Ford and GM Case Study

Q: 1 Why are Ford and GM entering the Russian car market now? Why did they not invest earlier, and why do they do not postpone investment until the market is bigger?

For any company going out for the foreign market is because of any one out of globalization, reducing tariff all over the world, to increase the market share, saturation of the local market, for getting the economies of scale of production, to use their excess capacity and use the resources where it is available at law cost.

The several factors for the Ford and GM moved to Russian market, out of above mentioned are as follow:

– The demand for cars and light commercial vehicles remained relatively stable prior to, and implementation of market reforms in 1992, For example as per the case study data in 2002 about 1.5 million new and used cars were bought in Russia, about 0.5 million were the car made from foreign manufacture.

– After economical crisis in 1997 there is a stable growth of economy.

– The Russian government has increased import duty of 35% which resulted the more cost for the foreign made car.(As per the Data in case study)

– Increasing the sell of foreign manufactured car.

If we see some current trend of selling of the cars in Russia

Built by: 2002 2003 2004 (1st Quarter)

Thousand units & market share $ billion& market share Thousand units & market share $ Billion and market share Thousand units & market share $ Billion & market share

Russian Manufacturers 842 (59%) 3.7 (35%) 870(58%) 4.3(35%) 222(68%) 1.4(47%)

Foreign Makes Made in Russia 11 (0.8%) 0.1(1%) 54(3.6%) 0.6(5%) 22(6.5%) 0.3(10%)

New Imports 117 (8.2%) 2.7 (25%) 170 (11.4%) 3.5(28%) 43(13%) 0.9(30%)

Used Imports 447(31%) 4(38%) 400(27%) 4(32%) 41 (12.5%) 0.4(13%)

Total 1417 (100%) 10.5 (100%) 1495(100%) 12.4 (100%) 328 (100%) 3.0 (100%)

Manufacturer/Brand 2002 (units) 2003(units) Growth rate of 2003 over 2002(percent) Growth rate trend: 1st quarter of 2004 over 1st quarter of 2003(percent)

Toyota 8,302 25,075 202 174

Ford 6,669 20,712 210 104

Daewoo 12,418 20,255 63 210

Mitsubishi 8,167 17,663 116 56

Hyundai 5,575 14,561 161 233

Kia 5,382 12,420 131 130

Renault 8,337 11,357 29 39

Nissan 8,026 9,470 18 156

Peugeot 6,984 8,762 25 22

Opel 2,865 7,318 155 161

(Data retrieved from
http://strategis.ic.gc.ca/epic/internet/inimr-ri.nsf/en/gr122079e.html)

According to GM data, the new car market in Russia currently totals about 1.1 million units. By 2006, that number should touch 1.5 million cars.

· There are very few domestic automotive component manufacturers that can compete with western companies. Local firms suffer with ineffective management, outdated technologies and equipment and lack of financing for modernization. Their only competitive advantages are low prices and barter agreements with customers (http://strategis.ic.gc.ca/epic/internet/inimr-ri.nsf/en/gr122079e.html )

The main reasons why they do not postpone investment until the market is bigger are as follows:

First mover advantage: As seen from above data there is a huge opportunity in the Russian market so whosoever enter first into the market have market share and can have advantage over the late entrants. After political and economical crisis Russia is now consider as a stable market for the auto industries. Though some says that the Russian market is still have threat for the foreign direct investment according to Managing Director of GM-AvtoVAZ “when you are in business you have to take a risk.

So the US car manufacturer FORD and GM now into the Russian car market and trying to make their position with their own strategy.

Q:2 Why do you think Ford chose to establish a wholly owned subsidiary in Russia, rather than license its production and product technology to a Russian carmaker like AvtoVAZ?

There are some constraints for the company for not giving the license to the subsidiary company in foreign market. We can understand this in term of the know- how. Know-how is the company’s competitive advantage over the competitor that company knows, how to make better technological product. If company wants to license this know-how it can have luxury of earning royalty but there are risks involved in it so the Ford decided to go with wholly owned subsidiary in Russia.

