Balancing the Paradox of Localization and Globalization: Research and Analyze the Levels of Market Involvement for Multinational Carmakers in China’s Market Authors: Chen Jun Jiao Zhiqiang Tutors: Dr. Philippe Daudi, Dr. Mikael Lundgren Program: Master’s Programme in Leadership and Management in International Context Subject: Level and semester: Master’s Thesis Masterlevel Spring 2008 Baltic Business School CHEN Jun ;JIAO Zhiqiang 16/05/2008 Acknowledgements Our Personal Thanks We want to thank the following people for their continued supports throughout this programme and their help in writing this thesis.
Without their help, this thesis would not have been possible. In the first place, we would like to give thanks to our professor, Dr. Philippe Daudi for his supervision, advice, and guidance all through this research. Above all and the most needed, he provided us great encouragement and support in various ways. We also sincerely appreciate Mr. Mikael Lundgren for his encouragement, supervision, constructive suggestions and professional advices to us during the research. His crucial contribution to the thesis is of great significance.
His involvement with his originality has triggered and nourished our intellectual maturity. 2 CHEN Jun ;JIAO Zhiqiang 16/05/2008 Abstract Field: Master thesis in change management Number of Pages: 94 Title: Balancing the Paradox of Localization and Globalization: Research and Analyze the Levels of Market Involvement for Multinational Carmakers in China’s Market Authors: Chen Jun ; Jiao Zhiqiang Supervisor: Mikael Lundgren, Baltic Business School, Kalmar, Sweden Submission Date: 16th May, 2008 3 CHEN Jun ;JIAO Zhiqiang 6/05/2008 Executive Summary: Multinational Corporations (MNCs) are facing the paradox of globalization and localization in entering each new market. Generally, there are two perspectives which regard to how a MNC configure its crossborder activities: The first is global convergence perspective, which focuses on leveraging corporate resources and attaining global synergies. The second is international diversity perspective, which lays more emphasis on local adaptation and harnessing diversities.
Both perspectives have their pros and cons, a balance between international standardization and local adaptation is vital. For the major Auto Giants in the world operating and competing worldwide, the significance of China market is as clear as day to everyone. This paper focuses on how the major Auto Giants balance the paradox of globalization and localization in the China market. In other words, how the MNCs deal with the dilemma of globalization and localization under different strategic contexts?
We adopt a model which divides their activities in China into 6 stages and which includes criteria with regard to the dilemma of localization and globalization. Key words: Multinational Corporation? Automotive Industry? China mar ket? Paradox? Globalization and localization.
Recently, automotive industry is also booming in the emerging markets such as China, east Europe, India and Russia. The automotive industry is regarded as the industry of the industries, which has a great influence on the world’s economy. The production accounted for 3. 3% of the USA’s GDP (BERA, 2004), for example. The automobiles manufacture relates to varieties of most important raw materials, steel, aluminum, dash boards, and rubber for tires and so on. Meanwhile, the automobiles industry creates a great number of employments for the whole country. In the U. S. for example, the number of automotive industry occupied workers reached the peak of 1313600 in 2001(U. S. Department of Commerce, 2005). The automobile manufacture contains the latest and sharpest technologies, such as the industrial design of the automobiles and the safety factors, all of which require the latest hightechs. 1. 1. 1 The global overview of the industry Currently, the major players in the industry are some U. S. companies, for example GM, Ford and the Chrysler, the German companies like DaimlerBenz, BMW and Volkswagen, and some Japan companies like Honda, Toyota and Nissan.
Toyota ranks the first in the global auto manufacturing list due to its high quality and low energyconsuming, followed by General Motors and Ford. Undoubtedly, globalization for the automobile manufacturers is an unstoppable trend. The international low cost of both manufacture and labor force, the low price of the 7 CHEN Jun ;JIAO Zhiqiang 16/05/2008 resources, and the most advanced hightechs are all needed for strengthening the company’s competitiveness. The worldwide merger and acquisition turn out to be the most effective and preferred way to increase its international market share.
However, the auto industry is a fierce competitive place? customers have a lot of choices, so the consuming automobiles depend heavily on consumers’ personal tastes, favors and of course wallets. The auto manufacturers need to study carefully their customers’ needs and demands to win the competition. 1. 1. 2 The China’s automotive market overview China’s automotive industry has experienced a great booming in the last decade. 10 years ago, automobiles were still luxuries for the common Chinese citizens, however, the dream that owning a car become reality for many rdinary families. The living standard all over the nation rose significantly? on the other hand, the producers are also offering cheaper cars with better quality. With both the local produced vehicles and the jointventure produced vehicles, China ranks the third on the list for the motor vehicle producing countries (Figure below) 2006 Top 20 vehicle producing countries (OICA correspondents’ survey, 2006) As for the consumers, the middle class of China is booming: there are about 180 million middle class or 13% of the Chinese population.
In fact, it is growing even 8 CHEN Jun ;JIAO Zhiqiang 16/05/2008 faster than the economy itself. As a result, car sales in China are skyrocketing. Analysts estimate that that 4. 1 million passenger cars were sold in China in 2006, representing a 25 percent increase over 2005 (Rise of China’s middle class, 2006) Millions of Chinese citizens are becoming private cars owners. The ‘China Speed’, which reflects the rapid rising of China, illustrates vividly the dramatic changes in automobile market.
