Geely motors: a Chinese automaker enters international markets Ilan Alon,* Marc Fetscherin and Marc Sardy Rollins China Center & International Business Department Rollins College 1000 Holt Avenue 32789 Winter Park, FL, USA E-mail: E-mail: E-mail: *Corresponding author Abstract: On 22 January 2006, Shufu Li, the Director of International Marketing for Geely Motors, was rushing to the check-in counter at the Detroit Metropolitan Airport in order to travel back to Shanghai, China. He had just come from the Detroit International Auto Show where his company had presented its new car models. Geely (pronounced ‘Gee-Lee’) had been selling cars in China since 1997. In 2004, they had begun exporting cars to North Africa and Latin America. Geely had now set their sights on the USA, the largest automobile market in the world. Geely’s management was planning to sell cars in the US market for under US$10,000 by late 2008.
The International Auto Show in Detroit was crucial in order to get feedback from and establish relationships with potential business partners, customers and the press. While he was boarding the plane, Mr. Li began to reflect on Geely’s transition from a regional manufacturer focused on the domestic Chinese market to an international player. Would the last few years of their marketing effort turn Geely into a global player in the auto market? Would US consumers warm up to the cars Geely had shown at the auto show? How could Geely overcome the lack of brand name and the negative country-of-origin quality image that Chinese manufacturers have? Keywords: international marketing; international business; globalisation; internationalisation; automotive; Geely Motors; Chinese companies. Reference to this paper should be made as follows:
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Alon, I., Fetscherin, M. and Sardy, M. (xxxx) ‘Geely motors: a Chinese automaker enters international markets’, Int. J. Chinese Culture and Management, Vol. X, No. Y, pp.000–000. Biographical notes: Ilan Alon is Harvard Kennedy School Visiting Scholar and Asia Fellow, and Rollins College Petters Chair of International Business and Executive Director of Rollins China Center. He has published 20 books (two authored), over 100 peer-reviewed articles and chapters. His four recent books on China include Chinese Culture, Organizational Behavior and International Business Management (Greenwood, 2003), Chinese Economic Transition and International Marketing Strategy (Greenwood, 2003), Business and Management Education in China: Transition, Pedagogy and Training (World Scientific, 2005), and The Globalization of Chinese Enterprises (Palgrave-McMillan, 2008).
I. Alon, M. Fetscherin and M. Sardy
Marc Fetscherin holds two Master’s degrees, one from HEC Lausanne, Switzerland; the other from the London School of Economics (LSE), UK. He received his PhD from the University of Bern, Switzerland. Currently he is an Assistant Professor of the Crummer Graduate School of Business and the International Business Department at Rollins College as well as an Associate of the Rollins China Center. He is also a Visiting Scholar and Asia Fellow at the Harvard Kennedy School. He has over 70 publications. Marc Sardy holds a PhD from the Judge Business School at the University of Cambridge, UK and a Master’s degree in Statistics from Bernard Baruch College. He is currently and Associate Professor of International Business and Finance at Rollins College as well as an Associate of the Rollins College China Center. He is also a regular Visiting Professor at EM Lyon, France.
Company background
Geely Motors, from Zhejiang Province, is a large regional manufacturing conglomerate (Exhibit 1 in Appendix A).
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Early in its history it produced primarily motorcycles, scooters, engines and vehicles. As it grew the company added an import-export trade company, a real estate management company, several hotels and a travel services company. In 1998 a motorcar division was built in collaboration with Jia Auto Works, Sichuan province. Two factories were used: one in Huzhou, the other in Quzhou, both in Zhejiang province. Among the initial products were the Haoqing, a 4-door sedan, later the LG-1 station wagon and most recently the PS4 sports car. Geely Motors was the first Chinese private enterprise to build passenger cars. In 2000 the Haoqing, equipped with a 4-cylinder Toyota engine, was introduced.
Geely presented the PS4 sports car at the Shanghai Automobile Show of 2005, and started to sell them in China during 2006 (Exhibit 2 in Appendix A).
By 2005 Geely Motors had four production facilities. One was a joint venture between Geely (53%) and the Quzhou Holding Co. (47%), an investment company listed in Hong Kong. Since 2003, Geely had also been working with Daewoo on a joint venture. In 2006 this venture had produced a new model of the PS4 sports car which had just been introduced at the 2006 Detroit International Auto Show. By 2006 overall production capacity for the four facilities were about 360 000 cars (Table 1).
