China is one of the fastest growing economies in the world and has been ranked highly in terms of the attractive nations for investment by multinational corporations. This is because of the fact that the nation is considered to have a good environment for production as well as readily available resources hence improving the productivity of multinational corporations. There has been a sharp rise of the multinational corporations that have moved their production centers from western nations as United States to China from where they export the goods produced but to their home nations. The main reason for this has been the low cost of production in China as well as a favorable environment that is welcoming to the multinational corporations. This paper examines the external environment and dynamics in the automobile industry that the multinational corporations face when doing or going to do business in China and how this affects their strategic decision making.
China Automobile Industry External environment analysis
Competition has become eminent in China as more MNCs set up operations in the nation targeting both the local and international markets. This is also the case in the automobile industry where there are many companies both local and MNCs that are competing for the same market and which aim to attract the customers in the market by offering quality vehicle models (Zeng, 2013). Some of the local companies in the Chinese automobile industry include BYD, Dongfeng Motor, FAW Group, SAIC Motor, Lifan, Chana, Geely, Chery, Hafei, JAC, Great Wall and Roewe. The MNCs that have set up subsidiaries in the Chinese automobile industry include Volkswagen, General Motors, Hyundai, Nissan, Honda, Toyota, and Mitsubishi among others. This shows the high degree of competition in the Chinese automobile industry and the need for MNCs to come up with strategies that will enable them to thrive in the industry (Chang, 2012).
Regulation is another important external factor for companies that are going to set up business in China or those that are already operating in the market. There are restrictions that have been put in place for MNCs that intend to set up operations in china and it is important to ensure that these restrictions are put into consideration. There are also regulations that govern the operations of MNCs in China to ensure that there is a favourable business environment and that the safety of consumers is taken into consideration (Jing, 2013). This is especially the case with the automobile industry where there are standards to ensure that the vehicles that are produced in China meet safety standards and of the right quality to offer value for the customers. China regulates the importation of goods into the market which affects the operations of MNCs. There are also regulations and penalties for companies that are found engaging in unethical acts such as corruption in china and this could result to the operating licence being withdrawn (Wang, 2013).
A major reason for the increased establishment of foreign companies in the Chinese automobile industry is the readily available and cheaper labour resources as compared to other nations such as in the west. Professionals in China charge a lower price for their services and this makes it possible for multinational corporations to work with qualified and competent people while at the same time reducing the cost of production by paying lower salaries. It is estimated that the cost incurred to pay a production engineer in US is 7 times more that the cost incurred to pay an engineer in the Chinese automobile industry (Ding, 2011).
The labour market in China is however changing and this would be an important factor for the companies that are planning to set up operations in China or those already operating in the nation. The government for instance came up with regulations for minimum wages to be paid to the local employees after realization that the MNCs were taking advantage of the cheap labour (Luong, 2013). As more companies set up operations in China, there has been an increased demand for labour in the nation and this has resulted to an increase in the average wages paid to workers. MNCs in the automobile industry that are after cost saving through utilization of cheap labour need to take into consideration this factor and come up with strategies that will ensure they remain competitive in then market (Fair, 2013).
Investment in the automobile industry in China requires high capital investment. According to Prange (2012), the capital scale of a project in the automobile industry in China requires over $10 billion. The financial market in China is however said to be imperfect where it can only provide limited capital for companies to invest in the automobile industry (Qiang, 2013). For this reason the MNCs intending to set up operations in the Chinese automobile industry will need to have sufficient capital for investment either from their parent companies or other sources of finance. The MNCs already operating in China may also be forced to rely on the profits generated for expansion purposes (Yuandi, 2014).
Social and cultural environment
This is an external environmental factor that affect the companies that establish business in China. The Chinese people are known for being innovative where they are constantly coming up with new innovations that is meant to improve the efficiency of production and reduce the cost. This is an important factor for the multinational corporations that aim to increase their profitability by increasing efficiency and lowering the cost of production which makes china a favourable destination (Cacchione, 2011).
