difficult as the Chinese government; the
main stakeholder asserts a serious influence on the joint venture which is in adverse relation
to the modernization efforts introduced by Mercedes.

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Table of Contents
1.1. Company background ...................................................................................................................... 9

1.2 Objectives........................................................................................................................................ 10

2.1. Expectations of the Chinese automotive market .......................................................................... 11

2.2. The Chinese automotive industry .................................................................................................. 11

2.3. Joint Venture .................................................................................................................................. 12

2.4. Cost/Benefit analysis...................................................................................................................... 12

2.5. Joint venture as an entry mode ..................................................................................................... 12

2.6. Setting Joint Venture Objectives.................................................................................................... 13

2.6.1. Entering new markets ............................................................................................................. 13

2.6.2. Reducing Manufacturing Costs ............................................................................................... 13

2.6.3. Developing and diffusing Technology ..................................................................................... 13

2.6. Reasons why foreign and Chinese firms establish Joint ventures ................................................. 14

2.7. Selecting partners .......................................................................................................................... 14

2.7.1. Establishing a desired partner profile ..................................................................................... 14

2.7.2. Identifying Joint Venture Candidates (Hollensen, 2002) ........................................................ 14

2.7.3. Screening and Evaluating possible Joint Venture Candidates ................................................ 15

2.7.4. Choice of Partner .................................................................................................................... 15

2.7.5. Develop a Business Plan.......................................................................................................... 15

2.7.6. Negotiation of the Joint Venture Agreement ......................................................................... 15

2.8. Matching foreign investors and Chinese companies expectations from a Joint Venture ............. 16

2.9. Performance appraisal ................................................................................................................... 18

2.10. Problems with International Joint Ventures ................................................................................ 18

2.11. Why do Chinese Joint Ventures fail? ........................................................................................... 19

2.12. Managing Change and Overcoming Resistance in a Joint Venture ............................................. 20

2.13. Planned change ............................................................................................................................ 20

2.14.H.R.M. ........................................................................................................................................... 21

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Business Dissertation Andreas Hirschbrunn
2.15. The transfer of technical knowhow versus non technical know how ......................................... 22

2.16. Business Modules and Frameworks............................................................................................. 23

2.17. Value Chain .............................................................................................................................. 23

2.18. Porters Five Forces Model ....................................................................................................... 23

2.18. PESTEL Analysis ........................................................................................................................ 23

2.18. Stakeholder mapping ............................................................................................................... 23

2.19. High and low context cultures ................................................................................................. 24

2.20. The contextual continuum of differing cultures ...................................................................... 24

2.21. Hofstede four plus one dimensions model .............................................................................. 24

3.1. Research question.......................................................................................................................... 26

3.2. Research design ............................................................................................................................. 26

3.3. Research Philosophy ...................................................................................................................... 26

3.4. Positivism ................................................................................................................................... 26

3.5. Interpretivism............................................................................................................................. 27

3.6. Realism ....................................................................................................................................... 27

3.7. Deductive approach ................................................................................................................... 27

3.8. Inductive approach .................................................................................................................... 28

3.9. Research Strategy .......................................................................................................................... 28

3.10. Data Collection Methods ............................................................................................................. 28

3.11. Analysing Data ............................................................................................................................. 28

3.12. Credibility of research findings .................................................................................................... 28

3.13. Reliability...................................................................................................................................... 29

3.15. Research Limitations .................................................................................................................... 29

4.1. Exporting ........................................................................................................................................ 30

4.2. Spot business ................................................................................................................................. 30

4.3. Distribution .................................................................................................................................... 31

4.4. Determine the export modes viability ........................................................................................... 32

4.5. The wholly owned subsidiary ......................................................................................................... 33

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Business Dissertation Andreas Hirschbrunn
4.6. Quanxi ........................................................................................................................................ 33

4.7. Foreign Production......................................................................................................................... 33

4.7.1. Licensing .................................................................................................................................. 33

4.7.2. Franchising .............................................................................................................................. 34

4.7.3Local Manufacturing ................................................................................................................. 34

4.8. Analyse whether the IJV is the most suitable market entry mode for Mercedes ......................... 34

4.9. Which type of a joint venture in which strategical context? ......................................................... 34

4.10. Porters five forces Model applied ................................................................................................ 36

4.11. SWOT Analysis of the Joint Venture between Foton and Mercedes. ...................................... 37

4.12. Key Drivers of change for the Chinese automotive industry ....................................................... 37

4.13. The Partner selection ................................................................................................................... 38

4.14. SWOT of Mercedes H.D.T. ....................................................................................................... 39

4.14. SWOT analysis of Foton ........................................................................................................... 40

4.15. Foton and Mercedes analysed with the Value Chain .................................................................. 41

4.16. Value Chain of the Initial Phase ............................................................................................... 41

4.17. Second Phase Value Chain ....................................................................................................... 42

4.18. Stake holder mapping .................................................................................................................. 44

4.19. Ministry of foreign commerce ................................................................................................. 46

4.20. Legal System............................................................................................................................. 46

4.21. The challenges of the Joint Venture ............................................................................................ 47

4.22. Cultural Poles ............................................................................................................................... 47

4.23. Hofstedes 4+1 dimensions model ................................................................................................ 47

4.24. Analysis of 100 cross regional JOINT VENTURES ......................................................................... 49

4.24. The H.R.M department’s problems in creating one culture ........................................................ 49

4.25. Personnel ................................................................................................................................. 50

4.26. Recruitment ............................................................................................................................. 50

4.27. Dismissal and Remuneration ................................................................................................... 51

4.28. Labour and Managerial Skills ................................................................................................... 51

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Business Dissertation Andreas Hirschbrunn
5.1. Recruitment .............................................................................................................................. 52

5.2. Training ..................................................................................................................................... 52

5.2. Continuity.................................................................................................................................. 53

5.3. The Chinese Government ......................................................................................................... 53

5.4. Performance Appraisal ............................................................................................................ 53

5.5. A new approach to change implementation........................................................................... 54

5.6. The exchange of non technical know how .............................................................................. 54

6.0 Conclusion..............................................................................................................................................................55

Bibliography

Appendices

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Abbreviations
H.D.T. Heavy Duty Trucks

J.V. Joint Venture

I.J.V. International Joint Venture

P.R.C. Peoples Republic of China

M.N.C. Multi National Corporations

M.o.f.com. Ministry of foreign commerce

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1. Introduction

1.1. Company background


To engage more actively in the market a Joint venture with Foton has been agreed on.
However this Joint venture is far away from delivering the expected outcome. The
international Joint Venture is in the initial phase and there are various problems faced on the
way to become a successful operation. Like any other major truck producer Daimler is very
interested in expanding its share of the Chinese market. The H.D.T. segment is the core
product of the truck business (Daimler.com, 2007). H.D.T.s define themselves as lorries
which carry 40 tons of load. They are built for heavy duty and succeed customer demands for
quality. In particular their reliability is the unique selling point which enables Daimler to sell
1500 units yearly in china. However this is a spot business (Doering, 2007). This means that
Mercedes lorries are rarely sold in large quantities to customers with specific needs for heavy
duty trucks. Those are found in sectors like mining and highway construction. The main area
where the trucks are used is the so called golden triangle (Daimler.com, 2007 A). The profit
margin on the trucks sold is at the top end of the range. The management is very keen on
increasing the quantity sold, although production capacity is already reached. The problem is
that with a quantity of roughly 1500 units a year Mercedes only covers a fraction of the
market which is estimated to be 500 000 lorries over the next 3 years(Mercer,2006). The
existing customers are extremely valuable. Being able to buy trucks which cost 250 000
Euros a unit in large quantities makes it clear that they are attractive and that a relationship to
the customers should be kept. The quality of the trucks themselves and more over of the
excellent packages sold and the unique after sales service could result in significant organic
growth which would increase the quantity sold and coherently the profit made. Mercedes
heavy duty trucks are currently a niche product only bought by the most demanding
customers for specific needs. The joint venture could enable Mercedes to penetrate the
Chinese HDT mass market.

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Business Dissertation Andreas Hirschbrunn

1.2 Objectives
This dissertation analyses to what extent the exporting entry mode is viable anymore. It
analyses the various market entry modes for their suitability. Furthermore the two partners
Foton and Mercedes will be analysed regarding their suitability for a Joint Venture. The
various phases of the joint venture will be explained and possible problems during them shall
be analysed. The stakeholders influence will be determined and their influence shall be
explained. Furthermore the key challenges to the management to make the joint venture work
in practice shall be analysed.

Investigation into the Mercedes Heavy Duty truck operation in the Chinese commercial
vehicles market:Is exporting outdated and is the proposed joint venture with Foton an
adequate market entry mode to overcome Socio-cultural and legal barriers of the
Chinese market?

The objectives therefore are to:

 Determine the export modes viability

 Identify the export modes weaknesses and strengths for Mercedes.

 Recommend on the future of the exporting mode

 Analyse whether the IJV is the most suitable market entry mode for Mercedes

 Identify to what extent Foton and Mercedes do have complementary activities which
make them suitable partners for a Joint Venture.

 Identify Key sociocultural and legal problems of the initial phase and comment on the
issues which will arise during the second and third phase.

 Recommend on how to satisfy stakeholders and solve cultural diffusion.

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2. Literature Review-Section I
This part shall provide the author with the theoretical framework to write this dissertation.
Besides this it will provide me with the necessary ammunition to carry out adequate primary
research.

2.1. Expectations of the Chinese automotive market


In this section the author will take a look at the importance of the Chinese market for
Mercedes and any other car producer from an external economical point of view.

“CHINA has begun to enter the age of mass car consumption. This is a great and historic
advance.”(Economist A, 2005) In 2002 demand for cars in China increased by 56%.”The
next year growth quickened to 75%, before slowing in 2004 (when the government tightened
rules on credit for car purchases) to around 15%. In a sluggish global market, China's demand
remains mesmerising (economist a, 2005).” According to the economist car sales are
expected to increase by 10-20% annually for several years to come. With 5m car in 2004,
China is the world's third-largest car market, after America (17m) and Japan (5.9m). “China
is going to become the second-largest market in the world sometime over the next two or
three years,” says David Thomas, head of China distribution for Ford (economist A, 2005).
Between 2010 and 2015, it should become the biggest automotive market, exceeding both
Japan and America. At the same time, the Chinese government spent billions into expanding
its highway network. “By the end of 2004, China had 34,000km (21,000 miles) of
motorways, more than double the 2000 figure (17 years ago, it had none)”.(economist
A,2005) The Chinese road network is already the 2nd largest worldwide. “1.8m km, with
44% of it built in the past 15 years. Nor will it stop there. By 2020, China plans to double
again the length of its motorways.”(Economist A, 2005)

2.2. The Chinese automotive industry


This section analyses the current state of the Chinese automotive industry outlining key
strengths and weaknesses which might affect the Mercedes operation.

“Car making is more capital-intensive than labour-intensive” (economist,2005 M) The author


refers to the cost of fixed assets employed. “The logic that is driving other manufacturing
industries to move production to China—skilled but very cheap labour—therefore does not
apply”(Economist.com,2005M). Besides this the author points out that china has the worst

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Business Dissertation Andreas Hirschbrunn
cost structure for the automotive industry, because “Supply chains are inefficient and
distribution systems are fragmented” (Economist.com, 2005) furthermore he describes a VW
problem which is significant in its impact on all carmakers in china “two-thirds of the
replacement parts for VW's Santana are pirated, and a “VW” headlight retails at about a tenth
of VW's official price tag” (Economist.com, 2005 M). The car manufacturers are missing out
on the highly lucrative after sales market. The expected synergies with the Joint Venture
partners are effectively not happening “There is not a single car plant in China, says Paul
Gao, a consultant from McKinsey's Shanghai office, that has economies of
scale.”(economist.com, 2005 M) Local production is in a stage where the automotive industry
is anything else then ready to reap profits from the Joint Ventures. The prenatal state of the
operations will need lot patience until it develops into the market expected by analysts. Mr
Gao recommends the foreign car makers to concentrate on after sales service, providing
finance to Chinese car buyers via loans as well as marketing car designs and brands, whilst
completely outsourcing the assembly to the Chinese. He strongly beliefs this would enable
rapid and sustainable long term growth. (economist.com, 2005 M)

2.3. Joint Venture


“A joint venture or strategic alliance is a partnership between two or more parties”
(Hollensen, 2006) “International Joint Ventures with companies based in two countries are
far harder to manage” (Hollensen). “Many multinational corporations (MNCs) gain access to
markets and/or resources through the formation of international joint ventures (IJVs). Joint
ventures are formed to achieve synergy through combining complementary partners”
(Griffith, 1998).