Table 1 Geely production and capacity 127 950 86 535 71 555 360 000
Production 2005 Production 2004 Production 2003 Production capacity growth 2006
Source: Catalogue of the present Chinese motorcar production, China motor vehicle documentation centre, 2006
Geely motors: a Chinese automaker enters international markets
The Chinese auto market
The Chinese Automotive Industry celebrated its 50th anniversary in 2003. However, much of Chinese automotive production over the last four decades was for military and commercial vehicles. Private car production in China is relatively new and emerged largely in the mid-1990s. By the end of the 1990s, passenger automobile production in China was still below one million vehicles per year. When compared to global competitors such as Japan, Germany and the USA in terms of quality, product features and R&D, the Chinese Auto industry is still in its infancy. Throughout the last two decades China had become a haven for contract manufacturing. By the mid-1990s many foreign companies had established joint ventures that brought needed expertise and exposure. In several industries ranging from toys to clothing and furniture, China had become the worlds largest manufacturer. With the 1999 handover of Hong Kong by Great Britian, China became the custodian of one of the worlds great capitalist-economic centres. In 2001, as China entered the World Trade Organization (WTO), automobile production in China soared.
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In 2004, for the first time in history, a Chinese auto company appeared in the list of the Global 500. Shanghai Automobile Industry Corporation (SAIC) was ranked 461st on the list for its 2003 sales of 12.3 billion USD. By 2006, automobile production in China had risen to roughly six million vehicles almost all of which was consumed by the domestic market. This made China the third-largest automobile market in the world, surpassing Germany and the UK. At its current rate of growth it will soon surpass Japan (Ravenhill, 2006).
This is quite an achievement considering less than 2.4% of the Chinese population have a car. The growth rate in automobile sales is expected to be between 8% and 10% per annum through 2010. Some estimates of growth suggest that the Chinese automobile market will exceed the US market by 2015. However, unlike the Chinese market and its double-digit growth, the US market has faced, a slight decline of about 500 000 vehicles or 3% in total units sold between 2005 and 2006 (Jianhua, 2006).
2.1 Makers and takers in Chinese automotive market
China’s Automobile Industry is a largely home-grown, fragmented business, and is likely to undergo future consolidation. In 2006, there were more than 120 automobile manufacturers, with 12 national manufacturers. Sales are also concentrated amongst a few firms; the top 5 companies accounted for almost 70% of total domestic production. All of these companies have Joint Venture (JV) arrangements with foreign partners. Automobile companies in China fall into two categories: small local manufacturers and large national ones (Figure 1 and Table 2).
Local manufacturers make and market mostly their cars within their region, often within their local community. Most of these small companies, are owned by their local government. However, from these local manufacturers a few private companies have emerged such as Geely Motors. The national players make and market cars in multiple regions within China. Many of them also have international manufacturing partners through JV. There are about 30 such partnership arrangements in place with foreigners. These partnerships are about access; where Chinese companies get access to international expertise and foreign auto manufacturers get access to the rapidly expanding Chinese market. Initially these JVs were tightly constrained by government regulation but China’s compliance with the WTO has tempered some of these restrictions.
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*Tiajing. Source: Case writers Major Chinese automotive manufacturers Total sales (unit) Passenger car sales (units) 2005 620,886 617,257 212,383 173,924 157,171 202,066 105,879 19,690 86,568 28,693 26,553 55,091 0 … 2,320,000
Geely motors: a Chinese automaker enters international markets
2.2 Growing Chinese market
The growth in demand for Chinese automobiles within China can be attributed to many factors such as affluence, investment, infrastructure and liberalisation of trade policies. Affluence in China an increase in per capita wealth has risen as a result of the boom in the Chinese economy; this has increased demand for luxury goods like cars. Heavy Foreign Direct Investment (FDI) has contributed by improving expertise and product offerings. Massive infrastructure changes in cities and between major cities have created better places to use cars. Liberalisation of trade policy such as reduction of import taxes have made it cheaper and easier to get components to build better vehicles (licenses or tariffs on imported vehicles went from 70% in 2001 down to 25% in 2006) (Luo, 2005).
The growth rate of automobile consumption has outpaced many of the developed more mature automotive markets in the last few years in China (Table 3).
