International Corporate Strategy – Beijing Jeep Co and the WTO

The underlying objective of this report is to present the case of the Beijing Jeep Corporation, a car manufacturing company based in China. BJC offers an interesting example of an alliance between an American and a Chinese company, which was the very first joint venture between companies from these two countries (American Motors Corporation and Beijing Automotive Works). Such cooperation brings about diverse challenges and interesting issues that need to be addressed.

Moreover, with the Chinese entry into the WTO, new opportunities and threats are being encountered, as the new world market puts BJC into an absolutely novel position.

For the purpose of our study, this report is going to be divided into five main parts. Initially, a general background will be provided, in order to highlight the most important events in the history of the company and to give an overall picture of the environment. Consequently we will look at the challenges faced by BJC both in the past and at the present time, which will be followed by a SWOT analysis in order to analyze the internal and external factors affecting the company’s performance. Finally, a conclusion will be drawn regarding our views on BJC’s future, whereby potential strategies will be considered.

The Beijing Jeep Corporation (BJC) was formed with the first Joint-Venture (JV) between an American company and a Chinese enterprise, the American Motors Corporation (AMC) and Beijing Automotive Works (BAW). The agreement was signed in 1983 and the company’s business operations began in early 1984.

At its initial stage, the company was provided with preferential treatment on tariffs and foreign exchange. In order to meet the company’s business goals it took a long time to build relationship with the senior government officials. At that time, as over 40% of the product’s content was produced in China, BJC became a local manufacturer under heavy protection from imports for all of its short life. Differences in culture of the two partners led to different strategic goals, and different ideas in the product to be produced. Additionally, the company also faced financial constraint to meet the needs of its main customers (the military); it required a large amount of money that BAW and AMC did not have.

Since BJC and AMC continued to loose money and market share, in 1987 Chrysler Corporation acquired AMC. The main reason for acquisition was the “Jeep” brand, which was well known amongst the other automobile brands. Although Chrysler planned not to alter operations at BJC, the Chinese were still concerned as they knew little about Chrysler, and they were also unaccustomed to the takeovers and other aspects of American-style capitalism.

In 1998, to form the world’s third largest car manufacturer, Daimler Benz merged with Chrysler Corporation. The concern of the Chinese was that Daimler-Chrysler would not focus much attention on BJC for two reasons: (1) they played a small role in its corporate structure; and (2) they were faced with merger problems (in particular the culture clash between the German and the American style of management, or the dominance of the Germans).

In 1999, the US trade representative and the China Trade Minister reached an agreement on terms for China’s entry into the WTO. China’s entry into the WTO encourages economic reforms and an increase in competition in the country as a whole. In order to meet the conditions of the agreement, China has to liberalize the financial market; allowing more foreign investment in firms engaged and different industries, such as e-commerce, entertainment, travel and tourism and so forth. Moreover, China has also to reduce trade tariffs on agricultural and manufactured products, especially a reduction in the tariffs on imported automobiles from 100% to 25% by 2006. In this situation, some specialists argued that if this were managed successfully, the terms of WTO would make China become more competitive, more modern and even more pluralistic. In contrast, if this is handled poorly, the country could encounter an explosion of rural poverty and the disintegration of central control, warned an economist in Beijing.

BJC had to face a variety of challenges since its inception. For the purposes of our analysis, we subdivided the timeline of the company into Past, Present and Future.

Past is considered the amount of time running from the 1983 joint venture between AMC and BAW up until before the final agreement by which China entered the WTO. This is a relatively large time span, which presents nevertheless some common features in the environment in which the company was operating.

The first and perhaps most obvious challenge faced by BJC consisted in the cultural differences between the Chinese and American methods of business practice. This was an inevitable obstacle, as it was the first Sino-American joint venture and each party presented a certain business behavior that was virtually unknown to the other. One of the major areas of divergence consisted in the issues over contracts. For the Americans, a contract constituted a legally binding document, which was supposed to seal all negotiations. However, the Chinese viewed a contract as merely a starting point for all negotiations, and their business culture emphasized the importance of personal relationships and individual charisma.

Different cultures also implied differences in vision regarding the future of the company, as well as decisions at the management level. As far as strategic goals were concerned, the Americans viewed the venture as a way of establishing a base in Asia, which would allow low-cost production in a potentially enormous market. On the other hand, the main Chinese priority was to import sophisticated technology, thus enabling them to become one of the giant global players in the automobile industry. Additionally, there was also uncertainty as to what the end product was supposed to be. While AMC wanted to continue manufacture a Jeep similar to their own American one (which would be addressed at the people), the Chinese wanted to produce a military Jeep for the Army, based on a Soviet Union model. This vehicle would include special features, such as a special roof that would grant soldiers greater facility in their shooting operations. However, the military Jeep would have been expensive to produce, and the company was already facing cash flow problems.

The situation resulted in a change in direction. In fact, the Americans (barely) succeeded in convincing the Chinese to import spare parts from the US, with which they would manufacture the cars in China. As stated in the case, the Americans switched their objective from “making money selling cars” to “making money selling kits”.

The company was once again facing problems and this time they were financial. The company lacked foreign exchange for the import of the spare parts, while at the same time housing costs had gone up by 38% due to the increase in tariffs of luxury hotels, where the American executives were housed. The company was nearly broke, and was compelled to shut down for two months in 1986. Moreover, even if they had the money needed, they still had not obtained the special import license from the government, which was necessary whenever large-scale foreign exchange was conducted. The company came to a standstill.

The then BJC’s American president Don St.Pierre thought of trying to solve the situation by approaching the Chinese government, thus practicing “guanxi”.

Technically, “Guanxi” stands for any type of relationship. In the Chinese business world, however, it is also understood as the network of relationships among various parties that cooperate together and support one another. In essence, it implies a situation of exchanging favors, which are expected to be done regularly and voluntarily. No matter how much experience there might be in American business management, the right “Guanxi” in China will make all the difference in ensuring success, as the inevitable risks, barriers, and set-ups to be encountered in China will be minimized when the right “Guanxi” network is found.

Thus, BJC obtained a confidential agreement from the government, which ensured large loans, new capital funds and foreign exchange, along with preferential import tariffs. In return, the company was expected to spread the good word in the Western world about China being an extremely attractive place for investors. It was rather like a trade-off, whereby the Chinese government would obtain large publicity.

This takes us to the last (but definitely not least important) point in highlighting the challenges BJC had to face: the nature of the Chinese environment in which the company had to operate. The overall climate in China was not particularly stable, as there was an unclear and fuzzy political environment, which could potentially lead to social and political unrest. The reasons are to be found in the conflicting views of the reformers (the ones who supported the reforms made by the government since 1978) and the more conservative fractions.

The former were optimistic about China slowly becoming a more market-oriented economy, while the latter wanted to keep the status quo. Such political uncertainties did not definitely make China an attractive market for foreign investors, and this could in the long term harm BJC. Once again, the company decided to continue with its strong relationship with the government, in order to be able to ensure at least some kind of stability for themselves. This led to additional preferential treatments, and, just to quote an example, in 1999 BJC was the only manufacturer whose sport utility vehicles were allowed to circulate on two very important arteries in the center of Beijing.