With the three brands, BMW, MINI and Rolls-Royce Motor Cars, the BMW Group has its sights set firmly on the premium sector of the international automobile market. (BMW.com) Brilliance China is one of the leading automotive manufacturers in China. Both BMW and Brilliance decided to form joint venture in 2003, in order to produce BMW 3-series and 5-series sedans in China market. (Brillianceauto.com). Base on the case study required, reports, information from the quality website the following analysis will explain why this two companies decides the joints venture business method, how the business success over the gaps and barriers of economic and how the culture and exchange rate reflect to their corporation business.
Task 1:
1.1 Why did they decide to form Joint Venture?
According to Vladimir (2002) “the increase in the gross domestic product of leading countries during the 1980s and 1990s was largely the result of the globalization of business (more than 50 percent of industrial products in developed countries are the results of international cooperation with other and especially with emerging market countries). One of the major forms for implementing the globalization of business is the international joint venture (IJV)”. (Vladimir, 2002)In addition, “IJVs provide a vehicle for decreasing the investment required by companies when entering new markets in foreign countries. In emerging and developed countries. IJVs provide an ideal vehicle from business and legal perspectives for doing business in highly competitive markets. IJVs often provide the best opportunity for competing in domestic markets within foreign countries”(Vladimir, 2002). This supports Chinadaily (2004) evidence that “BMW and Brilliance each hold a 50 per cent share in the BMW Brilliance Automotive Co Ltd joint venture, which was established in July 2003. In the medium term, the joint venture will produce around 30,000 BMW 3 series and 5 series vehicles, employing about 3,000 staff”. According to Helmut Panke, chairman of the board of management of BMW said that “With this plant, we are very well-prepared to meet future challenges here in China,” Panke said. “We want to dedicate our efforts to China for the long term. “I am convinced that together we will make this joint venture a success that both partners will notably benefit from” (Liu Weiling (China Daily), 2004). The supports of Brilliance China Automotive Holdings Ltd Chairman Wu Xiao’an evidence that also called the new plant a milestone for his company. “Our partnership with BMW is a crucial step for Brilliance,” Wu said. “It signals the success of both our strategic partnership and the global vision of our company.” (Liu Weiling (China Daily), 2004)
The main external push/pull factors & key environmental drivers
The analysis of external push and pull factors illustrate the automotive industry in China. The deal of joint venture between BMW and Brilliance to locate in Shenyang is influenced by both macro and micro environmental factors. As far as the information gathered “Chinese industrial policy encourages foreign investors to purchase from local vendors new equipment or materials that address local needs, particularly in the energy, transportation, and telecommunications industries. However IJVs do not produce the type of goods that are rigorously controlled by the Chinese government”(Vladimir, 2002). There are two provided frameworks for analyzing changing and complex environments PESTEL and Five Forces frameworks.
Base one the following analysis of the key macro-environment, which supported the BMW and Brilliance decided to form into IJVs. “The PESTEL framework can be used to identify how future trends in the political, economic, social, technological, environmental and legal environments might impinge on organizations”(Gerry Jonhson et al., 2008).
Figure 1.1: PESTEL analysis. Edgar (2010) [online] available from: http://pmmagsmartech.blogspot.com/2010/11/pestel-analysis_17.html [Accessed: 22/04/2011]
The following analysis will focus on the two key drivers that the political and economical of environment in China will effect at the most of BMW Brilliance automotive Ltd. According to Gerry Johnson (2008) “Politics highlights the role of governments; Economics refers to macro – economic factors such as exchange rates, business cycles and differential economic growth rates around the world.” In addition the following analysis micro-environment will be illustrated by the value of Porter’s five forces framework. “It can provide a useful starting point for strategy analysis even where profit criteria may not apply: in most parts of the public sector, each of the five forces has its equivalents. As well as assessing the attractiveness of an industry or sector, the five forces can help set an agenda for action on the various ‘pinch-point’ that they identify”. (Gerry Johnson et al, 2008). Base on the case situation analysis focus on the power of supplier. “From the 60 local suppliers and the local purchasing volume of 2 billion Renmibi (RMB) in 2006, to 100 suppliers and R 3.6 billion in 2007, and to 150 suppliers and RMB 4.4 billion in 2008, these figures show the commitment and achievements of BMW Brilliance in developing premium local suppliers”.(BMW Brilliance Automotive, 2008). “At the same time of maintaining rapid development, BMW Brilliance has always placed customers as its first priority, and provides great support to dealers. BMW Brilliance enjoys a leading position in customer satisfaction among premium auto brands” (BMW Brilliance Automotive, 2008)
Task 2:
How & why the partners identified each other as suitable partners? Which areas were the expected benefits $ synergies in companies involved?
