Case study: Chinese Automotive Industry and Chery Automobiles
With the rapid development of Chinese economy in last thirty years, automotive industry in china has achieved great improvements.
Brief History of the industry and Chery Automotives
- China’s Auto Industry
- Chery Automobiles
Analysis on Automotive Industry in China
In this part, Porter’s (1980) Five Forces Theory will be used as the major method to analyses china’s automotive industry., which includes threats of new entrants, threat of substitutes products and services, bargaining power of buyers, bargaining power of suppliers, and rivalry among the existing firms. Porter argued that these five forces jointly capture the extent of competition prevailing in a particular industry and firms also develop their strategies in the light of the strength of these forces.
- Threats of new entrants—- semi-strong
There usually are seven barriers for new entrants to entry, including economies of scale, capital requirements of entry, cost advantages independent of size, legislation or government action and others(Reading material on WebCT: week five). The existing firms’ economies of scale are a big barrier to new entrants. For example, some existing firms in the industry use the same development platform, which they invested a significant number of fund to build, to produce similar types of cars. Through this way, they can save cost and increase their output at the same time. Then, the capital requirement of entry is another big problem. Just as Qiu (2005) suggested that motor vehicle manufacture is a capital-intensive business requiring great amounts of money invested in machines, plant, building platforms, research and development (R&D), expanding market and so forth. These are not a one-off payment, but long-term, sustained investments, which may not be recovered in five or ten years. Also, the Chinese state industry policy requires that a company should have two billion yuan in minimum in order to make investments (Qiu, 2005). All the factors discussed above make it difficult for new entrants to this market, because they not only need to get enough money, but also should prepare for long time debt and difficulty to expand market and obtain customers.
However, with the rapid development of economy, people’s demand for private cars is increasing quickly, especially for cheap car. And government released new policy that allowing non-stated funds to be invested in passenger car market in 2004. Besides the two factors above, China’s accession to the WTO and few existing companies produce low-end cars which sold at low price also become motivations for new entrants to enter the market. According to the China Automobile Industry Yearbook (Recent Year), there have been thirteen independent carmakers until now, including Chery, Geely, BYD, and others.
- Threats of substitutes products and services—-weak
There are three common ways considered as the substitutes of private autos in china, that is, bicycles, motorcycles, and public transport.
- Bargaining power of buyers—-strong
- Bargaining power of suppliers—-weak
- Rivalry among the existing firms—-strong
Strategy of Chery Automobiles (1200)[maybe combining other specific strategy-pricing, and so forth]
Using porter’s generic strategy to analyses how chery gain the competitive advantages.
- Cost leadership
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