2.4. Cost/Benefit analysis


Investigating the Joint venture it must be ratified to what extent the Joint venture was
appropriate. The Cost/benefit analysis is basically evaluating the Joint Venture entry mode
option with others, and determines whether a specific entry mode might enable the company
to achieve it s objectives quicker or more effective. (Hollensen, 2002)

2.5. Joint venture as an entry mode


Some people might think that the JV is the only way to do business in china. In reality wholly
owned subsidiaries are possible, but foreign investors dislike them because as Maher points
out they do not provide them with a sufficient platform to do business in china. “The wholly

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Business Dissertation Andreas Hirschbrunn
owned subsidiary affords no realistic means of establishing a successful presence in china
and overcoming the formidable language and cultural barriers involved” Wong emphasises
that the “quan xi” policy is the strongest advocate for JVs, because the Chinese prefer to do
business through personal connections with mutual trust. Although the consequences of the
“quan xi” policy are catastrophic when applying western standards it is inevitable part of
Chinese culture. In this environment foreign investors need Chinese partners. This factor is so
important that it outweighs any benefit which is provided by a wholly owned subsidiary.
(Wilson/Brennar, 2002)

2.6. Setting Joint Venture Objectives


The objectives decided on by Mercedes of the JV are very similar to the reasons of other
foreign investors in China. They have in common that the Chinese partner has
complementary reasons for the collaboration. In this section the practical reasons to seek a
joint venture are contrasted with the theory. The relation between Chinese and foreign
objectives is of particular interest to the author.

2.6.1. Entering new markets


New markets, in particular if entered the first time are complicated. Therefore a local partner
with the necessary marketing skills combined with the product development skills is a very
good and quick way to serve the foreign market (Hollensen, 2002)

2.6.2. Reducing Manufacturing Costs


Joint Ventures may allow companies to pool capital or existing facilities to gain economies of
scale. Thereby production costs are reduced. Being an importer, Mercedes has strong interest
to produce locally to avoid tariffs and gain a larger market share. (Hollensen, 2002)

2.6.3. Developing and diffusing Technology


Joint ventures can be used to work together in the development and research of products
which would normally not be possible due to the limited capability of the companies acting
independently. Mercedes is an upstream producer with high quality, whilst Foton is a
downstream producer with highly competitive prices. A joint product with high end
Mercedes technology and quality, manufactured jointly with Foton using their expertise in
cheap production and their local expertise is the solution for both companies. (Hollensen,
2002)

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2.6. Reasons why foreign and Chinese firms establish Joint ventures
Wilson and brennan researched the joint venture opposed to the wholly owned subsidiary
entry mode. In this table they identify the main reasons to establish a joint venture.

Foreign firms Chinese Firms


Chinese market potential Government objectives to attract foreign capital
Possible advantage of being “first in” Access to technology and skills
Competitor pressure Learn modern management skills
Business portfolio diversification Export opportunities
Global environment pressure to enter markets Increase market share
No need to spend time building guanxi Access to marketing expertise
(Wilson/Brennan, 2002)

The market potential is undeniable as it was demonstrated in the abstract about the future of
the Chinese market. On the contrary the suitability of the JV into the business portfolio,
including the risk involved with sharing technology is outbalanced by the potential revenue.
The competitor’s pressure to enter the market is an important factor to consider.

2.7. Selecting partners


Partners are matched via similar expectations. Perfect JVs crave for synergies resulting from
their collaborative effort. Hollensen uses a five stage model of how partners are found and
screened for suitability. His model will be explained with links towards the relevancy for
Mercedes and Foton.

Due to the stringent political system and its implications in combination with the competitive
environment Mercedes selection of JV partners was limited.

2.7.1. Establishing a desired partner profile


Hollensen established a framework; the author will use it to determine which of these factors
are desired by Foton and Mercedes. According to Hollensen companies search for one or
more of the following resources in a partner. (Hollensen, 2002):“Strategically critical
manufacturing capabilities”, its “brand/reputation” and “financial support”. “Sales expertise”,
“low cost production facilities”, “expertise”.

2.7.2. Identifying Joint Venture Candidates (Hollensen, 2002)


Hollensen, 2002 criticises that prospective candidates are often predetermined by the
executive’s personal network, rather than doing an in-depth analysis and investigation of all
possible candidates. According to Hollensen this is the main mistake made in the early stages
of a Joint Venture. Rather than this reactive approach companies should proactively search

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Business Dissertation Andreas Hirschbrunn
for joint venture candidates. These are generally found in one of these groups:
Competitors/Suppliers/Customers/Related industries/Trade association members

Mercedes had only a limited choice, mainly due to being the last to establish its presence in
the market. Foton must be classified as a competitor.

2.7.3. Screening and Evaluating possible Joint Venture Candidates


According to Hollensen relationships get off to a good start if partners know each other well.
The negotiations for the Joint Venture have taken a long time. I would expect four years to be
enough to get to know Foton. However this will point needs clearance via the primary
research to be carried out. (Hollensen, 2002)

2.7.4. Choice of Partner


“The partner must bring the desired strength, ideally it should be complimentary to the
company” The goal is to create synergies between the contributions of each partner resulting
in a win win situation (Hollensen, 2002) Besides this it is imperative to choose a partner who
shows strong commitment to the Joint Venture. This must be both financial and
psychological.

2.7.5. Develop a Business Plan


Issues which must be negotiated determined before the establishment of the Joint Venture.

The Corporate points are the Ownership split, the Management which includes the board
composition and directors as well as the organization. The other organizational level is
composed of the Production, the installation of machinery and training of staff (Hollensen,
2002) The Marketing and exchange of non technical knowhow is a particularly interesting
point which will be discussed further in a separate part of this literature review.

2.7.6. Negotiation of the Joint Venture Agreement


With respect to Hollensen the respective bargaining power of each partner is the most
decisive factor to be taken into consideration. The more power one partner has the more he
will influence the final agreement and contractual terms. Due to Mercedes being the minority
owner with a 24% share its influence on this agreement was limited.

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2.8. Matching foreign investors and Chinese companies expectations


from a Joint Venture
I am analysing literature on this topic because it will enable me to determine later on in my
analysis how many expectations have been meet in which way and in favour of which side.

Table 1

Different Expectations between foreign investors and Chinese partners

Expectations Foreign investors Chinese partners


1 Open Chinas market for its products Adopt advanced production technology
2 Overcome trade barriers Improve R&D capability
3 Take advantage of low cost labour Open more information channels
and Materials
4 Expand existing techniques from Looking for allies for international
home facility competition
5 Reduce financial risks Add new financing source
6 Protect copyright for intellectual Increasing firm reputation from famous brand
products
7 Reduce capital input in investment Utilize current and available resources
8 Access natural resource Reduce operational risks
(Yang/Lee, 2002)

This table demonstrates the result of a survey carried out in 800 joint ventures located in the
golden triangle to investigate the different expectations from foreign investors and the
Chinese partners. Yang and Lee have compiled a very interesting set. They use the
expectations before a possible Joint venture and match them in the next table where they
combine the need of each side.

Factors Foreign investor needs Chinese partner needs


Advanced Promote its technology Introduce new technology Upgrade
Technology Protect copyright current equipment
China’s market Overcome Market barrier Increased demand from continuous
Increase Market Share growth
Labour resource High skilled labour with low cost More employment and job
good ethics opportunities
Capital resource Investment diversity More capital for facility
high return options technology upgrading
Information Have established global information Need connection with global business
Channels channels information network
Global alliance New partners to expand to expand Initialize toward globalization
international network

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Business Dissertation Andreas Hirschbrunn

Incentive policy Gain tax and all other governmental Support from governmental incentive
incentives policies
Global Market Expand new market and improve Enter international market and become
competiveness more competitive
Reduce risk Diversify Investment and share Improve management system and
potential risk control investment risk
Increase profit Invest in fast growth area for high Experience fast growth and profit
returns recapitalisation

(Yang/Lee, 2002)

The survey results revealed that those different expectations have a compensatory positive
effect on both sides. Yang and Lee point out how interlinked expectation 1 and 2 are, they
emphasise that the upstream/downstream relation is positive and matches Chinese and
foreign partners perfectly. However they do not mention at all that the second point, to
overcome the trade barrier and to successfully open the market for its product is a homemade
Chinese speciality. Basically the compensatory effect appreciated by yang and lee is only
existent because foreign investors have to bypass the Chinese regulatory body via a joint
venture. The positive effect for point 2 is definitely on the Chinese side. The third point is
relatively far off from being a positive effect on the automotive industry as the motors
provided by Mercedes are produced by highly sophisticated machinery which relies on robot
technique. The labour involved is concentrated on the machinery supervisors. The fourth
point is valid for the automotive industry as well as others which have a cutting edge
production technology. Lee and yang point out that the lifetime of the production facilities is
extended due to the prolonged competiveness whilst reducing the financial risks. According
to the authors of this study the financial risk reduction is a result of the diversification of the
production into different worldwide locations. In the compensatory factor for the Chinese
side in point number 4 yang/lee underline that the search for global allies is particularly
strong because of the need for a partner with high financial resources. Expectation number
four is the last one covered by yang and lee. Point’s five to eight could have used some
further elaboration to enhance the readers understanding of them. In particular the
compensatory affect in between “reduce financial risks” and “add new financing sources”.
First of all every expansion into a market abroad is expensive and a Joint venture involves
high risk as the initial investment is high, whilst the outcome and failure rate is high as
well.(Hollensen)A other point where further elaboration would be useful is the “protect
copyright for intellectual products” and “increasing firms reputation from famous brand”

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Business Dissertation Andreas Hirschbrunn
point. Because as Griffith” points out the foreigners loose the copyright to the Chinese whilst
the Chinese gain from the enhanced reputation.”(Griffith,2006)

2.9. Performance appraisal


This point is critical to every JV. The evaluation of tangible and intangible results is crucial
for the development of the Mercedes-Foton JV.

“Partners sometimes have different views on how successful their IJVs are, because they use
different criteria to evaluate their performance (luo, 1995). Chinese partners focus on long
term objectives such as the technology transfer, exports and managerial learning. In contrast
to this foreign partners use profitability and market share to evaluate performance.(Yan and
gray,1994) Yan and Grays statement on the performance appraisal is principally true, but
other writers such as Hollensen at least recommend to be patient with IJVs and evaluate their
performance not like the one demonstrated by a internal division(Hollensen,2003). Kotler
recommends that both partners to find common measurements on how to evaluate
performance

Different evaluations come to conclusions about the effectiveness of the operation. Key
problems are identified thereafter. The problem is that these areas might be subjected to the
point of view of the respective partner. A problem area for Mercedes might be of less interest
for Foton and vice versa.