The most important factor which effect to the decision that two companies decide choose each other, as the partner is base on the trust. And the business will continue to build up the trust and corporate in the future to solve the problem and achieve the common target. “In a typical international deal, the foreign partner contributes capital, technology, management expertise, training, or some type of product. The local partner contributes the use of its factory or other facilities, knowledge of the local language and culture, market navigation know how, useful connections to the host country government, or lower- cost production factors such as labor or raw materials”. (Cavusgil at el., 2008). China’s car market is growing rapidly, which become the largest emerging market with sales up 60% last year to 1.2 million cars to become the fourth biggest market worldwide (BBC.co.uk, 2003). The strategy for doing business in emerging markets will concern with the choosing partner with family conglomerates (FC). The FCs is the key players in their respective economies and has much capital to invest in new ventures. Many FCs possess extensive distribution channels throughout their home countries. The companies within the FCs have a deep understanding of local markets and customers. (Cavusgil at el., 2008). As Gerry Johnson (2008) noted “trust is the most important ingredient of success and a major reason for failure if it is absent. So the risk of losing assets to partner in joint ventures is reduced”. As indicated by Robert F. Ebin (2002) “The decision to create an international joint venture or a strategic alliance arises out of the recognition that the strengths of one party can complement the weaknesses of the other”. (David J.BenDaniel et al.,2002)
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“BMW, already a strong Asian presence thanks to operations in Malaysia, Vietnam, the Philippines, Indonesia and Thailand, is only the latest in a long line of Western carmakers to try to sell to China’s car-hungry customers” (BBC news, 2003). As stated by Gerry Johnson (2008) that major strengths and weaknesses have been identified using the analytic tools explained the interrelationship with the environmental impacts of the firm. The strengths would be used as the advantages and the weaknesses should be reduced or prevented from overcoming problem associated with the environmental change. According to BMW Brilliance automotive Mr. Wu Xiao’an, Chairman of BMW Brilliance said, “Brilliance China, as the Chinese shareholder of BMW Brilliance, has been effectively cooperating with the BMW Group based on the principle of trust, equality, and mutual support. Together we have been positioning BMW Brilliance as the most successful premium automobile manufacturer in China. ” (BMW Brilliance Automotive, 2008). “Business synergy involves exploring R&D, production, sales, marketing, or economies of scale, recognizing that incremental costs or less dramatic synergies than were anticipated are frequently the case” (Arthur H.Rosenbloom,2002). Moreover Brilliance Auto (2004) commented that “Strengthening and capitalizing on Brilliance company relationships with foreign strategic partners in terms of the development of new products and the exploration of potential new export markets for its products; and improving operational efficiency by implementing cost reduction programs, increasing domestic component ratios, optimizing resources and reinforcing internal controls and management directives”.
Task 3:
Why Joint Venture was selected?
The evidence supports Robert’s (2002) theory that the corporation and the partnership are the most suitable forms of joint venture. The partnership will prefer the consider taxation as the most because there is only one part of taxation will be encountered in distributing profits. However, this profit might be used to the advantages available only via the corporate form. (Robert F.Ebin ,2002). According to Gerry Johnson “Joint ventures are a favored means of collaborative venture in China. The Local firms provide labor and entry to markets; Western companies provide technology, management expertise and finance.” Gerry Johnson et al.,2008). As Vladimir(2002) indicated, “Chinese industrial policy encourages foreign investor to purchase from local vendor new equipment or materials that address local needs, particularly in the energy, transportation, and telecommunications industries”. As the Brilliance Auto’s President Su Qiang unveiled the strategy plan that “Brilliance Auto will expand co-operation with foreign partner especially BMW group to produce BMW’s 3 and 5 series, in order to build up Brilliance Auto into an international competitive automaker over the next five or 10 years.” (Chinadaily,2002)
Advantages:
Afford greater control over future directions
Facilitate transfer of knowledge between the partners
Common goals drive joint venture
Disadvantages:
Complex management structure
Coordination between the partner firms may a concern
Difficult to terminate
Greater exposure to political risk
Figure 1.2: Advantages and disadvantages of international collaborative ventures:
What are the risks of this structure to this particular partnership?