First the licensing may result in a firm’s giving away its know-how that is giving away his competitive advantage to the competitor in the foreign market. Suppose Ford gives license to AvtoVAZ, one of the large Russian manufacture then it can start its own car manufacturing using Ford’s know how. Second disadvantage is providing the license to the company there is no tight control over the subsidiary firm in foreign market. Ford wants to exploits the opportunity that it has in Russia by its own way. Licensee may not follow all instruction of Ford. The last problem with the giving license is that some terms of know-how can not be defined on a page or documented. Like service industry (Hospitality industry) that how to license the subsidiary for “how to well come and how to greet” as a part of the service.(Hill, 2003,p-215).

Since there is a vast opportunity for Ford as a first mover advantage it want to make sure of the 100% command over its operation in Russia. This may be the reason why it started its fully owned subsidiary.

Q: 3 Why do you think GM chose to establish a joint venture with AvtoVAZ, rather than a wholly owned subsidiary? What are the risks associated with GM’s joint-venture strategy?

GM enters into the Russian market immediately after the Ford entered. But it has decided to go with Joint venture with the AvtoVAZ of Russia. AvtoVAZ is the largest and most advanced manufacturer in Russia. The company was established in 1970 in cooperation with FIAT. But it could not manage the new innovation of its model due to a lack of available financing and inadequate management AvtoVAZ has not launched new, up-to-date models for the last several years. It was looking for the joint venture for foreign car maker to fulfill the demand of the local people of new model with new technology and foreign made car. Mean while the GM came to Russia as a part of the strategy of following the competitor, Ford and AvtoVAZ try to gain benefits joint venture. The following are the advantages of Joint Ventures:

1) The spread of the risk coming from the market.

2) Utilization of the market knowledge of AvtoVAZ.

3) Since the GM has local partner there is less risk in terms of political situation 4) Both company have the advantages of resources and capabilities of each other that they already have. Example: GM has good technology, products, trademarks and sound financial condition while the AvtoVAZ has the network, distribution system.

5) GM has less initial requirements of finance to invest in Russia

6) GM can have the access of the natural resources of Russia, the labour force that already with the AvtoVaz have and

7) GM may have benefits of the government policies in exemption of the duties for import or export.

Disadvantages of Joint Ventures: The main disadvantage for GM may be the loss of the control over its Russian venture.

1) It may end up with the conflict with the partner company AvtoVAZ in terms of marketing financial, share, dividends, supplier objectives productions objectives and R&D efforts and costs.

The issue may arise of the profit sharing.

2) when ever Russian feels exploitation they will change the quotas and export policies

3) There is a corruption in the political system

4) Tax laws change quite often.

(http://www.geocities.com/Athens/Delphi/9158/paper43.html)

So even though GM may have advantages of joint venture it has to careful about the issues that may arise in future. The data shows that this Joint venture is doing well in Russia. GM’s joint venture wiht AutoVAZ is producing the new Chevrolet Niva 4×4 sport utility. Production started towards the end of last year and capacity is 100,000 Nivas a year, with half destined for export from next year 2004.

(http://www.findarticles.com/p/articles/mi_m3012/is_10_183/ai_109505536)

Q:4 Which theory of foreign direct investment best explains the sudden increase in interest by foreign auto companies in Russian investment?

The theory of market imperfections or internationalization theory explains the recent trend to the FDI in Russia. The Market imperfections are the factors that are restrict the company from doing well or working perfectly (Hill, 2003, p-214)

The Foreign auto company has interested in Russian Investment because of the impediments to exporting. Russian government has 35% of import duty on the car and 25% duty on the parts made by the foreign car manufacture. Russian government restricts the free flow of the goods to Russia. The huge market of the Russia attracts the foreign auto companies. The Russian companies are suffering from the poor management, old technology and managing fiancé. So the Russians are now moved towards the foreign imported car. This also creates the foreign Auto companies to compete with price in the market. There are some impedance of selling know how to the license. The economical and political stability after the crisis of 1997 is also attracting the FDI from foreign auto companies.