The market still has a great potential to develop, every player in the market desires a higher profit. China’s entry into the WTO (World Trade Organization) means that the import tariffs and prices of both automobiles and parts became cheaper. The lower costs in labor and fastgrowing potential wait for no one, fierce competitions are going on in China’s automotive market. It’s safe to say that their next significant international growth for automotive industry will take place in China.
For the Auto giants, the emerging China market gives them a great opportunity of expanding, especially when the other major markets in western countries and Japan are already mature and saturated. For us, the differences and uniqueness in this emerging and robust market, due to the magnitude of it, provide a precious new arena for the study of MNCs’ international behaviors. 1. 2. Problem discussion: the par adox of globalization and localization According to Tallman and Yip (2001), there are three major strategic issues for MNCs operating globally.
The first is geographic spread, which is the original issue about internationalization process of the firms such as various modes of entry. The second is local adaptation or localization, which is about the level or degree MNCs adapt to the specific local circumstances. The last is global integration. This issue is to what extent the MNCs integrate their business operations between different national markets. The last two questions, being combined together, constitute the paradox of globalization 9 CHEN Jun ;JIAO Zhiqiang 16/05/2008 and localization which always puts many decisionmakers of MNCs into a dilemma.
The following paragraphs will go deeper into this paradox. The paradox of globalization and localization is a common issue for MNCs operating and competing worldwide. The tension lies in whether regard the global market as a whole or respect the local differences in the specific national or regional markets. 1. 2. 1 The globalization perspective Globalization in a literal sense is international integration (The Washington Post, March 24, 2006). It can be described as a process by which the people of the world are unified into a single society.
This process is a combination of economic, technological, sociocultural and political forces (Sheila L. Croucher, Globalization and Belonging, 2004). Globalization, as a term, is very often used to refer to economic globalization, which is integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and spread of technology (Bhagwati ; Jagdish, 2007). From the MNCs’, globalization means a global convergence perspective and “treating the world as one market” (Bob De Wit, Ron Meyer, 2004).
Great benefits of synergies will be achieved by MNCs through international uniformity/standardization. People who support the globalization perspective regard that international standardization is of great significance and crossborder synergies can be achieved. Through a series of standardization operations such as leveraging resources, integrating activities and aligning products offering (Bob De Wit, Ron Meyer, 2004) across countries, additional values can be created. That additional value can be the vital edge over their local competitors.
According to Susan and Yoram, the global standardization philosophy is based on three assumptions by their advocates. Firstly, customer needs are becoming more and more similar globally. Secondly, People around the world prefer lower price at high quality than differentiations which provide unique and tailored features at a higher price. Finally, considerable economy of scale in both 10 CHEN Jun ;JIAO Zhiqiang 16/05/2008 production and marketing can be achieved through international standardization (Susan D. Yoram W. , 1987). 1. 2. 2 The localization per spective For MNCs, localization is the opposite of globalization, which means MNCs’ acknowledging national differences and being local responsive in order to meeting local demands. According to this perspective, national managers of MNCs should then be empowered to be responsive to specific local conditions (Bob De Wit ; Ron Meyer, 2004). The reason for localization is that there are still vast differences as well as political barriers between different local markets.
In that case, even though global synergy is tempting, the cost of neglecting local uniqueness and merely pursuing for global standardization is too high. In another word, crossborder synergies may not offset the cost of disregarding local differences and local adaptation is very important. The proponents of localization argue that for MNCs, “the pressure to pursue synergies is only half the equation” (Bob De Wit, Ron Meyer, 2004). The three assumptions for global standardization philosophy are only valid in certain limited circumstances.
The demand for local responsive is actually quite strong because of the huge differences between countries. In that case, MNCs should try to adapt themselves to the local markets and the top managers of local markets should be empowered with greater power and flexibilities to be able to change their operations according to the local environments. 1. 3 Our research question For the Automotive companies operating worldwide, their success in China are vital for their future and no one could afford a failure in that vital market.
Those firms are also confronting the paradox of globalization and localization in China. How they manage the completely different market environment is an interesting issue and worthy study. 11 CHEN Jun ;JIAO Zhiqiang 16/05/2008 We found that the market activities of them are quite diverse within China’s market. Why BMW has its R;D institution in China but Toyota not? Most of Hyundai’s sedans sold in China’s market are made in China, while most Volvos are imported.
Moreover, there are also great differences in their market activities between China and western world. A case in point is Elantra, a successful sedan made by Hyundai. We also found that the Chinese version of Elantra is quite different from its European version. For all those differences will be noticed and experienced, the simple and direct explanation is that customers have their own preferences and tastes in different markets. Generally speaking, the uniqueness in China’s business environment could be one reason for those differences.
On the other hand, carmakers’ being vary in their cultural backgrounds could be another. Last but least important, their global organizational structures may have great influence on their China’s market strategy. Balancing the paradox of localization and globalization there is vital. The state of art of their behaviors is worthy our further study. Naturally, here then come our research questions: How do the multinational auto manufacturers balance the paradox of localization and globalization in China’ s market?
In other word, is there one specific perspective they prefer within the specific frames of different strategic contexts? We find that our research field is a very hot topic with numerous related studies. In that case, one of the first important objectives of this research is to penetrate the same topic in a different way. We try to find out what they do in each stage, in terms of balancing localization and internationalization. We want to know the key factors in China market which imposes great influence on the decisionmaking process of carmakers.