The international business has the differentiations with the domestic business base on “the risk of cross cultural risk which refers to a situation or event where a cultural miscommunications puts some human value at stake. Country risk refers to potentially adverse effects on company operations and profitability cause by developments in the political, legal, and economic environment in a foreign country. Currency risk refers to the risk of adverse fluctuations in exchange rates. Commercial risk refers to the firm’s potential loss or failure from poorly developed or executed business strategies, tactics, or procedures”(Cavusgil et al., 2008). “Country risk is the potentially adverse impact of a country’s environment on a multinational company’s cash flow” […] moreover the financial risk concern about the country’s economy base on the country ‘s demand for its products. “The economic growth is affected by the interest rates, exchange rates and inflation. A high level of inflation may also lead to a decline in economic growth. Most of these financial factors affect to country’s economic are difficult to forecast “(Madura, 2008).
Task 4:
Potential impacts of national & corporate culture on
In this case the BMW and Brilliance bring their different culture into the business and there are two types of cultures appear as the national culture and corporate culture. Each type will have the own influence on the common business culture as we can consider as corporate culture. Such as company’s culture, goals, manuals, rules and regulations, and particularly the presence of long-standing employees. Moreover according to Andre’ Laurent (1983), “the findings showed clear differences between countries with regard to the perception of organizations as political, systems, authority systems, role-formation systems and hierarchical relationship system”. Following the analysis of Wei Xinjiang, from the People’s Republic of China (2008)”although the Chinese prefer formality, they do not like it in an extreme form. If a situation is too formal, then the Chinese become inactive and lazy in their behavior. They prefer doing business during the dinner, which should be friendly, fairly informal and comfortable event. Moreover Chinese people will feel comfortable with the proper degree and they expect other to treat them as they treat others. In contrast to Germany person is really straight in their speech. According to Deal and Kennedy (2000:13), “The business environment is the single greatest influence in shaping a corporate culture” in other words, the type of industry in question, as well as the type of product and the markets involved, play an important role. Schein (1999) insists that “cultural assumptions consist not only of the internal working of a company, but also above all how an organization sees it self in relation to its environment”. “Each company has its own differences culture and this culture exists in company’s history that a corporate culture cannot be copied. That culture is a way a company can differentiate itself from its global competitors. Therefore, if the company has adapted to the demands of its environment, culture remains the most effective way of maintaining a lasting competitive advantage.” (Delavalle’e’s, 2002).
The exploration & negotiation of the collaboration
BMW and Brilliance is the two clearly example of high and low context culture country. Base on the figure show below the Chinese people is at the highest context culture and Germany is at the lowest context culture. So how they can collaborate and become one of the most successful joint venture Company in the world.
Figure 1.3: High and Low context culture. [Online] Source: berrypurechocolate.com [Accessed: 18/04/2011]
As Hall’s framework shows “Low-context cultures tend to value expertise and performance and conduct negotiations as efficiently as possible to value expertise and performance and conduct negotiations as efficiently as possible”. So BMW has long tradition of rhetoric, placing central importance on the delivery of verbal messages. The primary function of speech in such cultures is to express one’s ideas and thoughts as clearly, logically, and convincingly as possible. In contrast, “Chinese people prefer an indirect and polite face-saving style that emphasizes a mutual sense of care and respect for others” ” to succeed in Asia cultures, it is critical for managers to have a keen eye for nonverbal signs and body language. Negotiation tend to be slow and ritualistic, and agreement is founded on trust.” (Cavusgil, 2008). Moreover following the Hofstede framework on the national culture help partners in cross – national business understanding each other deeper base on a useful general guideline. With the case provided the four dimensions of Hofstede’s framework support the power distance play the importance role in each company’s structure and the BMW and Brilliance base on the two type of power distance: high and low power distance. However at the end of the deal both company decide to build up the organization goal and the power between managers and subordinates are more equal and corporate more. (Cavusgil, 2008). As the Hofstedes’ book says: “power and inequality, of course, are fundamental facts of any society and anybody with some international experience will be aware that all societies are unequal, but some are more unequal than others” (Hofstede and Hofstede, 2005:137). Follow the point of reflection “an organization’s structure and culture are often seen as one and the same. Its structure is often given more serious consideration than its culture. The business environment and company’s problem will be involved to change the corporation structure.”(Roger Price, 2008)
The initial operations of the collaboration.