2.10. Problems with International Joint Ventures


Lohin and Goffin name three key areas of trouble in IJVs in the manufacturing sector to
which Mercedes and Foton belong. First of all there will be “conflicts on the sovereignty of
technology transfer between partners or between partners and the host government”(1999),
secondly” a loss of competitive advantage which may result if the decision making process
between partners is slow”. Finally they name the “relative inexperience of managers in
running IJVs” as an area of concern and potential conflict. The heart of Goffin and Lohins
research was about the IJVs problems on an operational level. They basically reinforce their
thesis with exploratory research and identify the operational level as the least studied area,
whilst being the level where most problems arise. The solution to this problem might be
“People in a hurry in China do not succeed” (Griffith, 1996) this statement validates Goffin
and Lohin who recommend to take time, skill and in particular patience to make a
manufacturing IJV work.

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Business Dissertation Andreas Hirschbrunn

2.11. Why do Chinese Joint Ventures fail?


In 1998 two thirds of all joint ventures where running a loss (Pamell,2002). According to
pamell there are three main reasons for the losses:

 “No possibility to exploit economics of scale due to the plant sizes”. Not only plant
size but also a inefficient supply chain and mediocre operational management which
links into.(pamell,2002)

 “Bad planning”. Which is a result of the reluctance to change by the Chinese caused
by the foreign partners strategy to change.(pamell,2002)

 “Competition too strong” .The competition grows strong if companies do not utilize
on economies of scale and fail to realize expected JV synergies. Therefore this point
must be considered a result of the former two.(pamell,2002)

The difficulties in the JVs reality (pamell, 2002):

 Availability and education of workers/managers

 Problems with the distribution network

 Infrastructure problems

 Product quality

 Supply of raw materials

 Servicing and maintenance of machinery

Further difficulties arose over (pamell, 2002):

 Market potential proving lower than initially expected

 Insufficient productivity and labour morale

 The differing goals of the collaborating partners-indeed this latter factor (according to
59 percent) along with false expectations (63%) was/were the main reasons for
ventures to fail.

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Business Dissertation Andreas Hirschbrunn

This section has demonstrated the key problems faced by the JV operation. In the next
section the main problems will be discussed further in respect to strategies and tools to
overcome them. If these strategies are applied from the start of the operation there is a
chance to avoid the problems described above. However the implication of these
strategies might prove extremely complicated.

2.12. Managing Change and Overcoming Resistance in a Joint Venture


“Many Sino foreign joint ventures are set up by acquiring existing state enterprises” In this
type of Joint Venture the foreign partner is expected to transfer its routines to the Chinese
partners to make it more profitable and competitive. Tsang points out the importance of the
restructuring process, because otherwise the tremendous investment of funds, technology and
new machinery is not worthwhile. (Tsang, 2002). “This is because the foreign partner usually
adopts a strategy of dismantling and restructuring the existing state enterprise and
implementing its own system on the other hand.” Tsang warns that this is change is necessary
and that it needs to be implemented properly because otherwise the Joint Venture might fail
or run poorly. “Resistance to change from Chinese staff is often encountered”. The toughest
restructuring efforts have to be done in formerly state run enterprises. This was already
observed in the privatization process of European companies which where formerly run by
the state. In china it is even worse as the means of communicating the necessity for change
are more complicated.

2.13. Planned change


According to Dunphy there are four strategies along two dimensions: Incrementalism versus
Transformation and Collaboration versus Coercion. The first dimension refers to timing,
whether the change is implemented continuously, in small steps or in a large discontinuous
manner. The second dimension considers staff involvement. Basically whether employees are
invited to participate in planning and implementing change.

In Sino-Chinese Joint Ventures there is often a very tight schedule for the implementation;
therefore Tsang classifies the change as radical and discontinuous. The level of staff
participation is very limited due to two factors. First of all the lack of time and the tight
schedule, secondly the fear by the foreign investors that local staff might demand substantial
modifications.(Tsang, 2002) According to dunphy and Staces(1990) this approach is

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Business Dissertation Andreas Hirschbrunn
transformative and coercive, they refer to this strategy as dictatorial transformation. Due to
the low level of participation substantial resistance from local staff can be expected. The
problems which arise are apparent on every level. Both managerial and on the factory floor.
First of all the Chinese stick to their old routine although having agreed to the
implementation of change. This in turn leads to poor performance and a low level of mutual
trust which furthermore complicates the relationship and leads to the failure of the venture.

2.14.H.R.M.
Tsang summed up all the factors of HRM which are a problem in a Joint Venture. He used
these factors and outlined possible solutions. According to him the solutions are rather hard
as the “Chinese partner frequently maintains that the personnel is an internal matter and shall
therefore be off limits to foreign scrutiny” (Tsang,2003). Additionally there might develop a
mix up of management styles if the foreign and Chinese partners assert equal influence on
HRM matters.

Table: H.R.M. Problems and Causes

Problems Institutional/ Cultural Causes


Recruitment A.: Shortage of managers and professionals Damage inflicted by the cultural revolution.
Under deployment of higher education
B.: Difficulty of transferring new recruits Administrative planning; Social Control
C.: Pressure of overstaffing Marxist ideology.; benevolent government
policies
Dismissal A.: Difficulty of firing staff Legacy of lifetime employment system
Remuneration A.: Cost of providing numerous subsidies Social welfare requirements
B.: Egalitarianism Avoidance of income polarization
C.: Seniority-Based promotions Respect for elders/ emphasis on seniority
D.: Equal pay for both Chinese and expatriates “Equal pay for equal work” principle
Labour A.: Poor discipline Legacy of lax management in Chinese
Discipline enterprises
B.: Reluctance of local managers to enforce Avoidance of confrontation/ Interpersonal
discipline relationship harmony
Managerial A.: Shortage of modern managerial skills Legacy of being pure production facilities
Skills
B.: Unwillingness to take risks on an individual Severe punishment for mistakes and little
basis reward for achieving merits/Group decision
making/Group orientation
A.: Conflict of management styles Differences in management

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Business Dissertation Andreas Hirschbrunn

practices/Cultural misunderstandings
Training A.: Heavy training cost Similar to the recruitment problem A.:
B.: Danger of losing well trained staff Intention of the Chinese government to use
joint ventures as a training ground/More
dynamic labour market.
Trade Union Danger of a powerful and uncooperative trade Powerful workers congresses in Chinese
union enterprises

Adapted from (Tsang, 2003)

2.15. The transfer of technical knowhow versus non technical know


how
Foreign investors cannot avoid to transfer technical knowhow in whole or partly because it is
necessary for the manufacturing process. According to sheriff they might find little or no
reason to transfer their costly and carefully developed expertise in areas such as marketing,
sales techniques, analysing product cost and determining price, identifying customer
preferences, increasing customer loyalty, developing advertising strategies,etc.(Sheriff,2002)
This author points out that the analysed Joint Ventures appeared to him like completely
separate entities. There was apparently only moderate or minimal transfer of non
technological knowhow apparent. “On the whole the companies had a general but superficial
and incomplete acquaintance with the principles of strategic management.”The author hereby
refers to the Chinese partners, not the foreign managers. He states that the general overview
acquired by the Chinese is rather a coincident caused by the interaction with the foreigners.
The only successful company exhibited a conceptual management approach. There was
evidence that the conscious pursuit of a strategic management model improved the company
on both the corporate and operational level. (Sheriff, 2002)

Company Type Nationality of Year of Interviewee Transfer Level


foreign partner establishment position
Brake US 1997 General manager minimal
Glass US 1994 Managing director Not evident
Carpet fabric Germany 1999 General Manager Moderate
Department Hong Kong 1993 Assistant general Moderate
store manager
Soft drink US 1990 Assistant general Minimal
manager
Maher, 2002

The companies analysed by the author are not exactly the perfect match for a comparison
with the Mercedes/Foton joint Venture. On the contrary they show the illnesses of a lot of

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Business Dissertation Andreas Hirschbrunn
IJVs in China. A separated culture inside the companies where know how exchange is not
happening due to cultural reasons. Management could take influence, but due to a lack of
strategy and frameworks and mechanisms which might encourage the exchange a lot of JVs
do not exceed the primary function for which they where set up. (Maher, 2002)

2.16. Business Modules and Frameworks

2.17. Value Chain


The author has to analyze the capabilities of each partner in the Joint Venture. Therefore the
Value Chain will be applied

The value chain analysis is a tool to analyse strategic capabilities.”It analyses how value is
created or lost in an organization in terms of activities undertaken”(Scholes,2006).The cost of
value activities and the value they deliver determine whether best value products are
developed.(Scholes,2006) In an joint venture the core competences of each other are
evaluated by the value chain. The final outcome should be complimentary value activities.

2.18. Porters Five Forces Model


Provides a useful framework to analyse the competitive forces which affect an industry. The
model does not address interdependencies and synergies in one operation (Fleisher, 2003),
but besides this limitation it is a good analytical tool to determine the factors which affect
every player in the Chinese commercial vehicles industry.

2.18. PESTEL Analysis


This framework allows for a structured overview of Economical, Socio-cultural,
technological, legal and environmental factors affecting the Chinese commercial vehicles
industry. The author will focus on the most important aspects, rather then creating an endless
list of factors which might only have a limited influence on the industry.(Keegan,2005)

2.18. Stakeholder mapping


Identifies stakeholder expectations and their respective power. It basically determines each
stakeholders expectations and how much power they have to reinforce their respective
interest. It helps to analyze which stakeholders should be repositioned and whether this is
feasible. “Stakeholder groups are not usually homogenous, but contain a variety of subgroups
with somewhat different expectations and power. Power is the ability of individuals or groups
to persuade, induce or coerce others into following certain courses of action” (Scholes 2002)

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Business Dissertation Andreas Hirschbrunn

2.19. High and low context cultures


“Low context cultures rely on spoken and written language for meaning. The senders expect
that the receiver encodes the words accurately to understand the intended message. High
context cultures use and interpret the elements around a message.”In high context cultures the
social importance and knowledge of the person add extra information and will be perceived
by the message receiver”. Vice versa the sender in a high context culture will expect the
receiver to decode in the same way.

2.20. The contextual continuum of differing cultures

HIGH

Chinese

Arabs

Spanish
Context
North-Americans

Germans

Swiss
LOW

Messages HIGH

At one extreme are the low context cultures of northern Europe and on the other end are the
high context cultures of the Arabian and Asian world. “The greater the context differences
between those trying to communicate, the greater the difficulty in achieving accurate
communication”. The relation between agents and their networks is critical for the success of
operations in high context cultures. , (Solberg, 2002)

2.21. Hofstede four plus one dimensions model


This model will enable the author to identify familiarity with the most pervasive cultural
differentiators (Hollensen, 2002). The strengths of the model are that it is based on a sample
of 116000 employees; the four dimensions make significant comparisons between national
cultures and dig deep into cultural values. The main weakness of the model is that it is limited

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Business Dissertation Andreas Hirschbrunn
to national territory, neglecting the fact that one country might have a variety of different
cultures. Besides this Hofstedes model is based on one industry. Besides this the definition of
the dimensions might be different from culture to culture. An other limitation is that the
model neglects entrepreneurs and focuses on the corporate world.

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Business Dissertation Andreas Hirschbrunn

3. Research Methodology

3.1. Research question


All research starts with a question to be answered. It was imperative to ask this question in a
clear and objective way. However, during my research this question was expanded, modified
due to the exploratory nature of the research. The final research question is

Investigation into the Mercedes Heavy Duty Truck operation in the Chinese commercial
vehicles market: Is exporting outdated and is the proposed international joint venture with
Foton an adequate market entry mode to overcome Socio cultural and legal barriers?

3.2. Research design


Extensive primary and secondary data will be gathered and used to analyse the findings and
compare and evaluate these results with the literature review. Different research approaches
will be used depending on the specific area of the dissertation. Finally this will enable me to
establish a conclusion and answer to the research question.

3.3. Research Philosophy


In the following paragraphs the author will analyse the different research philosophies and
determine which one of them is most suitable to answer my research question. No
philosophical research approach is better or worse, but some are more suitable to answer the
research question then others.