For the carmakers themselves, their cultural backgrounds and global organizational structure has a great influence on their decisionmaking process. We want to find the roles those factors play in the decisionmaking process of MNCs. Finally, we hope to discover some practical recommendations for the industry out of our findings and analyses. 12 CHEN Jun ;JIAO Zhiqiang 16/05/2008 1. 4. Impor tance and Implication of the research The rise of China is an important event in the world for this century.
Comparing with the modernization of Japan after the Second World War and South Korea in 1970s, the rise of China is of much greater significance due to its size, political regime, population and history. It is a brand new issue in the history and attracts great attention. The hottest aspect is the economy of China, especially the transfer of China’s economic system from a closed planning system to an open market economy system. The fastdeveloping auto market is one of the embodiments of that transfer process. So, our research on the ajor carmakers’ activities in China’s automobile industry lies in the current issue of the rise of China. The paradox of globalization and localization for multinational companies is not new anymore? however, it doesn’t necessarily means that they are invalid or meaningless. Instead, it is a forever topic as the countries in the world is more and more economically interrelated. Moreover, the theory itself has been developing ever since. Nowadays, multinational companies are dominating the world economy, so is going to be in China.
Combined with the background of China’s unique business environment, the theory could be further applied and developed. The free participation of MNCs in the China’s market and their fierce competitions is the reason why ordinary Chinese customers are enjoying a great variety of commodities, comparing to 15 years ago when only limited types of inferior products were available. With regard to the choice of the industry, several industries were available for us to study the localization of MNCs in the China market.
Besides our personal interests on it, automobile industry is better than any others for researching MNCs’ global strategies. The automobile industry, due to its importance, is a popular topic in the academia. As a result, the accessibility of relevant literatures is high, which is important for our research based on secondary data and documentary study. Generally speaking, auto industry is regarded as a mature industry in western world, but in 13 CHEN Jun ;JIAO Zhiqiang 16/05/2008 China it just begins to start.
The booming of car industry is a symbol of economic development as well as social changes. As “the industry of industries”, in China automobile industry is regarded as one of the four major pillar industries by the government. Favorable regulations and custom rate came into force with China’s entry into WTO. The tempting market attracted all the major multinational carmakers in the world, making China’s market a new and significant battlefield of their worldwide competitions.
All the auto giants are taking off from the same scratch line, therefore the recent behaviors of those Auto giants especially their strategies in China are worth studying and would create new empirical knowledge. The possible generalization of the firms we study could be not only helpful for the whole automobile industry, but also for all the MNCs of other industries competing in China. 1. 5. Str ucture of the Thesis This thesis is consisted of five chapters.
It starts with the introduction chapter 1 which includes the background of the automobile industry and the unique Chinese business environment, the problem discussion and the research questions, the purpose and objects of the thesis, importance and implication of the research and delimitation. The theoretical framework of the thesis is in chapter 2. Literature study about MNCs’ activities in China’s car industry is added to supplement our preunderstanding and set the starting point of our study.
The paradox of globalization and localization is the major theory. We present different opinions about this issue to discuss both sides of the paradox. Then we discuss international composition of MNCs. To help our research, we also cover some areas such as international outsourcing and the organizational structures of multinational companies. Last but least important, our own understanding and opinions is also given in the literature review. Chapter 3, methodology, we discuss the methodology used in the thesis.
This chapter is about the way we design our research, which significantly affects the reliability and validity of this research. The general approach is given as how we organize the 14 CHEN Jun ;JIAO Zhiqiang 16/05/2008 research. In this chapter, some theories about research methodology are also given, then the reasons for choosing the certain methods and techniques. The issue about reliability and validity of this research is discussed. Chapter 4, empirical study, is made up of 3 parts. The first part is industry analysis? he second is business environment in China and finally the empirical studies of the selected firms. In the third part, we study the five selected firms one by one with the same model. There are brief introduction, degree of market involvement in China/balancing paradox in each stages, analysis of reasons behind. Chapter 5, comparative study, we conduct both vertical comparative study which is between the firms and horizontal comparative study within each stages. This is our chapter is our major analyzing chapter.
Chapter 6, conclusion, generalizes from the firms we research. The finding in the research is interpreted sensitively thus to make recommendations for practical actions. We also discuss the possibility and raise some interesting issues for further study in this chapter. 1. 6. Research scope and limitation In this thesis, we discuss how the MNCs in the world balance the paradox of internationalization and localization. The MNCs we study are automotive manufacturers or OEMs (Original Equipment Manufacturer)? he geographic scope is in mainland China. As we research the decisionmaking process of MNCs about how to make the maximum of China’s market, it mainly focuses on their market involvement and each stage of the value chain. The backgrounds of the carmakers such as their different cultural and organizational structures, which also have great influence on their China’s strategy, are discussed. The time dimension is focused in the last 5 years after China’s entry into WTO, when China’s automobile industry started to take off.
As for the automobiles, we mainly mean passenger cars especially 15 CHEN Jun ;JIAO Zhiqiang 16/05/2008 private cars and SUVs? other vehicles are not within our scope. The native automakers are also booming. The stateown car makers in China with certain degree of unwritten privileges of the government are reforming themselves to be more completive, while the private firms are developing their own car models as well as their own independent intellectual property rights.
Important as they be, we possibly research them in the future but not in this thesis. However, the joint ventures established by domestic firms and MNCs are important roles in our research. As that is the major way for MNCs to come into China’s market. 16 CHEN Jun ;JIAO Zhiqiang 16/05/2008 Chapter 2 Liter ature review A literature review is a crucial element of all researches. Bourner (1996) listed many reasons for spending time and energy on a review of literature before really embarking on the research project.
