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Aug 27, 2006

Business Analysis of Ford in China

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Business Analysis of Ford in China

Ford Motor Company is looking forward to celebrating its 100th anniversary. In the past
nearly 100 years, Ford has developed with the progress of car industry and become 2nd
largest car manufacturer in the world. Today, the American & European car industry
faces problems of over-capacity and oversupply. This causes the intense competition in
this industry. The world car industry is encountering its biggest changes in history.
Globalization is the most remarkable among those changes. We believe that the
worldwide market competition causes the accelerating of globalization. This tendency
makes the business environment more competitive and attractive.

Ford should take the chance of globalization to enter other markets outside US. Some
opportunities clearly exist. China has a huge family car market. Ford should take this
opportunity to enter the Chinese market.

In this report, the PEST analysis is carried out on the Chinese business environment so
that the following questions could be addressed:

i. Whether the political, economical and legal system in China is favorable for our
investment or not?

ii. Whether the Chinese car market is big enough or not? Will it keep on growing?

iii. Whether Chinese consumers will accept our products or not?

iv. Whether the human resources in China is suitable or not?

v. What are the benefits, costs and risks of producing family car in China?

In conclusion, the report suggests that Ford should invest in China to establish a family
car factory. Recommendations on this project are given.

BUSINESS ENVIRONMENT IN CHINA

1. POLITICAL ANALYSIS

1.1 General

China is in a state of transition now. Being a socialist country, China has carefully
changed its political system in recent years, while dramatic changes have taken place in
its economic system. In 1979, China started its open policy and economic reform. The
Chinese government persisted on carrying out the political guideline of developing
economy and enriching Chinese people. In these years, although the leadership of this
country had been handed over from Mr. Deng Xiaopin to Mr. Jiang Zeming and the
world political environment had changed rapidly, the Chinese economy survived and kept
going after the major world turbulences such as the collapse of Soviet Union and Eastern
Communist countries, the Tiananmen massacre in its own country in 1989 and the 1997-
1998 financial crisis in Southeast Asia. Being the largest developing country in the world,
China has achieved an average annual GDP growth of nearly 8% in recent years. The
living standard of Chinese people has been improving steadily. Now there is a remarkable
shift away from command economic system toward mixed economic system in China.
Such a transformation has also affected the current state policy related to car industry.

1.2 The Impact of China’s Entry into WTO on Car Industry

China has promised to break the tariff barrier on car-imported and spare parts after join
WTO. First, there will be a drastic reduction in customs duties on imported cars from the
current 100% to 25% by 2006. Second, the tariff on car parts will be reduced gradually
down to 10% in 2006. Third, the import quota system will be abolished in 2005. These
measures will lower the costs of the car-imported. It’s no doubt that the reduction of
tariffs will intensify the competition among the foreign and domestic motor companies in
the future automobile market. China’s entry into WTO will lead to a significant
reduction on the cost of selling cars manufactured overseas. It may be a problem that we
should take into careful consideration before we make a investment decision. However,
the tariff reduction is in a gradual procedure stepped through five years, we should have
time to occupy enough market share and gain reputation on our products in the first two
years. We can also make the price of our products very competitive even the car tariffs
would slash to 25%, because we can benefit from the relatively low labor cost and cheap
spare parts in China. Generally, we tend to believe that WTO will not pose significant
problem for our investment in China.

China is successful in attracting foreign investment. The Chinese government has given
some tax reduction policies for foreign owned companies. These policies include income
tax exemption in the first 3 years and another 2 years with half of income tax. On the
other hand, the Chinese car industry has been protected by special policies that limit
foreign investment, some examples are the local content requirement (40%), the
minimum share percentage (50%) held by Chinese partners, etc. These policies might be
unfavorable factors to our investment in China, but we can expect taking a turn for the
better after China enters WTO.
1.3 The Impact of Chinese Government’s 10th Five-Year Plan for National
Economic and Social Development

The Chinese government has declared its 10th Five-Year Plan for National Economic and
Social Development. Accordingly the Chinese National Economic and Social Committee
announced the tenth Five-Year Plan for car industry and stated three principles in this
document. These principles are self-development, fair play and openness. According to
these principles, we can know that the Chinese government has the intention to introduce
overseas capital and technology to develop its car industry. The government is also keen
on attracting and utilizing Foreign Direct Investment.