3.4. Positivism
This philosophy is also referred to as the traditional scientific approach to research (this
approach is very useful because it is a very objective way to conduct research with
quantifiable data. A positivist researcher will use a “highly structured methodology” to
enable exact replication of the research (Saunders 2003). It leaves no error margin because it
is supposed to be done in a “value free manner” and is therefore extremely reliable in
theory(Saunders,2003).Positivism is criticised for leaving a very low possibility for errors, it
assumes that the data accumulated is completely valid and neglects the business
environments subjectivness. Both can have a significant influence on the research outcome.

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Business Dissertation Andreas Hirschbrunn
I will limit the use of positivism because of the low availability of objective resources from
Foton and the dynamic macro environment of the Chinese economy. The analysis of the
situation in a cross-cultural joint venture is subjective. Therefore little use of positivism will
be made in this dissertation.

3.5. Interpretivism
This philosophy is the opposite of positivism. It advocates a more subjective approach to
research. It believes that the world, in particular socio-cultural issues cannot simply be
analysed with an objective approach. The advantages of interpretivism are the subjectivity
which focuses on the different interpretations of a business research. Depending on
experience and background these might differ substantially. On the other hand interpretivism
might ignore the relations of power, because an interpretist does not aim to explain the topic
in terms of laws or institutional structures.

A high proportion of this dissertation is based on the interpretation of authors, other


researchers and in particular personal primary data collected from interviews with respective
management. This type of data cannot be quantified. Therefore the author will mainly use
interpretivism, because of the complex nature of a Joint Venture.

3.6. Realism
Saunders defines it like this: “the essence of realism is that what shows us as reality is truth”
(Saunders, 2003) Realism must be divided into critical and direct realism. Realists belief that
researchers can only understand situations if they analyse the macro environment of society,
in particular the social structures. Generally speaking human beings are far too complex to be
studied in a purely scientific way. My report is based to a large extent on interviews. This is
the reason why a subjective view must be taken as well. To a certain extend realism is a
mixture of positivism and Realism. In this dissertation the author will apply a variety of
research methodology

3.7. Deductive approach


In this approach a research strategy is used to test the validility of the developed theory or
hypothesis. Deduction is linked to positivism, because it is a generalisation. As this
dissertation is more interpretivism and as this approach does not allow for alternative
explanations. Deductivism will not be used for this dissertation.

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Business Dissertation Andreas Hirschbrunn

3.8. Inductive approach


Being the opposite of deductivism theory arises from the collected data and not the other way
around as in the deductive approach. Inductivism relies on data which is qualitative and
subjective. It allows the researcher to adjust the emphasis of the research during the process
(Saunders, 2006)

For this dissertation mainly interviews and qualitative data have been the main sources to
establish a theory. Therefore an inductive research approach has been selected by the author.

3.9. Research Strategy


This section will explain the applied research strategy used to answer the research question.
This research was focused on exploratory studies. There are three different ways to conduct
exploratory research:

 Interviews of experts, to guarantee quality.

 Adequate literature

Exploratory research is highly flexible, allowing the researcher to start from an open minded
and broad perspective, change and adapt the direction from there onwards as new insights are
found. (Saunders, 2006)

3.10. Data Collection Methods


I will carry out interviews with three German executives from Daimler about the Joint
Venture. One interview will be done with a corporate solicitor to determine the legal
environment.

3.11. Analysing Data


The literature review will be the foundation of my interviews. Thereafter the primary research
will be fused into the analysis with respect to the literature review carried out beforehand.
The analysis will enable me to derive a conclusion and recommend solutions for problems
which might exist in the Mercedes-Foton Joint Venture.

3.12. Credibility of research findings


The literature to be used for this dissertation will be from respected business journals,
academic research papers and business books. The credibility will be enhanced by the use of

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Business Dissertation Andreas Hirschbrunn
contemporary writers which include the latest research into their work. The primary
researches quality will be guaranteed by the quality of managers interviewed. Tatiana Turck
is the director of corporate controlling for the Daimler holding. She used to be in charge of
strategic planning in the Chinese market until November 2006. Thomas Doering is the
director in charge of the strategic planning commercial vehicles division of Daimler. He is an
expert of the Joint venture and has accompanied the negotiations for the last five years. Dr.
Wolfgang is a recently retired personnel director whom I interviewed for cultural and HRM
issues. Dr. Moritz is a corporate trade lawyer who specialized on Euro-US transatlantic
contractual negotiations.

3.13. Reliability
Although my interview partners are experienced professionals in the segment, they are
human and therefore subjective. Besides there are compliance issues which will prevent my
interview partners to address problems freely. I will try to circumvent this via detailed
questions and guided interviews.

3.15. Research Limitations


The research is based to a large extend on primary research. The availability of secondary
data for this specific joint venture was very low. This is most likely because of the early stage
the joint venture is in and the secretive manner in which such strategical operations are
conducted.

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Business Dissertation Andreas Hirschbrunn

4. Findings-Section II
In this section the author will apply a variety of business modules via the use of the primary
data acquired during the interviews. The result of this section shall be used to derive
appropriate recommendations in concordance with the literature reviews background.

4.1. Exporting
For the investigation it is necessary to analyse the entry mode strategies for their suitability
and determine the advantages and disadvantages of the current strategy. This part of my
investigation will identify the reasons as to what extent a change of the market entry mode
strategy is necessary.

The exporting mode which is currently the only way Mercedes serves the HDT segment in
China has various advantages and disadvantages which will be analysed. Centrally
manufacturing enables producers to make full use of economics of scale; the additional
quantity of products exported into other markets (Henessy, 2001) like china enables a
marginally high profitability of the exports as volume is simply added to the existing
production facilities in Germany(Noonan,1996).

Mercedes uses direct exporting in collaboration with local distributors. These distributors are
either tradesmen who sell directly to the customers in spot businesses or they own multiband
saloons in which they present and sell the Mercedes truck range (Doering, 2007).

In the next section it will be analysed how effective these channels are.

4.2. Spot business


Spot businesses are carried out on the spot; basically they are a onetime transaction between
the seller and buyer. One example is a Chinese trade delegation which travels to Germany.
On their trip together with politicians they meet a German delegation which includes a
Mercedes representative. A deal is set up and the transaction is made resulting in the delivery
of the trucks. However this is an exception, in 80% of the sales independent Chinese
tradesmen negotiate the deal and sell the product (Doering, 2007). They are aware that the
key to their continuous success is being a good middleman. But they do not transmit the

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Business Dissertation Andreas Hirschbrunn
customer information to Mercedes. Most likely cause they are afraid of losing future business
once Mercedes established a close relationship (Doering, 2007).

Due to the simple nature of the transaction and the complexity caused by the middleman
there is almost no way to implement contemporary strategies such as relationship marketing.
(Doering, 2007)

4.3. Distribution
There are currently five saloons selling the HDT line of Mercedes. Sadly their core business
are the vans and MDTs. As described beforehand the most profitable segment is dominated
by spot business and respectively of the middlemen who dominate this market (Doering,
2007). Not even the distributors have a permanent relationship with the buyers. During the
interview the enquired how this could be possible, because you would expect customers to
have their maintenance done at the mechanics enclosed into the distributor. The answer was
that it is a homemade problem, because of the nature of the product and the included sales
and infrastructural barriers (Doering, 2007). Due to only having five repair shops Mercedes
early on offered the flying doctor service known from the outback in Australia. The only
difference is that they are not using planes. They are located at strategical positions in the
golden triangle. Once needed they are on site in a matter of a few hours (Doering, 2007).
These people have personal contact with the driver, but not the owner/repurchaser. The
second problem is more of an infrastructural problem. The sheer size of the country in
combination with the enormous complexity of an actros leads Mercedes to the principle of
selling a mechanic together with the trucks (Doering, 2007). Certainly not one mechanic a
truck. However large customers, which the actros customers usually are can send a mechanic
to Germany where he receives a 10month long training and returns to service the trucks for
their product lifetime. (Doering, 2007). So basically the largest customers don’t need a direct
line to Mercedes anymore because they have an in-house mechanic with all the necessary
equipment.

Successful marketing depends on the viability of the relationship between the company
exporting and the local distributor and/or importer (Henessy, 2001). In the next section the
author will assess the relationship between Mercedes and the intermediaries in China.

The regulations and obligations are against marketing objectives. For instance the sale of
Mercedes trucks in multi brand saloons is negative in regards to the separate identity of
Mercedes (Kotler, 2006). On the other hand there is given proof that competitors cut their

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Business Dissertation Andreas Hirschbrunn
margins and give higher commissions to the multi brand dealership (Turck, 2007). This
practice encourages the dealerships to over sell a certain brand due to the higher profit margin
achieved, whilst neglecting the sale of other brands in the saloon. This is a legal practice and
can only be tackled via matching the offered commissions. The problem is that this is done
secretly (Turck, 2007). Therefore it takes time and the in-depth analysis of sales figures to
realize the competitors advance. An intermediary with integrity would at least inform
Mercedes of this situation and offer them the chance to match it (Turck, 2007). The Chinese
partners of Daimler do not adhere to this part of western business culture.

The European and North American automotive distribution intermediaries are in an awkward
situation. Customers demand discounts whilst the producers reduce commissions (Doering,
2007). Their margins are shrinking and the main revenue is generated from repairs and
maintenance, not from the actual sale. Chinese distributors are overpowered due to the
partnership agreements necessary to open up a business. Therefore the control asserted by
Mercedes on its distribution partner is rather limited. Mercedes is seen to be rejective of
distributor’s demands and there are a few problems which have aroused in the past and will
continue to happen if the Chinese government is not willing to implement an objective and
fair legal system (Doering, 2007). For instance a distribution partner has apparently dumped
Mercedes for another brand with a completely unreasonable justification, although the
contract in place was supposed to be running for another three years (Doering, 2007).
Mercedes did not even try to take its former partner to court as they analysed the chances of
winning as to low, in particular together with the possibly generated negative publicity and
almost certain unwillingness to pay compensation from the former JV partner. This is
certainly an exception and not the normal business practice, but it happens in a significant
quantity Mr Doering did not want to specify due to confidentiality issues.

4.4. Determine the export modes viability


The situation with the Chinese intermediaries is not satisfactory. Besides this the sales figures
of on average 1500 units per year (2002-2006) have not increased. The markets value is
estimated to be 500 000 trucks for the next three years (mercer, 2006). The Mercedes market
share is small and there is no way to capitalize on the future demand of the Chinese market.
Exporting is therefore outdated, at least in the existing format. Although there are various
problems with the exporting mode it should be continued under any circumstances as there is
demand for the Mercedes Actros line and production capacity in Germany which needs to be

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Business Dissertation Andreas Hirschbrunn
filled (Turck, 2007). Mercedes rather seeks a strategy to enhance its position in the Chinese
market and to get a larger share of it via a different entry mode.

4.5. The wholly owned subsidiary


Wilson and Brennar researched this method and came to the conclusion that it is unsuitable
due to the limitations posed by the language and cultural barriers. Besides this Wong points
out the importance of “Quanxi”. Mr. Doering agreed with this thesis and in particular with
the quanxi problem. Out of his perspective a wholly owned subsidiary is absolutely
unsuitable and does not enable long term growth and a serious increase in market share. He
pointed out that such an approach could even worsen the already mediocre relations to the
active intermediaries resulting in a decrease of the sales figures. Besides this the
establishment of a wholly owned subsidiary would be very expensive and risky (Doering,
2007). In particular because of the bureaucracy and regulations. Mr.Doering expressed strong
concerns about the willingness of the government to allow a wholly owned subsidiary.
Theoretically they would allow it, but practically they would cover the operation in so much
red tape that the process would be delayed for a substantial amount of time (Doering, 2007).