Table 3 Year Truck Bus Cars Total Number of vehicles per segment (in millions) 1995 0.60 0.22 0.34 1.15 1996 0.63 0.19 0.38 1.20 1997 0.57 0.27 0.49 1.33 1998 0.74 0.32 0.51 1.56 1999 0.84 0.42 0.57 1.84 2000 0.86 0.58 0.61 2.05 2001 0.89 0.72 0.70 2.31 2002 1.09 0.86 1.09 3.05 2003 1.12 1.00 2.07 4.19 2004 1.51 1.24 2.32 5.07
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Source: Luo (2005)
2.3 First steps of globalisation of Chinese automotive manufacturers While most of China’s automobile production has been manufactured for the domestic market, most recently there has also been rapid growth in exporting automobiles to the international market. Some of the Chinese automotive firms are even building or purchasing manufacturing facilities abroad. Although, this has happened mainly in developing countries. But overall, the Chinese automobile export market is still in its infancy. Furthermore, most Chinese automobile manufacturers lack effective distribution and sales channels to connect with the international markets. Hence, the key challenges to overcome are quality improvement, meeting safety standards and emissions standards, sales and distribution networks, and establishing after sales service and maintenance networks. According to the China Association of Automobile Manufacturers, in 2005 the country exported about 170 000 vehicles to 179 countries, a small number of exports when compared to overall domestic sales. Destination regions ranked by volume were Asia, Africa, Europe, and South America. Of the 170 000 units, trucks made up nearly 100 000 units, with 90% of them being lightweight trucks. Most of these exports were privately owned Chinese domestic branded vehicles (Ravenhill, 2006; Jianhua, 2006).
Detroit international auto show
The Detroit International Auto Show is one of the most important windows into the direction of the automobile industry. Manufacturers feature their concept cars, their leading sellers and anything they plan to launch in the upcoming year. Geely Motors had
I. Alon, M. Fetscherin and M. Sardy
a rather ordinary display featuring a small silver Haoqing and yellow PS4 model outside the main show room. But its presence in Detroit is by no means unimportant. “This is the first Chinese automobile company to participate in the Detroit Auto Show, so we are unique,” said John Humer COO and vice president of Geely-USA. Until recently, Chinese auto exports were limited to buses and trucks. However, China’s manufacturers have been busy upgrading their technology and production to compete overseas and are now ready to sell low-priced vehicles in the US automobile market. This is good news for price sensitive customers but bad news for existing auto makers struggling with sales. At the Detroit Auto Show Xu Gang CEO of Geely Motors, announced, “We have found a local partner that can facilitate distribution and we plan to enter the US market in late 2008.”
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Executives at established auto makers say they are not really concerned about the threat of competition from Chinese brands any time soon. The silver Haoqing sedan which was shown at the exhibition was about the size of a Honda Civic and gets 24 miles per gallon in the city and 34 miles on the highway. The marketing director, Mr. Li says “we are very competitive in pricing, this model will be available at a price below USD 10,000. We want to provide low-priced cars for American consumers”. Several Chinese automakers are carefully watching Geely’s progress in the USA as they are also considering entering this market. Malcolm Bricklin, US multi-millionnaire, founder of the import company Visio Vehicles, and owner of 15 car franchise locations in major US cities is planning to import Geely’s cars by the end of 2008 (Luo, 2005).
The open road ahead
While Mr. Li is exhilarated at the prospect of being the first Chinese auto manufacturer in the USA he is also worried about the challenges his company will face in the coming months. He knows that going global with his company would provide enormous opportunities for future growth. However, there will be major organisational and resource challenges. Large financial resources will be necessary for manufacturing and establishing the distribution and sales network. To improve quality standards and meet US safety and emission standards, heavy investments in R&D will be necessary. They will also need to work closely with Malcolm Bricklin to develop international relationships, improve logistics, set up sales and distribution networks, build after-sales service and maintenance networks and manage currency risk. Malcolm Bricklin will need to work hard to build trust with consumers, and need to differentiate the brand in the USA, one of the most competitive markets worldwide. In a recent conversation with Mr. Li, John Humer expressed his concern that entering into the developed US market will be extremely costly.
He believed that the firm might be better served by entering smaller, less competitive international markets and leveraging the logistics and expertise they develop to tackle the larger competitive markets. Mr. Humer also mentioned that, since Geely Motors has been declared as one of the top 100 firms the Chinese government would like to see as an industry leader, there might be an opportunity to raise needed capital from a Chinese government loan programme that would lend Geely Motors money at below market rates. However it is not clear what autonomy this might cost Geely Motors or what perception a government partnership might create in a foreign market. Mr. Li wonders whether Geely Motors will be able to compete on price alone, especially when Japanese and Korean Automakers are entering international markets with their new ‘supercompacts’ which are priced below
Geely motors: a Chinese automaker enters international markets
USD 10,000 and provide a good value for money. And finally, he believes Geely must carefully consider the challenges of entering the international markets cheaply, quickly and safely, while providing customers the required sales and service network.
