Toyota in China

The Chinese automobile sector is one of the key sectors which was benefited by the policy reforms that started in 1987 in China. This industry has posted double digit growth rates in the past two decades and is promising to sustain that growth rate in the future also. According to Hua Wang (Policy Reforms and Foreign Direct Investment: The Case of the Chinese Automobile Industry, the journal of Economics and Business, Volume VI-2007), Until the mid-1990s, the auto industry was highly protected in China. When the government officially announced its “Industrial Policy for the Automobile Industry” in July 1994, it showed its intention to develop China’s highly protected automobile industry. According to the journal, this approach was modelled on that of Korean industrial development in the 1970s.The requirements for funds, technology, to upgrade the automobile industry, forced the authorities to attract foreign direct investment (FDI). However, the operations of the foreign companies were limited by several limitation measures, the most important of which were high tariff and non-tariff barriers, screening, foreign equity limits, and local content requirements.

After 1992 almost 200 of the world’s 500 largest transnational companies had started operations in China being attracted by multiple benefits like low cost of operations, availability of cheap and skilled and technical labour etc. This interested the Japanese firm Toyota, which was targeting to capture as much market share around the world as possible. Toyota an iconic car maker founded in 1937 was known for its innovations, quality and global competiveness. The company manufactured vehicles at 53 production sites in 27 countries around the globe. In the fiscal year 2008, Toyota sold approximately 8.91 million vehicles in 170 countries. Delivering quality is one the most fundamental principles of Toyota and company success were led by unusual quality delivery at competitive prices.

Toyota identified the huge potential in China and its untapped market potential made the company to come into China and start its operations. The selection of Toyota’s entry into China as the research topic is relevant because of the fact that how a company who was renowned in the world for its legendary quality was able to sustain its quality edge in China using local suppliers . Another interesting fact is that while Toyota was doing this they were also able to focus on cost cutting measures. This research also focus on the issues that a foreign company like Toyota faces in a developing economy like China and the strategy adopted by them to attain success in China. Also the matters were even difficult for Toyota as at the time of its entry into China, i.e around 1998 the 98 % of market share was controlled by the “big three plus the small three and the two minis” referring to the joint ventures of Volkswagen, Citroen, etc.( Source: Wang Hua, Policy Reforms and Foreign Direct Investment : The case of Chinese Automobile Industry).

Toyota which had the aim to become the world’s largest automaker undertook a completely different approach or pattern of entry by a Japanese Multi National Enterprise (MNE) into the Chinese market ,that of the ‘pre-clusterization’ strategy in which competitive suppliers enters the market first and develops a well integrated network in a targeted area and then only the core company enters.( F. Hatani, , Pre-clusterization in emerging markets: the Toyota group’s entry process in China ,Asia Pacific Business Review ,Vol. 15, No. 3, July 2009, 369–387).

HISTORICAL BACKGROUND FOR ENTRY OF TOYOTA INTO CHINA

Toyota used a different approach towards entering into China. Unlike the competitors from Europe and America, they took little longer for finalising on the decision to come into China. According to F. Hatani ,there were multiple reasons for the slow entry into China. Although Japanese car makers were the early movers into Southeast Asia (METI 2001), they were slow to take action in the Chinese market, mainly because of the uncertainty and complexity of the business environment in China. In particular, Toyota was concentrating decisively on boosting its market share in the North American market during the 1980s, judging that it was too early to produce passenger cars in China. Another reason was that Toyota couldn’t attain the contract with the Shangai Automotive Industry Corporation (SAIC) for a Joint Venture to start operations in core area of Shanghai. Instead General Motors won the bid with SAIC in 1995.

Toyota again tried to tie up with a local manufacture Tianjin Corporation to manufacture cars and again Toyota was not permitted to produce passenger cars in China, because the Chinese government’s new Auto Industry Policy, implemented in 1994. In May 2000, Toyota finally obtained the government permission required to produce passenger cars based on production in a 50-50 joint venture with Tianjin Auto, and began its production of passenger cars in late 2002. By that time, most major carmakers had already entered China based on tie-ups with local carmakers. Thus Toyota faced an entirely different situation in China which was unfamiliar to them in any countries .Thus they had to adopt a completely different strategy for entry into China being not able to start an assembling plant and unsure of when their operations will start.