4.6. Quanxi is the term describing a system in which social networks determine business
success. It is a favour doing system. The longer people have been involved with each other
the more trust they share. Quanxi is essential for Chinese businesspeople, building it up takes
a lot of time and patience. It is very difficult to be obtained by foreigners. In particular as
bribes are not possible anymore due to corporate social responsibility regulations Mercedes
accepted to adhere to. (Turck, 2007)

4.7. Foreign Production

4.7.1. Licensing
A company assigns the right to a patent (products, technology or process) or a Trademark
(which protects the name) to another company in China for a fee or royalty. The advantage is
that Mercedes could gain market share without equity investment (Henessy, 2001). This
method is unsuitable due to the complexity of the product and copyright issues. According to
Mrs.Turck an actros truck is far too complex; besides this she was concerned about the
copyright as there is no protection of intellectual property in china. At least not as in the
United States or Europe. Therefore Licensing is not a viable option.

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Business Dissertation Andreas Hirschbrunn

4.7.2. Franchising
This option is not possible due to the product nature. Franchising might be appropriate for
food or cosmetic chains, but in the automotive sector they make less sense.

4.7.3Local Manufacturing
Contract manufacturing and assembly could work in theory as long as the owner of the plants
is Chinese, however as analysed beforehand the complexity of the product as well as
copyright issues are against this entry mode. The Full-Scale integrated production requires a
substantial investment (Henessy, 2001). Mr. Doering identified a missing supply chain as the
main problem to establish this type of local manufacturing.

4.8. Analyse whether the IJV is the most suitable market entry mode
for Mercedes
The exporting mode is convenient to fill the productions capacity with a fairly low risk.
Various problems with the Chinese intermediaries and the wish to profit from the strong
demand of Chinese customers call for a new strategy to conquer a larger share of the market.
The wholly owned subsidiary and the foreign production entry modes are not suitable due to
the complexity of the product, copyright issues and the political framework of the P.R.C...
The main factors opposing the wholly owned subsidiary are the Cultural barriers, in particular
the language and “quanxi”.

4.9. Which type of a joint venture in which strategical context?


The only option left is a Joint Venture with a Chinese company. Besides being the only
option left it has special characteristics which are favourable for Mercedes. Other points are
unfavourable. In this section the author will analyse the Joint venture framework for it s
suitability for Mercedes.

Parent Firm A Parent Firm B

Joint Venture C
Chart adapted from Hollensen

There are three major types of joint Venture. In an upstream based JV company A and B
collaborate on Research & Development. They might include production as well (Hollensen,

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Business Dissertation Andreas Hirschbrunn
2006). This type is not suitable for Mercedes as they do have upstream competences
(Doering, 2007), but according to Mrs Turck there are no suitable upstream partners available
in the Chinese market. In a downstream based JV company A and B collaborate on
marketing, distribution, sales and service. This type of Joint venture is unsuitable for
Mercedes, because the Actros line in itself has a “product mix” which is yet unsuitable for the
H.D.T. mass market in China. It is too expensive in production. Therefore Mercedes seeks an
upstream/downstream coalition in which company A and B carry out complementary tasks.
These three types of joint venture are according to Mrs. Turck not possible in the Mercedes
practice.

Collaboration possibilities for company A and B in the Value Chain

Upstream Downstream

1 3 4 2

Upstream Downstream

Adapted from Hollensen, 2004

X and Y Coalitions

According to porter, 1986 1 and 2 are y coalitions where partners share one or more value
chain activities. In the short run Mercedes wants to build up a joint production and share
technology with its Chinese partner. In the long run this collaboration shall be extended to all
areas of the value chain (Turck, 2007). Points 3 and 4 represent an X coalition in which value
chain activities are divided amongst the partners focusing on the respective core
competences. In the short run Mercedes will provide most of the R&D know how whilst the
Chinese partner does the marketing of the joint product. (Tuerck, 2007)

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Business Dissertation Andreas Hirschbrunn

4.10. Porters five forces Model applied

Bargaining power of suppliers:

Fairly low as the components of a Foton are easy to copy, besides this there is no intellectual
property to speak of which would enhance the level of bargaining power. An other factor is
the fragmentation of the supplier industry.

Potential Entrants

Can be described as fairly low as the Chinese government sees Foton/Beiqi as some sort of
national champion. Besides this the automobile industry needs economies of scale and the
capital requirements to enter the market are fairly high, something a new entrant couldn’t
achieve at least initially. Therefore the threat of a new Chinese competitor is rather low.

Substitutes

The substitute is the railway system. China is investing strongly in the rail work network
(anderlini, 2007). The threat is low.

Buyers

The Chinese customer is spoiled by choices. However they are not very differentiated and the
demand for trucks is expected to grow significantly. Therefore their power is medium.

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Business Dissertation Andreas Hirschbrunn

Competitive rivalry

At the moment the industry growth rate is solid enough, therefore competitors see less need
to take market share of each other. The high fixed costs of the automobile industry make
capacity fill a prerogative which therefore leads to more competition. The main reason for the
Joint Venture is the competitive rivalry, because each Chinese truck corporation is either in a
joint venture with a foreign investor or plans to do so in the proximate future. Volvo and
MAN-Scania have already entered joint ventures and thereby increase the peer pressure on
Mercedes which has been last in a JV (Reuters.com, 2006). The competitive rivalry is high.

4.11. SWOT Analysis of the Joint Venture between Foton and Mercedes.
Strengths (Doering,2007) Weaknesses(Doering,2007)

 Guanxi  Production
 Finances  Organization
 Product Development  Double management/Culture
 Legal conflicts
 High Staff turnover
Opportunities(Turck,2007) Threats(Turck,2007)

 Finally exploit synergies  National Champion policy is


 Become domestic leader in the dangerous for the JV’s as
H.D.T segment. producers with no foreign partner
 Export the joint product globally are subsidized by the state.
 Competitors could advance at a
faster pace and be the first to
drive a global expansion with a
Sino foreign product.
The JV is in its initial phase. Therefore the analysis has shown significant problems in the
micro environment. The craved synergies are not yet in line of sight. This SWOT is simply
there to give the validility for the following value chain analysis.

4.12. Key Drivers of change for the Chinese automotive industry


These two drivers will shape the Chinese automotive industry in the next decade. They have
been derived from the PESTEL analysis in appendix number1 and Porters five forces model.

Enhancing the quality to compete not only locally but globally with products which are
adapted rather than standardized. This process is instigated by both the local Chinese
competitors as well as the foreign companies investing in China.

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Business Dissertation Andreas Hirschbrunn

Government objectives to establish national champions will conflict with the aim to
rebalance the slowly overheating economy via fiscal and monetary measurements. The
governments influence is and will continue to be very dominant in every aspect of the
Chinese automotive business.

4.13. The Partner selection


To manage these key drivers of change there is a strong need to select an appropriate partner
to work together with. The change faced by both foreign and domestic automotive companies
is a driving force to engage into a joint venture.

The Chinese partners for a joint venture are limited, in particular considering that Mercedes
main competitors Man Scania and Volvo (Reuters, 2007) have entered into the market at an
earlier stage. Thereby they have limited the choice for Mercedes down to Foton. Foton is part
of the Beiqi group with which Mercedes already produces C and E class sedans. In the next
paragraphs the author will analyse how Foton and Mercedes fit together and what they expect
from each other.Hollensen used this factors as the main driving forces for IJVs. In practice
they are split like this:

Foton desires Mercedes “Strategically critical manufacturing capabilities”, its


“brand/reputation” and “financial support”. Mercedes desires Fotons “Sales expertise”,
more specifically the distribution network. Besides this Mercedes has a strong interest into
the “low cost production facilities”, in particular the low labour costs. Finally Mercedes
wants to gain “market access” which is only possible via a Chinese partner and profit from
Fotons China “expertise”.

More specifically both partners have needs which they hope the other partner could fulfil
(Yang and Lee)

Factors Mercedes needs Fotons needs


Advanced Promote the use of its superior Introduce new technology and upgrade
Technology technology whilst protecting its current products and processes
intellectual property.
China’s market Overcome Market barrier posed by Increased demand from continuous
cultural forces and Increase Market growth
Share
Labour resource High skilled labour with low cost More employment and job

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Business Dissertation Andreas Hirschbrunn

opportunities
Capital resource To diversity its global investment More capital to improve facilities and
portfolio. technology upgrades
Information Establish itself in the Chinese market Need connection with global business
Channels network
Global alliance A partner in China and operations in Globalization expertise
other emerging markets
Incentive policy Gain tax- and other governmental Support from governmental incentive
incentives policies
Global Market Expand more deeply into the Chinese Enter international market and start
market and improve competiveness competing on a global scale.
Reduce risk Diversify Investment and share Improve management system and
potential financial risks reduce investment risk
Profit Expand the share of the Chinese Experience fast growth and profit
market and increase profit recapitalisation

Foton needs substantial investment into its production facilities (Turck, 2007). It needs to
enhance its existing product range with new technology and it wants to improve its
management applying adequate strategies to compete on a global scale (Turck, 2007).
Mercedes needs to enlarge its market share in the Chinese market, due to various factors
identified in previous sections there is a need for a partner with the distribution system, low
cost labour and expertise in the Chinese market. Mercedes primary objective is to
successfully enter the local market, whilst Fotons key objective is the restructurisation of its
operations. Both have in common that its competitors who are doing the same assert a level
of pressure to do likewise.

4.14. SWOT of Mercedes H.D.T.


This analysis will clarify the Mercedes heavy duty segments internal environment and how
they are prepared to meet an externally changing environment with regards to the key drivers
of change and the competitor’s analysis.

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Business Dissertation Andreas Hirschbrunn
SWOT of the Mercedes H.D.T in China

Strengths(Doering,2007) Weaknesses (Doering,2007)

 Financial resources  No Guanxi


 Product Development  No production facilities
 Reputation/Quality/Brand  Limited knowledge of the market.
 Import reliant

Opportunities(Turck,2007) Threats(Turck,2007)

 Use the financial resources  Staying a niche provider, limited


together with the reputation to to roughly 1500 units a year,
find a suitable Joint Venture whilst the competition closes in
partner whose competences have on the gap to the premium
the opportunity to erase segment and ultimately drives
weaknesses such as Guanxi and Mercedes out of the Market.
the market expertise.

4.14. SWOT analysis of Foton


Strengths(Doering,2007) Weaknesses (Doering,2007)

 Guanxi  Product development


 Chinese market expertise  No global experience
 Distribution Network  Limited Financial resources
 Expertise in low cost production  Limited Managerial Skills, in
of standardized vehicles. particular in marketing.

Opportunities(Turck,2007) Threats(Turck,2007

 The focus on standardized


 Export to markets with similar products might not fulfill the
conditions and demand as the expectations of the Chinese
domestic market, such as India. customers growing sophistication.
 Recruit foreign personnel to  Right now the Chinese domestic
institute change and overcome the market with its double-digit
problematic weaknesses. growth is an excellent
marketplace. However if the
Chinese economy is hit by a
slump this exposition to one
market will cause serious
problems.
 Competitor’s Joint venture
operations could give them a
cutting edge and synergies which
in the long run outperform Fotons
domestic operation.

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Business Dissertation Andreas Hirschbrunn

4.15. Foton and Mercedes analysed with the Value Chain


Now that the reasons for a joint venture have been explained and compared to the
expectations the author will analyse the suitability of both companies for a joint venture.

The aim of the HDT group is to collaborate on both up and downstream activities, in
particular in the long term strategy for the Chinese market and the expansion thereafter into
markets such as India and Russia. (Turck, 2007). However in the short run they will have an
asymmetric relationship where Mercedes takes significant influence in the production
processes and provides the technological knowhow, whilst Foton distributes and assembles
the product. For the next five years the Value Chain would look like this if each partner sticks
to his core competences. This value chain demonstrates the initial phase.

4.16. Value Chain of the Initial Phase


This is the start phase where initial objectives of the business plan are realized. As it marks
the beginning of the relationship it will be very difficult to fuse a new culture out of the two
existing ones. Therefore the operations are limited and parent company specific.

