Answer to Question #190860 in Microeconomics for Naren

Question

The case is called Hyundai Motor Company in China (free if you google and search it). Read the case and answer the below question

1. a. Summarize competitive environment in the Chinese car industry using Porter’s Five Forces (The number and power of a company's competitive rivals, potential new market entrants, suppliers, customers, and substitute products influence a company's profitability). Note the factors that benefit or hurt Hyundai’s potential profitability in the Chinese market. Hint: Check pages 6-10 of the case.

b. In the face of this competition, Hyundai and their Chinese partner disagree about the best business-level strategy to adopt. Describe at least 3 strategies that the partners deployed toward cost-leadership and/or differentiation. Do these seem effective given the competitive environment you described in Part a? Explain

Answer 1

Strengths :

Hyundai has been awarded several awards due to its excellent vehicle safety features and design. The improvements in their safety features are significantly evident which has enabled them to be tagged as one of the safest automobile brands in the world. With safety features, the company tried toward its car award winning designs. However, this was not easy enough for Hyundai as initially they were a shoddy brand outside of Korea. It was a challenge for them, but their initiative of Quality Control Division turned out as strength with their determination to not assemble products until quality is ensured.

Additionally, the company launched an incentive program “five star rating program” to monitor quality improvements for subcontractors and penalty for non-cooperative ones with 10 -10 policy to create a strong brand image. Today in the 21st century strong brand image is important to attract customers

and Hyundai has successfully gained a strong user friendly brand image globally. In 2016Hyundai brand was ranked 6th by Interbrand .Hyundai has been spending huge lump sum money on R&D effectively. They are continuously introducing a range of car models for different sets of customers. For instance, they introduced models like Ioniq and Sonata running on electricity only among which Sonata was awarded for its plug in hybrid engine in 2015 beating Toyota’s Prius. Moreover, Hyundai first introduced its Tucson vehicle which uses fuel cells only to the mass. Today Hyundai offers approximately 5 years guarantee on its car which no other brands give with the best residual value because they produce quality and durable cars at a very reasonable price. Their strategy of establishing assembly plants in their targeted markets allows them to be cost-effective. Beijing Hyundai working with HMC’s R&D selected few car models to enter the Chinese market to set a quality brand image and use modification depending on the local market needs.

Weaknesses:

While HMC is strong enough the only problem is they are comparatively weak in marketing, maintenance, sales, and service. They have specialist human resources in other parts of the world but as Beijing Hyundai, they lack quality and skilled human resources to compete with global makers to get the local experts in China. The competition in China was fierce and the local government played a vital role. The only entry mode was a joint venture where local partners offer the market in return for technology to global automakers. Since the global automakers were manufacturing old models in China as they were not keen to share their technological knowledge, the government made the entry of new entrants easier to increase competition among them. This led the global automakers to transfer their technology to local partners and produce new models. Hence, the local firms started imitating the foreign technologies at a low quality leading fierce competition.

Opportunities:

The consumer behavior is changing and thus the demands for automobiles are also increasing significantly with high expectations in this digital era. This industry offers several opportunities in the context of innovations. While conflicts were arising due to cultural differences, the geographical proximity was an advantage for Beijing Hyundai as they could use HMC’s global networks for the supply of auto parts in Korea. The quality was improving with reduced costs as HMC’s suppliers like Hyundai Mobis were also entering the market. This leads to an increase in capacity and achieving government approval. HMC having great leadership came up with an approach where they have reduced the cost and improved the quality. The other firms had a poor relationship with local suppliers but HMC maintained a close alliance with them leading to cost reduction and improved quality. Most of the parts were supplied by local suppliers Beijing and rest were supplied by other  provincing. Beijing Hyundai supported the locals with all their formation possible to build a harmonious relationship. They wanted to reduce the price to increase the sales volume in such a competitive market but BAIC was resistant as it was concerned about profit margin. Hyundai even designed its cars according to Chinese taste but after a period, the sales were stagnant. Thus, they decided to launch new models rigorously through a strong distribution channel and set a local brand image through various CSR. However, to maintain trust among the partners and to protect the technology shared with BAIC, Hyundai Beijing is working out to settle the conflicts they have. In the 1990s when the world automobile industry was facing surplus supply compared to demand giving a shock to the industry, the Chinese automobile market was booming due to the growth in the economy. That was a time when China introduced afamily automobile in the market attracting more joint ventures with foreign automobile makers. The Chinese government sought to 10th five year planning 2001 which included foreign direct investments and in the same year, they joined WTO enabling the global automaker to enter the market. The entry process was liberalized leading the economy to explode from 2001-2006. To enter the market first the automobiles were exported to understand the market following by a shift to KD exports for an assembly plant in China. Lastly, FDI was the next step through a joint venture with local firms. Hence, there was tough competition in the Chinese automobile industry and was known as an era of competition for global automobile makers .

Threats:

The main threat to HMC has increased competition from automakers around the globe. In China, the main competitors of HMC are outperforming and to be in the pace they need to innovate and launch new models with new technology rigorously which in return is also threatening as technologies are accessed by the local partners who can imitate them in low quality and prices. Chinese customers had lacked in terms of the automobile industry; hence, they did not know the quality of the automobiles. In addition, they had their consultation with peers before purchasing cars since information flow was limited back then. Also, the Chinese customers were very ethnocentric, and they valued the quality of the origin of the company. Being an Asian company, Chinese customers tended to move towards European and North American brands without acknowledging the value of the brand.

Conclusion:

The above SWOT analysis on HMC would support the decision of entering China. The Chinese market is booming and growing rapidly and the decision of penetrating the market was absolutely in favor of HMC. There will be challenges and HMC has always faced the mstrategically and it is quite evident if we investigate their expansion above into completely different countries whereas Korea and China have few similarities that can give them an extra advantage. In this study above we have discussed the entry of HMC in China along with the challenges it has faced and how tactfully they are continuously working to overcome the challenges and be the leader.