They finally opted to adopt pre-clusterization , in which suppliers of the parent company will start their operations in the foreign country and after developing an integrated network the core company will follow. Toyota suppliers’ initial steps to enter China were supported by favourable incentives offered by Special Economic Zones (SEZs) in China, which provided foreign suppliers with some choices for locations. After Toyota’s Joint Venture in auto-parts factory of Tianjin Auto in 1996, more Toyota suppliers started building plants around there, expecting that Toyota would construct its assembly plant in the nearby area in the future. In other words, they began to ‘pre-cluster’ near Toyota’s ‘virtual assembly plant’, which was an anticipated transplant assembly plant that did not exist at the time of the suppliers’ FDI decisions. .( F. Hatani, , Pre-clusterization in emerging markets: the Toyota group’s entry process in China ,Asia Pacific Business Review ,Vol. 15, No. 3, July 2009, 369–387).

As a result of this even though Toyota was late in entering into China, they were able to catch up with the first mover advantage of VW by a well established supplier network of 18 suppliers in Tianjin area and 19 in the Shanghai area even before the groups actual entry into the country. Toyota’s passenger-car production in China was finally launched in October 2002, and the group’s suppliers began to accelerate their FDI in the country. Although the minimum local content requirement in China is 40%, pre-clustered group’s suppliers enabled Toyota to achieve a local content ratio of well above 60% from the beginning itself.As time went pre-clusterization again started in Guangzhou, the southern city of China. In February 2004, Toyota established a joint venture for engine production with Guangzhou Automobile Group and announced the establishment of its second joint assembly plant in Guangzhou in September. As of mid-2004, 15 local operation units of Toyota’s key suppliers were present in the Guangzhou area. Thus the Toyota Group had configured three production clusters in China to cover three key regions of the country.

Toyota’s establishments in China

Tianjin Fengjin Auto Parts Co., Ltd. (TFAP)| May 1998|
Tianjin FAW Toyota Engine Co., Ltd. (TFTE)| July 1998|
Tianjin Toyota Forging Co., Ltd. (TTFC)| Dec. 1998|
Tianjin FAW Toyota Motor Co., Ltd. (TFTM)| Oct. 2002|
FAW Toyota (Changchun) Engine Co., Ltd. (FTCE)| Dec. 2004| Toyota FAW (Tianjin) Dies Co., Ltd. (TFTD)| Dec. 2004|
GAC Toyota Engine Co., Ltd. (GTE)| Jan. 2005|
Sichuan FAW Toyota Motor Co., Ltd. (SFTM)| Dec. 1999|
GAC Toyota Motor Co., Ltd. (GTMC)| May 2006|

(Source: F. Hatani, , Pre-clusterization in emerging markets: the Toyota group’s entry process in China ,Asia Pacific Business Review ,Vol. 15, No. 3, July 2009).

Toyota encouraged its suppliers in multiple ways to perform better. One of the major incentive for supplier firms in the Toyota Group was Toyota’s informal supplier management system. This included forming of a liaison group in the name of ‘Tianjin Auto Parts Liaison Group’ in order to facilitate better networking and efficient information exchange between them.

CHINESE ENVIRONMENT FOR BUSINESS

China has scored remarkable achievements in its socio-economic development since the 1990’s. China’s average annual GDP has increased by 9.5 per cent. The population in china is growing at the rate of 1% every year. The GDP is also growing at the rate of 2.6% every year and government spending is 13 % of the country’s GDP.

Since the opening up of the economy around the 1980s the economy in China was among the most rapidly growing markets among the world. With many China specific advantages like resource availability, availability of cheap and technical labour, infrastructure developments by the Government of China, Special Economic Zones for businesses, etc it had attracted almost all leading Multi National Enterprises towards China. But while opening up their economy Chinese were cautious about there domestic business enterprises and thus opposed many limitation measures on the foreign companies , , the most important of which were high tariff and non-tariff barriers, screening, foreign equity limits, and local content requirements.