Minor influence Minor influence


State of the art in the in Global After Sales
high R&D production marketing Service

Local know how Low cost base Distribution Minor influence


of the Chinese production network due to Chinese
market specifics facilities production market specifics
and learning facilities

Besides this there are Support activities such as HRM, which is rather underdeveloped in the
first stage due to the cultural diffusion. The firm infrastructure will not be joined as the main
production facilities of Foton will be used while a new plant is built (Doering, 2007). The

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Business Dissertation Andreas Hirschbrunn
technological development is limited to motor technology, not the whole product. The
procurement will be dependent on the organizational planning. (Doering, 2007)

This value chain shows that the planned initial phase will be an X-coalition where each
partner focuses on his core competences whilst learning from each other. The final result will
be a new product in the H.D.T. segment. A Foton Amuna truck with a Mercedes motor which
is qualitatively similar to the Actros yet far cheaper and with low cost components. An area
which will be targeted directly is the Sales and Service sector where Foton seems to have the
largest deficits. In particular as a Mercedes motor will be impossible to be repaired by
unqualified staff. The decision to supply Foton with Actros similar motors, but not the
original derives from the fact that they too complicated and expensive in production. Besides
this there are copyright concerns and the mutual trust is not yet established to such a high
extend.

4.17. Second Phase Value Chain


In the second phase the value chain will change significantly as Mercedes wants to assert
more influence on the joint operation

State of the art High tech Global


high production marketing After Sales
technologyR&D methods expertise Service

Local know how Low cost base Distribution Minor influence


of the Chinese production network due to Chinese
market specifics facilities production market specifics
and learning facilities

In the second phase the joint product will be enhanced significantly. Expertise in other fields
of R&D will be shared with Foton and incorporated into the product. According to

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Business Dissertation Andreas Hirschbrunn
Mr.Doering these will incorporate modifications necessary to enhance the performance of the
trucks. Due to confidentiality issues he would not specify them to the author. However the
idea is to basically create a whole new truck instead of supplying motors and building them
into the “Amuna”. This new product shall be the key to conquer the Chinese market and
expand the joint operations to markets with similar demands such as India and Russia
(Doering, 2007). To succeed with this they must improve the production methods
significantly whilst still maintaining the low cost basis. Therefore Mercedes will improve the
value chain via improving the production methods with adequate technique and processes
(Doering, 2007). On the other hand they have to improve the marketing, which lacks
significantly, in particular for the global expansion wished for by Foton. Besides this a joint
new product needs significant alterations to the marketing mix to succeed. The firm
infrastructure will be enhanced significantly through the joint new plant. The procurement
will be better due to the introduction of principles such as just in time management (Doering,
2007).

In the third phase Mercedes will exchange non technical know how to improve the whole
operation in exchange for more influence (Doering, 2007)? Whether this influence is
tolerated will depend on the stakeholders involved.

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Business Dissertation Andreas Hirschbrunn

4.18. Stake holder mapping


The suitability of Foton and Mercedes is given, now the stakeholders will be analysed to
determine what influence they have and to determine their key concerns

High power

Keep Satisfied Manage Closely


Main board Senior management
team
Chinese
Government/Major
Shareholder
Workers congresses
Financial Markets
Employees
Major suppliers

Suppliers

Large shareholders

Bond holders
Media

Small shareholders
Monitor Keep informed

Low power/interest
High Interest

Low power and interest

The small share- and bondholders of are no influential stakeholders as the operations scale is
limited seen in contrast to the corporate activities of the parent company. The Chinese side
has only one shareholder, the Chinese government; the influence will be discussed by the
author separately.

High power and low interest

The financial markets do not expect much from china joint ventures, as the past failure rate
has been high.But if significant company resources are employed into a continuously loss

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Business Dissertation Andreas Hirschbrunn
making operation they could react by downgrading ratings and other measures which have a
strong effect.Therefore Foton-Mercedes must keep them satisfied.

Low power and high interest

Large shareholders, the media and suppliers have a higher interest, but their power is
limited. In particular the Chinese media which is controlled by the government. Suppliers
only have power if they own unique intellectual property (Dr.Moritz, 2007). However due to
the simple nature of the product and the low level of legal copyright protection they have
only a limited short term power. In terms of enhancing the relationship Mercedes-Foton must
keep them informed.

High power and high interest

Major suppliers are in this group as they are not as easy to replace as the small ones due to
the extent of the operation. Therefore they can assert pressure on management and must be
managed closely. Employees are a very interesting group as they are the backbone of the
joint venture. Therefore the success depends largely on them. However as the core part of the
employees is Chinese it will be very interesting how they work together with the Mercedes
staff. The author will discuss this topic separately later on in the text. The Main Board of
Daimler is supervising and controlling a lot of operations which are more important then the
china joint venture (Dr.Wolfgang, 2007) as it is in the initial stage. However should it
succeed and the planned global expansion of Foton-Mercedes works out this might change.

The Chinese government/76% shareholder has the highest interest and power in this
operation. This is underlined by the fact that the whole Chinese senior management are either
party officials or involved with it (Turck, 2007). Although the liberalisation driven by the
WTO membership should limit the governments influence in theory at least. This is not the
case; the Chinese government influences the business in a decisive way. Even now after the
joint venture agreement there are daily changes and amendments to the existing contracts
which are directed by mofcom, party officials and other regulatory bodies (Turck, 2007).
Even decisions by senior management are reversed as terms of them do not suit the
regulators. This environment is harmful to the whole operation and the resulting process
delays are harmful to the whole joint operation (Turck, 2007).Therefore a repositioning of
this stakeholder into the keep informed segment is desirable, yet not possible due to the
ownership structure.

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Business Dissertation Andreas Hirschbrunn

4.19. Ministry of foreign commerce


The ministry of foreign commerce (Mofcom) is the single regulatory body which makes
business in china complicated. It covers both the domestic partners and foreign investor into
red tape and a bureaucracy of immense dimensions (Turck, 2007). Contractual negotiations
are worth nothing until a government official from mofcom has accepted them (Turck, 2007).
In roughly 90% of all cases they demand alterations, which are usually in Chinese favour.
The main problem is the time lost, even more so then the unfavourable terms amended.
Mofcom makes even simple negotiations fairly complicated.

4.20. Legal System


This is the view of all the interview partners: The law is against the foreign investor and the
Chinese partners know that they can rely on the government’s legal aid
(Turck,Doering,Dr.Wolfgang,Dr.Moritz,2007). The main problem is that the legal system is
the backbone of an economy. It is the guarantor which reinforces mutual confidence into the
fairness of the business(Dr.Moritz,2007)Certainly there are always contractual terms in
favour of one or the other party, but these terms are written in stone and can be reinforced in
court. This is even the case in bilateral legal disputes (Dr.Moritz, 2007). For instance the
French law is different from the Spanish or German law; however they are all based on the
Roman law foundation which holds up the same principles (Dr.Moritz, 2007). The English
and American law systems are matched by the Indian law which has been implemented
during colonial times and is highly appreciated in the Indian society for its reliability and
fairness (Dr.Moritz, 2007). Both the roman and case law are reasonably fair based on logic
and the past. Although there is a fair bit of protectionism involved, in particular considering
industries of strategic importance it is overall fair and a foreign investor will be treated fairly.
It is a matter of national interest and part of being an evolved society to entitle both the
foreigner and domestic citizen with a reliable legal system. On the contrary the Chinese legal
system is like every official body closely involved with politics. Chinese entrepreneurs have
close relations to politicians, otherwise they wouldn’t even get the permissions and
concessions to do business (Dr.Wolfgang, 2007) Mercedes is exposed to this system in both
the popular copyright violation cases and smaller legal disputes with the distributors (Turck,
2007). This is extremely annoying in particular with respect to the property rights issue. The
legal systems problems will become dramatic once the joint venture operation should enter
into a problematic change phase in which bargaining power shifts and initial contracts are
doubted and questioned by the respective parties.

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Business Dissertation Andreas Hirschbrunn

4.21. The challenges of the Joint Venture


As identified in the value chain there are brilliant opportunities for this Joint Venture. In
particular the third stage and its global expansion. The problem is that Mercedes, although
being the minority owner with 24% wants to assert significant influence on the Chinese
majority partner. This is wished for to a certain extent to modernize Foton, but the success
will depend largely on the way change is implemented. A unique challenge thereby is to
overcome the immense cultural barriers between the partners. This section will provide the
reader with the key differences between the cultures.

4.22. Cultural Poles


Mercedes and Foton delegations communicate only via translators, even if the Chinese speak
English they prefer this method to avoid uncertainties. (Turck, 2007) This form of
communication is not only time consuming but also very uninteractive and therefore
impersonal. The manners and customs are completely different from each other. Even long
term expatriates face difficulties with the diffusion of the Chinese culture (Dr.Wolfgang,
2007). The same likewise for the Chinese side confronted with the western culture. Due to
the fact that the Chinese managers come from a rather political background there are lacks in
managerial knowledge as it is applied by the western delegations (Dr.Wolfgang 2007). This
gap is responsible for mistrust and miss communication. Further enhanced by the fact that the
Chinese side has a collectivistic approach whilst the Mercedes delegation has an
individualistic background. This means that even after month long discussions there is no
mutual trust between the delegations. This is the main reason why the JV negotiations took
up a total of five years before the final signing (Turck, 2007).

4.23. Hofstedes 4+1 dimensions model


The way people in different cultures interpret their world varies along four plus one
dimensions:

Power Distance

China has a high power distance. The inequalities in between the ones who assert power and
the ones on the receiving end are very high. The ones on the receiving end accept this and
follow orders, the result is that decisions are made by a few and the autonomy level of mid
management is fairly low as they have to double check everything with top management
(Doering, 2007).

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Business Dissertation Andreas Hirschbrunn

Uncertainty avoidance

China has high uncertainty avoidance. Individuals don’t want to take risks, because the
punishment for failure is higher then the merits of succeeding. This sharply contrasts with the
Mercedes manager’s sharp and self-conscious use of their span of control (Doering, 2007)

Individualism

The Chinese side demonstrates a high level of collectivistic behaviour whilst the Mercedes
side comes from an individualistic background. The Chinese have a group mentality and they
are interdependent on each other. Hey have high levels of loyalty to their organizations and
the country. (Hollensen.2006)

Masculinity

In masculine societies values such as achievement, performance, success and money exceed
the feminine values such as quality of life, warm personal relationships and preserving the
existing. China has a rather masculine society; however the collectivistic belief reduces the
extent to an acceptable level. (Hollensen.2006)

Time Perspective

This dimension considers the perspective of the future. Long term versus short term
orientation. Principally Asian countries have a core focus on the long run whilst Europeans
and northamericans have a short term orientation. (Hollensen.2006)

Considering these cultural differences there is a tremendous task ahead to manage this joint
venture and to implement change.

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Business Dissertation Andreas Hirschbrunn

4.24. Analysis of 100 cross regional JOINT VENTURES


A clear cultural impact can be seen for cross-regional projects

Japan

XXX XXXXX XXXXXXXX8 XXXXXXXXX


9
Europe

XXXX XXXXXXXXX XXX XXXX


XXXXX
XXXX
XXXXXXXXX
America XXXXXXXXX
XXX XXXXXXXX XXX XXXXXX
27
XXXXXXXXX
China
XXXXXXXXX
XXX XXXXXXXX9 XXXX
XX21

Africa

XXXX XXXXX XXXX XXXXXX

Africa China America Europe Japan

In this internal paper the failure quota was analysed. 40 out of 100 euro-sino joint ventures
and 48 out of 100 US-Sino joint ventures collapsed in the first three years. European and
Chinese Joint Ventures have a very high collapse quote. There are no apparent problems in
between sino-japanese operations. Interestingly enough there is fairly high quota of collapsed
joint operations in between the Japanese and American/European partners. The largest the
cultural difference, the larger the collapse quote.

