Executive Summary
Beijing Jeep Corporation (BJC), the first major Sino-American joint venture in the automobile industry, had seen several years of decline in sales volumes and was strategically challenged by China’s joining to the WTO in 2001. China’s WTO membership implied that the market could be flooded with imports, thus threatening the current players in the market, most of them (including BJC) carried on substantial portions of production processes on Chinese soil. Clearly, BJC’s market propositions did not meet its consumers at the time, and the situation had the potential of further deteriorating the company’s already-low image within the DaimlerChrysler group.
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This paper reviews the challenges and opportunities embedded in the new era of the Chinese market for 4WD vehicles. The main focus is the three strategic components to be addressed, namely the macro environment, BJC’s immediate competitive settings, and the company’s internal relations, including the interrelations with the DaimlerChrysler group. Finally, this analysis argues that the best way to sustain and develop the business is by appealing to government spending and making modifications in the current market offering to maximize the potential of public spending.
2. Problem statement
Influenced from several changes in the external environment, most notably China’s joining to the WTO in late 2001, Beijing Jeep Corporation (BJC) must refine its business strategy to remain competitive. Its internal conditions as a subsidiary of DaimlerChrysler at the time were also challenging, mainly due to incoherency between the German-American parent and the Chinese venture, but those problems were less material than the occurrences in the market. Thus, the main scope of this paper is to define, explore, and recommend the most appropriate responses that BJC should engage in for sustaining and expending its operations.
3. Analysis
In order to fully comprehend the challenges facing BJC’s management, we can define three strategic levels that require careful analysis. First, as a member of the WTO, China’s macro environment less favorable for BJC, mainly since the company lost its precedence in the local market for reasons discussed below. Second, the Chinese private (i.e. non-governmental and now less-controlled) automotive market was less favorable for BJC’s market offerings at the time. Third, turbulences within the company and between BJC and DaimlerChrysler needed to be addressed as a fundamental necessity before any other drastic measurements would be taken.
3.1. The Influence of China’s WTO Membership on BJC
As a celebrated Sino-American venture, whose relations with the Chinese government had been one of its major competitive advantages, BJC was threatened by China’s joining to the WTO. This shift meant that tariff and non-tariff market entry barriers for BJC’s competitors would necessarily cease to exist. Moreover, increased competition in the Chinese 4WD market forced to company to handle its inefficiencies and to adjust its capacities to the real demand. Simply put, the new market resembles other markets in the West, where consumers will carefully examine the real attributes of the product without sentiment and/or governmental advocacy. Finally, BJC’s reliance on the Chinese government as a major customer was unsafe as a leading business strategy.
3.2. Trends in the Chinese 4WD Market
Excluding military consumption and other types of government spending, the Chinese market for 4WD vehicles differed significantly from that of sedans and from Western markets. Three major points deserves most of our attention: First, as their peers in the West, the Chinese consumers demand better vehicles and would appreciate higher safety and reliability, as well as better fuel economy. Second, SUVs cannot be positioned as a leisure vehicle insofar as sedans, the chief and much more economically sound passenger car, are still out of reach for most Chinese households. Third, enhanced infrastructures and low purchasing power of the agricultural sector imply that the two major needs that can be addressed by 4WD vehicles (principally transportation in rural areas) cannot be satisfied with high-end SUVs and jeeps, rather than with simpler 4WD market offerings and even sedans in those areas of developing roads and motorways.
3.3. Trends and Challenges within BJC
Having access to traditional models and DaimlerChrysler’s technological advantages, as well as well-established production capacities, BJC’s internal strengths are enormous, at least theoretically. Unfortunately, the company is competitively disadvantaged within the DaimlerChrysler group, for whom BJC represent an insignificant fraction from its total sales. Unfavorable conditions such as China’s weak protection for intellectual property rights and a small market for state-of-the-art SUVs further weaken the company’s attractiveness to the parent conglomerate. Due to the natural competition among DaimlerChrysler’s subsidiaries for resources, any strategic decision must counterbalance the unattractive features and correspond not only with BJC’s growth prospects, but also with the larger scale of needs and abilities of the group.
4. Discussion of alternatives
The removal of foreign trade barriers, which provided great benefits to BJC in the past, is an opportunity for the company at least as it is a threat. Above all other issues, the steady decline in sales throughout the second half of the 1990s (Young and Tun 19) suggests that the company needs more adjustments than the required response to the new macro environment. Regardless of the strategy chosen, BJC should clearly improve its efficiency by redesigning its operations to a more global value chain, a possibility that is now viable through the free trade environment. In accordance with the discussion above, three main strategic categories can be suggested:
- Splitting the operations: up until the point in time under question, BJC produced its vehicles and sold them in several markets, principally China. One alternative to this approach is to create two divisions within the firm. One should produce and sell low-end vehicles for mass marketing, while the other will engage in imported vehicles (including, but not limited to, Grand Cherokee and other SUVs) for specified segments. Within the boundaries of economic rationale and protection of technology, some production processes can be made on Chinese soil. The main advantage of this strategy is the internal repositioning parts of BJC as a marketing wing of the whole group; however, the strategy may bring about stagnation in the other parts of the company.
- Rebranding and cost leadership: China’s clear advantages as a manufacturing country, which exceed all other major South-east Asian industrial countries, despite a shortage in financing facilities (Harwit 662), can be leveraged by BJC and DaimlerChrysler to create a new (or semi-new) line of jeeps and SUVs for domestic and foreign consumption. Based on current production capacities and outdated technologies, BJC’s products can attract cost-concerned customers, for whom DaimlerChrysler’s current market offerings is out of reach. By strengthening the company’s manufacturing operation, increased economies of scale can improve BJC’s current value for money of its market offerings in China. This strategy’s major drawback, however, is a potential corporate cannibalism towards other brands of the group.
- Focusing on the institutional market: with an annual GDP growth of about 8 per cent during the period in question (chinability.com), it is safe to assume that the Chinese government spending will increase at similar rates.
Therefore, by expanding the ties with the government and offering a wider product line, which will meet more of its needs (in terms of e.g. defense vehicles and public works), BJC will be able to grow without making drastic changes in its operations. This will allow BJC to retain most of its current competitive advantages and to support growth with less sensitivity to fluctuations in consumer markets. However, pursuing such a strategy would imply that the company’s decision-making would continue to be subject to government opinion, which may not be always economically reasonable.
5. Recommendations
“When in Rome, do as the Romans do,” St. Ambrose’s famous quote, is as truthful today as it was in the forth century A.D. China is a huge market with immense potential, but it is nonetheless a tightly controlled economy, where business ventures may collapse almost overnight due to government-imposed obstacles and considerable political risk (Kotaki). As long as the Chinese government is on BJC’s side, the company must continue nurturing these relations, rather than reading the relations with the WTO and the rise in consumer demand as a permission to take unnecessary risks.
BJC has the production capacities needed to leverage its guanxi with Chinese officials into a broader line of products for public consumption. Such products include, among others, several types of light trucks, chasses for armed vehicles, and other modifications of the current product line, to supply cheap and reliable vehicles to meet the needs of national and local authorities. One of the merits of this strategy is the fact that it is based on current production capacities, and even modifications would arguably be less expensive than any other initiative in China. Finally, in the long term, it is possible that BJC will facilitate tighter relations between the group and the Chinese government, whose fiscal policy is not subject to WTO stipulations.
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