The Japanese firm Toyota experienced many hurdles at the initial years of its entry process into China like lack of support from the Chinese Government, restrictions on key operating areas, lack of approval etc. According to Toyota they were slow to take action in the Chinese market, mainly because of the uncertainty and complexity of the business environment in China. China’s economic and political policies were conservative in nature towards their infant industries and thus there were restrictions imposed on the incoming foreign enterprises in order to protect their domestic firms. Foreign Companies were only allowed to operate in terms of Partnership basis or Joint Ventures and not on their own. Thus the group had to form Joint Ventures with local manufacturing units like Tianjin Corporation, etc. At the same time Toyota supplier’s initial steps to enter China were supported by favourable incentives offered by Special Economic Zones (SEZs) in China, which provided foreign suppliers with some choices for factory locations. The trade barriers were the most important item of import substitution strategy for the industry.

The tariff rate on automobiles was set, before 1986, at 180-220 per cent. Concerning the non-tariff barriers, China applies restrictive import licensing to a number of product categories including; motor vehicles, key parts for vehicles, etc . Other regulations like foreign exchange controls, monopoly of state trading companies, and domestic marketing, as well as standard and technical requirements were also imposed . The import industry was not encouraged that much in automobile sector as only 6 ports in China was designated for complete car imports .MNCs entering China’s completely built up car project and the three key component projects (motors, air bags, and ABS) are limited to the maximum equal stakes of share holding. But in the component industry foreign investors can have total equity control over subsidiaries. Social support and support from Chinese partners were essential for Toyota to help them understand the functioning of the local market and the business norms. . Other major legal restrictions included the ‘localisation of content’ agreement in which the Foreign MNC had to source the majority of their supplies from within China itself. Here the pre-clusterisation of suppliers of Toyota gave them a great advantage over their competitors because they were able to source more than 50% of the supplies internally. Lack of availability of capital from Chinese banks is another legal issue in china.

The main environmental issues faced by China for further development are as a large, populous developing country, China’s productive forces are far from developed. China has shortage of accessible land, fresh water, energy and important mineral resources, while its ecological environment is rather weak and its economic structure is irrational.

When we are looking at the religious aspect about china it is officially atheist, but traditionally pragmatic and eclectic; Most important religions are Taoism and Buddhism followed by Islam and Christianity. ISSUES REGARDING FDI

Home and Host country issues:

There are three main patterns of foreign investment in China: equity joint (EJV), co-operative joint ventures (CJV) and wholly foreign-owned ventures (WFO). The EJV is the main pattern of foreign investment. The degree of Government intervention is on the higher side in the automobile industry in China. This is a major issue pulling the companies back from investing in much larger proportions in China. Foreign companies are encouraged to find the capital for their operations on their own and thus compete with the financial institutions in China. Another issue concerning this sector is that the distribution is controlled majorly by the Government. China is facing challenges in four main areas, they are

1. Energy
2. Environment
3. Safety
4. Congestion

Another major issue faced by China is energy crisis , that is non availability of clean energy sources. China relies heavily on oil imports and more than 90% of their automotive industry runs on gasoline. So with the current rate of growth of this industry sustainability of the energy sector is one of the major issues in China. As the Government encouraged FDI in Chinese automobile sector and aided development, the industry grew in size and is one of the chief contributors to pollution now. As a remedy Toyota is heavily investing on hybrid energy automobiles like Prius, and boosting their production throughout the country.The production of prius in China is made possible through a joint venture with FAW group of China. Toyota is also focussing on safety aspect of the passengers and conducting awareness campaign throughout the country.

BUSINESS ANALYSIS
i) Industry analysis.
Chinese market has already become one of the most attractive market for global automotive industry. Compared to other major world markets, which offer little prospect of short term growth, china’s explosive demand for new vehicles makes it an irresistible attraction for most industry players. The automotive industry in China had a modest beginning in 1956 through First Auto Works manufacturing Trucks and the passenger car industry started two years later in 1958. The industry started to develop significantly in the 1980s after the economic and policy reforms in China. In 2003 4 million units was the china’s total output of vehicles and out of that 50% was passenger vehicles. The Chinese automotive sector had overtaken the USA ‘s sector to become the second largest automobile producing country behind Japan.The analysts expect china’s market will grow up to 18% by 2012 and by 2025 it will surpass the whole US market by volume. China’s expansion rate cannot be sustained, over capacity problems are looming. The Chinese economy is booming and the standard of living of the Chinese are improving year after year.