4.24. The H.R.M department’s problems in creating one culture


The author has analysed the various cultural aspects and identified the key problems. The
HRM department’s mission is to diffuse and provide solutions for them. However in practice
the department faces problems and constraints which will be analysed in this section.

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Business Dissertation Andreas Hirschbrunn

4.25. Personnel
Training personnel is extremely expensive and time-consuming. The cultural factor is the
most complicated aspect as there are rarely people experienced in modern sales techniques
(Dr.Wolfgang, 2007). The training of a German sales representative is done in 3months time.
Including a few short courses and practical experience in the saloon (Dr.Wolfgang, 2007). In
china the situation is different. Training is far harder and longer. It takes up to a whole year
before a sales representative meets the Mercedes standard expected by both the company and
customer. The situation worsens when looking at car mechanics. Quality cars need quality
mechanics. The educational level in the west is not yet matched in China (Dr.Wolfgang,
2007). Potential car mechanics are an investment which takes up both time and money. The
worst thing is something observed by Daimler in the past two years. Experienced mechanics
and sales representatives are lured away to other European or American competitors with
more attractive sales packages (Turck, 2007). Thereby the unnamed competitors save
themselves the time and money needed for training. This strategy strengthens the competitor
whilst weakening Daimler. Another serious problem which is interlinked to the low level of
loyalty is the salary policy. Only minor wage increase offers from competitors or the
knowledge of colleagues who earn more cause disloyalty. The Chinese workforce will either
take any competitor’s offer which is slightly higher or demand increase of salary without any
justification (Dr.Wolfgang, 2007). At Daimler the Chinese senior manager in charge of
competitor analysis left the company from one day to the other without even mentioning the
reason or giving Daimler the chance to match the competitors offer. She did this after seven
years in the company, where she was according to Dr.Wofgang extremely satisfied. The low
level of loyalty is a serious problem both in the white collar and to a certain extent in the blue
collar sector as personnel know how is lost to the competitor and all the tangible and
intangible investment into the person is gone forever(Dr.Wolfgang,2007).

4.26. Recruitment
There are two key problems with the recruitment. First of all there is a shortage of qualified
managers and workers (Dr.Wolfgang, 2007). This is the result of the under deployment of
higher education in the P.R.C. and the long term result of the damage inflicted by the cultural
revolution initiated by Mao(Tsang,2003). Secondly there is pressure to overstaff the joint
venture due to Marxist/Maoist/communist ideology and their respective government policies
(Tsang, 2003).

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Business Dissertation Andreas Hirschbrunn

4.27. Dismissal and Remuneration


It is basically impossible to fire inefficient staff due to the lifetime employment system
implemented and caressed by the government (Tsang, 2007). There are four problems with
the remuneration; first of all there are tremendous subsidies to be made to the government to
pay for social welfare benefits. Making the labour more expensive then expected
(Dr.Wolfgang, 2007) Secondly there is egalitarianism in place which means that employees
should be paid equally no matter how efficient they are (Tsang, 2003). This is in sharp
contrast to the bonus payment scheme applied in the western hemisphere which gives special
financial incentives to the ones who work the hardest. The next problem is directly
interlinked with this. It is the income polarization between expatriates and Chinese managers.
The Chinese are upset that foreigners earn roughly 10 times more than they do for the same
work. This problem is unsolvable as the expatriates wouldn’t work in china without receiving
as much as they do at home plus the extra financial incentive (Dr.Wolfgang, 2007).

4.28. Labour and Managerial Skills


Some of the Chinese show a low level of discipline and the local managers do not reinforce it
as they are avoiding confrontation (Dr.Wolfgang, 2007). There is a tremendous shortage of
modern managerial skills which seems to be a legacy of the Chinese companies being pure
production facilities (Tsang, 2003). Besides this the Chinese seem to be unwilling to take
risks on an individual basis. This is the result of a culture where there is severe punishment to
be expected for mistakes, whilst receiving little reward for achieving. The group orientation
and decision making processes are another area of concern for the H.R. department as the
processes suffer an enormous time lag. The clashes of the western and eastern managerial
styles are another area of concern. The main reasons for them are the cultural differences
(Dr.Wolfgang, 2007).

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Business Dissertation Andreas Hirschbrunn

5. Recommendations
As analysed beforehand there are two separate cultures at work. The collaborational efforts
are undermined by a “them vs. us” atmosphere. It is necessary to remove this sentiment and
replace it with one joint culture. It is therefore imperative to diffuse both the Foton and
Mercedes culture and provide the employees with a new framework which shall take
influence on their mindset and encourage a new way of thinking. In this section the author
will give practical solutions on how to overcome the difficulties. These recommendations
shall serve as a base on how to implement a joint culture with one identity.

5.1. Recruitment
The Joint operation needs fresh and young minds with a sophisticated education. There is a
strong need for young people as their minds have not yet been pressed into an organizational
framework. The origin of these recruits should be 50/50% Chinese and international. It is
imperative that these recruits have been exposed to various cultures during their formation, as
this will increase the speed with which they adopt to the new Sino-international
organizational culture. The Chinese recruits must be fluent in English, whilst the international
recruits should have at least a basic understanding of mandarin, the official language. These
basic language skills would already underpin the effort made to engage into the Chinese
culture. The practical problem is that this type of graduate is hard to find and that the
international competition for these individuals is tremendous. Resulting in high employment
costs in respect to the salary and a high staff turnover due to competitors offering even better
pay packages and opportunities.

5.2. Training
The existing managers should be sent abroad for extensive training programmes where they
learn modern management principles and get a feel for the joint venture partner’s culture.
This training should also be done with new recruits to provide an extra incentive to start
working for Mercedes-Foton. Training of managers in an environment abroad might be one
of the best, yet very costly actions to undertake to enhance the mutual trust and knowledge.

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Business Dissertation Andreas Hirschbrunn

5.2. Continuity
In the last five years the director of the Mercedes China division was changed three times. In
the Chinese culture where personal relationships are valued tremendously it is imperative to
enhance the relationship with the Chinese stakeholders via one top management team with
long term visions of the Chinese market and the expressed will to stay for a long period of
time. Rotating expatriates must therefore come to a stop. Only a long term relationship
between Chinese and Mercedes executives will encourage mutual trust which is decisive to
overcome the difficulties of double management. Only a united effort will lead to a
successful cooperation.

5.3. The Chinese Government


Is not only the largest stakeholder, it is moreover the controlling force and one of the two key
drivers of change for the automotive industry. It is imperative to build up Guanxi with a wide
range of politicians without breaking the international corporate social responsibility
regulations. Ten years ago it was possible to buy Guanxi, or respectively the people who
owned it via bribes. However this practice was not legal and Daimler faces serious charges
due to the historical misconduct. Therefore it is a necessity that Daimler engages the Guanxi
issue in a different way. Guanxi is a harmonious relationship between businessmen. It can be
fostered via various social activities and projects carried out together. It is imperative to
approach the Chinese government as a partner. Reliability, trust and diplomacy are essential
to succeed with the politicians. Mercedes must establish itself as a friend of the Chinese
people through various Corporate Social Responsibility programs. These should include
models to fight poverty, build up infrastructure and adequate relations to trade unions who
can help with the direction of these activities.

5.4. Performance Appraisal


The Joint Venture will need time and careful management to succeed. It is imperative to be
patient with the financial assessment. Neither the Foton side, nor the Mercedes side should
analyse the performance with their standard point of view. More particular Mercedes not
profit- and Foton not production output wise. The Joint Venture must be evaluated with
regards to its special position and the long term objectives to be realized rather than short
term profit or market share objectives.

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Business Dissertation Andreas Hirschbrunn

5.5. A new approach to change implementation


Rather than using the transforming and coercive strategies, where change is implemented in
an abrupt and disruptive way there is a necessity to apply a more diplomatic approach.
Mercedes might have more know how in the business, but this must be included into the joint
venture in a non autocratic manner. Otherwise the Chinese managers will become frustrated
and reject any positive influence at all.

5.6. The exchange of non technical know how


The Chinese side’s primary objective is to obtain new technology and update their production
facility. In the long run they want to modernize their management system as well to become
more competitive on a global scale. If Mercedes keeps its influence on the management low
in the first stage and the joint product succeeds mainly because of the superior technology by
Mercedes there will be far more trust in the partnership. This trust must then be used to
exchange non technical knowhow such as marketing, sales techniques, analysing product cost
and determining price, identifying customer preferences, increasing customer loyalty,
developing advertising strategies,etc.(Sheriff,2002). The openness to this change will be far
more open due to the success of the initial phase in which Mercedes kept a low profile.

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6. Conclusion

The exporting entry mode used by Mercedes has reached its limit. Various problems with the
intermediaries and the expressed motivation to enter the Chinese market in a large scale make
the joint venture as an entry mode a necessity. Other entry modes have been analysed, they
are not adequate due to various limitations, cultural and legal barriers. The suitability of
Mercedes and Foton has been proven through the value chain analysis and the key drivers of
change for the Chinese automotive industry gave further evidence for the necessity of a joint
venture. Foton will gain technological knowhow in the initial phase, production facility
updates in the second and finally non technical expertise for the global expansion in the third
phase. There are various concerns about copyright caused by the high R&D input of
Mercedes. These shall be limited via the use of slightly adapted technology which shall
guarantee that an Amuna truck will never have the same product sophistication as an actros
truck. The main benefits for Mercedes are that they get a local partner with extensive
knowledge of the Chinese market. Besides this they gain a strategic alliance in the Asian
market which might be decisive for the future of the Mercedes truck operation all over Asia.
However this vision proves difficult to be achieved as there are various problem areas which
delay processes and make it very complicated to realize the objectives. The collaboration
between Foton and Mercedes is very complicated due to cultural factors. In particular the
language, managerial background and the decisively different societies make it extremely
complicated to get the partnership on a profitable base. The results are miscommunication
and mistrust. This is further enhanced by a Chinese government which in its role as the main
shareholder asserts a high level of control and pressure on management. Mercedes executives
have to satisfy various stake holders. In particular the political stakeholders prove to be
disruptive of the joint operation and demand changes to existing contracts, thereby causing
substantial time lags.

The JV is not an adequate market entry mode to overcome the cultural and legal barriers of
the Chinese market, at least not in the initial phase. But of all the possible modes it is the best
one for Mercedes at this moment in time. In the long run these difficulties might be overcome
and the Joint Venture is a great success or they become more serious which will ultimately
cause a collapse.

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Business Dissertation Andreas Hirschbrunn
The joint venture is in its initial phase, therefore the performance evaluation must be carried
out once the operation is running. At this early stage it cannot be determined whether it will
be a success or failure. The most important task for management is to implement change in a
diplomatic manner. Mercedes must be careful not to overload the Chinese partner with
western style management techniques as the Foton executives will need time to adapt to the
new corporate culture. The key areas of concern identified are in HRM. The way the
personnel are managed will be decisive for the success. The main objective at this early stage
is the implementation of a common organizational culture. The author recommends a very
determined recruitment process in which young talent that can grow into the new corporate
culture is employed. The continuity of service for the Joint Venture by Mercedes expatriates
is imperative, both for adapting to the culture and building up the necessary relationships
with the key stakeholders of the operation. The author recommends following a very
diplomatic approach to manage the change necessary to succeed not only in the Chinese, but
also in the global market.

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Bibliography

Books
Johnson, G. & Scholes, K., (2002), “Exploring Corporate Strategy: Text and Cases”, Prentice Hall
International (UK) Limited, 6th Ed.

Bensoussan, B., and Fleisher, G., (2003), “Strategic and Competitive Analysis: Methods and
Techniques for Analysing Business Competition”, Prentice Hall

Henessy D. (2001)”Global Marketing Strategies” Noughton Mifflin, 5th edition

Hollensen S.(2004)”Global Marketing, a decision making approach”, Pearson education Ltd. 4th
edition

Keegan, J. (2005) “Global Marketing”, Pearson prentice hall, 4th edition

Kotler, P., (2002), “Principles of Marketing”, Prentice Hall, 3rd Ed.