The major reasons include: l to increase the researchers’ breadth of knowledge of the researching field as well as provide the intellectual context for the researchers’ own work, enabling them to position their project relative to other work l to identify gaps in the literature as well as opposing views, put the work into perspective while demonstrating that the researchers can access previous work in an area l to carry on from where others have already reached and avoid ‘reinventing the wheel syndrome’ (at the very least this will save time and avoid making the same mistakes as others) l to identify information, ideas and methods that may be relevant to the project According to Cooper (1988), ‘…a literature review uses as its database reports of primary or original scholarship, and does not report new primary scholarship itself. The primary reports used in the literature may be verbal, but in the vast majority of cases reports are written documents. The types of scholarship may be empirical, theoretical, critical/analytic, or methodological in nature. Second a literature review seeks to describe, summarize, evaluate, clarify and/or integrate the content of primary reports. Finally, the ultimate goal of literature review is to maintain currency in their field of study for the duration of their research (Bruce 1990). Our literature review includes empirical, theoretical and critical/analytic knowledge about the project area. On the other hand, methodological literature is included in the methodology part of this thesis. The first building block of literature review is the discussion about the paradox of 17 CHEN Jun ;JIAO Zhiqiang 16/05/2008 globalization and localization, which is the theoretical framework of this thesis. Then is pragmatic and specific knowledge about the MNCs’ business strategy in the global market, especially the barriers of globalization as well as how to interpret a new local circumstance.
To a large extent, the organizational structure of MNCs, which is decided by history and cultural factors of their homecountry, influence their decisionmaking process. As a result, organizational structure is also discussed. Finally are the international composition of MNCs and the definition of each stages of auto industry. 2. 1 The discussion on the par adox of Globalization and Localization As mentioned above in the problem discussion part of the thesis, the paradox of globalization and localization puts many decisionmakers of MNCs into a dilemma. The following gives a deeper discussion about this dilemma form the both perspectives. Global convergence perspective For the global convergence perspective, the prediction of a world of growing internationalization is accepted by many people. In that case, the key to success is the development of global products and brand, more specific, standardized product and brand worldwide. Theodore Levitt’s article ‘The globalization of Market’, published in 1980s is more representative and proglobalization. In this article, he mentioned that the fast development of technology is the driving force which makes the world’s need and desires become more and more similar. As technology develops international communication, transportation and travel will be facilitated greatly. The consumer’s preference and taste would thus become more and more homogenous.
Simultaneously, mass production, also due to technology development, makes it possible for the superior good become affordable for ordinary consumers. In a word, his basic suggestion to multinational companies is mass standardized production for the 18 CHEN Jun ;JIAO Zhiqiang 16/05/2008 homogenous world market. The oldfashioned multinational operating model, which emphasized on adapting itself to the unique local business environment, is thus ’obsolete’ (De wit ; Meyer, 2004:p. 555). According to Theodore (1983), the failure of many multinational companies in oversea market is not just due to poor executions but, more importantly, ‘a failure of imagination’ to realize the trend.
The decisionmakers of MNCs should be bold enough to predict and face the trend of globally homogeneous consumer preference. They should become more proactive, meaning that they shouldn’t just supply what the customers want but teach and educate them the best product and services. In Theodore’s article, three basic arguments can be concluded to support his global convergence perspective (Douglas ; Wind, 1987: p 22). Firstly, Customer needs and interests are becoming more and more globally homogeneous. Secondly, people around the world tend to sacrifice preferences in product features, functions and designs for more reasonable price. What they really like is lower prices at high quality.
Last but least important, by supplying standardized product and service to the global market, it is much easier for MNCs to acquire economies of scale (Douglas ; Wind, 1987: pp 1929). Proponents of globalization perspective deem that the focus of the multinational companies should be put into leveraging its global resources to attain synergy. Global standardization is necessary to acquire the scale economy and a must to achieve competitive advantage. Theodore’s vision on the global market is quite bold and farsighted in early 1980s, when world trade became more and more important. However, the focus is mainly on the globalization market, especially the convergence of customer preference. The supply side, on the other side, is not pay attention to.
The reason of his global convergence is growing international similarity in market rather than international integration of MNCs themselves (De wit ; Meyer, 2004: p 555). For an international integration angle, those internal forces of MNCs create pressures on the integration of crossborder strategies (Douglas ; Wind, 1987). l Porter’s position 19 CHEN Jun ;JIAO Zhiqiang 16/05/2008 Another proponent of global convergence perspective, Michael Porter (1980), also argued for the form an international integration angle in his article ‘The competitive advantage of nations’. Porter stands for the global convergence perspective by agreeing with that the world is becoming greatly integrated. Despite of that, Porter’s position still varies from Theodore’s.