2.LEGAL ANALYSIS

Legal system also plays a very important role in the international business. In order to
establish a well-functioned market economy, the Chinese government has emphasized on
drawing up laws. These laws include “The Law of the P.R.C. on Joint Ventures Using
Chinese and Foreign Investment”, “Company Law of P.R.C.”, etc. China has a stable
government, the protection of private property is adequate. China also has laws protecting
intellectual property, but these laws are not well enforced by the authorities. The property
rights (specially intellectual property rights) are routinely violated. Regarding the car
industry, we think that also China has enough laws to protect our investment, it maybe
not so easy to execute those laws.

3.ECONOMICAL ANALYSIS

3.1 Macroeconomic

Twenty years ago, China was among the world’s poorest countries, with 80% of the
population having incomes of less than US$1 a day. However, since economy
reformation, the living standard of Chinese people has changed a lot and most people are
able to earn more and more money than ever before. From 1979, China’s gross national
income (GNI) per capita has increased rapidly (see graph 1), gross domestic product
(GDP) has reached US$1.1 trillion in 2000, and the foreign exchange reserve is also
significant and has increased to US$190.05 billion at the end of August 2001, which is
the second largest country of the world. Meanwhile, the exchange rate of RMB has been
keeping stable. All of these show the strong domestic and foreign confidence in current
China’s economy.

From 1997, the economy of almost all the countries in Asia had been influenced by the
financial crisis, including China. Since then, China entered deflation. In order to stimulate
economy and encourage consumption, the authorities adopted a series of financial and
monetary policies. One of these policies is to reduce the interest rate. For instance, the
average deposit rate per year decreased from 7.47% in 1996 to 2.25% in 1999, and the
loan interest rate (over 5 years) from 12.42% in 1996 to 6.21% in 1999 (see table 1).
Accordingly, the deflation has been controlled.
3.2 Microeconomics of Car Industry

Nowadays, the consumer market of cars in the world trends to be saturated, and the
overproduction of cars is about 20 million, while China has great potentialities of the cars
market. From 1978, the number of cars in China has been increased by 12% every year,
which is a little bit higher than the rise of China’s GDP. In addition, the growth rate of
China’s total car output in 2000 was 11%, which was 7.8% higher than that of the world
and ranked the ninth of the world (see table 2). The policy of reducing interest rate not
only changed the consuming habit of Chinese people, who used to prefer saving money
rather than spending them, but also improved the consuming environment. According to
the survey made by China Consumers’ Association, except buying a house, people’s first
choice to spend their money is to own a cars. This is phenomenon is good news for the
constantly declined car industry.

GNI per capita of China

Variation of Interest Rate of China from 1996 (Unit: annual rate %).

23/08/1996 23/10/1997 25/03/1998 01/07/1998 01/06/1999

Average deposit rate per year 7.47 5.67 5.22 4.77 2.25

Loan interest rate (over 5 years) 12.42 10.53 10.35 8.01 6.21

Table 1 (Source from China Central Bank)

Car Output of the World and “Top-10”Countries in 2000

Ranking Country Output in 2000 Output in 1999 Growth rate %

1 United States 12,810,140 13,024,978 -2

2 Japan 10,144,847 9,895,476 3

3 Germany 5,197,685 5,237,906 -1

4 France 3,351,929 3,180,513 5

5 South Korea 3,114,998 2,843,114 10

6 Spain 3,032,874 2,852,389 6

7 Canada 2,345,882 2,737,454 -14

8 China 2,008,500 1,804,500 11

9 Mexico 1,918,807 1,518,054 26

10 United Kingdom 1,817,059 1,973,028 -8

The total output of the world 57,539,713 55,742,856 3.2

Table 2 (Source from National Bureau of Statistics of China)

Most of the world famous car-makers (including Ford) invested China since 1998. All
their plants started production and sales within 1-2 years. The following chart (Chart 1)
shows the car production in 1999 and the forecast for 2003 and 2005.

As we can see from the chart, our major competitors are GM, Volkswagen and Toyota.
Although competing with these established market leaders is going to be very difficult,
Ford should be confident to gain the market share and achieve good profit.