Technology has been another major factor in the Chinese external environment which has attracted many MNCs setting up operations in the Chinese automobile industry. The nation has good infrastructure as well as skilled labour force which has resulted to high level of innovation in the automobile industry. With the high degree of completion the companies are continuously working towards coming up with new and exceptional features for their vehicle models. Technological advancement in China has resulted to the high level of innovation where the production process of vehicles has been automated. This helps to reduce the costs of production where most of the production operations are undertaken by automated machines. Automation also makes the process of production faster and the MNCs are able to meet the demand in the market without shortages (Barnes, 2011).
According to (Luo, 2008), the Chinese market is becoming increasingly demoralised despite the high economic growth that has been reported. This is as a result of increased cases of guanxi and corruption are becoming extremely Intertwined. This results to creation of business environment where people and organizations have to give out favours in order to get things working their way. Luo (2008) gives example of cases such as businesses seeking for premises to carry out operations, parents who are looking for college opportunities for their children or sales people who are after winning orders. In all these cases people are forced to rely on guanxi and corruption in order to get things working their way (Swinder, 2014). This is another external environemnt factor that affects multinational corporations in the automobile industry of China. The MNCs in the autobobile industry for instance may face situations where they are curious to engage in corruption in order to achieve the set goals such as sales targest. They may also be forced to rely on relationships or connections in order to ensure that the business gets a favourable working environemnt. Guanxi and corruption is considered unethical and could end up ruining the image of a MNC in the automobile industry (Determann, 2009).
Application of theoretical framework in strategic decision making for MNCs
The kind of strategies that MNCs come up with is a key determinant of the success in the Chinese market. Strategic decision making allows the MNCs to evaluate the external environment that they are exposed to and come up with effective decisions that will enable the organization overcome any challenges that it may face as well as taking advantage of the opportunities that arise in the market (Victor, 2014).
There are various theories that MNCs can apply in making strategic decisions while setting up operations in China. One of these is the cognitive theory of decision making where it is important for organizations to take into consideration the kind of environment that they are exposed to before coming up with the right strategic decisions in the Chinese automobile industry (Jane Zhao, 2009). The cognitive theory is a continuous process that allows the organization to continue evaluating the changes in the environment. Companies in the automobile industry for instance should undertake a continuous evaluation of the external environment in China. This will enable them to make appropriate decisions such as winding up operations when the costs of operation are too high as compared to the returns that they get from the Chinese market (Smale, 2008).
Rational and analytical will be advantageous for the MNCs when making decisions in regards to venturing to the Chinese automobile industry. Analytical decision making will allow for the managers in the MNCs to undertake a sequence of steps which helps to come up with possible alternatives from which they can choose the best possible strategy. The MNCs for instance will need to analyse the total costs that will be incurred in setting up production in the automobile industry (Harwit, 2013). The analytical process will give the managers an opportunity to evaluate the opportunities that exists in the market which they can take advantage of and the potential markets for the vehicle models that will be produced. Rational decision making is about the use of sense to come up with the right decisions by the MNCs. With an analysis of the possible alternatives, the MNCs are able to establish the best strategy that will help in achievement of the set goals. This is done through an analysis of the advantages and the disadvantages that each alternative has (Claver, 2005).
If the total costs in venturing to the Chinese market exceed the expected returns, the MNCs should not venture to the market and can opt to invest in other markets where there are higher returns. They will also be able to analyse the various financing alternatives that they have from which they can source for capital to make investments in the Chinese automotive industry. This is done by taking into consideration the availability of capital as well as the expected costs such as the interest charged. With this analysis the MNCs should go for the financing option that is easily accessible and which does not increase the costs as a result of high interest rates (Abosag, 2012).
In conclusion, the Chinese economy has had a continuous growth over the past years attracting many MNCs to set up operations in the market. This has been the case with the automobile industry where many MNCs have set up subsidiaries in the nation. Some of the main external environment factors that affect the strategic decision making in China include competition, regulations, the labour market, social and cultural factors technology and cases of increased corruption which has a negative impact. The MNCs will need to apply various decision making theory such as the cognitive theory as well as rational and analytical decisions making to be able to analyse the positive and negative impacts of investing in the Chinese automobile industry.
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