The difference is that his international integration perspective actually encourages international diversity, while Theodore concludes an international standardization from his international similarity perspective (De wit ; Meyer, 2004: p 556). Porter deems that the characteristic of the home nation plays an important role of shaping a company’s capacity. Thus the firms should also position themselves to make the full use of the advantages in their national environment. To put it in another way, it’s up to the company to seize the opportunity of competitive advantage existing in its home nation. In a word, porter regard that the competitive advantage of a company is depended by a combination of both its national circumstance and its strategy of harnessing it. Global adaptive perspective Comparing to Porter’s relatively natural position above the paradox of localization and globalization, Susan Douglas and Yoram Wind (1987) demonstrate a quite opposite point of view from Theodore in their article ‘The Myth of Globalization’. They consider that the global convergence perspective is ‘somewhat polemic’ and only effective on limited particular business circumstances (De wit ; Meyer, 2004: p 555). According to Douglas and Wind, the underlying assumptions of the global standardization philosophy are quite doubtful. Firstly, there is lack of evidence about homogenization of global customer taste. Even within one country, there are considerable diversities in customer behaviors.
Secondly, lowprice strategy was proved to be an inferior strategy in most cases which is lowprofit and vulnerable. Differentiation is more profitable and can avoid overcompetition in the industry. The price sensitivity of customers is actually as high as expected as the advocate of global standardization strategy. Besides, in most cases, even standardized product can be 20 CHEN Jun ;JIAO Zhiqiang 16/05/2008 priced differently within and between countries. As a result, a universal customer preference for low price at acceptable quality is not the case. Thirdly, economy of scale of product and marketing is a reason for global convergence, but not plausible enough.
With the development of flexible factory automation make the scale economy be acquired at a much lower output, which has been proven by many modern manufacturing companies. In addition, the cost in the production process is not the only cost in the final product. R;D, distribution channels, marketing and aftersale service sometimes matters more than the production. They also regard the standardization philosophy is mainly product driven, which is neglect the other aspect of the marketing mix (Douglas ; Wind, 1987:pp. 1929). As the presumptions of global perspective are implausible, a local adaptation perspective should also be considered.
According to that same article, they demonstrate that there are different factors facing MNCs to make a choice between global convergence and local adaptation. ‘Factors such as economies of scale in production, purchasing, faster accumulation of learning from operating worldwide, decrease in transportation and distribution cost, reduced cost in product adaptation, and the emergence of a global market segments have encouraged the competition on a global scale. However, barriers such as governmental and institutional constraint, tariff barriers and duties, transportation cost, differences in customer demand, and so on, call for nationalistic or ’protected niche’ strategies’.
From their point of view, ‘The adoption of a global perspective should not be viewed as a synonymous with a strategy of global product and brands’, some regional products and brand and some national product and brand are also needed to constitute a hybrid strategy which is more flexible and effective. The companies should learn to not only take advantage of the benefits of standardization and potential synergies form an international scale, but also harnessing the international diversity by adaptation to specific country characteristics (Douglas ; Wind, 1987: pp. 1929). l Bartlett and Ghoshal’s position 21 CHEN Jun ;JIAO Zhiqiang 16/05/2008
Comparing to others mentioned above, Bartlett and Ghoshal (1989) don’t have a clear stance with regard to the dilemma of localization and globalization. They study the MNCs strategy from a different third angle. According to their article Transnational Management, MNCs are facing different pressures such as local responsiveness, optimizing learning as well as efficiency. The traditional multinational companies which are organized in a countrybycountry basis are obsolete, international companies need to operate across borders, to deal with and benefit from international integration and similarity. However, this is just one of the issues that MNCs need to deal with.
Optimizing learning, efficiency and responsiveness simultaneously is the challenge facing each multinational company. Optimizing learning means learning and transferring competence between head companies and local subsidiaries worldwide. In order to achieve worldwide efficiency ‘global business management’ is also very important. They believe that as the extent of globalization is different from place to place, there is no one best organizational response to globalization, every organization should balance those factors dynamically and find their own strategy. Generally speaking, with regards to the dilemma of localization and globalization, there are different opinions.
However, Douglas’s position is becoming more and more accepted by both the academia and decisionmakers of MNCs. There is a consensus that MNCs should not just focus on one side of the coin, but try to make an optimized balance between localization and globalization. MNCs should deal with the dilemma differently according to different strategic contexts. In the following paragraphs, we will discuss the barriers for standardization as well as the way of interpreting a new business environment more effectively. 2. 2. Inter national management International management deals with how MNCs organize themselves worldwide.
As achieving crossborder synergy is the main reason for a global standardization strategy. ‘Internationalization only makes sense if enough crossborder synergies can be reaped 22 CHEN Jun ;JIAO Zhiqiang 16/05/2008 to offset the extra cost of foreignness and distance’. l Achieve crossborder synergies There are three dimensions for MNCs in terms of achieving crossborder synergies: standardization, coordination and centralization (De wit ; Meyer, 2004: p. 540). Standardization means standardizing product offering, valueadding activities and resources. Doing the same thing in each country, without any costly local adaptation, is an easy way to achieve synergy (Prahalad ; Doz, 1987).
Coordination means aligning the activities in different countries, which make all the separate subsidiaries united and empowering them with a higher competitive position and greater bargaining power. A coordinated assault on a few markets can sometimes lead to competitive success (Prahalad ; Doz, 1987). Activities within the firm can be integrated at one central location, which is called centralization. Different countries have different competitive advantages. For example, raw resources in one country are much lower than any other country, and then the resource procurement activities could be integrated in this particular country.
The abundant of talent as well as the high level of education always make a firm’s home country a logical place for R;D. Another apparent reason is scale of economy, especially in production process, as production centralization can reach the optimized output more easily. The three dimensions mentioned above are interrelated with each other, but are not included each other. MNCs should choose the appropriate level of each of those three dimensions (De Wit ; Meyer, 2004:p. 540). l Barriers for standardization/realizing Synergy The benefit of synergy and scale of economy through standardization is tempting, but 23 CHEN Jun ;JIAO Zhiqiang 16/05/2008 there are many barriers in the execution of standardization strategy.