Chart 1. (Source http://autoworld.com.cn)

4. SOCIAL AND CULTURE ENVIRONMENT ANALYSIS

The survey of the basic condition of 150,000 urban citizens in China that is made by
National Bureau of Statistics of China shows every 10,000 urban citizens just have 114
cars. Furthermore, a new research made by Roland-Berger predicts that the car sales in
Chinese market will reach to 1,000,000 in 2005, and 2,000,000 in 2010 after China enter
WTO. The demand of 1.2 litres exhausting private car will increase fastest among all the
automobiles.

4.1 Consumer’s Psychology

One of investigations made by China Consumers’ Association shows that approximately

20% of Chinese consumers will prefer to buy imported cars, even though the price of
them are higher than domestic cars. There will be 80% of consumers choosing to buy
imported cars on the condition that the price of imported cars is almost as same as that of
domestic cars. According to this investigation, it seems that band is more important
thing to be concerned by consumers besides price.

4.2 Car Purchasing Power

In 2000, China’s GDP per capita reached over US$ 800. In terms of economic principle
when GDP is at this level, or family annual income is the half of the car’s price, this kind
of family is suitable to buy a car. At present, there have been more than 500,000 families
having US$5400 annual income, which is the half of the car’s selling price, in Beijing.
Shanghai, Guangzhou, Shenzhen, and economic flourishing district in southern of China
also have the same situation. This means China has had the basic conditions of
developing cars for family-use, and at least 300,000,000 citizens have the capability of
purchasing cars according to the income of urban citizen. This situation will climb to the
peak during the period from 2005 to 2010.

4.3 Environmental Factor Influence on Car Consumption Behaviour

4.3.1 Car Consuming Environment

According to the present situation, demand of cars is constantly growing, as well as the
consuming level of Chinese people. There are approximately 20% Chinese urban
families, in other words about 26 million families will want to buy cars, which is equal to
the total outputs of automobiles in world. On the other hand, the infrastructure of road in
most China’s cities has been getting better and better, which enhance people’s
confidence of buying cars.

4.3.2 Political Influence on Car Consumption

The planning for the tenth five-years of automobile issued by China Economy and Trade
Committee points out that China will focus on developing car which is under 1.3 liters
exhausting private cars and will provide a series of preferential policy to encourage
people to buy cars. Under that conditions almost all the automobile producers will
manufacture this kind of cars to dominative this huge market.

4.3.3 Car-buying Tax

At the beginning of 2001, Chinese government announced to use the car buying tax
instead of the car-buying fee. This change can reduce the unreasonable charges, such as
in Chengdu (one of biggest city in South West China), people who want to buy a car must
be charged 10% - 15% of car buying fee, which is repealed now.

4.4 Influence of WTO on Car Consumption Behavior

It is no doubt that the selling price of car will decrease gradually after China enters WTO.
Consumers who want to buy a car will be delighted to see this situation. On the other
hand, the Chinese government has got ready for policy and consumption system to make
a suitable environment after entering WTO. It can be seemed that the market of car
consumption will be triggered in the future.

5. HUMAN RESOURCES ANALYSIS

With the development of high-education and skill training, China has prepared a pool of
well educated and trained people that they have sufficient skills to meet our requirement.
The labor cost in China is relatively lower than many developed country because of the
abundant labor. Moreover, China also has a mature human resources system for foreign
investment. We can believe that China has a good human resource for our company’s
development.
RECOMMENDATIONS AND INVEST PLAN

1. OVERALL ATTRACTIVENESS AND CONCLUSION

According to the above analysis, it seems that it should be beneficial for Ford to invest a
family car company because of its large market and strong consuming power.

We should also look into the costs and risks. Someone may doubt whether the Chinese
market will ever really take off and reach the enormous volumes predicted, or the
Chinese will get all they need to know about building and selling cars and then somehow
evict their Western partners. These are the concerns many have about doing business in
China.

China has experienced a stable political system (which is considered totalitarian) with
rapid economic growth for more than 10 years, but some political risks still exist. The
Chinese government is still insisting on its communist and totalitarian policy, there is no
guarantee that China will continue to its open policy and maintain the rapid GNP
increase. China also has an unsatisfied human right record; corruption exists in some
economical activities in China, all these will be obstacles to foreign investments.

