Market entry modes for international businesses chapter 7

After you have read this chapter you should be able to:

1 Explain the three basic decisions that firms contemplating foreign expansion must make: which markets to enter, when to enter those markets, and on what scale.

2 Compare and contrast the different modes that firms use to enter foreign markets. 3 Identify the factors that influence a firm’s choice of entry mode.

4 Recognize the pros and cons of acquisitions versus greenfield ventures as an entry strategy.

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part 5 Competing in a Global Marketplace

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General Motors in China

Entering Foreign Markets

12 c h a p t e r

opening case

T he late 2000s were not kind to General Motors. Hurt by a deep recession in the United States, and plunging vehicle sales, GM capped off a decade where it had progressively lost market share to foreign rivals such as Toyota by entering Chapter 11 bankruptcy. Between 1980, when it dominated the U.S. market, and 2009, when it entered bankruptcy protection, GM saw its U.S. market share slip from 44 percent to just 19 percent. The troubled company emerged from bankruptcy a few months later a smaller enterprise with fewer brands, and yet going forward some believe that the new GM could be a much more profitable enterprise. One major reason for this optimism was the success of its joint ventures in China. GM entered China in 1997 with a $1.6 billion investment to establish a joint venture with the state-owned Shanghai Automotive Industry Corp. (SAIC) to build Buick sedans. At the time, the Chinese market was tiny (less than 400,000 cars were sold in 1996), but GM was attracted by the enormous potential in a country of over 1 billion people that was experiencing rapid eco- nomic growth. GM forecast that by the late 2000s some 3 million cars a year might be sold in China. While it explicitly recognized that it had much to learn about the Chinese market, and would probably lose money for years to come, GM executives believed that it was crucial for them to establish a beachhead and to team with SAIC (one of the early leaders in China’s emerging automobile industry) before its global rivals did. The decision to enter a joint venture was not a hard one. Not only did GM lack knowledge and connections in China, but also Chinese government regulations made it all but impossible for a for- eign automaker to go it alone in the country. While GM was not alone in investing in China—many of the world’s major auto- mobile companies entered into some kind of Chinese joint venture during this time period—it was among the largest investors. Only Volkswagen, whose man- agement shared GM’s view, made similar-sized investments. Other compa- nies adopted a more cautious approach, investing smaller amounts and setting more limited goals.

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418 Part Five Competing in a Global Marketplace

By 2007 GM had expanded the range of its partnership with SAIC to in- clude vehicles sold under the names of Chevrolet, Cadillac, and Wuling. The two companies had also established the Pan-Asian Technical Automotive center to design cars and components not just for China but also for other Asian markets. At this point it was already clear that both the Chinese market and the joint venture were exceeding GM’s initial expectations. The venture was profitable, selling more than 900,000 cars and light trucks in 2007, an 18 percent increase over 2006 and placing it second only to Volkswagen in the market among foreign nameplates. Equally impressive, some 8 million cars and light trucks were sold in China in 2007, making China the second-largest car market in the world, ahead of Japan and behind the United States. Much of the venture’s success could be attributed to its strategy of de- signing vehicles explicitly for the Chinese market. For example, together with SAIC it produced a tiny minivan, the Wuling Sunshine. The van costs $3,700, has a 0.8-liter engine, a top speed of 60 mph, and weighs less than 1,000 kilograms—a far cry from the heavy SUVs GM was known for in the United States. For China, the vehicle was perfect, and some 460,000 were sold in 2007, making it the best seller in the light-truck sector. It is the future, however, that has people excited. In 2008 and 2009, while the U.S. and European automobile markets slumped, China’s market regis- tered strong growth. In 2009 some 13.8 million vehicles were sold in the country, surpassing the United States to become the largest automobile mar- ket in the world. GM and its local partners sold a record 1.8 million vehicles in 2009, a 67 percent increase over 2008. At this point, there were 40 cars for every 1,000 people in China, compared to 765 for every 1000 in the United States, suggesting that China could see rapid growth for years to come. • Sources: S. Schifferes, “Cracking China’s Car Market,” BBC News , May 17, 2007; N. Madden, “Led by Buick, Carmaker Learning Fine Points of Regional China Tastes,” Automotive News , September 15, 2008, pp. 186–90; and “GM Posts Record Sales in China,” Toronto Star , January 5, 2010, p. B4.

Introduction This chapter is concerned with two closely related topics: (1) the decision of which foreign markets to enter, when to enter them, and on what scale; and (2) the choice of entry mode. Any firm contemplating foreign expansion must first struggle with the issue of which foreign markets to enter and the timing and scale of entry. The choice of which markets to enter should be driven by an assessment of relative long-run growth and profit potential. The choice of mode for entering a foreign market is another major issue with which international businesses must wrestle. The various modes for serving foreign markets are exporting, licensing or franchising to host-country firms, establishing joint ven- tures with a host-country firm, setting up a new wholly owned subsidiary in a host