Douglas and Wind, classify all those constraints into two categories, external constraint and internal constraint. External constraints include governmental and trade restrictions, the differences in the marketing infrastructure, constraint in the resource market as well as the differences in competition between countries. Tariff and quotas on the import of key materials and component will influence the balance between the demand and supply, thus effect the price of them. On one hand, a universal pricing strategy will be affected? on the other hand, firms may try to find alternatives for those materials which make the local design and quality become different from other oversea firms.
As complete competition market is not the case in most of the industry, the existing cartels tend to adopt a differentiation strategy in pricing to acquire more customer surplus. In addition, cartel controls the distribution channels, thus a standardized distribution strategy become hard. The differences in marketing infrastructure include the differences in availability and accessibility of various promotional media, distribution channels or retail institutions, the existence and efficiency of communication and transportation network. All these differences require a local adaptation strategy of firms.
Different countries have their own comparative advantages. For example, the price of raw material may vary in different countries, the quality and price of component may also vary, management and labor cost are different, and differences in capital cost also exist. As the result of the interdependency with resource market which varies from country to country, it’s become harder for MNCs to adopt a standardization strategy. The market leaders’ preemption of distribution channels may force the followers to find more innovative ways to shortcircuit the channels (Douglas ; Wind, 1987:pp. 1929).
All those constraints in the environment suggest the need to adapt to specific market conditions. In addition to that, there are also many internal constraints that need to be considered. The first constraint lies in the local management. The local managers 24 CHEN Jun ;JIAO Zhiqiang 16/05/2008 want to be empowered with more authorities or powers. They regard themselves as knowing better about the local condition and the best way to do. A standardization strategy of the headquarters may let them feel like being ‘imposed’ by the father company and the may be refused by them as ’it doesn’t work here, things are different. The other constraint comes from the existing operations in local circumstances. Whollyowned subsidiaries is not the way MNCs entering into a new market. In some cases, there are joint ventures, licensing operations or cooperation with other local companies in purchasing, manufacturing and distribution channels. There are lots of agreements or commitments with local companies and the partners of the joint venture. Those commitments and agreement is not easy to change in a short term, which make the standardization, if not impossible, difficult to achieve (Douglas ; Wind, 1987:pp. 1929). Identifying external business environment: The magnitude of external influence on the international business strategy makes it necessary to establish a strategy to handle it. This is especially the case for the complex business environment in those emerging markets, such as China. As a result, the way of indentifying the business environment is important to reduce the complexity and improve the decisionmaking. Child (2001) listed two strategies for MNCs to handle environmental complexity. The first is complexity reduction, which includes lobbying and similar activities to change the environment into a more favorable and familiar one and following wellknown routines to keep the complexity at a distance.
The second is complexity absorption, meaning that MNCs should accept the complexity as it is and try to adapt to them. Generally, MNCs tend to follow a mix of those two basic strategies (Jansson, 2006). In order to interpret the business environment in a more systematic way, Van den Heijden (1996) breaks down the knowledge about business environment into three categories which is Events, Trend and Patterns and Structure. 25 CHEN Jun ;JIAO Zhiqiang 16/05/2008 Events Trends and Patterns Structure Economic resources Legal system Technology Demography Political System Ecology Country Culture International agreement Source: Hans Jansson (2006)
As shown in the figure, only the ‘Events’ is visible above the water, the ‘Trend and Patterns’ as well as ‘Structure’ are invisible for most of the people, especially those of different cultural background. The implication of that iceberg figure is that interpretation is much more important than mere information. The information is just what can be seen above the water and could easily be misinterpreted without the relevant frame of reference. In order to interpret it rightly, MNCs are suggested to perceive the environment from an institutional perspective, from which the business environment is viewed as consisting of a set of rule systems (Jansson, 2006).
By breaking down the external environment into smaller formative parts which are easy to understand and evaluate, a uniform model is established which makes the environment more intelligible, all the environmental factors that qualify as relevant institutions must be taken into consideration. 26 CHEN Jun ;JIAO Zhiqiang 16/05/2008 There two models which give better description about all the factors, the PEST models and Terpstra’s model. According to Fahey and Narayanan (1986) in their PEST model, four aspects are needed to be investigated. The political segment deals with political process in a society as well as the regulatory framework.
The economic segment focuses on general set of economic factors and conditions that confront all industries in a society. The social segment includes changes in demographics, liftstyle and social values. The technological segment concerns with R;D, new products, materials, scientific activity and advances in fundamental science (Jansson, 2006). The model shows great emphasizes on changes taking place on the environment, the main method and principle for this model is scan, monitor, forecast and assess the important external trends. However, this model mainly descriptive. Being lack of theoretical foundation, it’s not specific enough.