References
Jianhua, F. (2006) ‘Getting out of first gear, Chinese auto industry drives into a future featuring innovation and the will to take on the international market’, Beijing Review Online, 24 August, No. 34. Luo, J. (2005) ‘The growth of independent Chinese automotive companies’, International Motor Vehicle Program, MIT. Ravenhill, J. (2006) The Growth of the Chinese Automobile Industry and Its Impact on Production Networks.I. Alon, M. Fetscherin and M. Sardy
Appendix A Exhibit 1 Profile of Zhejiang Province
Map of China and Zhejiang Province (see online version for colours)
Zhejiang Province is also called the ‘the land of silk’ and produces one third of China’s raw silk, satin and brocade. The province has nine cities of regional level: Wenzhou, Jia, Huzhou, Shao, Jinhua, Zhoushan, Quzhou, Taizhou and Lishui, 24 county-level cities, 38 counties and one autonomous county, with a total population of 47 million (2000).
The main ethnic groups are Han, Hui, Manchu and Miao. Zhejiang Province has a sub-tropical climate, warm, rainy and humid. Average temperature is between 16–19 C.
Geely motors: a Chinese automaker enters international markets
9
Exhibit 2
Example Geely cars (see online version for colours)
Model Haoqing In production since 2000. Technical information: • Engine type: 3, 4-cylinder • Cylinder capacity: 993 cc, 1046 cc, 1342 cc • Engine power: 38 kW/5600 rpm, 40 kW/6000 rpm, 63 kW/6000 rpm • Maximum torque: 77 Nm/3600 rpm, 85 Nm/3600 rpm, 110 Nm/5200 rpm • Drive: 4 × 2 • Wheelbase: 2340 mm • Length: 3900 mm • Width: 1650 mm • Height: 1420 mm • Empty weight: 930 kg • Tyre size: 175/65 R 14 • Maximum speed: 120–145 km/h • Fuel consumption: 6.3–6.8 L/100 km • Price in China: 35,000–48,000 Yuan (USD 4,500–6,200)
Model LG-1 In production since 2006. Technical information:
• Engine type: 4-cylinder • Cylinder capacity: 1498 cc, 1587 cc, 1794 cc • Engine power: 69 kW/6000 rpm, 79 kW/6000 rpm, 102 kW/6200 rpm • Maximum torque: 128 Nm/3400 rpm, 137 Nm/5200 rpm, 172 Nm/4200 rpm • Drive: 4 × 2 • Wheelbase: 2502 mm • Length: 4342 mm • Width: 1692 mm • Height: 1435 mm • Empty weight: 1040 kg • Tyre size: 175/65 R 14, 185/60 R 15 • Maximum speed: 150–170 km/h • Fuel consumption: 4.7 L/100 km • Price: 65,000 = 85,000 Yuan (USD 8,400–10,900)
Model PS4 In production since 2006. Technical information:
• • • • • • • • • • • Engine type: 4-cylinder Cylinder capacity: 1762 cc
Engine power: 83 kW/5600 rpm Maximum torque: 157 Nm/3400 rpm Drive: 4 × 2 Wheelbase: 2440 mm Length: 4160 mm Width: 1690 mm Height: 1325 mm Maximum speed: 190 km/h Price: 79,000 Yuan (USD 10,200)
Appendix B Teaching note Geely Motors: a Chinese automaker enters international markets Detailed Teaching Notes (TN) will be provided upon acceptance of this case Case summary In 2006, Geely Motors, a Chinese Automotive manufacturer, was the first Chinese company to participate in the International Auto Show in Detroit. This case outlines the Chinese automotive market, compares it to the global market, describes opportunities and threats faced by the Chinese automotive company when it enters competitive international markets. The case also discusses the potential impact of the new entry on the global automotive industry. Possible frameworks The case can be discussed with framework like PEST analysis, Porter 5-forces, SWOT analysis, BCG Matrix, Ansoffs-Matrix, Market Entry Modes, Marketing Mix, Product Life cycle, etc. Suggested student assignment questions Broad questions (industry level)
How does the entry of Chinese auto makers in the USA compare with those in the 1970s for Japanese and in the 1980s for South Korean auto makers? How does the competitive landscape change with the entry of Chinese auto makers? Should Chinese automotive manufacturers enter smaller, less competitive developing markets, or enter larger more competitive developed markets? Or should they focus on their growing domestic market? How should Geely Motors enter its chosen market? Provide quantitative answers for the market screening and selection (ranking or Likert scale rating).
What is the most suitable entry mode for Geely Motors to enter international markets? How can Geely Motors compete against existing auto manufacturers?
Can they establish a brand in international markets? Which competitive advantage(s) should be their focus? What are the opportunities and the challenges facing Geely Motors when entering the US market? If Geely Motors were to export their LG-1 or PS4 model, how much would it cost to export each from China to the USA? Provide a quantitative answer (transportation costs in China, shipment, VAT, insurance, freight, tariffs and taxes, etc.) as well as a description of the type of documents required. At what price might these models be sold in other markets (developed or developing)? How should their product be positioned? How distributed and promoted? (4P’s)