Q:5 What are the general costs and benefits to Russia with the entry of Ford and General Motors? What are the costs and benefits to the United States economy and society in general?

Costs and benefits that Russia has with the entry of Ford and GM:

COSTS and BENEFITS:

· Adverse effects on Competition: The foreign company boosts the competition in the host country. It will help to the host country. But when the Ford and GM tried to acquired the local competitor. It they do so and when the competition is abolished they can charge the price what ever they like.

· Adverse effect on the balance of Payments: When the FDI of Ford and GM invested in Russia they have inflow of the foreign reserve. It will surplus for the country. But when this company started its activity in full fledged then they will take the profit to their home country, which finally create the deficit to the host country. Another point for imports by the companies from their home country then the payment of it is end into the deficit of the account.

· The most important is the national sovereignty and autonomy: If the Russian car industry much depends on the Ford and GM then they can have power to lobby the government which will result of policies that are favorable to the company and its parent country will become in effective. For example the OPEC country is now mainly depending on the European and US oil Exploration Company.

· The benefits for the Russia is the opportunity that created by the foreign company for the employee, labour in terms of creating more jobs, giving technology and know-how of the company developing the infrastructure.

If we look some projected figure from the case study then Assembly line workers at the Ford factory will earn $220 a month which is quite high compare to $134 per month wage in Russia, Skilled engineer may earn up to $600 a month. GM initially invested some $141 million in the AvtoVAZ venture. It is forecasting to create 3,500 new jobs for the Russians.

COST AND BENEFITS FOR US:

Benefits: The benefits of FDI of GM and Ford to the US arise from three sources.

1) The capital account of the home country’s balance of payments from the inward flow of foreign earnings. Ford has started with 10,000 car per year and if every thing goes in its favour it has plan to produce 1000,000 cars per years. Ford has set the price of $10,900 as compared to local cars of $5000 to $8000 by putting it self in the premium segment. So the revenue generated by Ford will goes to the capital account of US. Same way GM has 41.5 % ownership in its JV with AvtoVAZ. Profit earned by this company also goes to the US.

2) Employment effects: As with the balance of payments, positive employments effects arise when the foreign subsidiary creates demand for home country exports. Thus the GM and Ford’s investments in car manufacturing operations in Russia has benefited both the US balance of payments position and the employments in US because Ford and GM will imports some component parts for their Russian-based car manufacturing plant.

3) Valuable skills: The Ford and GM will learn valuable skills from its foreign exposure to the Russia. So it will make them more competitive back in their home country US. These companies can have benefits from cheap labor and recourses available in Russia and produce less costly car and earn revenue which finally help to US.

COST: The costs of FDI of GM and Ford to the US arise from two sources.

1) Balance of payments: When GM and Ford initially invest in to the Russian Market the US balance of payment has capital outflow. It will also suffer because of the GM has plan to sell the law cost car back into the US. The third way the balance of payment’s current account will suffer because the GM and Ford direct investment into the Russia is the substitute for the US direct export of the car or Car parts to the Russia.

2) Employment Effects: If the Ford and GM has decided to move out completely from US then it will become the substitute for the domestic production. So it will reduced the job and create the unemployment back in US.

(Hill,2003, pgs 242-244)

References:

Case Study: Ford and General Motors in Russia

Hill, Charles W.L., 2003, Competing in the Global Marketplace, 4th edition, The McGraw-Hill companies, Inc., New York

Electronic references:

Retrieved from on 9th May, 05

http://strategis.ic.gc.ca/epic/internet/inimr-ri.nsf/en/gr122079e.html

Retrieved from on 9th May, 05

http://www.geocities.com/Athens/Delphi/9158/paper43.html

Retrieved from on 10th May, 05

http://www.findarticles.com/p/articles/mi_m3012/is_10_183/ai_109505536