Terpstra’s model, which views culture as including every aspect of society, is able to identify and describe institutions/environments in more detail. According to his model, society could be divided into the following parts: Law: common law, code law, international law, antitrust policy, regulation Politics: nationalism, sovereignty, power, national interests, ideologies, political risk Technology and material culture: transportation, energy system, tools and objects, communications, urbanization, science, invention Social organization: kinship, social institutions, authority structures, interest groups, social mobility, social stratification, status system
Education: for mal education, vocation training, primary education, secondary education, higher education, literacy level, human resource planning 27 CHEN Jun ;JIAO Zhiqiang 16/05/2008 Values and attitude: towards time, achievement, work, wealth, change, scientific methods, risk taking Religion: scared objects, philosophical systems, beliefs and norms, prayer, taboos, holiday, rituals Language: written language, official language, linguistic pluralism, language hierarchy, international language, mass media Source: Hans Jansson (2006) The two models mentioned above provide the decisionmakers of MNCs with frames of how to identify the external environment more allsided.
With the environments being broken down into small and intelligible parts and all important factors being covered, MNCs can improve the decisionmaking as well as reduce the unpredictability largely. 2. 3 Por ter ’s Five Forces According to Michael Porter (1985), seeking for the competitive strategy for a favourable competitive position in an industry, a firm will encounter the two choices? the first one is the attractiveness of industry. To analyse any industry’s attractiveness, whether it is domestic or international, the rules would embodied in five competitive forces: the threat of new entrants, the bargaining power of suppliers, the bargaining power of buyers, the threat of substitutes and the intensity of rivalry competitors.
The five forces determine the industry profitability, because they have great influence on the products’ price, costs and profits. Buyer power determines the prices that firms can charge. The bargaining power of suppliers influences the costs of raw materials and other inputs. The intensity of rivalry influences prices of competing. The threat of 28 CHEN Jun ;JIAO Zhiqiang 16/05/2008 entrants places a limit on prices and shapes the industry structure required to entry (De wit ; Meyer, 2004: p. 259) . (Source: De wit ; Meyer, 2004: p. 260) 29 CHEN Jun ;JIAO Zhiqiang 16/05/2008 2. 4. Or ganizational str ucture of MNCs
Operating worldwild and dealing with different business environments, MNCs need to have a more sophisticated organizational structure to cope with the international complexity. Four generic organizations models for MNCs were distinguished by Bartlett and Ghoshal (1989), which are decentralized federation, coordinated federation, centralized hub as well as integrated network. l Decentralized Federation European companies internationalized themselves through Decentralized Federation in the 1920s and 1930s. In order to cope with the different local business environment, the local subsidiaries are granted with abundant autonomy to became local adaptive.
Bartlett and Ghoshal found that there is an internal culture in those European firms which emphasized personal relationship rather than formal controls, and financial controls more than coordination of technical or operational detail (De wit ; Meyer, 2004: p580). l Coordinated Federation Due to the high degree of independence and strategic freedom, all the subsidiaries abroad are operated more like a portfolio of offshore investment. US firms enjoy a fast afterwar expansion period in the 1950s and 1960s. Their core competence lies in the technology and management. In order to sustain that competitive advantage in other countries, they adopted a Coordinated Federation with a sophisticated management system and specialist corporate staff.
The headquarters are delegating responsibility to and retaining control on the subsidiaries at the same time (De wit ; Meyer, 2004: p580). l Centralized Hub Centralized Hub was developed with the oversea thrust of Japanese firms since 1970s. 30 CHEN Jun ;JIAO Zhiqiang 16/05/2008 Japanese firms are influenced by their strong national cultural norms and values. As group behavior is and interpersonal harmony is important in the Japanese culture, their firms adopted a centrally controlled, exportbased internationalized strategy, due to which they chose the centralized hub as their way of organizing across borders (De wit ; Meyer, 2004: p580). Integrated Network According to Bartlett and Ghoshal (1995), each of the three organizational structures has own advantages as well as shortcomings. Decentralized federation has a good performance in local adaptation. However, fragmentation of activities also leads to inefficiency. Centralized hub, on the other hand, achieves efficiency by exploiting potential scale of economies. However, being lack of resources and authority of local adapting, the national subsidiaries are likely to be less motivated. Moreover, the headquarters tend to lack understanding of the specific market need and competition conditions. International companies which organized as a coordinated federation are sort of stuck in the middle.
They are less locally responsive than decentralized companies and less efficient than the multinational companies managed in a way of centralized hub. There are three different groups in MNCs which are the country management group, worldwide product divisions and functional management groups. Those groups have different positions in firms of different organizational structures. For example, key decisions are made by functional management groups in a coordinated federation while in centralized hub are worldwide product divisions. If the major power is controlled by one single group, it is inevitable that biased decisions are made as a result of the lack of balancing.
Bartlett and Ghoshal argue than by building up the capability, credibility, and influence of the less powered, management groups while protecting the morale and capability of the dominant group, biases in the decisionmaking process can be reduced significantly (De wit ; Meyer, 2004: p580). 31 CHEN Jun ;JIAO Zhiqiang 16/05/2008 (Source: De wit ; Meyer, 2004:p. 541) An Integrated network model was built up by Bartlett and Ghoshal, in which subsidiaries and headquarter are having different relationships. The national units are no longer viewed as local adaptors or implementers of central strategies? nstead, they are regarded as source of ideas, skills, knowhow, and capabilities that can be use by the whole organization. As showed in the figure above, there are three traits of an integrated network. First are distributed, specialized resources and capabilities? second are large flows of component, product, resources, people, and information among interdependent units? the third is complex process of coordination and cooperation in an environment of shared decision making (Bartlett and Ghoshal, 1995). MNCs begin to learn from each other to overcome the shortcoming in their own organizational structures.