Noonan, C. (1996)” The CIM Handbook of Export marketing”, Reed educational publishing Ltd.

Saunders,M,Lewis,P and Thornhill (2006)”Research methods for Business Students” Pearson


education Ltd. 4th edition

Websites
Anderlini, j. (2007), FT.com “Environment: Devastating price to pay for rampant growth”

Available URL:http://www.ft.com/cms/s/1/9566a176-7561-11dc-b7cb-
0000779fd2ac,dwp_uuid=07c92c3a-757f-11dc-b7cb-0000779fd2ac.html

As viewed on the 26th of October

Anderlini,J. (2007) Ft.com

Available URL:http://www.ft.com/cms/s/0/cb8d3138-907e-11dc-a6f2-0000779fd2ac.html

Date viewed 16th of October

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Daimler.com

Available URL: www.daimler.com

Date viewed 6th of October

Economist.com,( 2007 X) “Economic data:Country Briefing China”

Available URL:
http://www.economist.com/countries/China/profile.cfm?folder=Profile%2DEconomic%20Data

As viewed on the 7th of November

Economist.com,(2005 Y)”Shanghaied”

Available URL: http://www.economist.com/business/displaystory.cfm?story_id=E1_PRJJDGR

As viewed on the 7th of November

Economist.com,(2007 Z)“Governing China:caught between right and left, town and country”

Available URL:
http://www.economist.com/research/backgrounders/displaystory.cfm?story_id=8815195

As viewed on the 7th of November

Economist.com,(2007 W) “Chinas economy: How fit is the Panda?”

Available URL:
http://www.economist.com/research/backgrounders/displaystory.cfm?story_id=9861591

As viewed on the 7th of November

Economist.com, (2002 B)” Is there any point in manufacturing cars in china? Leave it to the locals!”

Available URL: http://www.economist.com/business/displaystory.cfm?story_id=E1_TDRDPRP

As viewed on the 18th of October

Economist.com(2005 M),”Dreammachines”

Available URL:http://www.economist.com/world/displaystory.cfm?story_id=E1_QDPNRQN

Date viewed: 16th of October

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Finfacts.com (2007)”world Bank China update-Short term macro challenges are manageable”

Available URL:http://www.finfacts.com/irelandbusinessnews/publish/article_10008039.shtml

As viewed on the 26th of October

Reuters.com

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Song, Lijun.(2004)” educational inequality at the macro level in China”

Available URL: http://www.allacademic.com/meta/p110064

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Journals
Brennan,R.,Wilson,J.(2003),Market entry modes for western firms in China, Asia-pacific
journal of Marketing and Logistics, Volume 4,issue 2, pg, 3-18, Barmarick Publications

Dunphy D., (1997) “Organizational learning as the creation of corporate competencies”,Journal of


management development, Volume 16, issue 4, Page 232-244

Goffin,J., Lihong Z. (1999), Joint venture manufacturing in China: an exploratory investigation”


International Journal of Operations & Production Management, MCB UP Ltd, Volume: 19 Issue:
5/6 Page: 474 – 490. MCB UP Ltd

Griffith, D., Chen, H. (2006). The influence of liability of foreignness on market entry strategies. An
illustration of market entry in China.International Marketing Review. Emerald group publishing Ltd.
Volume 23, issue 6, page 636-649.

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Maher,T.,Sheriff,T.K., Wong j. (2002) The hesitant transfer of strategic management knowledge to
international joint ventures in China: greater willingness seems likely in the future, Volume: 25
Issue: 1 Page: 1 – 15, Barmarick Publications

Tsang, W.K.(2003), Resistance to restructuring in Sino-foreign joint ventures: toward a preliminary


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UP Ltd

Parnell,M.(2002) Doing business in China – the modern German experience, Volume: 14 Issue: 5
Page: 351 – 363, European Business Review, MCB UP Ltd

Yang,J. Lee,H.(2002), Identifying key factors for successful joint venture in China, Industrial
Management & Data Systems journals, Volume: 102 Issue: 2 Page: 98 – 109, MCB UP Ltd

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Appendices

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Appendice A: PESTEL Analysis


PESTEL Analysis of the Commercial Vehicle industry for China

Political

 “Regulations on car loans increased instead of decreased.”


 “Create national chinese car champions”
 “Expand the Golden triangles economy into the east”
 “The central government is spending more on education: 54 billion yuan last year, an
increase of more than 39%. This means less than 2.3% of GDP—“significantly lower” than
the international average, according to a UN report in 2005.” (Economist.com,2007 Z) The
shortage of qualified staff will enforce a higher spending by the automotive companies to
train workers and managers alike.
 “The budget presented to the NPC calls for a nearly 18% increase in military spending this
year to 347 billion yuan. Most analysts believe this is far less than China's true spending.”
(Economist.com,2007 Z) The military sector is of particular interest to the comercial vehicles
sector. Further growth can be expected.
 “Protectionism: military equipment, electric power, oil and petrochemicals,
telecommunications, coal, aviation and shipping.” The protection of these sectors, in
particular the military equipment, could lead to the exclusion of sino-foreign products.
(Economist.com,2007 Z)
 “New law on property rights which is mainly intended to reassure the country's fast growing
middle class that their assets are secure.” (Economist.com,2007 Z) Important law to
encourage consumer spending.
 Freeze until the end of 2007 on a wide range of government-controlled prices, such as oil,
electricity and water. (Economist.com,2007 W) Short term stability for the enegy needed for
production.

Economical

 “Low interest rates compared to growth. Higher interest rates expected”(finfacts.com,2007)


The cost of money Hill increase over the long run. However the rates are still favourably for
the automotive industry at present.
 “Inflation eased back from August's decade-high levels in September. Overall low in
comparison to other economies with similar growth.” (Economist.com, 2007 X) Low inflation
encourages consumer spending in both the B2C and B2B sector.

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 “China's trade surplus in January-September, at US$185.8bn, was up by 69% year on year”.
(Economist.com, 2007 X)
 “Real GDP growth is forecast to ease to 10% in 2008 and 9.3% in 2009. The forecast for 2009
is marginally higher than the 9.2% forecast last month.” (Economist.com, 2007 X)
 “Real growth in exports of goods and services is now expected to reach 14.7% in 2008, down
from last month's forecast of 16.4%, owing to weaker global demand”. (Economist.com,
2007 X) As the chinese automotive industry is not yet in a state to export on a large scale,
the lower global demand is a low risk factor.
 “Appreciating Yuan gradually against the dollar”. (Economist.com,2007 W) Exports into the
US, aswell as Europe will become slightly more expensive, whilst the imports price will
decrease gradually.
 “In August consumer-price inflation jumped to 6.5%, up from 1.3% a year earlier and its
highest for more than a decade. Food prices responsible due to supply shortages.”
(Economist.com,2007 W) If essential goods increase in price they cause fear amongst
consumers and therefore reduce spending
 “Share prices have risen by 400% in just over two years. This bubble might burst. Chinese
firms have invested in other Chinese companies' stocks, a slump in share prices could
directly hurt their profits and hence their investment just like in the 90s in japan.”
(Economist.com,2007 W) Depending on the amounts of investment this can cause serious
problems for the comercial vehicle automotive sector because of its dependency of B2B
customers.
 “The chinese road network is already the 2nd largest worldwide. 1.8m km, with 44% of it
built in the past 15 years. Nor will it stop there. By 2020, China plans to double again the
length of its motorways.”(economist A,2005) The more extensive the road network, the
higher the demand for trucks Hill become as new zones are connected and invested in.

Socio Cultural

 Educational inequality(Lijun,2004)
 The one child policy leads to significant changes in the agestructure. The present generation
will be the largest ever. (Economist.com,2007 W)
 Income disparities between rural and urban areas fosters the move of population towards
the east and into the cities. (Economist.com,2007 Z)
 corruption is rampant. (Economist.com,2007 Z)
 Ideological battles between free-marketeers and left-wingers threaten to impede reform.
(Economist.com,2007 Z)
 Excluding food, inflation is only 0.9%. This does not mean that food is unimportant: it
accounts for one-third of the inflation basket, and rising prices could trigger social unrest.
(Economist.com,2007 W)
 Equities account for less than 20% of Chinese households' total financial assets.
(Economist.com,2007 W)
 China's fragile and inefficient banking system is certainly a drag on its economy, but the risk
that a banking crisis could bring down the economy seems small. China has huge foreign-
exchange reserves available to protect its banking system. (Economist.com,2007 W)

Technological

 Technological gaps are closed via copying and buying foreign


technology(Economist.com,2005 Y)

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 Rather then Capital intensive production methods with robots, Chinese producers rely
heavily on labour as it is cheaper. average wages have risen by around 15% over the past
year, but labour productivity in manufacturing has risen even faster. (Economist.com,2007
W)

Environmental

 Water scarcity
 The problem is not China’s environmental laws, many of which are copied in their entirety
from European legislation and are some of the best in the world. The fault lies in a lack of
enforcement at all levels. (Anderlini, j. 2007)
 The government neglected the environmental and health implications of rapid economic
growth until recently(Anderlini, j. 2007)
 The economic costs of toxic growth are huge but hard to calculate. The World Bank report
estimates the health costs of pollution at about 6 per cent of gross domestic product in
2003, or Rm781bn, but that does not include clean-up costs or the future costs to industry of
current unsustainable development. (Anderlini, j. 2007)
 Having decimated much of its own environment through economic growth at all costs, the
Chinese government has introduced some policies in recent years that essentially export the
problem abroad. (Anderlini, j. 2007)

Legal

 “A record US$45m judgement for patent infringement was awarded against a French firm,
Schneider Electric, in favour of a Chinese one. Schneider is appealing.” (Economist.com,2005
Y) The chinese legal system is still not demonstrating the same level of sophistication as the
European and even US law. The result are ongoing legal disputes about patents and
contracts.
 “Chinese banks are officially not allowed to lend to investors to buy shares, but anecdotal
evidence suggests that households and firms have taken out loans disguised as mortgages to
buy shares. If so, the effect of the Stockmarket bubble bursting could be larger than the
direct impact on consumers' wealth.” (Economist.com,2007 W). If the middle classes wealth
is in danger, this will ultimately lead to lower spending. Lower demand for consumer goods
will lower the demand for transportation and therefore reduce commercial vehicle demand.
 “Product piracy destroys margins for aftersale market” (Economist,2002 B) Both domestic
and foreign commercial vehicle producer can not capitalize on the highly profitable after
sales market.

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Apendice B: Interviews
Dr. Hans Moritz

Karl Eugen Weg 7

70599 Stuttgart

Tel.:00491727372929

Tradelawyer experienced in Euro-US bilateral tradeagreements with extensive


knowledge of international trade law.Open interview and discussion about the Chinese,
Roman and English legal systems and the transition problems in bilateral trade
agreements.

Thomas Doering

Director of Strategic planning of the commercial vehicles unit of the Daimler


plc.Guided 90 minute interview about the Joint venture operation in China.

Tatiana Turck

Director of corporate controlling, formerly stationed in China for four years of time
negotiating the terms of the Joint VentureGuided 60 minute interview about strategic
marketing in China.Aspects covered included Long and short term strategies, Entry
modes, Objectives, Threats and opportunities,

Dr. Hans Wolfgang

Walter-Flex-str.38

70519 Stuttgart

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Business Dissertation Andreas Hirschbrunn

Tel.:00497114790544

Retired member of the board of Daimler Chrysler was responsible for the personnel
department.Guided 120 minute interview about HRM, Socio cultural aspects and
change management. Aspects covered in the interview incorporated
Recruitment,Training,Chinese workforce, German workforce, legalities, Cultural
barriers, Motivational aspects, salary policy, Expatriates

66