Investigate of Chinese Auto Mobile Industry -- a Study of Shanghai Volkswagen Case

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Part 1 External Environment Analysis

Macro Environment Analysis – PEST Analysis

Political/legislative

Chinese began to open its market and reduces of governmental control over marketing and labour mobility in the1980s. After twenty year reform of state-ownership enterprises the SOEs remained the most significant role in China economy and control the key industry of China. The adjustment of government policy and stabile political environment played a role in the recent increase of foreign investment in China. By the end of June 1997, it was reported that over 200,000 business joint ventures had been registered in China, with a total foreign investment of $204 billion ($15.7 billion from US companies) (China National Statistics Bureau, 1997). Chinese government was full support the automobile industry and regards this industry as the ‘pillar’ industry of the nationally economy. But increased restrictions on foreign exchange and set up high tariff barrier for foreign investment. In addition China’s entry into the WTO would dramatically alter the competitive landscape on one hand and also lower the tariffs on the other hand.

Economical

China is a developing country, after economic reform started in the early 1980s, China's economic system has been in a transition period from an "old" centralized planning economy to a more open and decentralized market economy. China’s Gross Domestic Products (GDP) growth rapidly with an average 8% raise per year and seem will maintain its high-speed increase in the future. At the same time individual income gain fast growth particularly in some eastern coastal city like Shanghai (see Appendix 1,2). A top economical official predict: “China’s gross domestic product will maintain its 7 percent growing speed in the future” (Yang, 1998).

Social/Culture

Labour Market: China's abundant labor resource has provided a great amount of labors at a relatively very low cost to foreign multinational corporations and their Chinese local plants. In order to provide more knowledgeable and skilled workforce, China began to reform its the education policy in 1998. With the expanding adoption of university the percentage of group enrolled in tertiary education increased by 1% percent during nearest 10 years. The power of the education will be more and more powerful before long. Lifestyle Change: Cities like Shanghai, Tianjin, and Guangzhou - have been developed into regional business centers, mainly due to their geographic locations - now these places displaying a more modern business-oriented culture with hybrid east-west lifestyle. Geographic change: With the economic development and increase populations China has been urbanizing more rapidly than had been anticipated. The urban share of the population rising by nine percentage points between 1987 and 1997. (China National Statistics Bureau, 1997)

Technological

Global: Along with the computerization and usage of Internet, many company built up their own Internal Area Network and Database. Thought the extensive application of the network, many transactions performed thought the Internet. E–business has been the main transaction approach of all the company. China: the development of technology in China was two decades behind the global. But recent year, Chinese government was focusing on industry technological reform.

Industry Environment Analysis – Michael Porter’s five forces analysis

The threat of new entrants

Economies of scale – China’s automotive industry was in the growth stage of the industry lifecycle in 1997/98, capacity was extremely dispersed with about 115 assembly plants with an average production scale of 13739 units per plant, far below the minimum efficient scale of the international standard. Economies of scale are harder to achieve (low barrier)

Capital Cost – huge requirement of plants, equipments, technologies, and skilled labors in this particular industry. (high barrier)...
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