The integrated network model could be an example of how to managing the whole firm across the border more efficiently. However, as a result of the past management experience and the influence of culture never vanish, firms still show their uniqueness of organizational structures and the effect of which in their decisionmaking process (Bartlett and Ghoshal, 1995). 32 CHEN Jun ;JIAO Zhiqiang 16/05/2008 To sum up, the organizational structures of MNCs have a great influence on their entry of new market. We hope to explain the automakers’ balancing the paradox of localization and globalization from the organizational perspective. 2. 5. Inter national composition of MNCs
International composition is about “where the firm wants to have a certain level of involvement” (De Wit ; Meyer, 2004:p. 538). As the term of ‘level’ might be misunderstood by readers to relate to being inferior or superior, we choose to use ’degree of market involvement’ in this thesis. There two layers of this term. Firstly, it is the international scope of which countries are selected by the MNCs to entry. The Second layer is different emphasis as well as level of involvement for MNCs with regards to different local markets. Operating worldwide, it is impossible for a MNC to take the identical strategy in two countries due to the differences between them.
On their international growth stage, MNCs tend to choose different entry options to different countries (De Wit ; Meyer, 2004:p. 538). The degree of involvement in a country varies according to those entry options from sale agent to integrated foreign subsidiary, which can be shown in the follower figure. Source: (De Wit ; Meyer, 2004: p538) 33 CHEN Jun ;JIAO Zhiqiang 16/05/2008 As shown in the figure, there four typical kinds of involvements of the international growth options: exporting via agent or distributor, exporting via sales subsidiary, foreign production subsidiary and integrated foreign subsidiary.
All those options stand for varied degrees of involvement, which are determined by the stages that the company takes part in (De Wit ; Meyer, 2004:p. 538). In this paper, the idea of dividing the valueadding activities into six stages is adopted by us to analysis the automotive manufacturers’ behavior in China. For us, one company’s degree of market involvement in a country shows the importance of this market for the company. To some extent, the degree of market involvement can also reflect how MNCs balance the dilemma of globalization and localization. For example, adopting an exporting via agent way means, to some extent, this company regard standardization is more important than local adaption in the country.
On the other hand, an integrated foreign subsidiary means that the firm wants to localize its activity in that country, or to take advantage the local competitive advantage. By using the concept ‘degree of market involvement’ in this paper, we try to research MNC automakers’ balancing the paradox of localization and globalization in a different angle from previous studies. The degree of market involvement is one of the major issues that we discuss in this paper 2. 6. The definition of the six stages in the valueadding pr ocess We use the idea by De wit and Meyer which divides MNCs’ activities into 6 stages including R;D, production, assembly, marketing, sales and aftersales services (De Wit ; Meyer, 2004: p. 538).
However, that idea is not detailed enough in their 6stage model for our thesis. In this paper, we define each stage with regard to our specific automotive industry. MNCs’ balancing the paradox in China’s automotive industry is the main perspective we consider during the definition. For the consistency of the study, the 6stage model is applied to all the firms. l R;D (Research and Development) 34 CHEN Jun ;JIAO Zhiqiang 16/05/2008 For those carmakers, R;D is a longterm investment which is the source of profit but highly costly and risky. The first question of this stage is whether the firm has R;D institutions in China.
If there is, what their functions and roles are? Some of R;D institutions are playing an important role for the innovation of the whole companies, which is regarded as a major source of innovation for the whole firm. The new technologies developed in China are applied by other subsidiaries all across the world. If that is the case, then the firm is making use of China’s talents and resources for its innovation. In another word, the globalization perspective is more relevant for the firm in China in R;D. On the other hand, some of those R;D institutions only mainly for are local or even regional adaptation instead of innovation.
For example, the R;D institution may just redesign some of the sedans to make them easy to product technologically for the local plant and use the components made by local suppliers. In that case, it means that the firm more focuses on localization strategy in their R;D activities of the China market. l Production Production is the backbone for any automobile manufacturers. The major criterion we use in evaluating those firms’ activities is localization rate of parts and components, which means the percentage of the components and part made in China account for. This rate varies from firm to firm? ifferent sedans of one same firm could also be different. Generally, a higher localization rate means a more localized production. This rate could be studied by sedans. We pick up one to three most important sedans for each firm and generalize from sedan to the whole firm. l Assembly The difference between production and assembly is quite confusing at the first beginning. Our definition of those two stages in our thesis with regard to the paradox of localization and globalization is quite simple, however. The major question with regard to assembly is whether the sedan is imported or assembled in China.
Both alternatives represent a globalization or localization strategy representatively. It needs 35 CHEN Jun ;JIAO Zhiqiang 16/05/2008 to point out that some sedans are imported but the localization rate of parts and component are not necessarily 0%, as it could be the case that some parts of the imported sedans are made in China. l Marketing Regarded as a source of premium revenue, marketing is playing an increasingly important role in the valueadding activities. With regard to marketing of those firms, we focus on the similarities and differences in marketing between China and rest of the world, especially with the developed countries.
First is the brand image and market position of the firms in China and abroad. Advertising is important? the chosen of major competitors is also of significant meanings. After studying the firms as a whole, we go to the sedans that we selected in the production study stage. The market position, pricing policy, targeted customers, designs and function are covered. Generally speaking, the more difference we find in a sedan’s marketing, the more localized strategy the firm is adopting with regard to this sedan. l Sales The income in automotive sales accounts for a high percentage of the whole valueadding activities. The border between