On the economical front, China had been adopting centrally planned command economy
for many years. Since the 1980s, the government has been encouraging the establishment
of private-owned enterprises. In the 1990s, China established its own stock exchange and
started to sell state-owned business to private investors. But the policy is still not clear
and produced a lot of turbulence in the stock market. The delay of political reform may
also effect the development of economy. It is still doubtful whether or not China will
keep on its economical renovation toward a market economy.

Although the legal system of China is adequate to protect foreign investment, the
violation of laws by some local authorities will be a potential risk to our investment.

The overall attractive of China as a investment site depends on balancing the benefits,
costs and risks associated with doing business in China. Despite all the above risks, we
still consider China as a suitable country for our investment.

2. INVESTMENT STRATEGY

We shall establish our business gradually, in a steady way. The first step is to establish a
joint venture with a local Chinese car manufacturer for producing our “Ka” family sedan
car and spare parts. The plant should be put into production within 2 years at a capacity
of 50,000/year. If it’s guaranteed by the government policy after China joins WTO, we
shall introduce our car-rental (Hertz) and financial service (auto loan) in the future.

2.1 Entry Time

Although the car industry is declining in the US and Europe, it is still a suitable time for
Ford Motor Company to invest in China. As the 2nd largest car manufacturer in the
world, Ford had been waiting patiently to enter the Chinese Market for more than 20
year. Some other world-famous car manufacturers (such as Volkswagen, General Motor,
Toyota, etc.) had already started their business years ago, but we do not consider that it is
too late to enter the Chinese family car market. Because we are quite confident with the
potential of the Chinese market and also the Ford company, we should not care too much
about where we enter this market early or late, we should improve ourselves
progressively toward the purpose of surpass our competitors. We have the ability to
achieve that. Actually there are also some advantages of enter the market late, such as we
can learn the lesson from some other unsuccessful car manufacturers like Peugeot, which
closed it’s plant in Guangzhou. We can also be beneficial from the intelligent and skilled
workers who have a lot of experience in the car-making field.

2.2 Entry Procedure

Ford has been producing its Transit van in China for many years. The productivity and
sales are not as good as expected because of the high cost (price) and limited production.
We suggest choose “Ka” family sedan as our major product for this project. The car will
be sold at a price around RMB100,000 (USD12,000).

According to the current Chinese policy on motor industry, Ford will establish a joint
venture with 50% share with Chang An Automobile Company in Sichuan Province.
Chang An Automobile Company is the 3rd largest car manufacturer in China, which has
the experience of car-making for more than 20 years. The place that Ford will build its
plant is located in the west part of China, which will benefit from the favorite policy of
“Developing West (of China)”. In the future, if permitted by the Chinese policy, we can
increase of share percentage and wholly own this company.

Ford will introduce it car-rental service (Hertz) after China opens its car-rental market.
We will also set up our financial service in China in the future.

Ford should invest China “slowly but steadily” and should always consider there would
be political or economic problems down the road. China demands a cautious approach.
We have to be careful in deciding when and how much to invest in China. We should
take a lot of patient to do business in China.

SUMMARY

To sum up, we believe that Chinese business environment is suitable for Ford to establish
a family car factory. With a caution and steady investment strategy, Ford will gain
satisfactory benefit in the future.

REFERENCES
Hill, C. W.L. (2001) International Business, Irwin/McGraw-Hill, New York.

Needle, D. (2000) Business in Context, Business Press, London.

Pettinger, R. (2000) Investment Appraisal: A Managerial Approach, St. Martin’s Press,

New York.

Fahey, L. and Narayanan, V.K. (1994) Global Environmental Analysis, in Segal-Horn S.

(ed.), The Challenge of International Business, Kogan Page Limited, London.

Deng, P. (2001) WFOES: The Most Popular Entry Mode into China (wholly foreign-
owned enterprises), Business Horizons, July

Min, Z. (2000) Family Cars Predicted to rev up Auto Sales, China Daily, 01 March.

Nie, Y. (2001) The Investment Tendency of Multinational Auto Companies in China,

http://autoworld.com.cn/

Ford Motor Company: http://www.ford.com

China Consumers’ Association: http://www.cca.org.cn

National Bureau of Statistics of China: http://www.stats.gov.cn

China Automobile Information Centre: http://www.autoinfo.gov.cn

World Bank: http://www.worldbank.org

Shanghai Automobile Post: http://www.shqcb.com.cn