The imports market share has been considerably decreased by the policies of Government and its intervention .
Exhibit 2 – Sales vs Imports in China between 1995-2001 (Source: Haiyan Deng, Market structure and pricing strategy of china’s automobile industry, JOURNAL OF INDUSTRIAL ECONOMICS 0022-1821 ,Volume LVIII December 2010)

ii) Competitor Analysis

The major competitor can be identified as Volkswagen which was among the first movers into the mainland of China. They started their operations in the 1980s , much before the Toyota company and enjoyed multiple advantages as such. The other major competitors were Peugeot, Citroen etc. Also the matters were difficult for Toyota as at the time of its entry into China, i.e around 1998 the 98 % of market share was controlled by the “big three plus the small three and the two minis” referring to the joint ventures of Volkswagen, Citroen , Peugeot( later replaced by Honda), Jeep and the mini’s refer to those projects by Suzuki and Subaru. Other major competitors include GM, Mercedes, etc.

iii) Company Competitive Analysis

Like in other countries around the world the major competitive advantage of the Toyota company is the Quality Edge over the competitors and their value for money prospect. The company is renowned around the world for its innovations and customer friendly nature. Also through pre-clusterization of the groups suppliers the company was able to attain almost 60 % of the components sourced locally and that gave them a major advantage over the competitors. The efficient network among the suppliers added to their advantage.Toyota was also able to reduce their operating costs through wide spread cost cutting measures. The major vulnerability of the company was exposed recently through the recalls of their multiple models citing manufacturing defects. This caused a downfall of their supremacy over Quality edge.

COUNTRY ANALYSIS
According to Institute for Management Development (IMD) the country competitiveness report, 2012 the mainland of China was ranked 19th which shows that the country is stable and is highly competitive. The Chinese Government is open to more and more investments in the automobile sector but the restrictions or limiting measures like the infant industry protection and Government intervention remains a hindrance for more investments. Based on the huge growth rate for demand of passenger cars , Toyota should make high investments in China and capture more market share.

Also as it is doing now it should focus more on energy efficient vehicles like the hybrids and consider higher investments towards this segment. But Toyota should also consider the risks pertaining to the current political and economical relationship between the host country China and their home country Japan before investing more. The relationship between the two is on the bitter side now due to the recent crisis in the name of the control over an island in the separating ocean. In order to attract more investments the Chinese government should consider revising their tariff rates and restrictions. They should focus on making the market more competitive one rather than making it a protective one.The government interventions should be decreased to a level acceptable to all the companies.

SUMMARY
The whole strategy taken by Toyota group towards its entry into China can be summarized a successful one and an efficient one that enabled them to capture more market share year after year. They were not able to absorb the first mover advantages being late to enter into the market but recovered well from there into a highly competitive position. This project enables us to study the importance of establishing a strong and interconnected network of suppliers in the foreign country and its advantages in the long term. The other factors that should have been considered while analyzing the scenario are the current financial stability of Toyota company worldwide, the regulations by the Japanese government,the ideological differences between the Japanese and the Chinese people.

CONCLUSION
Through the research and studies about this topic we can conclude that pre-clusterization is a very efficient and successful strategy that can be adopted by a MNE while entering into a foreign market. We can also learn about the Chinese automobile industry and the different issues related to that .We can also suggest that if the strategy is sound and well planned then the time of entry has little impact on the success of a company in the foreign market.

REFERENCES ( All journals and articles are EBSCO material)
1. Hua Wang (Policy Reforms and Foreign Direct Investment:
The Case of the Chinese Automobile Industry, the journal of Economics and Business, Volume VI-2007). 2. Haiyan Deng, Market structure and pricing strategy of china’s automobile industry, JOURNAL OF INDUSTRIAL ECONOMICS 0022-1821 ,Volume LVIII December 2010).

3. Zhou Gang ,China’s Economic Developmentand Environment Protection.

4. F. Hatani, , Pre-clusterization in emerging markets: the Toyota group’s entry process in China ,Asia Pacific Business Review ,Vol. 15, No. 3, July 2009.

5.Macro accessibility of China.
6.News articles from EBSCO database.