As the time of joint venture start, both company have to start the business with the negotiation to solve the company problem, effort the achievement, identify the business risks and collaborate with the deal of conflict or the scope and profit of organization. On the word of Arthur (2002) “for the both sides, a negotiating style should be calculated to minimize conflict while still getting or most of what each side wants”. According to Andrew Hupert (2008) stated that there are two culture factors influence the China negotiation style such as the relationship and “art of war”. The five dimensions of negotiation styles are identified as competitive (win- lose), accommodators (lose-win), compromisers (win-win/lose-lose), avoider and collaborators. As the success of BMW Brilliance Auto until now the negotiation style played the importance role in every business agreement between both companies. As the supports of Lothar Katz (2008) mentioned the negotiation style of Germany people base on the step in business operation from the attitudes and styles (joint problem- solving process), sharing of information, pace of negotiation, bargaining and decision-making. Until making decision Germany dislike “making exception” and uneasy with change and reluctant to take risks.
Task 5:
The long-term, strategic effects, both positive & negative of exchange rate movements during the exploration/negotiation period and after the deal was agreed.
In the word of Madura (2008) exchange rate can be influenced by the inflation rate that effect to the international trade activities, interest rate which effect to investment in foreign securities, income lever which effect to amount of import demanded, government control and expectations of future exchange rate. These factors will effect to the demand and supply of currencies, which influence the exchange rate.
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BMW is a Company working base on the Europe currency and Brilliance working base on the Yuan so the exchange rate is considered as one of the factors effect to the business as the profit over the economic changing everyday. “BMW is a company that has frequently favored the financial hedging approach of exchange rate shocks” (Sara Algoe, 2009). There are exist four systems of exchange rate such as fixed, freely floating, managed float and pegged. According to Madura (2008) the fixed exchange rate system would be benefit for the exporters and importers country. The multinational company will not have to worry about the exchange rate in the future while engaging into the international trade. However there is a disadvantage that they will have to face the possibility that its government will devalue or revalue its currency. Dollar is more stable than most currencies, so the foreign investment will be attracted by the weak economic or political conditions.[…]The Germany government was mostly concerned about inflation because its economy was relatively strong (Madura, 2008). On the other hand from 1996 until 2005, China’s Yuan was pegged to be worth about $1.2 (8.28 Yuan per U.S dollar). In 2005 some political argued that an explicit tariff (tax) of about 30 percent should be imposed on all products imported from China.[…] in 2007, China widened its band so that the Yuan’s value could float subject to a .5 percent each day. Even though the Yuan is now allowed to float (within limit)(Madura, 2008). On the words of Carter Dougherty (2008) stated that “Roughly 80,000 of BMW’s 108,000 employees are in Germany, at a company that has 80 percent of its sales outside its home country. That creates problems because its costs are largely denominated in euros but its revenue is heavily dollar-based as a result of the robust American sales, making it particularly sensitive to currency fluctuations”.”Mr. Baumann said that if the euro, which settled in New York late Wednesday at a record $1.5120, remained high, BMW might consider additional layoffs”(nytimes.co, 2008)
Conclusion:
BMW Brilliance Auto is the most successful business typical for the international joint venture. From the plan in 2003 until now company have achieve all most the best results in car market in the world. Base on the competitive advantage of the luxury and high-class product. BMW was and continue playing the important role in the global market. Moreover in the future company continue develop the innovative technology to produce the friendly product and save energy and protect environment.
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